SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of
The Securities Exchange Act of 1934
Date of Report: October 29, 2003
--------------------------------
(Date of earliest event reported)
NAPOLI ENTERPRISES, INC.
------------------------
(A Colorado Corporation)
(Exact name of registrant as specified in its chapter)
Colorado 7389 912015608
-------- ---- ---------
(State or other (Primary Standard (IRS Employer
jurisdiction of Classification Code Identification No.)
incorporation) Number)
35, Vlaicu Pircalab str.
Chisinau 1S 000000
Republic of Moldova
------------------------
(Address of principal executive offices)
(386) 409-0200
--------------
(Registrant's telephone number,
including area code)
Suite 566 - 1027 Davie Street
Vancouver, BC Canada V6E 4L2
----------------------------
(Former name or address, if changed since last report)
Item 2. Acquisition of Business
- ---------------------------------
Napoli Enterprises Inc. hereby announces that the acquisition of Lion-Gri
S.R.L., previously announced on our Current Report on Form 8K filed on July 16,
2003, has been completed effective October 29, 2003.
Item 5. Other Events and Regulation FD Disclosure
- ---------------------------------------------------
This current report contains forward-looking statements regarding future events
and future performance of the Company, including statements with respect to
completion of an acquisition transaction, all of which involve risks and
uncertainties that could materially affect actual results. Such statements are
based on Management's current expectations and actual results could differ
materially. Investors should refer to documents that the Company files from time
to time with the Securities and Exchange Commission for a description of certain
factors that could cause the actual results to vary from current expectations
and the forward-looking statements contained in this report. Such Filing
includes, without limitation, the Company's Form 10-KSB report, Form 10-QSB
reports and Form 8-K reports.
AUDITED FINANCIAL STATEMENTS OF LION-GRI S.R.L. AND SUBSIDIARY FOR DECEMBER 31,
- --------------------------------------------------------------------------------
2002 AND DECEMBER 31, 2001
- --------------------------
So as to keep investors and potential investors of Napoli informed of the
activities of the Company, filed herewith are the audited financial statements
of Lion-Gri for the fiscal years ended December 31, 2002 and December 31, 2001.
Lion-Gri is a wine producer operated out of Moldova selling its wines throughout
Russia, Denmark, Poland and Western Europe. The wine industry in Moldova is
among the most historically well-established in all of the former Soviet Union.
Lion-Gri is among the largest wine producers in Moldova and is one of the
largest exporters of wines to the Russian Federation. Lion-Gri currently markets
and sells over 110 varieties of wine including red and white varietals and
desert wine.
2
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
November 7, 2003
/s/ Greg Sonic
- --------------
Greg Sonic
CEO, CFO, President & Secretary
Chairman & Director
3
CONSOLIDATED FINANCIAL STATEMENTS
LION-GRI S.R.L. AND SUBSIDIARY
DECEMBER 31, 2002 AND 2001
F-1
LION-GRI S.R.L. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages
-----
Independent Auditor's Report F-3
Consolidated Balance Sheet F-4
Consolidated Statements of Operations and Comprehensive Income F-5
Consolidated Statements of Changes in Members' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8 to F-21
F-2
INDEPENDENT AUDITOR'S REPORT
----------------------------
To the Members of Lion-Gri S.R.L.
We have audited the accompanying consolidated balance sheets of Lion-Gri S.R.L.
(a Republic of Moldova limited liability company) and its subsidiary as of
December 31, 2002 and 2001 and the related consolidated statements of operations
and comprehensive income, changes in members' equity and cash flows for the
years ended December 31, 2002 and 2001. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United of States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Lion-Gri S.R.L. and
its subsidiary as of December 31, 2002 and 2001 and the results of its
operations and its cash flows for the years ended December 31, 2002 and 2001 in
conformity with accounting principles generally accepted in the United States of
America.
Thomas Leger & Co., L.L.P.
Houston, Texas
April 30, 2003 (except for the second paragraph of Note 17, which is dated
June 5, 2003 and Note 19, which is dated October 3, 2003)
F-3
LION-GRI S.R.L. AND SUBSIDIARY
(A LIMITED LIABILITY COMPANY)
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2002 AND 2001
(UNITED STATES DOLLARS)
ASSETS
------
2002 2001
-------------- --------------
CURRENT ASSETS
Cash and bank balances $ 97,708 $ 36,682
Trade receivables 954,062 698,165
Inventories 4,141,639 2,241,178
Advances to suppliers 987,453 393,527
Other current assets 45,886 67,879
-------------- --------------
TOTAL CURRENT ASSETS 6,226,748 3,437,431
NOTE RECEIVABLE-RELATED PARTY 185,582 43,733
EQUITY INVESTMENTS 93,730 150,121
FIXED ASSETS, net 3,457,027 1,846,799
OTHER ASSETS 58,727 225,130
-------------- --------------
TOTAL ASSETS $ 10,021,814 $ 5,703,214
============== ==============
LIABILITIES AND MEMBERS' EQUITY
-------------------------------
CURRENT LIABILITIES
Current portion of long-term debt $ 391,293 $ 264,000
Short-term bank loans 449,487 356,593
Related party loans 2,536,423 237,822
Other short-term loans 41,920 -
Short-term advances from customers 244,668 493,955
Trade accounts payable 3,274,980 1,763,706
Related party payables 194,295 497,458
Accrued liabilities 67,076 99,595
-------------- --------------
TOTAL CURRENT LIABILITIES 7,200,142 3,713,129
LONG-TERM LIABILITIES
Long-term debt 139,631 176,000
-------------- --------------
TOTAL LIABILITIES 7,339,773 3,889,129
MINORITY INTEREST 94,269 101,526
MEMBERS' EQUITY 2,587,772 1,712,559
-------------- --------------
TOTAL LIABILITIES AND MEMBERS' EQUITY $ 10,021,814 $ 5,703,214
============== ==============
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
LION-GRI S.R.L. & SUBSIDIARY
(A LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(UNITED STATES DOLLARS)
Year Ended December 31,
--------------------------------
2002 2001
-------------- --------------
SALES $ 10,522,978 $ 10,129,297
COST OF SALES 7,648,678 6,487,754
-------------- --------------
GROSS PROFIT 2,874,300 3,641,543
SELLING AND MARKETING EXPENSES 1,053,624 1,845,639
GENERAL AND ADMINISTRATIVE EXPENSES 549,448 597,636
OTHER OPERATIONAL EXPENSES 187,671 111,975
-------------- --------------
INCOME FROM OPERATIONS 1,083,557 1,086,293
MINORITY INTEREST 1,922 (9,411)
OTHER INCOME (LOSS)
Other income 8,438 -
Loss from equity investments (64,597) -
Net gain (loss) on sale of fixed assets (12,318) 22,146
Interest expense (114,754) (88,593)
-------------- --------------
INCOME BEFORE TAX PROVISION 902,248 1,010,435
PROVISION FOR INCOME TAXES 4,730 6,737
-------------- --------------
NET INCOME 897,518 1,003,698
OTHER COMPREHENSIVE INCOME (LOSS)
Foreign currency translation (106,752) (57,139)
-------------- --------------
COMPREHENSIVE INCOME (LOSS) $ 790,766 $ 946,559
============= ==============
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
LION-GRI S.R.L. & SUBSIDIARY
(A LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' EQUITY
Years Ended December 31, 2002 and 2001
(UNITED STATES DOLLARS)
Accumulated
Other
Statutory Earnings Comprehensive Members'
Capital (Deficit) Income (Loss) Equity
------------- ------------- ------------- -------------
Balance at December 31, 2000 $ 50,650 $ 682,986 $ (10,530) $ 723,106
Capital contributions 42,894 - - 42,894
Comprehensive loss:
Net income - 1,003,698 - 1,003,698
Foreign currency translation - - (57,139) (57,139)
------------- ------------- ------------- -------------
Balance at December 31, 2001 93,544 1,686,684 (67,669) 1,712,559
Capital contributions 84,447 - - 84,447
Comprehensive income:
Net income - 897,518 - 897,518
Foreign currency translation - - (106,752) (106,752)
------------- ------------- ------------- -------------
Balance at December 31, 2002 $ 177,991 $ 2,584,202 $ (174,421) $ 2,587,772
============= ============= ============= ==============
The accompanying notes are an intergral part of these
consolidated financial statements.
F-6
LION-GRI S.R.L. & SUBSIDIARY
(A LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNITED STATES DOLLARS)
Year Ended December 31,
--------------------------------
2002 2001
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 897,518 $ 1,003,698
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 413,483 586,299
(Gain) loss on disposition of fixed assets, net 13,980 (22,146)
Minority interest (1,922) 9,411
Loss on equity investment 64,597 -
Changes in operating assets and liabilities:
Increase in trade receivables (298,198) (223,227)
Increase in inventories (2,056,046) (1,537,429)
Increase in advances to suppliers (626,019) (282,125)
(Increase) decrease in other current and noncurrent assets 24,122 (53,794)
Increase in advances from customers 1,089,314 362,207
Increase in accounts payable and accrued liabilities 1,339,576 1,262,832
-------------- --------------
Net cash provided by (used in) operating activities 860,405 1,105,726
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (2,121,006) (1,091,783)
Proceeds from disposal of fixed assets - 33,205
Purchase of intangibles (6,306) (402,573)
Purchase of note receivable-related parties (146,807) (43,733)
Payments received on other note receivables 97,295 -
Purchase of long-term investments - (152,680)
-------------- --------------
Cash used by investing activities (2,176,824) (1,657,564)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions - 42,894
Proceeds from long-term debt 361,435 508,776
Proceeds from short-term loans 500,422 500,296
Proceeds from related party loans 1,107,751 72,113
Principal payments on long-term debt (266,728) (61,053)
Principal payments on short-term loans (343,927) (515,709)
-------------- --------------
Cash provided by financing activities 1,358,953 547,317
-------------- --------------
Effect of exchange rate changes on cash 18,492 (2,271)
NET INCREASE (DECREASE) IN CASH 61,026 (6,792)
Cash and cash equivalents, at beginning of period 36,682 43,474
-------------- --------------
Cash and cash equivalents, at end of period $ 97,708 $ 36,682
============== ==============
Supplementary disclosures of cash flow information:
Interest paid $ 114,574 $ 87,065
============== ==============
Taxes paid $ 7,178 $ -
============== ==============
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
LION-GRI S.R.L. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
Lion-Gri S.R.L. (the "Company"), a limited liability company in the
Republic of Moldova, commenced operations in 1998. The Company acquired
controlling interest in Botritis S.A. (50.3%), a Moldovan entity in the
fiscal year 1998, which was recorded as a purchase. The Company is owned by
Grineva S.R.L. (70%), a limited liability company in the Republic of
Moldova and Argo L.L.C. (30%), a limited liability company located in
Wyoming, U.S. Grineva S.R.L. and Argo L.L.C. are controlled by the
Company's President, Gregory Sonic.
The consolidated financial statements include the accounts of the Company
and Botritis S.A. (collectively referred to as the "Group").
The Group produces, markets, and sells premium Moldavian wines in countries
outside Moldova.
2. BASIS OF PRESENTATION
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States of America
("US GAAP"). This basis of accounting differs from that used in the
statutory financial statements of the Moldovan subsidiaries which are
prepared in accordance with the accounting principles generally accepted in
Moldova. The principal difference in which adjustments were made to conform
to US GAAP include write downs of fixed assets with an offset to paid-in
capital of approximately $3,280,000 for the year ended December 31, 2002.
There were no signficant adjustments made to fixed assets and paid-in
capital to conform to US GAAP for the year ended December 31, 2001.
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
Basis of consolidation
----------------------
The consolidated financial statements of the Group include the Company and
its subsidiary. All material intercompany balances and transactions have
been eliminated.
Economic and political risks
----------------------------
The Group faces a number of risks and challenges since its operations are
in the Republic of Moldova and its primary market is in Russia. The
financial statements have been prepared assuming the Group will continue as
a going concern.
Cash and cash equivalents
-------------------------
The Group considers cash and cash equivalents to include cash on hand and
demand deposits with banks with maturity dates of three months or less.
F-8
LION-GRI S.R.L. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES Continued
Inventory
---------
Inventories are stated at the lower of cost or market on the weighted
average cost basis, and includes finished goods, raw materials, packaging
material and product merchandise. Finished goods include costs of raw
materials (grapes and bulk wine), packaging, labor used in wine production,
bottling, shipping and warehousing on winery facilities and equipment.
In accordance with general practice in the wine industry, wine inventories
are included in current assets, although a portion of such inventories may
be aged for periods longer than one year.
Investments
-----------
Investments in which the Company does not have a majority voting or
financial controlling interest are accounted for under the equity method of
accounting unless its ownership constitutes less than 20% interest in such
entity for which such investment would then be included in the consolidated
financial statements on the cost method.
Property, plant and equipment
-----------------------------
Property, plant and equipment are carried at cost. The cost of repairs and
maintenance is expensed as incurred; major replacements and improvements
are capitalized. Costs incurred in developing vineyards, including interest
costs, are capitalized until the vineyards become commercially productive.
When assets are retired or disposed of, the cost and accumulated
depreciation are removed from the accounts, and any resulting gains or
losses are included in income in the year of disposition.
Depreciation is calculated on a straight-line basis over the estimated
useful life of the assets as follows (in years):
o Buildings 10-30
o Machines and equipment 2-10
o Vehicles and other 3-7
In accordance with Statement of Financial Accounting Standards (SFAS) No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets", the
Group examines the possibility of decreases in the value of fixed assets
when events or changes in circumstances reflect the fact that their
recorded value may not be recoverable.
Other assets
------------
Other assets include licenses, trademarks, technology process know-how, and
other receivables and cost method investments. Intangible assets are
amortized using the straight-line method over the term of the agreement or
estimated useful lives.
F-9
LION-GRI S.R.L. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES Continued
Income taxes
------------
Taxes are calculated in accordance with taxation principles currently
effective in the Republic of Moldova. The Group accounts for income tax
using Statements of Financial Accounting Standards ("SFAS") No. 109
"Accounting for Income Taxes". SFAS No. 109 requires an asset and liability
approach for financial accounting and reporting for income taxes and allows
recognition and measurement of deferred tax assets based upon the
likelihood of realization of tax benefits in future years. Under the asset
and liability approach, deferred taxes are provided for the net tax effects
of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for
income tax purposes. A valuation allowance is provided for deferred tax
assets if it is more likely than not these items will either expire before
the Group is able to realize their benefits, or that future deductibility
is uncertain.
Minority interest
-----------------
Minority interest is based on the net book value of the subsidiaries
financial statements used in the consolidation.
Foreign currency translation
----------------------------
Conversion of currency from a Republic of Moldova Lei ("MDL$") into a
United States dollar ("US$") has been made at the respective applicable
rates of exchange. Monetary assets and liabilities denominated in foreign
currencies are converted into US$ at the applicable rate of exchange at the
balance sheet date.
Conversion of currency from MDL$ into US$ has been made at the rate of
exchange on December 31, 2002 and 2001: at US$1.00: MDL$13.822: and
US$1.00: MDL$13.0909. No representation is made that the MDL$ amounts could
have been, or could be, converted into US$ at that rate. Income and expense
items were converted at the average rates for the year.
Concentrations of credit risk and major customers
-------------------------------------------------
Financial instruments, which potentially expose the Group to concentrations
of credit risk, consist of cash, investments, and accounts receivable at
December 31, 2002. The Company performs ongoing evaluations of its cash
position and credit evaluations at the subsidiary level to ensure
collections and minimize losses.
Two customers accounted for approximately 85% and 81% of sales for the year
ended December 31, 2002 and 2001 respectively. Over 90% of the Company's
revenues are from sales in Russia.
Use of estimates
----------------
The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported
F-10
LION-GRI S.R.L. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES Continued
amounts of revenue and expenses during the reporting period. Actual results
when ultimately realized could differ from those estimates.
Revenue recognition
-------------------
Revenue is recognized when title passes to the customer upon delivery of
the merchandise to a third party shipper.
Shipping costs
--------------
Shipping costs are included in selling and marketing expenses and totaled
$671,221 and $698,781 for the years ended December 31, 2002 and 2001,
respectively.
Employees' benefits
-------------------
Mandatory contributions are made by the Moldovan subsidiaries to the
Moldovan Government's health, retirement benefit and unemployment schemes
at the statutory rates in force during the period, based on gross salary
payments. The cost of these payments is charged to the statement of income
in the same period as the related salary cost.
Recent accounting pronouncements
--------------------------------
In April 2002, the FASB issued Statement No. 145 "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections". The statement addresses the accounting for
extinguishment of debt, sale-leaseback transactions and certain lease
modifications. The statement is effective for transactions occurring after
May 15, 2002. The Group does not expect the adoption of Statement No. 145
to have a material impact on the Group's future results of operations or
financial position.
In July 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". The statement addresses
financial accounting and reporting for costs associated with exit or
disposal activities and supercedes Emerging Issues Task Force Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring)." The provisions of Statement No. 146 are effective for exit
or disposal activities that are initiated after December 31, 2002. The
Group does not expect the adoption of Statement No. 146 to have a material
impact on the Group's future results of operations or financial position.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the
fair value of an obligation assumed under a guarantee. FIN 45 also requires
F-11
LION-GRI S.R.L. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES Continued
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 are effective for any guarantees issued or
modified after December 31, 2002. The disclosure requirements are effective
for financial statements of interim or annual periods ending after December
15, 2002. The adoption of FIN 45 is not expected to have a material effect
on the Group's financial position, results of operations, or cash flows.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial acquisitions of financial institutions, except transactions
between two or more mutual enterprises. The Group does not expect that this
standard will have any effect on its financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". SFAS No. 148 amends SFAS No. 123
"Accounting for Stock-Based Compensation," to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect
of the method used on reported results. SFAS No. 148 is effective for
fiscal years beginning after December 15, 2002. The interim disclosure
provisions are effective for financial reports containing financial
statements for interim periods beginning after December 15, 2002. The Group
does not expect the adoption of SFAS No. 148 to have a material effect on
our financial position, results of operations, or cash flows.
Reclassification
----------------
Certain reclassifications have been made to the December 31, 2001 financial
statements in order to conform to the classification used in the current
year.
4. TRADE RECEIVABLES
Trade receivables are summarized as follows at December 31, 2002 and 2001:
2002 2001
------------ ------------
Domestic $ 91,047 $ 132,727
Foreign 863,015 565,438
----------- -----------
$ 954,062 $ 698,165
=========== ===========
F-12
LION-GRI S.R.L. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------
5. INVENTORIES
Inventories are summarized as follows at December 31, 2002 and 2001:
2002 2001
------------ ------------
Raw materials $ 1,167,535 $ 899,544
Work-in-process 2,402,256 1,175,843
Finished goods 571,848 165,791
----------- -----------
$ 4,141,639 $ 2,241,178
=========== ===========
Certain inventory is pledged as collateral for loans.
6. NOTE RECEIVABLE-RELATED PARTY
On November 13, 2001, the Company entered into a non-interest bearing note
receivable agreement with Grineva S.R.L. (Grineva), the 70% owner of the
Company and controlled by the Company's President. According to the terms
of the agreement, the Company will loan approximately $380,000 to Grineva.
At December 31, 2002 and 2001, the Company had loaned a total of $185,582
and $43,733 respectively to Grineva. No payments on the loan had been
received during 2002 and 2001. The note receivable is due no later than May
1, 2005.
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment consisted of the following at December 31,
2002 and 2001:
2002 2001
------------ ------------
Land and buildings $ 1,825,356 $ 1,102,817
Construction in progress 1,135,721 351,277
Machinery and equipment 1,542,227 1,296,798
Vehicles and other 173,197 72,335
----------- -----------
4,676,501 2,823,227
Less accumulated depreciation (1,219,474) (976,428)
----------- -----------
$ 3,457,027 $ 1,846,799
=========== ===========
Depreciation expense for 2002 and 2001 totaled $354,188 and $241,080,
respectively
F-13
LION-GRI S.R.L. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------
8. EQUITY INVESTMENTS
Investments in companies in which the Group has a 20%-50% interest are
accounted for on the equity method. Summarized financial information
(unaudited) for these equity investments at December 31, 2002 and 2001 is
summarized below.
2002 2001
(Unaudited) (Unaudited)
------------ ------------
Revenues $ 260,856 $ 368,990
Costs and expenses 461,262 368,990
----------- -----------
Net loss $ (200,406) $ -
=========== ===========
Current assets $ 640,825 $ 317,351
Noncurrent assets $ 2,248,722 $ 2,219,069
Current liabilities $ 453,516 $ 2,408,294
Noncurrent liabilities $ 950,088 $ -
Equity $ 1,485,943 $ 128,126
9. INTANGIBLE ASSETS
On January 3, 2001, the Company purchased technology process know-how for
the development and improvement of quality of its natural dry white and red
wines. The amount paid for the know-how was approximately $400,000 and was
amortized over the term of the agreement of 1.2 years. Intangible assets
are included in other assets and consisted of the following at December 31,
2002 and 2001:
2002 2001
------------ ------------
Licenses and trademarks $ 4,818 $ 6,365
Technology process know-how 14,129 400,222
Other intangibles 3,907 3,988
----------- -----------
22,854 410,575
Less accumulated amortization (11,864) (342,308)
----------- -----------
$ 10,990 $ 68,267
=========== ===========
Amortization expense on intangible assets during 2002 and 2001 was $58,227
and $345,219, respectively.
F-14
LION-GRI S.R.L. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------
10. TRADE AND RELATED PARTY PAYABLES
Trade and related party payables are summarized as follows at December 31,
2002 and 2001:
2002 2001
------------ ------------
Foreign $ 2,065,359 $ 1,598,141
Domestic 1,403,916 663,023
----------- -----------
$ 3,469,275 $ 2,261,164
=========== ===========
11. SHORT-TERM BANK LOANS
Short-term loans consisted of the following at December 31, 2002 and 2001:
2002 2001
------------ ------------
Note to Victoria Bank, Moldova
dated December 26, 2002 due
January, 2003. Interest rate
At 18%. Secured by revenues. $ 151,932 $ -
Note to Victoria Bank, Moldova
Dated November 6, 2002 due
November, 2003. Interest rate
At 11%. Secured by equipment 297,555 -
and inventory.
Note to Victoria Bank, Moldova
dated February 23, 2001 due
February, 2002. Interest rate
at 17%. Secured by equipment
and inventory. - 100,000
Note to Victoria Bank, Moldova
dated December 13, 2001 due
December, 2002. Interest rate 12%.
Secured by equipment and inventory. - 164,926
Note to Moldova Agroindbank
dated September 3, 2001 due August,
2002. Interest rate 34%. Secured
by equipment and inventory. - 15,278
F-15
LION-GRI S.R.L. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------
11. SHORT-TERM BANK LOANS Continued
Note to Moldova Agroindbank
dated August 22, 2001 due August
2002. Interest rate 28%. Secured by
equipment and inventory - 76,389
----------- -----------
$ 449,487 $ 356,593
=========== ===========
12. RELATED PARTY LOANS
During August 2002, the Company entered into an unsecured non-interest
bearing loan agreement of $1,087,795 with Rabel S.A. (Rabel) The Company's
President is an Executive Director of Rabel. According to the agreement,
the Company is obligated to export wine on behalf of Rabel as repayment of
the loan. The agreement calls for annual penalties of 22% for products that
are not delivered in accordance with the agreement. For the year ended
December 31, 2002, the Company recorded $81,043 in penalties as certain
products were not delivered in accordance with the agreement.
During March 1998, the Company entered into an agreement with Argo LLC
(Argo), the 30% owner of the Company and controlled by the Company's
President, whereby Argo will provide financing for the Company in exchange
for the Company's products. At December 31, 2001, the Company's obligation
to Argo related to the agreement was $237,822. During November 2002,
various customer advances were settled by Argo and the obligations were
assigned to Argo. On November 29, 2002, Argo's receivable from the Company
of $1,448,628 was assigned to NovoTech Holdings, Inc., (NovoTech) a British
Virgin Islands corporation, which is controlled by the Company's President.
According to the Assignment Agreement, NovoTech has the right to demand
payment in the amount of $1,448,628 US dollars from the Company.
13. LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 2002 and 2001:
2002 2001
------------ ------------
Note to Banc de Economii S.A., Moldova
Dated December 20, 2002 due in monthly
installments through June, 2004. Interest
Rate at 18% Secured by raw wine inventory. $ 274,924 $ -
F-16
LION-GRI S.R.L. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------
13. LONG TERM DEBT Continued
Note to Moldova Agroindbank
Dated July 31, 2002, due in monthly
installments through June 2003. Interest
Rate at 12%. Secured by equipment. 80,000 -
Note to Victoria Bank, Moldova
dated August 22, 2001, due in
monthly installments through
August 2003. Interest rate at
12%. Secured by equipment
and inventory. $ 176,000 $ 440,000
Less current portion (391,293) (264,000)
----------- -----------
$ 139,631 $ 176,000
=========== ===========
The scheduled maturities of long-term debt are as follows:
2003 $ 391,293
2004 123,631
2005 16,000
-----------
$ 530,924
===========
14. INCOME TAXES
The nominal statutory tax rate in the Republic of Moldova is 25% in 2002
and 28% in 2001. Taxes are calculated in accordance with Moldovan
regulations and are paid on an annual basis. Taxes are calculated on a
separate entity basis since consolidation is not allowed in Moldova. Based
on the local tax rates, Lion Gri S.R.L. has qualified for the "Free
Enterprise Zone" for five years (years 2001 through 2005), in which
Lion-Gri S.R.L. is not required to pay income taxes for these years. No
significant deferred tax assets or liabilities existed for Lion-Gri S.R.L.,
at December 31, 2002 and 2001. Botritis S.A. is subject to the applicable
statutory tax rates and the provision for taxes on earnings for Botritis S.
A. was $4,730 and $6,737 for the years ended December 31, 2002 and 2001
respectively. No significant deferred tax assets or liabilities existed at
December 31, 2002 and 2001.
The income tax expense was different than the amount computed using the
U.S. Federal Income tax rate of 35% as a result of the following:
F-17
LION-GRI S.R.L. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------
14. INCOME TAXES Continued
Years Ended December 31,
---------------------------
2002 2001
------------ ------------
Computed "expected" tax expense $ 315,787 $ 353,652
Difference in foreign subsidiary rates (90,225) (70,730)
Income tax exemption (229,523) (254,990)
Other 8,691 (21,195)
----------- -----------
$ 4,730 $ 6,737
=========== ===========
The unaudited proforma effect of the tax holiday on net income is as
follows:
Years Ended December 31,
---------------------------
2002 2001
------------ ------------
Net income as reported $ 897,518 $ 1,003,698
Proforma net income $ 667,995 $ 748,708
15. OTHER RELATED PARTY TRANSACTIONS
The financial statements include balances and transactions with related
parties. For the years ended December 31, 2002 and 2001, the Company
purchased $136,539 and $163,402, respectively of equipment and
transportation services from a Fabbri-Inox S.R.L, (Fabbri-Inox) which is
controlled by the President of the Company. At December 31, 2002 and 2001
the Company had a payable to Fabbri-Inox of $49,277 and $52,286,
respectively. At December 31, 2002 and 2001 the Company had prepayments to
Fabbri-Inox of $43,444 and $2,707 respectively.
For the years ended December 31, 2002 and 2001 the Company purchased
$30,396 and $138,132 of transportation services and other products from
Rabel, S.A., (Rabel). The Company's President is an Executive Director of
Rabel. At December 31, 2002 and 2001, the Company had a payable to Rabel of
$1,588 and $158,839, respectively. At December 31, 2002 the Company had a
prepayment to Rabel of $36,603.
There were sales of approximately $625,000 to Argo for the year ended
December 31, 2001.
The Company purchases raw wine from Ceteronis S.R.L. and Prut. Total
purchases from Ceteronis S.R.L. during 2002 and 2001 was $81,001 and
$21,450 respectively. A payable to Prut of $19,097 existed at December 31,
F-18
LION-GRI S.R.L. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------
15. OTHER RELATED PARTY TRANSACTIONS Continued
2001 related to 2000 purchases. There were no purchases from Prut during
2001. The Company has investments in Ceteronis S.R.L. and Prut.
The Company purchased $30,794 and $26,325 of fixed assets and services from
Agrotehnica-Invest S.A. during 2002 and 2001 respectively. The Company has
an investment in Agrotechnica-Invest, S.A. At December 31, 2002, the
Company had a prepayment to Agrotechnica-Invest S.A. of $88,600.
The Company supplies fertilizers to Weis-MD Vine Co., S.R.L. (Weis). At
December 31, 2002, Weis had advanced $143,430 to the Company as a
prepayment for fertilizers. The Company has an investment in Weis.
16. CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
The Group's operations are conducted in the Republic of Moldova.
Accordingly, the Group's business, financial condition, and results of
operations may be influenced by the political, economic, and legal
environments in the Republic of Moldova, and by the general state of the
Moldovian economy.
The Group's operations in the Republic of Moldova are subject to
considerations and significant risks not typically associated with
companies in North America and Western Europe. These include risks
associated with, among others the political, economic and legal
environments and foreign currency exchange. The Group's results may be
adversely affected by changes in the political and social conditions in the
Republic of Moldova, and by changes in governmental policies with respect
to laws and regulations, anti-inflationary measures, currency conversion
and remittance abroad, and rates and methods of taxation among other
things.
17. COMMITMENTS AND CONTINGENCIES
Arranger Services Agreement
---------------------------
During July 2002, the Company entered into an Arranger Services Agreement
(the "Agreement") with Market Management International, Inc. (the
"Arranger"), a Florida, U.S. Corporation, and Intreprinderea Mixta Market
Management International S.R.L. (the "Agent"), a limited liability company
in the Republic of Moldova. The services to be rendered by the Arranger are
arranging for securities offerings and of marketing of securities in the
United States of America. This includes arranging for an SB-1 for the
Company, introducing investors and potential partners for fund raising and
arranging for various other investor services during and after the
effective date of the SB-1. As consideration for the services to be
rendered, the Company shall pay the Arranger a fee of $15,000 upon signing
the Agreement. In addition, the Agreement calls for significant payments
including cash, issuances of stock, and option contracts to be paid to the
F-19
LION-GRI S.R.L. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------
17. COMMITMENTS AND CONTINGENCIES Continued
Arranger for services related to an SB-1 registration and certain periods
thereafter. The total value of these payments, if any, are not
determinable. The period of performance under the Agreement shall be two
years from the date of the Agreement.
On June 5, 2003, the Company terminated the Agreement and had not filed an
SB-1 with the Securities and Exchange Commission in the United States of
America. There have been no claims or lawsuits against the Company related
to the Agreement and management represents certain provisions of the
Agreement have been breached. The ultimate outcome of this matter cannot be
predicted with certainty, however the Company believes, based on advice
from legal counsel, this matter will not have a material adverse effect on
the Company's financial statements.
Guarantee of Credit
-------------------
The Company guarantees credit of approximately $495,000 plus interest
granted to Weis-MD Vine Co., S.R.L. (Weis). The Company has a 40.4% equity
investment in Weis. The obligation is due on March 18, 2007, with a daily
penalty rate of 0.15% for non-payment.
18. NON-CASH DISCLOSURES OF CASH FLOW INFORMATION
For the year ended December 31, 2002, the following represents non-cash
disclosures of cash flow information:
Conversion of liabilities to contributed capital $ 85,995
Transfer of advances from customers to related party loans $1,245,828
19. SUBSEQUENT EVENTS
Transfer of Related Party Loan and Change In Ownership
------------------------------------------------------
On May 6, 2003, the Company's related party loan of $1,448,628 that was
assigned to NovoTech on November 29, 2002 was transferred and re-assigned
to Argo. (See Note 12.). On May 12, 2003 Argo converted this loan to
capital of the Company and obtained 99.97% ownership of the Company. On
July 10, 2003, Argo transferred its 99.97% ownership of the Company to
NovoTech.
F-20
LION-GRI S.R.L. & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------
19. SUBSEQUENT EVENTS Continued
Share Purchase Agreement
------------------------
During July 2003, as disclosed in a Form 8-K Securities and Exchange
Commission Filing, Napoli Enterprises, Inc. (Napoli) will issue 34,474,451
of its common stock to acquire 90% of the issued and outstanding capital
stock of NovaTech. In doing so, Napoli will acquire an indirect controlling
interest in the Company.
Consulting Agreement/Legal Services Memorandum and General Releases
-------------------------------------------------------------------
During February 2003, the Company entered into a one-year consulting
agreement with Marx One, Inc. (Marx) related to consultation and advisory
services for the equity and/or debt raising process and other services.
During March 2003, the Company entered into a legal services memorandum
with Feingold & Kam L.L.C. (Feingold) which sets forth various corporate
legal services including U.S. Securities and Exchange Commission filings
and other requested legal services after the Company becomes a publicly
traded corporation. During October 2003, Marx and Feingold each signed a
General Release which releases and discharges the Company from these
agreements. In consideration for the General Releases, Napoli must issue
1,000,000 restricted shares to Marx and 1,000,000 restricted shares to
Feingold, and the General Releases shall only be binding in the event that
these shares become registered as free trading/unrestricted securities
within ninety days of the date of the General Releases.
F-21