AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 20, 2002.
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM F-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
BIOPROGRESS PLC
(Exact name of Registrant as specified in its charter)
<Table>
ENGLAND AND WALES 2843 NOT APPLICABLE
(State or Other Jurisdiction of (Primary Standard Industrial (IRS Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</Table>
---------------------
HOSTMOOR AVENUE
MARCH, CAMBRIDGESHIRE,
UNITED KINGDOM. PE15 0AX
+44.135.465.5674
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------------
BIOPROGRESS INTERNATIONAL INC.
9055 HUNTCLIFF TRACE
ATLANTA, GEORGIA 30350-1935
UNITED STATES
+1.770.649.1133
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
WITH COPIES TO:
BRIAN M. MCCALL, ESQ.
DECHERT
2 SERJEANTS' INN
LONDON EC4Y 1LT
ENGLAND
+44.207.583.5353
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
---------------------
CALCULATION OF REGISTRATION FEE
<Table>
<Caption>
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) SHARE PRICE(2) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------------
Ordinary shares, nominal value L0.01 each(2)..... 49,417,601 Not Applicable $21,002,480 $1,932.23
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
(1) Based on the product of (a) 49,417,601 outstanding shares of common stock,
par value $0.001 per share of BioProgress Technology International, Inc.,
and (b) a conversion ratio of 1 ordinary share of par value L0.01 per share
of Bioprogress Plc for each share of BioProgress Technology International,
Inc. common stock.
(2) Pursuant to Rules 457(f)(1) and 457(c) under the Securities Act and solely
for the purpose of calculating the registration fee, the proposed maximum
aggregate offering price is equal to the market value of the approximate
number of BioProgress Technology International, Inc. shares to be cancelled
in the transaction and is based upon a market value of $.425 per BioProgress
Technology International Inc. share of common stock being the average of the
reported high bid and low ask prices per share on OTC Bulletin Board on
December 16, 2002.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement. [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2)).
[ ] Definitive Proxy Statement.
[ ] Definitive Additional Materials.
[ ] Soliciting Material Pursuant to Rule 240-14a-11(c) or Rule 240-14a-12
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
1) Title of each class of securities to which transaction applies:
--------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
--------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
--------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
--------------------------------------------------------------------
5) Total fee paid:
--------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
-----------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
--------------------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
--------------------------------------------------------------------
3) Filing Party:
--------------------------------------------------------------------
4) Date Filed:
--------------------------------------------------------------------
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED -- , 2002
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS
BIOPROGRESS PLC
(INCORPORATED UNDER THE LAWS OF ENGLAND AND WALES)
49,417,601 ORDINARY SHARES
This Prospectus relates to the reincorporation of BioProgress Technology
International, Inc., a Nevada corporation, in England and Wales through a merger
with our wholly owned subsidiary. The reincorporation has been approved by our
board of directors and the board of directors of BioProgress Technology
International. On or about February 1, 2003, the date the reincorporation merger
is expected to occur, each of your shares of common stock in BioProgress
Technology International will become one of our ordinary shares.
The transaction must be approved by the holders of a majority of the common
stock of BioProgress Technology International. Our directors, officers and their
affiliates, assuming exercise of all of their outstanding options, hold 35.0% of
the common stock. We understand that our directors, officers and their
affiliates intend to give their consent to the reincorporation. We are asking
you to return the enclosed written consent, in lieu of a meeting, if you approve
of the transaction.
We will issue a total of 49,417,601 of our ordinary shares to the holders
of BioProgress Technology International's common stock on a one-for-one basis.
We plan to have our ordinary shares listed on the Alternative Investment Market
of the London Stock Exchange, under the symbol BPRG, following the
reincorporation.
WE ARE ASKING FOR YOUR CONSENT AND YOU ARE REQUESTED TO SEND US A WRITTEN
CONSENT.
YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE 5 OF THIS
PROSPECTUS.
THIS PROSPECTUS DOES NOT COVER ANY RESALES OF OUR COMMON STOCK RECEIVED BY
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC. STOCKHOLDERS. NO PERSON IS AUTHORIZED
TO MAKE ANY USE OF THIS PROSPECTUS IN CONNECTION WITH ANY RESALE.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENCE.
THE DATE OF THIS PRELIMINARY PROSPECTUS IS DECEMBER 20, 2002 AND WILL BE
MAILED TO THE SHAREHOLDERS OF BIOPROGRESS TECHNOLOGY INTERNATIONAL ON
, 2002.
WHERE YOU CAN FIND MORE INFORMATION
BioProgress Technology International, Inc., is subject to the informational
requirements of the Securities Exchange Act of 1934, as amended, and, in
accordance therewith, is required to file reports and other information with the
Securities and Exchange Commission relating to its business, financial condition
and other matters. Certain information as of particular dates concerning its
directors and officers and other matters, the principal holders of its
securities and any material interest of such persons in transactions with it is
required to be disclosed in proxy statements distributed to stockholders and
filed with the SEC.
BioProgress Technology International, Inc. files annual, quarterly and
special reports, and other information with the SEC. Its SEC file number is
0-24736. Copies of the Annual Report on Form 10-KSB, as amended, for the fiscal
year ended December 31, 2001 and other reports are available for inspection at
the locations referred to below.
The reports and other information should be available for inspection at the
SEC's public reference facilities of the SEC at 450 Fifth Street, N.W.,
Washington, DC 20549, and at the regional offices of the SEC located at 233
Broadway, New York, NY 10279 and Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, IL 60661. Please call the Commission at
1-800-SEC-0330 for further information. Copies of such information should be
obtainable, by mail, upon payment of the SEC's customary charges, by writing to
the SEC's principal office at 450 Fifth Street, N.W., Washington, DC 20549. The
Commission also maintains a web site on the Internet (at http://www.sec.gov/)
that contains reports and other information regarding registrants that file
electronically with the Commission.
BioProgress PLC, has filed with a registration statement on Form F-4 to
register it's ordinary shares to be issued to stockholders of BioProgress
Technology International in the reincorporation. This proxy statement/
prospectus is a part of that registration statement and constitutes a prospectus
of BioProgress PLC in addition to being a proxy statement of BioProgress
Technology International as allowed by SEC rules, this proxy statement/
prospectus does not contain all the information you can find in the registration
statement or the exhibits to the registration statement.
Upon completion of the reincorporation, BioProgress PLC will be subject to
the informational requirements of the Exchange Act, as they apply to a foreign
private issuer, and will file annual reports on Form 20-F and current reports on
Form 6-K and other information with the Commission. As a foreign private issuer,
it will be exempt from Exchange Act rules regarding the content and furnishing
of proxy statements to stockholders and rules relating to short swing profits
reporting and liability.
BioProgress PLC will also be subject to the informational requirements of
UK company legislation, in particular the Companies Acts 1985 and 1989 (as
amended), the Public Offers of Securities Regulations 1995 (as amended), the
Criminal Justice Act 1993 (as amended), and the Financial Services and Markets
Act 2000, and will be required to file annual accounts and certain other
administrative information with the Registrar of Companies in England and Wales.
BioProgress PLC must file an annual return containing basic company information
with the Registrar of Companies in England and Wales within 28 days after each
anniversary of the company's incorporation date. Under the Companies Act 1985
BioProgress PLC, as a public company, must deliver audited accounts to the
Registrar of Companies in England and Wales within seven months of the end of
each financial year. As long as BioProgress PLC's shares are admitted to traded
on the Alternative Investment Market, it must follow the requirements of the
Alternative Investment Market Rules (which include requirements to publish
half-yearly reports and annual audited accounts), the City Code on Takeovers and
Mergers and the Rules governing Substantial Acquisition of Shares. Such reports
and other information will be available from the Registrar of Companies in
England and Wales or through a regulatory information service approved by the
London Stock Exchange or through the Alternative Investment Market section of
the London Stock Exchange website (http://www.londonstockexchange.com) as
applicable.
We have not authorized anyone to provide you with information that is
different from what is contained in this proxy statement/prospectus. This proxy
statement/prospectus is dated December 20, 2002. You should not assume that the
information contained in this proxy statement/prospectus is accurate as of any
date other than [filing date], 2002, and neither the mailing of the proxy
statement/prospectus to holders of BioProgress Technology International, Inc.
common stock nor the issuance of BioProgress PLC ordinary shares in the
reincorporation shall create any implication to the contrary.
TABLE OF CONTENTS
<Table>
PROSPECTUS SUMMARY.......................................... 1
The Companies............................................. 1
The Reincorporation and Dissolution....................... 2
Tax Consequences of the Reincorporation................... 2
Reasons for the Reincorporation........................... 2
Your Consent is Needed to Approve the Reincorporation..... 2
Ownership after the Reincorporation....................... 2
Regulatory Requirements................................... 2
Comparison of the Laws of Nevada and England and Wales.... 3
Expected Trading Market for the Ordinary Shares........... 3
Risk Factors.............................................. 3
Exchange of Certificates.................................. 3
Structure Chart........................................... 3
RISK FACTORS................................................ 4
FORWARD LOOKING STATEMENTS.................................. 10
SOLICITATION OF WRITTEN CONSENT............................. 10
THE REINCORPORATION......................................... 10
General................................................... 10
Details of the Reincorporation............................ 11
Background and Reasons for the Reincorporation............ 11
The Reincorporation Plan.................................. 11
Effective Time............................................ 11
United States Federal Securities Laws Consequences........ 11
Exchange of Share Certificates............................ 12
Description of the CREST System........................... 12
MATERIAL TAX CONSEQUENCES................................... 13
COMPARISON OF STOCKHOLDER RIGHTS............................ 21
BUSINESS.................................................... 31
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA.............. 44
CAPITALISATION AND INDEBTEDNESS STATEMENT................... 45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 45
MANAGEMENT.................................................. 55
</Table>
ii
<Table>
EXERCISE OF OPTIONS........................................................................................ 59
LEGAL MATTERS.............................................................................................. 61
EXPERTS.................................................................................................... 61
ENFORCEMENT OF CIVIL LIABILITIES AGAINST FOREIGN PERSONS................................................... 61
INDEX TO FINANCIAL STATEMENTS.............................................................................. F-1
FINANCIAL STATEMENTS....................................................................................... F-2
ANNEX A: Agreement and Plan of Manager
ANNEX B: Form of Written Consent
ANNEX C: Substitute W-9
</Table>
iii
You should rely only on the information contained in this proxy
statement/prospectus. We have not authorized any other person to provide you
with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not making an offer
to sell these securities in any jurisdiction where the offer or sale is not
permitted. You should assume that the information appearing in this proxy
statement/prospectus is accurate only as of the date on the front cover of this
proxy statement/prospectus. Our business, financial condition, results of
operation and prospects may have changed since that date.
PROSPECTUS SUMMARY
This summary highlights selected information from the proxy
statement/prospectus. It does not contain all of the information that is
important to you. To understand the reincorporation fully and for a more
complete description of the legal terms of the reincorporation, you should read
carefully the entire proxy statement/ prospectus and the additional documents
referred to in this proxy statement/prospectus. See the section headed "Where
You Can Find More Information" above.
THE COMPANIES
BioProgress Technology International, Inc.
9055 Huntcliff Trace
Atlanta, Georgia 30350-1935
United States
We are engaged in the research, development, manufacturing and marketing of
products that use water soluble and biodegradable films for the dietary
supplement, pharmaceutical, recreational and cosmetic industries and other
applications. We also develop flushable and biodegradable products for the
medical and hygiene industries. Our principal research and development
operations and executive offices are in the United Kingdom. Our primary focus is
the development and commercialization of our unique and proprietary process, the
XGel(TM) film system which comprises the equipment used to encapsulate
"ingredients" in our XGel(TM) film. We have developed an ingestible and a
non-ingestible form of XGel(TM) film to be used for ingredients such as vitamin,
herbal and mineral supplements and as oral delivery systems for drugs, or in the
case of in non-ingestible form, paintballs and toiletries (such as bath and
aromatherapy oils). Three additional versions of XGel(TM) film are in
development and available in prototype form. Collectively, these five versions
of XGel(TM) film aim to provide a cost effective and animal-free encapsulation
process for liquids, tablets and powders, thereby addressing the needs of the
entire market for oral dosage forms while providing novel delivery mechanisms
not possible with traditional processes.
BIOPROGRESS HOLDINGS, INC.
165 West Liberty Street, Suite 210
Reno, Nevada 89501
We are a newly formed company incorporated in the State of Nevada which was
formed to accomplish the reincorporation. We will not have any assets or
liabilities before the reincorporation.
BIOPROGRESS PLC
Hostmoor Avenue
March, Cambridgeshire,
PE15 0AX
United Kingdom
We are a newly formed company incorporated under the laws of England and
Wales which was formed to accomplish the reincorporation. We have authorized
100,000,000 ordinary shares, par value L0.01 and 170,000 preference shares, par
value L0.005. We will continue the business of BioProgress Technology
International, Inc. We will not have any assets or liabilities before the
reincorporation. BioProgress Technology International, Inc. will become our
wholly owned subsidiary.
THE REINCORPORATION
Under the reincorporation:
-- BioProgress Holdings Inc. will merge with BioProgress Technology
International, Inc., which will become a wholly owned subsidiary of
BioProgress PLC.
-- You will receive one of our ordinary shares in exchange for each share
of common stock of BioProgress Technology International, Inc. which you
own.
1
-- Our ordinary shares will be admitted to the Alternative Investment
Market of the London Stock Exchange.
TAX CONSEQUENCES OF THE REINCORPORATION
Stockholders are urged to read the more detailed summary of the tax
consequences of the reincorporation set forth under "Material Tax Consequences".
REASONS FOR THE REINCORPORATION
We have proposed the reincorporation to obtain a trading facility on the
Alternative Investment Market in London. We believe a trading facility on the
Alternative Investment Market will potentially broaden our capital raising
opportunities and potentially give us access to more market liquidity.
YOUR CONSENT IS NEEDED TO APPROVE THE REINCORPORATION
The reincorporation must be approved by holders of a majority of the common
stock of BioProgress Techology International. We are asking you to return the
enclosed Form of Written Consent, in lieu of a meeting, if you approve of the
transaction. We expect the reincorporation to occur on or about February 1,
2003, assuming we receive written consents in favor of the transaction
representing at least a majority of the common stock of BioProgress Technology
International. We believe that our directors and officers intend to support the
reincorporation. We expect them to execute and deliver written consents that,
together, will make up 35.0% of the voting stock.
OWNERSHIP AFTER THE REINCORPORATION
The result of the proposed reincorporation is that our shares will be owned
directly and in the same proportions by the same persons who currently own the
shares of BioProgress Technology International, Inc.
CONDITIONS TO THE REINCORPORATION
Completion of the reincorporation is conditional on a number of factors
including, among others, the registration statement of which this proxy
statement/prospectus is a part being declared effective by the SEC, the receipt
of the required written consents of the shareholders of BioProgress Technology
International, and the obtaining of UK tax clearances.
REGULATORY REQUIREMENTS
The reincorporation is not subject to any regulatory requirements other
than the US federal securities laws. We have filed a registration statement on
Form F-4 which includes the proxy statement/prospectus to comply with those
requirements. For our admission to the Alternative Investment Market we must
produce an admission document disclosing the information specified in the
Alternative Investment Market rules of the London Stock Exchange. In addition,
an admission application form and declaration from Collins Stewart Limited, our
nominated adviser for the purposes of the Alternative Investment Market Rules
must be prepared.
COMPARISON OF THE LAWS OF NEVADA AND ENGLAND AND WALES
There are differences between the rights of stockholders under the law of
Nevada and the law of England and Wales. In addition, there are differences
between the current articles of incorporation and by-laws and our memorandum of
association and articles of association. See "Comparison of the Laws of Nevada
and England and Wales" and "Description of BioProgress Ordinary Shares" for
further details.
EXPECTED TRADING MARKET FOR THE ORDINARY SHARES
It is intended that our ordinary shares will be admitted to trading on
Alternative Investment Market of the London Stock Exchange.
RISK FACTORS
This proxy statement/prospectus includes certain additional factors related
to our operations and strategies and the reincorporation. Stockholders should
read carefully the section entitled "Risk Factors" below.
EXCHANGE OF CERTIFICATES
You do not need to do anything with your share certificates. After the
reincorporation they will be deemed to represent ordinary shares of BioProgress
PLC.
2
STRUCTURE CHART
The following charts(1) shows the corporate structures before and
immediately after the reincorporation:
BEFORE THE REINCORPORATION
[FLOW CHART]
- ---------------
(1) Dormant companies are not shown on this chart
(2) Owned 46.6% by BioProgress Technology International, Inc.
AFTER THE REINCORPORATION(1)
[FLOW CHART]
- ---------------
(1) Dormant companies are not shown on this chart
(2) Owned 46.6% by BioProgress Technology International, Inc.
3
RISK FACTORS
Statements concerning our future results of operations, our financial
condition and business are "forward-looking" statements as defined in the
Securities Act of 1933 and the Securities Exchange Act of 1934. Investors are
cautioned that information contained in these forward-looking statements is
inherently uncertain, and that actual performance and results may differ
materially due to numerous risk factors, including, but not limited to, the
risks outlined below. You should carefully consider the following factors, as
well as other information regarding BioProgress PLC, BioProgress Technology
International, Inc. and the reincorporation contained in this proxy
statement/prospectus.
CERTAIN RISKS ASSOCIATED WITH THE REINCORPORATION
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC. AND ITS STOCKHOLDERS MAY SUFFER
UNFAVORABLE TAX TREATMENT IN EFFECTING THE REINCORPORATION.
U.S. HOLDERS OF OUR STOCK MAY OWE U.S. TAX ON THE REINCORPORATION.
If you are a United States holder (as defined in Material Tax Consequences,
below), you will recognize gain, if any, but not loss, upon the receipt of our
ordinary shares in exchange for BioProgress Technology International, Inc. stock
pursuant to the reorganization. That gain generally will equal the excess, if
any, of the fair market value of the ordinary shares received in exchange for
BioProgress Technology International, Inc. stock in the merger. That gain
generally will be taxed as capital gain. If you are an individual and have held
the common stock for more than one year, you generally will be taxed at a
maximum rate of 20% on the exchange.
You will not be permitted to recognize any loss on your exchange of common
stock for our ordinary shares. Instead, if you would have recognized a loss,
your aggregate tax basis in the ordinary shares will equal your aggregate tax
basis in the BioProgress Technology International, Inc. stock you surrender.
YOU MAY BE SUBJECT TO ADDITIONAL TAX IF WE DECIDE TO PAY DIVIDENDS.
We have no immediate plans to pay dividends after the closing. However, if
we do so, you will be taxed on the dividend. If you are a United States holder
that is a corporation incorporated in the United States, you may not be able to
claim a dividends received deduction because we will not be a corporation
incorporated in the United States. Because the distributions would come from a
foreign corporation, some or all of them may be deemed to have come from foreign
sources for purposes of calculating any foreign tax credit that may be available
to you. The foreign tax credit rules are complex, subject to interpretation, and
limited by many specific requirements that are unique to individual taxpayers.
As a result, we urge you to consult with your own tax advisor regarding the
possible foreign tax credit consequences of any future distributions.
WE URGE YOU TO CONSULT YOUR TAX ADVISORS REGARDING THE TAX CONSEQUENCES TO
YOU OF ANY FUTURE DISTRIBUTIONS FROM US.
WE COULD BE TAXED IN THE UNITED STATES AS A RESULT OF LEGISLATION CURRENTLY
UNDER CONSIDERATION.
BioProgress Technology International, Inc. is currently is subject to U.S.
corporate income tax on its worldwide income. After the reorganization,
BioProgress Technology International, Inc. will continue to be subject to U.S.
corporate income tax, including U.S. tax on certain operations of the U.K.
subsidiaries of the BioProgress Technology International, Inc. If we establishes
new subsidiaries outside the U.S., those subsidiaries ordinarily would not be
subject to tax in the United States. However, several members of the United
States Congress have introduced legislation that, if enacted, could have
significant tax consequences to us. All proposals discussed below are from the
107th Congress and will need to be reproposed in the 108th Congress. The number
of proposals and the continued attention given to "expatriation" transactions
mean that legislation resembling one or more if the proposals discussed below
may be enacted.
One group of proposals would treat a foreign corporation, like us, who
undertake a corporate expatriation transaction, such as the reorganization, as a
domestic corporation. These proposals have various effective dates, but all
would apply retroactively and would cause us to be treated as a domestic
corporation. If any of these proposals ultimately is adopted, we will be taxed
in the United States on ours worldwide income, including certain income earned
by our subsidiaries that are not United States corporations, much as BioProgress
Technology International, Inc. is now. In addition, we may lose the ability to
claim certain tax losses in the United States.
Under some proposals, we could be subject to a tax at the time of the
reincorporation on the excess of our assets' fair market value over their basis.
Another proposal would deny a foreign corporation that may otherwise be
entitled to certain benefits under a tax treaty between the United States and a
foreign country those treaty benefits, unless that foreign corporation is
4
predominantly owned by individuals who are residents of such foreign country. If
this proposal is enacted, the United States may deny us the benefits of the
United States-United Kingdom tax treaty.
U.S. TAX CONSEQUENCES TO HOLDERS OF OUR SHARES COULD CHANGE IF THE LEGISLATION
CURRENTLY UNDER CONSIDERATION IS ENACTED.
If we are treated as a United States corporation as a result of the
proposed legislation discussed in "Risk Factors -- We Could be Taxed in the
United States as a Result of Legislation Currently Under Consideration," above,
your tax treatment may differ from that described under "Certain United States
Tax Consequences of the Reincorporation."
WE COULD BE PROHIBITED FROM CONTRACTING WITH THE U.S. GOVERNMENT OR ANY OF ITS
AGENCIES.
Under the Homeland Security Act of 2002, the new United States Department
of Homeland Security is prohibited from contracting with any "inverted domestic
incorporation" (which would include us after the reincorporation) unless the
corporate group has substantial business operations in the jurisdiction where
the parent is incorporated. We believe at present that our business operations
in the United Kingdom are sufficient to permit us to contract with the
Department of Homeland Security.
Provisions similar to those of the Homeland Security Act have been proposed
to apply generally to all United States government agencies. Those provisions
may be adopted without providing an exception like the one in the Homeland
Security Act. If so, we would lose the ability to contract with the United
States government. However, we do not currently have any contracts with the
United States government or any United States government agency, and do not at
present anticipate entering into any such contracts.
WE COULD BECOME A PASSIVE FOREIGN INVESTMENT COMPANY.
If we acquire significant passive assets, such as cash or marketable
securities, or engage in transactions producing passive income, we could be
classified as a passive foreign investment company (a "PFIC") for United States
federal income tax purposes. A sale of all or most of our business could result
in the acquisition of a substantial amount of passive assets and, in certain
circumstances, may result in us being classified as a PFIC. If we become a PFIC,
United States holders of our stock would be subject to a special tax regime
imposed upon PFICs. If we become a PFIC, United States holders will be taxed at
ordinary income rates (rather than favorable capital gains rates) when they sell
our stock, and they will also be taxed on an imputed interest amount.
THE REINCORPORATION INTO A COMPANY INCORPORATED IN ENGLAND AND WALES MAY
MATERIALLY AFFECT STOCKHOLDERS' RIGHTS.
We were formed solely to accomplish the reincorporation of BioProgress
Technology International, Inc. into an English company. The laws of England and
Wales may be materially different than the laws of Nevada, under which
BioProgress Technology International, Inc. is incorporated. We cannot assure you
that the differences between the laws of England and Wales and Nevada will not
materially affect your interests. For a discussion of certain material
differences between the laws of England and Wales and Nevada, please see
"Comparison of the Laws of Nevada and England and Wales" in this document.
YOU MAY NOT BE ABLE TO ENFORCE A US JUDGEMENT AGAINST US OR OUR OFFICERS AND
DIRECTORS IN ENGLAND.
We are an English company and a majority of our officers and directors are
residents of various jurisdictions outside the United States. A substantial
portion of our and such persons' assets are located outside the United States.
As a result, it may be difficult for US investors to effect service of process
within the United States upon such persons or to enforce in United States courts
judgements obtained against such persons including judgements of United States
courts predicated under United States securities laws. We will arrange that we
may be served with process with respect to actions based on offers and sales of
securities made hereby in the United States by serving BioProgress Technology
International, Inc., 9055 Huntcliff Trace, Atlanta, Georgia 30350-1935, United
States, our United States agent appointed for that purpose. We have been advised
by our English counsel, Dechert, that there is doubt as to whether English
courts would enforce judgements of United States courts obtained in actions
against such persons or us that are predicated upon the civil liability
provisions of the Securities Act. There is no treaty in effect between the
United States and England providing for such enforcement, and there are grounds
upon which English courts may enforce judgements of United States courts.
RISKS RELATING TO OUR BUSINESS
OUR LIMITED OPERATING HISTORY MAKES EVALUATING OUR BUSINESS DIFFICULT.
We began demonstrations of our XGel(TM) product during the early part of
2000 and executed the first sale of a license and XGel(TM) film systems during
August 2000. Accordingly, we have only a limited operating history in order to
evaluate our business. The risks, expenses and difficulties that an early-stage
company like ours faces
5
must be considered. These risks include our ability to successfully complete the
production engineering, manufacture and commissioning of each of the three
XGel(TM) products that currently form our product offering. We must:
-- successfully respond to competitive developments;
-- continue to upgrade our products and service offerings;
-- continue to attract, retain and motivate qualified personnel; and
-- continue to attract financing to support the planned growth of our
business.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY AND YOU SHOULD NOT
RELY ON THEM TO PREDICT OUR FUTURE PERFORMANCE.
Fluctuations in our quarterly results may adversely affect the price of our
ordinary shares. We expect that our quarterly results could fluctuate
significantly due to many factors, including:
-- the loss of a customer or the abandonment of a project by a customer;
-- our small customer base;
-- the need for future research and development funding;
-- the pace of development of technologies and processes in our market; and
-- our ability to effectively manage our growth during the anticipated
growth of our markets.
We believe that period-to-period comparisons of our operating results are
not meaningful. Additionally, if our operating results in one or more quarters
do not meet securities analysts' or your expectations, the price of our ordinary
shares could decrease.
OUR BUSINESS MAY SUFFER IF NEW CUSTOMERS DO NOT ACCEPT OUR PRODUCT OFFERINGS.
We currently derive the majority of our revenues from our XGel(TM) products
and associated services. We anticipate that these sources will continue to
account for a majority of our revenues for the foreseeable future. As a result,
our business will suffer if the market does not accept our product offerings and
our future enhancements of these product offerings. If demand for our product
offerings drops as a result of competition, technological change or other
factors, our business could be substantially harmed.
The market for gelatin replacement materials and means of processing is
still emerging and it may not continue to grow. Even if the market does grow,
businesses may not adopt our product offerings as gelatin substitutes. We have
expended, and intend to continue to expend, considerable resources educating
potential customers about the XGel(TM) products and our services in general and
about the features of the XGel(TM) film system and new product development
opportunities afforded by it in particular. However, our product offerings may
not achieve any additional degree of market acceptance. If the market for our
product offerings fails to grow or grows more slowly than we currently
anticipate, our business would be materially harmed.
WE DEPEND ON A FEW INDUSTRIES FOR MOST OF OUR SALES, AND WE MAY NOT BE
SUCCESSFUL IN EXPANDING BEYOND THOSE LIMITED MARKETS.
A substantial portion of our revenues has been derived from sales to
manufacturers of fast moving consumer goods, vitamins herbs and minerals and
confectionery products. We may not continue to be successful in these markets.
In addition, we may not be successful in achieving significant market acceptance
in other markets that we target.
THE LOSS OF ONE OF OUR LARGEST CUSTOMERS COULD CAUSE OUR REVENUES TO DROP
QUICKLY AND UNEXPECTEDLY.
In fiscal 2000, our top three customers accounted for 96% of total
revenues, with Proctor and Gamble accounting for 67.5% of total revenues and the
remaining 28.5% attributable to Boots and EcoProgress. In fiscal 2001, our top
five customers accounted for 93% of total revenues, with Proctor and Gamble
accounting for 43% and the four other customers (Boots, EcoProgress, Peter Black
and VAX) contributed the remaining 50%. Our contract with the Proctor & Gamble
Company has been completed. For the nine months ending September 30, 2002 our
top five customers were Bristol-Myers Squibb, Convatec, Peter Black, Farmasierra
and Boots, accounting for approximately 95% of total revenues approximately
evenly spread across the five of them. We cannot be certain that our customers
will continue to do business with us, that business from existing customers will
continue at the levels of previous periods, or that we will be able to do a
significant amount of business with new customers. If we lose one of our
customers, our revenues could drop more quickly than we could reduce expenses.
This could substantially harm our financial results.
WE DEPEND UPON LICENSES WITH MANUFACTURERS FOR REVENUES.
Revenues from our technologies will be dependent upon the production and
sale of products utilizing such technologies. We do not currently possess the
ability or resources necessary to complete on our own the
6
development, testing, regulatory approval process and commercialization for
products utilizing our technologies and we do not currently intend independently
to market products incorporating our technologies in the foreseeable future. It
is our strategy to seek to enter into agreements with manufacturers which will
assist us in developing, testing and obtaining governmental approval for, and
the marketing and commercialization of, the various formulations of our
technologies. There can be no assurance that we will be able to enter into
additional collaborative arrangements with respect to product development
utilizing our technologies, that any existing or future collaborative
arrangements will be successful, that milestones in such agreements will be met
or that the terms of any future development agreements entered into will be
favorable to us. If we are unable to obtain development assistance and funds
from manufacturers to fund a portion of our product development costs and to
commercialize products, we may have to delay, scale back or curtail one or more
of our activities.
We have no control over the resources and attention devoted by our
collaborative partners to the development of a product candidate and, to the
extent resources devoted are limited, we may be adversely affected. If any of
our collaborators breaches or terminates its agreement with us or otherwise
fails to conduct its collaborative activities in a timely manner, the
development or commercialization of the product candidate or research program
under such collaborative agreement may be delayed, and we may be required to
devote unforeseen additional resources to continue such development or
commercialization, or terminate such programs. The termination of collaborative
arrangements could have a material adverse effect on our business, financial
condition and results of operations. There can be no assurance that disputes
will not arise in the future with respect to the ownership of rights to any
technology developed with third parties. These and other possible disagreements
between collaborators and the Company could lead to delays in the collaborative
research, development or commercialization of certain product candidates, or
could require or result in litigation or arbitration, which would be time
consuming and expensive and would have a material adverse effect on our
business, financial condition and results of operations.
WE NEED ADDITIONAL CASH TO OPERATE OUR BUSINESS AND OUR VIABILITY AS A GOING
CONCERN IS UNCERTAIN.
Since our inception, we have incurred significant losses and negative cash
flow from operations, and as of December 31, 2001, we had an accumulated deficit
of approximately $18.8 million. Based on our present operating expenses, taking
into account available cash reserves, we will not be able to continue as a going
concern without an increase in cash flow from operations and/or the infusion of
addition capital to fund operations. We expect to meet our working capital
obligations and other cash requirements with cash derived from operations and
from placement of additional equity by issuance of ordinary or preference
shares. If we issue securities to raise capital you may have your ownership
interest diluted.
There can be no assurance however that we will be able to continue as a
going concern, that cash from operations and the other sources described above
will be achieved or will be sufficient for our operating needs or that we will
be able to achieve profitability on a consistent basis, if at all. In the event
that cash flow from operations is less than anticipated and we are unable to
secure additional funding, in order to preserve cash, we would be required to
further reduce expenditures and effect further reductions in our corporate
infrastructure, either of which could have a material adverse effect on our
ability to continue our operations. Even if we obtain additional working capital
in the near future, the need for additional funding may be accelerated and there
can be no assurances that any such additional funding can be obtained on terms
acceptable to us, if at all.
OUR STOCK PRICE OR OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE ARE NOT ABLE
TO EFFICIENTLY INTEGRATE ACQUISITIONS. DURING JUNE, 2001 WE ACQUIRED PRODESIGN
TECHNOLOGY LTD.
We have consummated and we may continue to pursue acquisitions that provide
new technologies, products or service offerings. Future acquisitions by us may
involve potentially dilutive issuances of equity securities. We also may incur
substantial additional liabilities and expenses, such as debt or amortization
expenses related to goodwill and other intangible assets. If any of these occur,
the market price of our ordinary shares and our financial results could suffer.
Acquisitions also involve numerous risks, including:
-- difficulties in the assimilation of the operations, technologies;
-- integration of products and personnel of the acquired company;
-- the diversion of management's attention from other business concerns;
-- risks of entering markets in which we have no or limited prior
experience; and
-- the potential loss of key employees of the acquired company.
7
WE HAVE A LIMITED ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AND
OTHERS COULD INFRINGE ON OR MISAPPROPRIATE OUR PROPRIETARY RIGHTS.
Our success and ability to compete are substantially dependent on our
internally developed technologies and trademarks, which we protect through a
combination of patent, trademark and trade secret laws, confidentiality
procedures and contractual provisions.
We may not have protected all of our intellectual property rights as part
of our arrangements with customers and suppliers. In addition, despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to
copy aspects of our technology or to obtain and use information that we regard
as proprietary. Policing unauthorized use of our technology is difficult. In
addition, the laws of some foreign countries do not protect our proprietary
rights to the same extent as the laws of the United States and certain European
countries. Furthermore, our competitors may independently develop technology
similar to ours.
The number of intellectual property claims may increase as the number of
competing products grows and the functionality of products in different industry
segments overlaps. Although we are not aware that any of our products infringe
upon the proprietary rights of third parties, there can be no assurance that
third parties will not claim infringement by us with respect to current or
future products. Any of these claims, with or without merit, could be
time-consuming to address, result in costly litigation, cause product shipment
delays or require us to enter into royalty or licensing agreements. These
royalty or licensing agreements, if required, might not be available on terms
acceptable to us or at all, which could have a material adverse effect upon our
business.
WE DEPEND ON KEY PERSONNEL FOR OUR SUCCESS.
Our success depends upon the continued contributions of our executive
officers and scientific and technical personnel. During our operating history,
many key responsibilities have been assigned to a relatively small number of
individuals. The competition for qualified personnel is intense, and the loss of
services of certain key personnel could adversely affect the business. We have
employment agreements with each of our senior management and certain key
scientific personnel.
OUR FOUNDERS, OFFICERS AND PRINCIPAL STOCKHOLDERS HAVE SUBSTANTIAL CONTROL
OVER OUR VOTING STOCK AND HAVE THE ABILITY TO MAKE DECISIONS THAT COULD
ADVERSELY AFFECT OUR STOCK PRICE.
As of December 2, 2002, our directors, officers and their affiliates,
assuming exercise of all of their outstanding options, held 19,135,035 shares,
or 35.0% of our outstanding common stock. Consequently, this group will be able
to significantly influence the outcome of all matters submitted for stockholder
action, including the election of members to our Board of Directors and the
approval of significant change in control transactions, which may have the
effect of delaying or preventing a change in control. Representatives of the
controlling stockholders constitute all six directors and will therefore have
significant influence in directing the actions of the Board of Directors.
WE MAY BE SUBJECT TO FUTURE PRODUCT LIABILITY CLAIMS.
Our business exposes us to potential product liability risks that are
inherent in the testing, manufacturing and marketing of products used for human
ingestion. Product liability results from harm to end users using our products
that were either not communicated as a potential side-effect or were more
extreme than communicated. Although we believe that the ingredients used in our
products are not harmful, the risk of accidental contamination or injury from
our products cannot be completely eliminated.
While our license agreements with our customers typically contain
provisions designed to limit our exposure to potential product liability claims,
it is possible that these provisions may not be effective under the laws of
certain jurisdictions. Although we believe our products contain suitable
substances for human ingestion, we cannot give any assurance that adverse
reactions will not occur once our products are available on a wide scale basis.
While we have not experienced any product liability claims to date, we may be
subject to such claims in the future. A successful product liability claim
brought against us could have a material adverse effect on our business.
Moreover, defending these claims, regardless of merit, could entail substantial
expense and require the time and attention of key management personnel.
WE FACE RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS.
We own subsidiaries, conduct operations and market our product suite
internationally. Conducting business in most countries will require us to become
familiar with and to comply with foreign laws, rules, regulations and customs.
We have limited experience conducting foreign business and we cannot assure
investors that we will be successful. Moreover, our failure to comply with
foreign laws, rules and regulations of which we are not aware
8
may harm the development of our business. Further risks are inherent in
international operations, including the following:
-- customers' agreements may be difficult to enforce and receivables
difficult to collect through a foreign country's legal system;
-- foreign customers may have longer payment cycles;
-- foreign countries may tax our foreign income and tax rates in certain
foreign countries may exceed those of the United States and United
Kingdom and foreign earnings may be subject to withholding requirements
or the imposition of tariffs, exchange controls or other restrictions;
-- intellectual property rights may be more difficult to enforce in foreign
countries;
-- fluctuations in exchange rates may affect product demand and may
adversely affect the profitability of products provided by us in foreign
markets where payment for our product suite is made in the local
currency;
-- general economic conditions in the countries in which we operate could
have an adverse effect on our earnings from operations in those
countries;
-- unexpected changes in foreign laws or regulatory requirements may occur,
which could interfere with our business or operations;
-- compliance with a variety of foreign laws and regulations may prove
difficult; and
-- an overlap of different tax structures may prove too complex to
administer effectively.
There can be no assurance that any of these factors will not have a
material adverse effect on our business and results of operations.
WE ARE DEPENDENT ON A SMALL NUMBER OF SUPPLIERS.
We currently contract with four suppliers to produce the film we use in our
XGel(TM) film system. There are a limited number of producers capable of
producing film for us and it could take an extended period of time to transition
to a new supplier. A loss of one of our sources of supply could have a material
adverse effect on our business, customer relations and financial results.
WE FACE RISKS RELATED TO EXCHANGE RATES.
Our operations are conducted in several countries. The results of these
operations are reported in the relevant foreign currency and then translated
into US dollars at the applicable exchange rates for inclusion into our combined
financial statements. Fluctuations in the value of the US dollar against other
currencies have had in the past, and may in the future, a material effect on the
results of operations.
RISKS RELATING TO OUR INDUSTRY
OUR BUSINESS WILL NOT BE SUCCESSFUL IF WE DO NOT KEEP UP WITH THE RAPID
CHANGES IN OUR INDUSTRY.
Vitamin, mineral, supplement and drug delivery, biotechnology,
pharmaceutical science and manufacturing are evolving fields in which
developments are expected to continue at a rapid pace. Our success depends, in
part, upon maintaining a competitive position in the development of products and
technologies in its areas of focus. Our competitors may succeed in developing
competing technologies or obtaining regulatory approval for products more
rapidly than we or our customers are able. There can be no assurance that
developments by others will not render our products or the compounds used in
combination with our products uncompetitive or obsolete.
WE FACE STRONG COMPETITION.
Our competitors may be able to develop products and services that are more
attractive to businesses than our products and services. Most of our competitors
have longer operating histories, significantly greater financial, technical,
marketing and other resources, greater name recognition and larger customer
bases. As a result, they may be able to adapt more quickly to new or emerging
technologies and changes in customer requirements. They also may be able to
devote greater resources to the promotion and sale of their products and
services than us. If these companies introduce products and services that
effectively competed with our products and services, they could be in a position
to charge lower prices. This could give them a competitive advantage over us.
In order to be successful in the future, we must continue to respond
promptly and effectively to the challenges of technological change and
competitors' innovations. If we cannot compete successfully with existing or new
competitors, we may have to reduce prices on our products, which could lead to
reduced profits. We could also lose market share, which would materially and
adversely affect our business.
9
RISKS RELATED TO OUR SHARES
EXCHANGE RATE FLUCTUATIONS MAY REDUCE THE VALUE OF OUR SHARES FOR U.S.
HOLDERS.
Individuals and entities located in the US who hold our ordinary shares
will bear exchange rate risk. Our ordinary shares issued in the merger will be
traded on the Alternative Investment Market of the London Stock Exchange and
will be priced in pounds sterling. As a result, US holders of our ordinary
shares who would like to sell their shares must sell them on Alternative
Investment Market and have the proceeds of the sale converted into dollars.
Holders may receive a reduced dollar value upon the sale of their shares as the
result of the dollar/pound sterling exchange rate in effect at that time.
Our stock will likely be subject to substantial price and volume fluctuations
due to a number of factors, some of which are beyond our control.
Application will be made for our ordinary shares to be admitted to trading
on Alternative Investment Market. The future success of Alternative Investment
Market and the liquidity in the market for our ordinary shares cannot be
guaranteed. In particular, the market for our ordinary shares may be, or may
become, relatively illiquid and therefore our ordinary shares may be, or may
become, difficult to sell.
FORWARD LOOKING STATEMENTS
We have made forward looking statements in this proxy statement/prospectus
that are based on the beliefs of our management as well as assumptions made by,
and information currently available to, us. These statements include the receipt
of regulatory approvals, the adequacy of our capital resources, trends relating
to our business and others. When used in this document, the words "anticipate,"
"believe," "estimate," "expect," "plan," and "intend" and similar expressions,
as they relate to us or our management, are intended to identify forward-
looking statements.
Forward-looking statements reflect the current view of our management with
respect to future events and are subject to certain risks, uncertainties and
assumptions. Many factors could cause our actual results, performance or
achievements to be materially different from any future results, performance or
achievements that may be expressed or implied by the forward-looking statements,
including, among others, those set forth in "Risk Factors" and the following:
-- the failure to maintain adequate capital resources;
-- competition to the businesses;
-- the lack of acceptance of any new products we may develop;
-- changes in currency exchange rates;
-- changes in general economic and business conditions;
-- changes in business strategy; and
-- any significant delay in the expected completion of the reincorporation
and risks that the benefits anticipated from the reincorporation may not
be fully realized.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those described in this proxy statement/prospectus as anticipated, believed,
estimated, expected, planned or intended.
In addition, the terrorist attacks on September 11, 2001 have adversely
affected the economy generally. These developments have, and will continue to,
adversely affect our business, although we are not able to quantify or reliably
estimate the future impact that these matters may have on our businesses,
results of operations or financial condition.
SOLICITATION OF WRITTEN CONSENT
The Company is mailing a copy of this proxy statement/prospectus to each
holder of record of common stock. Solicitations of written consent will be made
by mail and may also be made by our officers, or by other regular employees,
personally, by telephone or by other electronic means. We do not presently
intend to but may also request that brokers and other nominees solicit written
consents from stockholders whose shares are held in accounts, street name, or at
brokerage firms. The Company will bear the cost of the solicitation of written
consent from its stockholders.
THE REINCORPORATION
GENERAL
BioProgress PLC ("PLC") and BioProgress Technology International, Inc.
("BPTII" or the "Company") propose the following reincorporation (the
"Reincorporation") of the current business of the Company. The Reincorporation
will be implemented pursuant to an agreement and plan of merger (the
"Reincorporation Plan").
10
DETAILS OF THE REINCORPORATION
1. BioProgress Holdings Inc. ("Holdings") a wholly owned subsidiary of
PLC will be merged with and into the Company (the "Merger"). Pursuant to the
Merger, stockholders will receive one ordinary share in PLC, par value L0.01 for
each BPTII share of common stock, par value $.001 per share owned, and one
preference share of PLC, Par Value L0.005 for each BPTII share of Series B
preferred stock, par value $.01 per share owned.
2. The Company will survive the Merger as a wholly owned subsidiary of
PLC. The board of directors of PLC intend to seek admission of PLC's ordinary
shares to trading on the Alternative Investment Market of the London Stock
Exchange in London, England.
3. On December 18, 2002, the Board of Directors of the Company
unanimously approved the terms of the Reincorporation Plan. Our business exposes
us to potential product liability risks that are inherent in the testing,
manufacturing and marketing of pharmaceutical products. Product liability
results from harm to end users using our products that were either not
communicated as a potential side-effect or were more extreme than communicated.
Accidents related to hazardous materials used in products could subject us to
significant liability. Although we believe that the ingredients used in our
products are not harmful, the risk of accidental contamination or injury from
our products cannot be completely eliminated. In the event of an accident, we
could be held liable for any damages that result, and any liability could exceed
our financial resources.
BPTII is requesting that stockholders of BPTII approve of the Merger and
Reincorporation Plan by written consent in lieu of a meeting ("Stockholder
Action"). The Reincorporation Plan has was unanimously approved by the directors
of PLC on December 18, 2002. The Company is proposing the Merger be consummated
on or about February 1, 2003 assuming Stockholder Action has occurred by then.
Upon consummation of the Merger, stockholders of the Company will receive the
same number of ordinary shares and/or preference shares in PLC as they currently
hold in the Company.
THE REINCORPORATION PLAN
The Reincorporation will be effected by the merger of Holdings, into the
Company. The terms of the Merger is set forth in the Reincorporation Plan which
is attached hereto as Exhibit A. Pursuant to the Reincorporation Plan:
-- Holdings will merge with the Company, and the Company will be the
surviving corporation.
-- Each outstanding share of common stock of the Company will automatically
be converted into one ordinary share of PLC.
-- Each outstanding share of Series B preferred stock of the Company will
automatically be converted into one preference share of PLC.
-- Any options or warrants exercisable for shares of BioProgress Technology
International, Inc. common stock issued and outstanding immediately
prior to the effective time will become exercisable for an equal number
of ordinary shares of PLC in accordance with the terms of such options.
CONDITIONS TO THE MERGER
The Merger is subject to the following conditions:
-- the Merger must be adopted and approved by the stockholders of
BioProgress Technology International and BioProgress Holdings;
-- the Merger must be duly authorized and approved by the board of
directors of the Company;
-- the registration statement must be declared effective under the
Securities Act of 1933;
-- any required notice or waiting period before the Merger shall have
occurred pursuant to Regulation 14A of the Securities Exchange Act of
1934;
-- acquiring the requisite UK Inland Revenue tax clearances; and
-- the documents required by the Nevada Private Corporation Law shall have
been filed with the Secretary of State in Nevada.
EFFECTIVE TIME
We expect that on February 1, 2003 assuming Stockholder Action has been
achieved, the corporate existence of Holdings will cease upon the filing of the
Articles of Merger with the Nevada Secretary of State and the Company will
become a wholly owned subsidiary of PLC. The Reincorporation Plan provides that
the Merger may be abandoned by PLC or the Company prior to the filing of the
Articles of Merger.
UNITED STATES FEDERAL SECURITIES LAWS CONSEQUENCES
THIS PROXY STATEMENT/PROSPECTUS DOES NOT COVER ANY RESALES OF PLC ORDINARY
SHARES RECEIVED BY THE COMPANY'S SHAREHOLDERS NOR THE ISSUE OF ANY ORDINARY
SHARES PURSUANT TO THE EXERCISE OF OPTIONS OR
11
WARRANTS. NO PERSON IS AUTHORIZED TO MAKE ANY USE OF THIS PROXY
STATEMENT/PROSPECTUS IN CONNECTION WITH ANY SUCH RESALE OR EXERCISE.
All the ordinary shares received by you in the Reincorporation will be
freely transferable, unless you are deemed to be an affiliate of PLC under
United States federal securities laws at the effective time of the Merger . If
you are deemed to be such an affiliate, the ordinary shares received in the
Merger may be resold by you only in transactions permitted by Rule 145 under the
United States securities Act of 1933 or as otherwise permitted under the
Securities Act.
Persons who may be deemed to be affiliates of PLC for the above purposes
generally include individuals or entities that control, are controlled by, or
are under common control with PLC and may include officers, directors and
principal shareholders of the Company.
EXCHANGE OF SHARE CERTIFICATES
As of the effective time of the Merger, the stockholders of the Company
before the effective time will automatically become the owners of PLC ordinary
shares and, as of the effective time, cease to be owners of the Company's common
stock. The articles of association of PLC provide that share certificates
representing the Company's common stock, as of the effective time, will be
deemed to represent an equivalent number of PLC ordinary shares. Holders of the
Company's common stock will not be required to exchange their share certificates
as a result of the reincorporation. Should a shareholder desire to sell some or
all of his, her or its ordinary shares in PLC, delivery of the share certificate
or certificates which previously represented the Company's common stock will be
sufficient.
Certificates bearing the name of PLC will be issued in the normal course
upon surrender of outstanding Company common stock certificates for transfer or
exchange. If any stockholder surrenders a certificate representing the Company's
common stock for exchange or transfer and the new certificate to be issued is to
be issued in a name other than that appearing on the surrendered certificate
representing the Company's common stock, it will be a condition to such exchange
or transfer that the surrendered certificate be properly endorsed and otherwise
be in proper form for transfer and that the person requesting such exchange or
transfer either: (1) pays us or our agents any taxes or other governmental
charges required by reason of the issuance of a certificate registered in a name
other than that appearing on the surrendered certificate; or (2) establishes to
our satisfaction or our agents that those taxes or other governmental charges
have been paid.
For those stockholders of the Company who hold their shares in
uncertificated form through the Depositary Trust Company ("DTC") you must
either: (1) if your bank or broker/dealer has the capacity, request that your
bank or broker/dealer open an account for you with the CREST settlement service
("CREST") in London where the DTC or your bank or broker/dealer will transfer
your shares in PLC; or (2) if your bank or broker/dealer does not have the
capacity to open a foreign account, you, or your bank or broker/dealer will be
issued a new share certificate representing PLC ordinary shares. You should
contact the person through whom you hold your shares to make these arrangements.
DESCRIPTION OF THE CREST SYSTEM
CREST is a paperless settlement procedure enabling securities to be
evidenced otherwise than by a certificate and transferred other than by a
written instrument. PLC's articles of association will permit the holding of
ordinary shares in PLC in uncertificated form under the CREST system.
ACCOUNTING TREATMENT
The reincorporation will be accounted for using merger accounting rules,
similar to pooling of interests formerly available under generally accepted
accounting principles in the United States ("US GAAP"), under generally accepted
accounting principles in the United Kingdom ("UK GAAP") and using the purchase
method of accounting under US GAAP.
SHARE QUOTE
APPLICATION WILL BE MADE FOR THE ORDINARY SHARES OF PLC TO BE ADMITTED TO
TRADING ON THE ALTERNATIVE INVESTMENT MARKET ("AIM"). IT IS EXPECTED THAT
ADMISSION OF THOSE SECURITIES TO TRADING ON AIM WILL BECOME EFFECTIVE AND
DEALINGS FOR NORMAL SETTLEMENT WILL COMMENCE SHORTLY AFTER THE EFFECTIVE TIME OF
THE MERGER.
12
MATERIAL TAX CONSEQUENCES
GENERAL
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes material U.S. federal income tax
consequences of the reincorporation and ownership of PLC shares to holders of
BPTII stock.
A "U.S. holder" is:
- a citizen or resident of the U.S.;
- a corporation or partnership (including an entity treated as a
corporation or a partnership for federal income tax purposes) created
or organized in or under the laws of the U.S., any state thereof or
the District of Columbia (unless, in the case of a partnership,
Treasury Regulations are adopted that provide otherwise);
- an estate whose income is subject to U.S. federal income tax
regardless of its source; or
- a trust if a court within the U.S. is able to exercise primary
supervision over the administration of the trust and one or more U.S.
persons have the authority to control all substantial decisions of
the trust (or, in the case of certain trusts in existence on August
20, 1996, if the trust elects to be treated as a U.S. person).
- You are a "Non-U.S. holder" if you are not a U.S. holder.
The following discussion applies only if you hold BPTII stock, and will
hold PLC shares, as a capital asset, and not through a partnership or other
flow-through entity; you do not hedge your investment in the BPTII stock or PLC
shares; and you hold less than 10% of the BPTII stock and will continue to hold
less than 10% of the PLC shares after the reincorporation. This discussion is
based on the Internal Revenue Code, Treasury Regulations, cases and rulings in
effect as of the date hereof and except as expressly noted does not take into
account any possible future changes in the law or interpretations thereof. We
have not requested a ruling from the Internal Revenue Service ("IRS") on the tax
consequences of the reincorporation. As a result, the IRS could disagree with
portions of this discussion
WE URGE YOU TO CONSULT YOUR OWN TAX ADVISOR REGARDING YOUR PARTICULAR TAX
CONSEQUENCES AS A RESULT OF THE REINCORPORATION.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO U.S. HOLDERS OF CURRENT SHARES
TAXATION UPON RECEIPT OF PLC SHARES
You will have taxable gain, if any, but not loss, upon the receipt of PLC
shares in exchange for BPTII stock pursuant to the reorganization. You will not,
however, be permitted to claim a tax loss upon the receipt of PLC shares.
Your taxable gain generally will equal the excess, if any, of the fair
market value of PLC shares received in exchange for BPTII stock. That gain
generally will be taxed as capital gain, and will be long-term capital gain if
you have held the BPTII stock for more than one year. If you are an individual,
long-term capital gain will be taxed at a maximum rate of 20%.
You will not be permitted to recognize any loss on your exchange of BPTII
stock for PLC shares. Instead, if you would have recognized a loss, your
aggregate tax basis in the PLC shares will equal your aggregate tax basis in the
BPTII common stock you surrender.
We are required to send you a Form 1099-CAP showing, among other things,
the number of PLC shares you receive and the fair market value of those shares.
US Holders should return the Form W-9 included with this proxy
statement/prospectus to enable us to provide you with a Form 1099-CAP.
TAXATION UPON FUTURE RECEIPT OF DIVIDENDS FROM PLC
We have no immediate plans to pay dividends after the Merger. However, if
we do so, you will be taxed on the dividend. Because PLC will not be a US
corporation, you will not be able to claim a dividends received deduction if you
are a corporation. Because the distributions would come from a foreign
corporation, some or all of them may be deemed to have come from foreign sources
for purposes of calculating any foreign tax credit that may be available to you.
The foreign tax credit rules are complex, subject to interpretation, and limited
by many specific requirements that are unique to individual taxpayers. In
addition, the treatment of dividends from PLC may be affected by the proposed
legislation discussed in "U.S tax consequences for BPTII," below. As a result,
we urge you to consult with your own tax advisor regarding the possible foreign
tax credit consequences of any future distributions.
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TAXATION UPON SALE OF PLC STOCK
If you sell your PLC stock after the Merger, gain or loss recognized from
that sale will be taxed as capital gain or loss unless we are a PFIC, as
discussed below, in an amount equal to the difference between your sale price
and your adjusted basis in the stock. If your holding period is at least one
year, any gain will be subject to a maximum tax rate of 20%.
If you recognized gain on the reincorporation, your holding period will be
treated as starting on the date of the reincorporation, and your basis in the
stock generally will equal the value of your shares on the date of the
reincorporation. If you did not recognize gain on the reincorporation, your
holding period will be treated as starting on the date you acquired your BPTII
stock, and your basis in the stock generally will equal the amount you paid for
your BPTII stock.
TAXATION IF PLC BECOMES A PFIC
A non-U.S. corporation will be classified as a passive foreign investment
company (a "PFIC") for U.S. federal income tax purposes in any taxable year in
which, after applying certain look-through rules, either (i) at least 75 percent
of its gross income is passive income or (ii) at least 50 percent of the gross
value of its assets is attributable to assets that produce passive income or are
held for the production of passive income. Passive income for this purpose
generally includes dividends, interest, royalties, rents and gains from
commodities and securities transactions.
Based on certain estimates of our gross income and gross assets and the
nature of our business, we believe that PLC will not be classified as a PFIC for
its current taxable year. PLC's status in future years will depend on its assets
and activities in those years. For instance, if PLC were to sell substantially
all of its business, it may become a PFIC.
Presently PLC has no reason to believe that its assets or activities will
change in a manner that would cause it to be classified as a PFIC. However, the
tests for determining PFIC status are applied annually, and it is difficult to
predict accurately future income and assets, which are relevant to this
determination. Accordingly, PLC cannot ensure that it will not become a PFIC.
If PLC were to become a PFIC, you would be subject to a special tax regime
imposed upon PFIC shareholders. Although this regime is complex, it is generally
designed to preclude U.S. shareholders of a PFIC from obtaining the benefits of
tax deferral that would otherwise be available to the shareholders of a
corporation. In particular, to the extent that you sell your shares or receive
certain large distributions from us, you would be subject not only to tax (at
ordinary income rates) on the realized gain on the sale or the amount of the
income on the distribution, respectively, but you also would be taxed on an
imputed interest amount. This imputation of interest is the mechanism by which
the PFIC rules eliminate the benefit of deferral.
If PLC becomes a PFIC, you may be able to make a "qualified electing fund"
or mark-to-market election that would affect the tax consequences to you of
owning our shares. Please consult your tax advisor regarding the availability
and consequences to you of these tax elections.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS OF CURRENT
SHARES
TAXATION UPON RECEIPT OF THE PLC SHARES
Generally, for U.S. tax purposes, if you are a "Non-U.S. holder," you will
not be subject to U.S. federal income tax when you receive PLC shares in
exchange for BPTII stock pursuant to the reorganization, unless:
- the gain is effectively connected with your conduct of a trade or
business in the United States; or
- you are an individual, you hold the common stock as a capital asset
and you are present in the United States for 183 or more days in the
taxable year of the sale and certain other conditions exist.
Your aggregate tax basis in the PLC shares will equal your aggregate tax
basis in the BPTII stock you surrender.
TAXATION UPON FUTURE RECEIPT OF DIVIDENDS FROM PLC
Under current law, you will not be subject to U.S. taxation on any future
dividends you would receive from PLC if you are a Non-US Holder. However, the
treatment of dividends from PLC may be affected by the proposed legislation
discussed in "Certain U.S. Tax Consequences -- U.S tax consequences for BPTII,"
below, and "Risk Factors -- We Could be Taxed in the United States as a Result
of Legislation Currently Under Consideration," above. As a result, we urge you
to consult with your own tax advisor regarding the possible foreign tax credit
consequences of any future distributions.
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TAXATION ON FUTURE DISPOSITION OF PLC SHARES
If you are a Non-U.S. holder you generally will not be subject to U.S.
federal income tax on gain recognized on a disposition of PLC shares unless one
of the two exceptions described in "-- Taxation upon receipt of the PLC shares"
applies.
Effectively connected gains recognized by a corporate Non-U.S. holder may
also, under certain circumstances, be subject to an additional "branch profits
tax" at a 30% rate or at a lower rate if so specified in an applicable tax
treaty.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES FOR BPTII
Under present law, we believe that we should not incur U.S. federal income
or withholding tax as a result of this reorganization. The only U.S. federal
income tax on the reorganization, if any, will be paid by the U.S. shareholders,
as discussed above. After the reorganization, if we decide to pay dividends to
PLC, we would be required under present law to withhold 5% U.S. federal income
tax, but if the new U.S.-U.K. tax treaty is ratified by the U.S. Senate and U.K.
Parliament, we may no longer be required to withhold tax on dividends paid from
BPTII to PLC beginning approximately two months after ratification of the
treaty.
Several members of the United States Congress have introduced legislation
that, if enacted, could have significant tax consequences to us. All proposals
discussed below are from the 107th Congress and will need to be reproposed in
the 108th Congress. However, the number of proposals and the continued attention
given to transactions such as the reincorporation makes it likely that
legislation resembling one or more of the proposals discussed below will be
enacted.
One group of proposals would treat a foreign corporation, like PLC, that
undertakes a corporate expatriation transaction, such as the reorganization, as
a domestic corporation. These proposals have various effective dates, but all
would apply retroactively and would cause PLC to be treated as a domestic
corporation. If any of these proposals ultimately is adopted, PLC will be taxed
in the U.S. on its worldwide income, including certain income earned by its
non-U.S. subsidiaries, much as BPTII is now. In addition, PLC may not have the
ability to claim certain tax losses in the U.S.
In addition, under some proposals, we could be subject to a tax at the time
of the reincorporation on the excess of our assets' fair market value over their
basis (in the case of subsidiary stock, generally equal to our purchase price,
if any, for the stock plus any capital contributions to the subsidiaries, and in
the case of other assets, generally equal to the assets' cost reduced by any
depreciation deductions we have claimed on them).
Another proposal would deny a foreign corporation that may otherwise be
entitled to certain benefits under a tax treaty between the United States and a
foreign country those treaty benefits, unless that foreign corporation is
predominantly owned by individuals who are residents of such foreign country. If
this proposal is enacted, the United States may deny us the benefits of the
United States-United Kingdom tax treaty.
The following summary provides only a general summary of the current U.K.
tax law based on the current interpretation of the legislation, case law and the
practice of the Inland Revenue all of which may be subject to change. The
summary may not apply to, or may not cover all the U.K. tax consequences to, a
particular shareholder in the light of such shareholder's particular
circumstances. The sections relating to the taxation of chargeable gains only
relate to shareholders holding shares as an investment rather than as a dealer.
Any person who is in any doubt as to the specific tax consequences to them of
the Reincorporation, ownership or disposal of the ordinary shares or preference
shares in PLC should seek professional advice without delay.
THE REINCORPORATION
This section is not generally relevant to those holders of common stock who
are not resident in the U.K. for tax purposes unless they carry on a trade or
profession in the U.K.
Taxation of Chargeable Gains
SHAREHOLDERS HOLDING 5% OR LESS OF COMMON STOCK
Roll-over relief should be available to the holders of common stock who,
together with any connected persons own 5 per cent. or less of the common stock,
as the Reincorporation will not involve a disposal of the common and preferred
stock for U.K. tax purposes. Accordingly, the ordinary shares received in PLC
will be treated as the same asset as the common stock, acquired at the same
time, and for the same acquisition cost, as the common stock.
SHAREHOLDERS HOLDING OVER 5% OF THE COMMON STOCK
The roll-over treatment referred to above will apply to those holders of
the common stock who hold, either alone or with persons connected with them,
more than 5% of the common stock, provided that the Reincorpora-
15
tion is effected for bona fide commercial reasons and not for tax avoidance
purposes. Such holders of the common stock are advised that a clearance is being
sought under Section 138 of the Taxation of Chargeable Gains Act 1992 confirming
that the Inland Revenue are satisfied that the Reincorporation is effected for
bona fide commercial reasons and not for tax avoidance purposes. The Company is
advised that, such holders of the common stock should be able to benefit from
the roll-over treatment.
In addition, a confirmation is being sought from the Inland Revenue under
Section 707 of the Income and Corporation Taxes Act 1988 that the Inland Revenue
will not invoke certain anti-avoidance rules.
Income tax
As the Reincorporation is regarded as a transaction of a capital nature for
U.S. purposes, the receipt of ordinary shares in PLC should not be regarded as a
distribution taxable as income in the hands of the U.K. holders of the common
stock. Therefore, the Reincorporation should not give rise to a liability to
income tax, or, in case of a corporate holder, a corporation tax liability on
income.
AFTER THE REINCORPORATION
Taxation of dividends on the ordinary shares in PLC
U.K. RESIDENT INDIVIDUAL SHAREHOLDERS
Dividends paid by PLC will carry a tax credit at a rate of one-ninth of the
dividend or 10% of the aggregate of the cash dividend and the tax credit. Both
the tax credit and the dividend will be included in computing the shareholder's
income in the relevant year of assessment for U.K. tax purposes and therefore
the gross dividend for tax purposes will comprise the dividend and the tax
credit.
Shareholders who are liable to income tax at the higher rate will be
subject to income tax on the gross dividend at 32.5 per cent. but will be able
to set off the tax credit against part of this liability leaving a net income
tax liability equal to 25 per cent. of the net dividend.
For those Shareholders who are liable to income tax at a rate other than
the higher rate in respect of the gross dividend the tax credit will satisfy in
full such shareholders' tax liability to income tax on the dividend.
Shareholders who are not liable to income tax in respect of the gross
dividend will not be entitled to any payment in respect of the tax credit.
U.K. RESIDENT CORPORATE SHAREHOLDERS
A U.K. corporate shareholder within the charge to U.K. corporation tax will
not be liable to corporation tax on any dividends paid on the ordinary shares in
PLC. Such shareholders will not be able to claim repayment of any tax credits
associated with dividends.
NON-U.K. RESIDENT SHAREHOLDERS
Non-U.K. resident shareholders are generally not entitled to any tax credit
in respect of a dividend received from a U.K. company. Depending on the
provisions of any relevant double taxation agreement, certain shareholders may
be entitled to a repayment from the Inland Revenue although the U.K. withholding
tax may eliminate any repayment claim (as is generally the case with U.S.
Holders unless it is a U.S. corporation holding at least 10 per cent. of the
voting capital of the U.K. company). Such shareholders should consult their
professional advisers as to their entitlement to utilise the tax credit and
procedures and the tax treatment of dividends received from PLC in those
jurisdictions where they are resident.
Taxation of chargeable gains on disposal of the ordinary shares or preference
shares in PLC.
UK SHAREHOLDERS
A U.K. resident shareholder may, depending upon the shareholder's
particular circumstances, be liable for capital gains tax, or, in case of a
corporate shareholder, corporation tax on any chargeable gains realised on the
disposal of the ordinary shares in PLC.
NON-UK SHAREHOLDERS
A shareholder who is not resident in the UK for tax purposes (including a
U.S. resident holder) will not generally be liable to U.K. tax on chargeable
gains realised on the disposal of the ordinary shares in PLC unless the holder
carries on a trade or profession in the U.K.
Stamp Duty and Stamp Duty Reserve Tax (SDRT)
This section provides a general summary of the Stamp Duty and SDRT regime.
Certain categories of persons are not liable to stamp duty and SDRT and others
may be liable at a higher rate.
A transfer for value of the ordinary shares in PLC will be generally
subject Stamp Duty or SDRT at 0.5% of the consideration. Stamp Duty and SDRT are
generally paid by the purchaser of the shares although where such purchase is
effected through a financial intermediary, that person should normally account
for SDRT.
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STAMP DUTY
No Stamp Duty will arise on the issue of the ordinary shares in PLC. Stamp
duty at 0.5 % of the consideration payable will arise on the execution of any
instrument whereby the ordinary shares in PLC are transferred for value.
SDRT
No SDRT liability will arise on the issue of the ordinary shares in PLC to
shareholders. SDRT will generally arise at the rate of 0.5% of the consideration
payable on an agreement to transfer shares held in certificated form although if
the agreement to transfer such shares is completed by a duly stamped transfer
the stamp duty paid on such transfer will extinguish the liability to SDRT and
enable a refund of any SDRT already paid.
TRANSFER OF SHARES INTO CREST
Where shares are transferred to a member of CREST who will hold those
shares in uncertificated form as a nominee for the transferor no stamp duty or
SDRT will be payable.
TRANSFER OF SHARE WITHIN CREST
SDRT is payable on a change in the beneficial ownership of shares held in
CREST. This liability will be generally met by the new beneficial owner.
TRANSFER OF SHARES OUT OF CREST
Where shares are transferred by a member of CREST to the beneficial owner
(on whose behalf it has held them as nominee) no stamp duty or SDRT will be
payable.
DESCRIPTION OF BIOPROGRESS PLC ORDINARY SHARES
The following summarizes certain rights of holders of the PLC ordinary
shares based on PLC's memorandum and articles of association and English law in
force as of the date of this proxy statement/ prospectus. The summary does not
purport to be complete and is qualified in its entirety by reference to the
memorandum and articles of association of PLC. You are encourage to read PLC's
memorandum and articles of association which are an exhibit to the registration
statement of which this proxy statement/prospectus forms a part. See also
"Comparison of Stockholder Rights".
Each of the issued PLC ordinary shares will be fully paid and not subject
to any further calls or assessments by PLC. PLC ordinary shares are represented
in certificated form and following the reincorporation will also be capable of
being held and transferred in uncertificated form under CREST. After the Merger,
all PLC ordinary shares:
-- may be represented by certificates in registered form issued (subject to
the terms of issue of the shares) by PLC's registrars or
-- may be in uncertificated form with the relevant CREST member account
being credited with the PLC ordinary shares issued.
Under English law, persons who are neither residents nor nationals of the
UK may freely hold, vote and transfer ordinary shares in the same manner and
under the same terms as UK residents or nationals.
DIVIDENDS
PLC may, by ordinary resolution, declare a dividend to be paid to the
members of PLC. Any dividends on the PLC ordinary shares must be declared and
paid according to the amount paid up on the PLC ordinary shares (save that no
amount paid on a share in advance of calls by the company for payment shall be
treated as being paid on a share) but no dividend shall be declared in excess of
the amount recommended by the directors. The directors may from time to time pay
to the members of PLC such interim dividends as appear to the directors to be
justified by the profits of PLC available for distribution. No dividend may be
paid other than out of profits available for distribution as defined by the
Companies Act 1985 (the "Act"). For a further discussion, see "Comparison of
Stockholder Rights -- Sources and Payment of Dividends".
PLC's articles of association permit a scrip dividend scheme under which
registered owners of PLC ordinary shares may be given the opportunity to elect
to receive fully paid PLC ordinary shares instead of cash, or a combination of
shares and cash, with respect to future dividends.
RIGHTS IN WINDING UP
In the event of a winding-up or reduction of capital of PLC involving
repayment, the assets of PLC available for distribution among the members shall
be divided between the holders of the PLC ordinary shares according to the
respective number of shares held by them and in accordance with the provisions
of the Act. The liquidator may, with the sanction of an extraordinary resolution
of PLC and subject to the Act, divide among the members in kind the whole or any
part of the assets of PLC in such manner as the liquidator may determine.
17
VOTING
Voting at any general meeting of the PLC shareholders is by a show of hands
unless a poll is duly demanded. A poll may be demanded by:
-- the chairman of the meeting;
-- at least two shareholders present in person or by proxy, and who are
entitled to vote at the meeting;
-- any stockholder(s) present in person or by proxy, who represent in the
aggregate at least 10% of the voting rights of all stockholders entitled
to vote at the meeting; or
-- any shareholder(s) present in person or by proxy, who hold shares
providing a right to vote at the meeting on which the aggregate sum paid
up on such shares is equal to not less than 10% of the total sum paid
upon all the shares providing that right.
On a show of hands, every holder of PLC ordinary shares who is present in
person at a general meeting of PLC will have one vote, and on a poll, every
holder of PLC ordinary shares who is present in person or by proxy will have one
vote per share of which is the holder. The necessary quorum for a shareholder
meeting is a minimum of two persons entitled to vote on the business to be
transacted, each being a shareholder or a proxy for a shareholder or a duly
authorized representative of a corporation.
Unless otherwise required by law or the articles of association, voting in
a general meeting is by ordinary resolution which include among other matters:
- -- resolutions for the election of directors; -- the approval of financial
statements; -- the declaration of final dividends; -- the appointment of
auditors; -- the increase of authorized share capital; or -- the grant of
authority to allot shares.
An ordinary resolution requires the affirmative vote of a majority of the
votes cast at a meeting at which there is a quorum. A special or extraordinary
resolution (e.g., relating to certain matters concerning, among other things, an
alteration of the articles of association, a winding-up of PLC, or modifying the
rights of any class of shares at a meeting of the holders of such class)
requires the affirmative vote of not less than three-fourths of the votes cast.
Meetings are generally convened upon advance notice of 21 or 14 clear days (not
including the days of delivery or receipt of the notice or the day of the
meeting) depending on the nature of the business to be transacted. For a
description of the difference between ordinary, extraordinary and special
resolutions see "Comparison of Stockholder Rights -- Special Meetings of
Shareholders".
PREEMPTIVE RIGHTS
Under section 89 of the Act, the issue of equity securities that are, or
are to be, paid for wholly in cash (except shares held under an employees' share
scheme) must be offered in the first instance to the existing shareholders in
proportion to the respective nominal values of their holdings on the same or
more favorable terms, unless a special resolution to the contrary has been
passed in a general meeting of shareholders. In this context, equity securities
means, PLC ordinary shares, or shares with no restrictions on the amounts
receivable in a distribution of dividends or capital and all rights to subscribe
for or convert into such shares.
Under Section 80 of the Act, directors are, with certain exceptions, unable
to allot relevant securities without the authority of the shareholders in a
general meeting. Relevant securities as defined in the Act would include PLC
ordinary shares or securities convertible into PLC ordinary shares.
VARIATION OF RIGHTS AND SHARE CAPITAL
PLC may by ordinary resolution increase its share capital or consolidate
and divide all, or any, of its share capital into shares of larger amounts.
Subject to the provisions of the Act, PLC may also subdivide its shares, or any
of them, into shares of smaller amount or cancel or reduce the nominal value of
any shares which have not been taken, or agreed to be taken, by any person.
Subject to the provisions of the Act, PLC may by special resolution reduce
its share capital, any capital redemption reserve or any share premium account.
PLC may also, subject to such approvals as are required by the Companies Act and
to the sanction of an extraordinary resolution, purchase its own shares.
Subject to the provisions of the Act, the rights attached to any class of
shares may (unless otherwise provided by the terms of issue of that class) be
varied with the written consent of the holders of three-fourths in nominal value
of the issued shares of that class, or with the sanction of an extraordinary
resolution passed at a separate meeting of the holders of the shares of that
class.
DISCLOSURE OF INTERESTS
The Act gives PLC power to require persons who it knows are, or has
reasonable cause to believe to be, or to have been within the previous three
years, interested in its relevant share capital to disclose prescribed
particulars of those interests. For this purpose "relevant share capital" means
issued share capital of PLC carrying the right
18
to vote in all circumstances at a general meeting of PLC. Failure to provide the
information requested within 14 days after the date of sending of the notice may
result in sanctions being imposed against the holder of the relevant shares as
provided in the Act. The articles of association also allow the board to impose
certain restrictions as they see fit. In this context, the term "interest" is
broadly defined and will generally include an interest of any kind in shares,
including the interest of a holder of a PLC ordinary share. In addition, under
the Act, any person who acquires either alone or, in certain circumstances, with
others a direct or indirect interest in the relevant share capital of PLC in
excess of the "notifiable percentage" (currently 3%, or 10% for certain types of
interest) is obligated to disclose prescribed information to PLC with respect to
those shares within two business days. An obligation of disclosure also arises
where such person's notifiable interest subsequently falls below the notifiable
percentage or where, above that level, the percentage of PLC's relevant capital
in which such person is interested (expressed in whole numbers) increases or
decreases. See "Comparison of Stockholder Rights -- Disclosure of Interests".
MISCELLANEOUS
There are currently no United Kingdom foreign exchange controls on the
payment of dividends on the PLC ordinary shares or the conduct of operations of
PLC. There are no restrictions under the articles of association or under
English law that limit the right of non-resident or foreign owners to hold or
vote the PLC ordinary shares except that a foreign shareholder who has not
supplied PLC with an address with the United Kingdom for the service of notices
shall not be entitled to receive noticed from PLC.
DESCRIPTION OF BIOPROGRESS PLC PREFERENCE SHARES
The following is a summary of certain rights of holders of the PLC
preference shares based on PLC's Memorandum and Articles of Association and
English law in force as at the date of this proxy statement/prospectus. The
summary does not purport to be complete and is qualified in its entirety by
reference to the Memorandum and Articles of Association of PLC. You are
encouraged to read PLC's Memorandum and Articles of Association which are an
exhibit to the registration statement of which this proxy statement/prospectus
forms a part.
Each of the issued PLC preference shares will be fully paid and not subject
to any further calls or assessments by PLC. PLC preference shares are
represented in certificated form only.
Under English law, persons who are neither residents nor nationals of the
UK may freely hold vote and transfer preference shares in the same manner and
under the same terms as UK residents or nationals.
PLC has authorized 80,000 4% convertible redeemable non-voting preference
shares, par value L0.5 each, ("Convertible Preference Shares") and 90,000 4%
redeemable non-voting preference shares, par value L0.5 each, ("Non-Convertible
Preference Shares") all of which are outstanding.
DIVIDENDS
PLC shall, in priority to any payment of dividend to holders of all other
shares in the capital of PLC, pay to the holders of Convertible Preference
Shares and Non-Convertible Preference Shares out of the profits available for
distribution in respect of each financial year of PLC to 31 March 2004, a fixed
cumulative preferential dividend at the rate of 4% per annum on UK pound
sterling equivalent of $2.50 as of the effective time of the Merger, together
with a certificate for any related tax credit. This convertible preference
dividend shall accrue on a daily basis from the date on which each such share is
issued and shall be payable quarterly in arrears in four equal instalments. The
first convertible preference dividend payment shall be on 30 June 2003 in
respect of the period from the date of issue to 31 March 2003.
RIGHTS IN WINDING-UP
On a return of capital on a winding-up or otherwise the assets of PLC
available for distribution to its members shall be applied in paying to the
holders of Convertible Preference Shares and Non-Convertible Preferrence Shares
in priority to any payment to the holders of all other shares in the capital of
the Company a sum equal to the arrears of the convertible preference dividend
and a sum equal to the nominal amount together with any premium paid up on the
Convertible Preference Shares.
VOTING
The holders of Convertible Preference Shares and Non-Convertible Preference
Shares shall each have the right to receive notice of and attend all general
meetings of the Company, but shall not have the right to speak or vote at such
general meetings.
19
CONVERSION
Each holder of Convertible Preference Shares shall be entitled before
December 31, 2003 to convert all or any of its Convertible Preference Shares
into fully paid Ordinary Shares on the basis of one Ordinary Share for two
Convertible Preference Shares. The last conversion date is December 31, 2003.
The Non-Convertible Preference Shares have no rights to convert into
Ordinary Shares.
REDEMPTION
PLC may at any time (subject to the provisions of the Act) give to the
holders of Convertible Preference Shares and/or Non-Convertible Preference
Shares 30 days' prior written notice of the redemption of such shares at a price
equal to US$4.88 per share.
The Company must redeem all the then outstanding Non-Convertible Preference
Shares (if any) in issue on 31 March 2003 at a price equal to US$5.19 in respect
of each such Non-Convertible Preference Share. PLC must redeem all the then
outstanding Convertible Preference Shares (if any) issued on 31 March 2004 at a
price equal to US$5.19 in respect of each such Convertible Preference Share.
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COMPARISON OF STOCKHOLDER RIGHTS
NEVADA VS. ENGLISH LAW
As a result of the Reincorporation, holders of Company common stock
("Current Shares") will receive one ordinary share of PLC ("New Shares") for
each current share owned. PLC is a public limited company incorporated under the
laws of England and Wales. The following is a summary comparison of material
differences between the rights of a holder of Current Shares and a holder of New
Shares arising from the differences between the corporate laws of Nevada and of
England and Wales, the governing instruments of the two companies, and the
securities laws and regulations governing the two companies. This summary is not
a complete description of the laws of Nevada or of England and Wales, the other
rules or laws referred to in this summary, the Company's articles of
incorporation, the Company's bylaws or PLC's memorandum and articles of
association.
A copy of PLC's memorandum and articles of association may be obtained from
the Registrar of Companies in England and Wales ("Companies House"), subject to
payment of a fee, or by writing or telephoning the Secretary of the Company at
the following address:
BioProgress PLC
Hostmoor Avenue
March, Cambridgeshire
PE15 0AX
United Kingdom
+44 1354 655 674
Under Section 14A and the proxy statement rules promulgated under the
Exchange Act, the Company is required to comply with certain notice and
disclosure requirements relating to the solicitation of written consent in
respect of stockholder action.
VOTING RIGHTS
Unless otherwise provided in the articles of incorporation or in a director
resolution providing for the issuance of a class or series of stock pursuant to
authorities granted in the articles of incorporation, under Nevada law,
stockholders of a corporation are entitled to one vote for each whole share on
matters to be voted upon by the stockholders of the corporation, including the
election of directors. Holders of common stock of a corporation do not have
cumulative voting rights in the election of directors unless specified in the
articles of incorporation of the corporation. BPTII's articles of incorporation
do not grant cumulative voting rights.
Under English law, the voting rights of shareholders are governed by a
company's articles of association, subject to the statutory right of
stockholders to demand a poll at a general meeting. This poll is a vote based on
the number of shares held. The PLC articles of association provide that a poll
may be demanded in certain circumstances. English law does not generally provide
for cumulative voting. Under English law, three shareholders present in person
constitute a quorum for purposes of a general meeting, unless the company's
articles of association specify otherwise. PLC's articles of association specify
that three shareholders present in person or by proxy and entitled to vote
constitute a quorum. Any PLC shareholder on the register may vote in person or,
provided that the relevant provisions of the articles of association have been
complied with, by proxy.
ACTION BY WRITTEN CONSENT
Under Nevada law, any action required or permitted to be taken at a meeting
of the stockholders may be taken without a meeting if a written consent thereto
is signed by stockholders holding at least a majority of the voting power,
unless a different proportion of voting power is otherwise required for the
action taken without a meeting.
Under English law, a company's articles of association may provide that a
resolution in writing executed by or on behalf of each stockholder who would
have been entitled to vote upon it if it had been proposed at a general meeting
at which he was present will be as valid and effectual as if it had been passed
at a general meeting properly convened and held. Such a written resolution
requires the unanimous consent of all such shareholders entitled to attend and
vote. PLC's articles of association contain such a provision.
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SOURCES AND PAYMENT OF DIVIDENDS
Under Nevada law dividends may be declared and paid out of any funds
legally available therefor, as often, in such amounts, and at such time as the
board of directors may determine and share dividends may be issued pro rata
without consideration to the corporation's stockholders or to the stockholders
of one or more class or series.
Under English law, a company may pay dividends on its ordinary shares only
out of its distributable profits and not out of share capital. Distributable
profits equals accumulated realized profits, not previously utilized by
distribution or capitalization, less accumulated realized losses. Share capital
includes share premiums, also known as paid-in surplus. Amounts credited to the
share premium account, representing the excess of the consideration for the
issue of shares over the aggregate par value of such shares, may not be paid out
as cash dividends. Amounts credited to the share premium account may be used,
among other things, to pay up unissued shares which may then be distributed to
stockholders as fully paid bonus shares. A public company such as PLC may make a
distribution at any time only if, at that time and immediately after such
distribution, the amount of its net assets is not less than the aggregate of its
issued and paid-up share capital and undistributable reserves. Holders of PLC
ordinary shares must approve any final dividend to be paid by PLC at a general
meeting of PLC but no dividend can exceed the amount recommended by the PLC
board. The PLC board has the power under PLC's articles of association to
declare and pay interim dividends. In order to comply with the best practice,
PLC will be required to disclose such distributions together with a full
explanatory timetable immediately following approval by the board of directors,
the information being disseminated through a regulatory information service
approved for the purposes by the London Stock Exchange (an "RIS").
RIGHTS OF PURCHASE AND REDEMPTION
Under Nevada law the corporation may repurchase shares of its own stock for
cash.
Under English law, a company may issue redeemable shares if authorized by
its articles of association and subject to the conditions stated therein. PLC's
articles of association permit the issue of redeemable shares which may be
redeemed at the discretion of PLC or the shareholder. Such shares may be
redeemed only if fully paid and, in the case of public companies, only, subject
as provided below, out of distributable profits or the proceeds of a new issue
of shares issued for the purpose of the redemption. When redeemable shares are
redeemed wholly out of profits, the amount by which the par value of the
company's issued share capital is diminished on cancellation of the redeemed
shares must be transferred to the capital redemption reserve, which is generally
treated as paid-up share capital. In addition, any amount payable on redemption
of any redeemable shares in excess of the par value of such shares may be paid
out of the proceeds of a fresh issue of shares made for the purposes of the
redemption up to an amount equal to the lesser of (1) the aggregate of the
premiums received by the company on the issue of those shares or (2) the amount
of the company's share premium account as at the time of the redemption
including any sum transferred to that account in respect of premiums on the new
issue. A company may purchase its own shares, including any redeemable shares,
if:
-- authorized by its articles of association and
-- previously approved by an ordinary resolution of its shareholders in the
case of an on-market purchase, which, in the case of PLC's, will mean a
purchase on AIM, or a special resolution in other cases.
As with a Nevada corporation, any such purchase is subject to the
availability of sufficient lawful funds.
SPECIAL MEETING OF STOCKHOLDERS
Pursuant to Nevada Revised Statute 78.310, a meeting of stockholders may be
called by the entire board, any two directors, or the president. The
stockholders' meeting may be located within or outside the State of Nevada
unless the articles or bylaws provide otherwise. NRS 78.370 requires that the
notice of meeting must be in writing and signed by the president, secretary,
assignment secretary or a person designated by the bylaws, and must state the
purpose of the meeting, and time and place of the meeting. A copy of the notice
must be delivered personally or mailed not less than 10 days nor more than 60
days before the meeting.
Under English law, an extraordinary general meeting of shareholders may be
called by the board of directors. Notwithstanding any provision to the contrary
in a company's articles of association, an extraordinary general meeting may
also be called by a request from shareholders holding not less than one-tenth of
the paid-up capital of the company carrying voting rights at general meetings.
An ordinary resolution, other than an ordinary resolution to remove a director
which requires 28 clear days' notice, or one to be proposed at an annual general
meeting which requires 21 clear days' notice, requires 14 clear days' notice,
and requires a majority vote of those present, in person or by proxy, and
voting. An extraordinary or special resolution requires 21 clear days' notice
and a three-quarters majority vote of those present, in person or by proxy, and
voting. An extraordinary resolution
22
requires 14 clear days' notice, other than one to be proposed at an annual
general meeting, which requires 21 clear days' notice, and a three-quarters
majority of those voting and present, in person or by proxy. The term "clear
days' notice" means calendar days and excludes the date of mailing, the deemed
date of receipt of such notice, and the date of the meeting itself. PLC's
articles of association provide that if notice is served at a registered address
for service in the UK by post it will be deemed to have been served on the first
day following the day of posting if sent by first class post and on the second
day after it is posted, if sent by second class post. A member who (having no
registered address within the UK) has not supplied PLC with an address within
the UK for the service of notices shall not be entitled to receive notices from
PLC. Extraordinary resolutions are relatively unusual and are confined to
certain matters out of the ordinary course of business such as a proposal to
wind up the affairs of the company. Proposals which are the normal subject of
special resolutions generally involve proposals to:
-- change the name of the company;
-- alter its capital structure;
-- change or amend the rights of shareholders;
-- permit the company to issue new shares for cash without applying the
shareholder's statutory pre-emptive rights;
-- amend the company's objects, or purpose, clause in its memorandum of
association and to amend the company's articles of association; and
-- carry out certain other matters where a special resolution is required
by either the company's articles of association or the Companies Act.
All other proposals relating to the ordinary course of the company's
business such as the election of directors would be the subject of an ordinary
resolution. Resolutions to change the name of a company, alter its share
capital, change or amend the rights of stockholders, issue new shares of a
company and amend a company's objects, or purpose, clause in its memorandum of
association or to amend the company's articles of association must be made
publicly available by being filed with the Registrar of Companies in England and
Wales and copies can be obtained from Companies House, upon payment of the
appropriate fee, and information concerning certain resolutions must be
disseminated through an RIS in compliance with the AIM Rules.
PREEMPTIVE RIGHTS
Pursuant to Nevada Revised Statutes Section 78.265, stockholders have a
preemptive right to acquire unissued shares, treasury shares or securities
convertible into such shares. The preemptive right is only an opportunity to
acquire shares or other securities upon such terms as the board of directors
fixes for the purpose of providing a fair and reasonable opportunity for the
exercise of such right.
Under English law, the issue for cash of:
-- equity securities namely those securities which, with respect to
dividends or capital, carry a right to participate beyond a specified
amount; or
-- rights to subscribe for or convert into equity securities, other than
pursuant to an employees' share scheme must be offered in the first
instance to the existing equity shareholders in proportion to the
respective nominal values of their holdings, unless a special resolution
has been passed in a general meeting of shareholders to the contrary. As
is the custom of many English companies, at its annual general meeting
each year PLC will seek general disapplication by special resolution of
statutory preemption rights on an annual basis in respect of the entire
unissued ordinary share capital where the equity securities are to be
issued in connection with a pro rata offer or issue to existing
shareholders; and
-- in respect of the issue for cash of equity securities representing no
more than five per cent. of the company's then issued ordinary share
capital.
AMENDMENT OF GOVERNING INSTRUMENTS
Under Nevada law, the board of directors must adopt a resolution setting
forth the amendment proposed and declaring its advisability, and call a meeting,
either annual or special, of the stockholders entitled to vote. The proposed
amendment must be passed by stockholders holding a majority of the voting power
entitled to vote or by a greater portion of the voting power as may be required
in the case of a vote by classes or series.
Under English law, shareholders have the authority to alter, delete,
substitute or add to the objects clause in a company's memorandum and all
provisions of its articles of association by a vote of not less than
three-quarters of the shareholders entitled to vote and who do vote, either in
person or by proxy, at a general meeting. In the case of certain alterations to
the memorandum of association, the dissenting shareholders have a right to apply
to
23
the court to cancel the alterations. Under English law, the board of directors
is not authorized to change the memorandum or the articles of association.
Amendments affecting the rights of the holders of any class of shares may,
depending on the rights attached to such class and the nature of the amendments,
also require approval of the classes affected in separate class meetings. Copies
of the memorandum and the articles of association, as amended from time to time
must be filed with the Registrar of Companies in England and Wales and copies
are available from Companies House, upon payment of the appropriate fee.
STOCKHOLDER VOTES ON CERTAIN TRANSACTIONS
The corporation may sell, lease or exchange all of its property and assets
with an action taken by the board and an affirmative vote of shareholders
holding not less than a majority of the voting power. The stockholders holding a
majority of voting power must approve a plan of merger unless a greater vote is
required by the articles of incorporation or the board of directors or as may be
necessary if class voting is required.
Under English law the Companies Act provides that where a director, in his
personal capacity, is buying something from or selling something to the company,
then the prior consent of the shareholders by ordinary resolution is necessary
if the asset being bought or sold is of "requisite value", and therefore amounts
to a substantial property transaction for the purposes of the Companies Act. If
the asset in question is worth less than L2,000, it is not of requisite value
and the transaction will not be a substantial property transaction. If the asset
is worth more than L100,000, it will always be a substantial property
transaction. If the asset being bought or sold is worth between L2,000 and
L100,000 then it will qualify as being requisite value if it is worth more than
10 per cent. of a company's net relevant assets (the net assets figure shown on
the latest set of accounts). If a substantial property transaction takes place
without the shareholders' authority being obtained in advance, the contract is
voidable by the company. If voided the director who was party to the transaction
and any other director who authorized the transaction become liable to indemnify
the company for any loss it has suffered and to account to the company for any
gain they have made.
Under the Act, fundamental corporate changes, such as the passing of a
resolution for winding up, non pro rata issuances of shares for cash, reduction
of capital (subject to sanction by the court) and certain repurchases of shares
must be authorized by a vote of not less than three-quarters of the stockholders
entitled to vote and who do vote, either in person or by proxy at a general
meeting. Subject to the provisions of the Act, if at such time, the capital of
PLC is divided into different classes of shares and the amendment or other
resolution would cause any of the special rights attached to any class of shares
to be varied or abrogated, the amendment must also be sanctioned by the holders
of at least three-quarters in nominal value of the issued shares of the class
concerned. The Act provides for schemes of arrangement, which are arrangements
or compromises between a company and (any class of) its stockholders or (any
class of) its creditors and are used for certain types of reconstructions,
amalgamations, capital reorganizations or takeovers. They require the approval
at an extraordinary general meeting of the company convened by order of the
court of a majority in number of the shareholders representing 75 per cent. in
value of the capital or class of creditors or shareholders or class of
shareholders present and voting, either in person or by proxy, and the sanction
of the court. Once so approved and sanctioned, all creditors and stockholders
(of the relevant class) are bound by the terms of the scheme. A dissenting
stockholder would have no rights comparable to dissenter's rights in Nevada
described below. A scheme of reconstruction under section 110 of the UK
Insolvency Act 1986 may be made when a company is being wound up voluntarily
under which, with the sanction of a special resolution of shareholders in a
general meeting the whole or part of the company's business or property is
transferred to a second company in consideration for the issue or transfer to
them of shares in the second company. Any dissenting shareholder can require the
liquidator to abstain from carrying the resolution into effect or to purchase
his interest at a price agreed or determined by arbitration. Details of any
winding up, petition for dissolution or application for liquidation events, non
pro rata issuances for cash, reduction of capital (subject to sanction by the
court) and certain repurchases of shares must be made publicly available by
being filed with the Registrar of Companies in England and Wales and copies can
be obtained upon payment of the appropriate fee, and; if PLC is admitted to
trading on AIM, must be disseminated through an RIS.
RIGHTS OF INSPECTION
Nevada law provides that any person who has been a stockholder of record of
the corporation for at least six months immediately preceding the demand, or any
person holding, or authorized in writing by the holders of, at least five per
cent. of all of its outstanding shares, upon at least five days' written demand
is entitled to inspect in person or by agent or attorney, during usual business
hours, the stock ledger of the corporation and make copies therefrom. NRS 78.257
provides that any stockholder who owns fifteen percent (15%) of issued and
outstanding
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shares may inspect the financial records of the corporation.. The inspection
rights do not apply to any publicly traded corporation or corporation that
furnishes its stockholders detailed annual financial statements and may be
limited by the articles or bylaws of the corporation.
Except when closed in accordance with the provisions of the Act, the
register of names and registered address of shareholders of a company, together
with certain other registers required to be maintained by such company, may be
inspected during business hours by its shareholders without charge and by other
persons upon payment of a fee, and copies may be obtained on payment of a fee.
The shareholders of an English public company may, without charge, also inspect
the minutes of meetings of the stockholders during business hours and obtain
copies upon payment of a fee. The published annual accounts of a public company
are required to be laid before the shareholders in general meeting and a
shareholder is entitled to a copy of such accounts. Copies are filed with the
Registrar of Companies in England and Wales from whom copies are publicly
available upon payment of the appropriate fee. The shareholders of PLC have no
rights to inspect its accounting records or minutes of meetings of its
directors. Certain registers required to be kept by the company are open to
public inspection. Service contracts of directors of the company which have more
than 12 months unexpired or require more than 12 months' notice to terminate
must be available for inspection during business hours. Rights of inspection
during business hours mean that the company must make the register, index or
document available for inspection for not less than two hours during the period
between 9:00 a.m. and 5:00 p.m. on each business day.
CLASSIFICATION OF THE BOARD OF DIRECTORS
Nevada Revised Statute 78.330 -- provides that articles and bylaws may
provide for classification of directors as to duration of their terms of office
or as to their election by one or more authorized classes or series of shares.
BPTII does not currently have a classified board.
English law permits a company to provide for the classification of the
board of directors with respect to the time for which directors severally hold
office. PLC's articles of association currently provide that unless otherwise
determined by PLC in a general meeting there shall not be less than two
directors. The directors are not subject to a maximum number. All directors are
subject to the general corporate law requirements concerning the removal of
directors. In accordance with best practice for listed companies, one-third of
the directors or the number nearest to but not greater than one-third are
required to retire from office by rotation at each annual general meeting and
are eligible to be re-elected by the stockholders. The directors to retire are
selected on the basis of time in office since their last election. Any director
appointed by the directors since the last annual general meeting is required to
retire at the next following annual general meeting and is then eligible for
election, but is not taken into account in determining which directors are to
retire by rotation at such meeting. PLC's articles of association provide that
each director shall retire from office at the third annual general meeting after
the annual general meeting at which the director was last elected. Details of
directors' appointments and retirements must be filed with the Registrar of
Companies in England and Wales and copies of the relevant forms are available
upon payment of the appropriate fee, and such details must also be disseminated
through a RIS in accordance with the AIM Rules.
In addition to the provisions of PLC's articles of association, PLC is
expected to confirm its compliance with the principles of good governance and
code of best Practice published in June 1998 and appended to but not forming
part of the UK Listing Authority's Listing Rules (the "Combined Code"), in its
annual report and accounts. The Combined Code provides that all directors should
be subject to election by shareholders at the first opportunity after their
appointment and reelection thereafter at intervals of no more than three years.
REMOVAL OF DIRECTORS
Directors of a Nevada corporation may be removed without cause by a vote of
stockholders representing not less than two thirds of the voting power of the
issued and outstanding stock entitled to vote at a special meeting, unless the
articles of incorporation provide for the election of directors by cumulative
voting, then directors may be removed by a vote of stockholders owning
sufficient shares to have prevented his election to office in the first
instance. If a director was elected by holders of a class or series of shares
entitled to elect the director, only the shareholders of that group may
participate in the vote to remove that director.
Under the Act, shareholders have the right to remove a director without
cause by ordinary resolution of which special notice of 28 clear days has been
given to the company, irrespective of the provisions of the articles of
association of the company. Details of directors removals must be filed with the
Registrar of Companies in England and Wales and are available upon payment of
the appropriate fee, and details must also be disseminated through a RIS in
compliance with the AIM Rules.
25
VACANCIES ON THE BOARD OF DIRECTORS
Nevada Revised Statute 78.335 provides that vacancies on the board may be
filled by a majority of the remaining directors.
Under English law, appointment of directors is primarily determined by a
company's articles of association. PLC's articles of association provide that it
may, by ordinary resolution of a meeting at which any director retires by
rotation, appoint a person who is willing to fill a vacancy. Without prejudice
to the right of the company, PLC's articles also provide that the directors
shall have the power to appoint a person who is willing to act as a director to
fill a vacancy or as an addition to the board.
LIABILITY OF DIRECTORS AND OFFICERS
Nevada law provides that the articles may contain provisions which limit
the liability of a director or officer liability, except for improper payment of
dividends, willful misconduct or knowing violation of law.
English law does not permit a company to exempt any director or other
officer of the company or any person employed by the company as auditor from any
liability in respect of any negligence, default, breach of duty or breach of
trust of which he may be guilty in relation to the company.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Nevada law, a corporation may indemnify officers, directors,
employees and agents against expenses, including attorney's fees, judgments,
fines and amounts paid in settlement actually and reasonably incurred in
connection with the action, suit or proceeding if he acted in good faith and in
a manner which he reasonably believed to be in or not opposed to the best
interest of the corporation, and with respect to criminal action or proceeding
had no reasonable cause to believe his conduct was unlawful.
Indemnification of expenses when the individual being indemnified has
successfully defended any action, claim, issue or matter therein, on the merits
or otherwise is allowed under Nevada law. Expenses incurred by an officer or
director in defending and action may be paid in advance, under Nevada law, if
such director or officer undertakes to repay such amounts if it is ultimately
determined that he or she is not entitled to indemnification.
English law does not permit a company to indemnify a director or an officer
of the company or any person employed by the company as auditor against any
liability in respect of negligence, default, breach of duty or breach of trust
in relation to the company. This general rule does not apply where a director,
officer or auditor incurs liability in defending any legal proceedings (whether
civil or criminal) in which judgment is given in his favor or in which he is
acquitted or in certain instances where, although he is liable, a court finds
that such director, officer or auditor acted honestly and reasonably and that
having regard to all the circumstances he ought fairly to be excused and relief
is granted by the court. Section 310 of the Act enables companies to purchase
and maintain insurance for directors, officers and auditors against any
liability which would otherwise attach to them in respect of any negligence,
default, breach of duty or breach of trust in relation to the company.
STOCKHOLDERS' SUITS
Nevada Revised Statute 78.650 provides that a stockholder owning 10% or
more may seek to dissolve the corporation and appoint a receiver if directors
are guilty of fraud, misfeasance, malfeasance, waste, refusal to function or if
the corporation has become insolvent, abandoned its business, or for other dire
reasons.
Section 459 of the Act permits a shareholder whose name is on the register
of members of the company (including US persons) to apply for a court order when
the company's affairs are being or have been conducted in a manner unfairly
prejudicial to the interests of the shareholders, or when any actual or proposed
act or omission of the company is or would be so prejudicial. A court when
granting relief has wide discretion, including authorizing civil proceedings to
be brought in the name of the company by a stockholder on such terms as the
court may direct. Judgments of United States courts, including judgments against
PLC, based on the civil liability provisions of the federal securities laws of
the United States, may not be enforceable in English courts.
CERTAIN PROVISIONS RELATING TO STOCK ACQUISITIONS
Unless the corporation opts out, Nevada law provides, among other things,
that a person (individually or in association with others) who acquires a
"controlling interest" (which, under definition in the CSL, can be as small as
20% of the voting power in the election of directors (in a corporation will
obtain voting rights in "control shares" only to the extent such rights are
conferred by a vote of the disinterested stockholders. In addition, in certain
cases where the acquiring party has obtained such stockholder approval for
voting rights, stockholders who voted against conferring such voting rights will
be entitled to demand payment by the corporation of the fair market value of
their shares. BPTII has not opted out of this law.
26
Takeovers of public companies incorporated in England and Wales are
regulated by the City Code on Takeovers and Mergers (the "City Code"),
non-statutory rules unenforceable at law but administered by the Panel on
Takeovers and Mergers, a body comprising representatives of certain City of
London financial and professional institutions. Although PLC is subject to the
City Code, the Company is not. One of the provisions of the City Code provides
that
-- when any person acquires, whether by a series of transactions over a
period of time or not, shares which (taken together with shares held or
acquired by persons acting in concert with him) carry 30% or more of the
voting rights of a public company; or
-- when any person who, together with persons acting in concert with him,
holds not less than 30% but not more than 50% of the voting rights and
such person, or any person acting in concert with him, acquires
additional shares, then such person must generally make an offer for all
of the voting or non-voting equity shares of the company for cash, or
accompanied by a cash alternative, at not less than the highest price
paid for the relevant shares during the 12 months preceding the date of
the offer.
The Companies Act also provides that where a takeover offer is made for the
shares of a company incorporated in the UK and, within four months of the date
of the offer the offeror has, by virtue of acceptances of the offer, acquired or
contracted to acquire not less than nine-tenths in nominal value of the shares
of any class to which the offer relates, the offeror may, within two months of
reaching the nine-tenths level, by notice require shareholders who do not accept
the offer to transfer their shares on the terms of the offer. A dissenting
shareholder may apply to the court within six weeks of the date on which such
notice was given objecting to the transfer or its proposed terms. The court is
unlikely, in the absence of fraud or oppression to exercise its discretion to
order that the acquisition not take effect, but it may specify such terms of the
transfer as it finds appropriate. A minority shareholder is also entitled in
these circumstances to require the offeror to acquire his shares on the terms of
the offer.
ANTI-TAKEOVER PROVISIONS
In addition to the provisions of Nevada law relating to "controlling
interests" discussed above, Nevada law allows for the adoption of forms of
takeover defenses. Although BPTII has not adopted a shareholder rights plan or
other takeover defenses the board of directors could adopt one if the need
arose.
PLC has no anti-takeover plan. Under English law, directors of a company
have a fiduciary duty to take only those actions which are in the best interests
of the company. Generally, anti-takeover provisions may not be actions which
under English law fall within this category. Under the City Code a company is
generally prohibited from taking any action which could effectively result in a
bona fide offer being frustrated (unless shareholder approved by being given in
respect of such action) or in the shareholders being denied an opportunity to
decide on its merits.
DISCLOSURE OF INTERESTS
Acquirors of shares of the Company common stock are subject to disclosure
requirements under Section 13(d) of the Exchange Act and Rule 13d-1 of the
Exchange Act. These rules provide that any person who becomes the beneficial
owner of more than 5% of the issued and outstanding shares of the Company common
stock must file a Schedule 13D or Schedule 13G with the Commission disclosing
certain specified information, and send a copy of the Schedule 13D or Schedule
13G to the Company and to the securities exchange on which the security is
traded within 10 days after the acquisition. Additionally, officers and
directors and beneficial owners of common stock holding 10% or more of the
Company's common stock must make disclosures under Section 16(a) of the Exchange
Act and the rules promulgated thereunder. After the reincorporation, the
provisions of Section 13(d) of the Exchange Act will apply to the holders of PLC
ordinary shares but the provisions of 16(a) of the Exchange Act will cease to
apply.
Section 198 of the Act provides that a person, company and other legal
entity who acquires an interest or becomes aware that he has acquired an
interest of 3%, or for certain types of interest, 10%, or more of any class of
shares comprised in a public company's "relevant share capital" is obliged to
notify that company of his interest within two days following the day on which
the interest was acquired. Relevant share capital means that company's issued
share capital carrying rights to vote in all circumstances at general meetings
of the company. Thereafter, notice must be given to the company of any changes
in respect of whole percentage figure increases or decreases, rounded down to
the next whole number or which reduce such interest below 3% or 10%, as
appropriate. The PLC ordinary shares are "relevant share capital" for this
purpose. Details of any person or group acting in concert (as defined by the
City Code) who own or come to own three per cent. or more of PLC's
27
ordinary shares and details of changes to such shareholding which increase or
decrease the holding through any single percentage must be disseminated through
a RIS in compliance with the AIM Rules.
Under Section 212 of the Companies Act 1985, a public company may by notice
in writing require a person whom the company knows or has reasonable cause to
believe to be, or have been within the previous three years, interested in the
company's share capital to confirm that fact and to give particulars of that
interest and any interest of any other person in this share capital.
When a pursuant to section 212 notice is served by a company on a person
who is or was interested in shares of the company and that person fails to give
the company any information required by the notice within the time specified in
the notice, the company may apply to the court for an order directing that the
shares in question be subject to restrictions prohibiting any transfer of those
shares, the exercise of voting rights in respect of such shares, the issue of
further shares in respect of such shares and, other than in a liquidation,
payments, including dividends, in respect of such shares. Such restrictions may
also void any agreement to transfer such shares. In addition, a person who fails
to fulfill the obligations described above is subject to criminal penalties in
the United Kingdom. Under the PLC articles of association certain sanctions are
imposed unless its board of directors decides otherwise.
BUSINESS COMBINATION
Under Nevada law, the stockholders of a majority of the voting power must
approve any plan of merger or share exchange unless a greater vote is required
by the articles of incorporation or the board of directors or as may be
necessary if class voting is required. The Nevada Business Combination Law (the
"BCL") provides, among other things, for restrictions on business "combinations"
(as broadly defined in the BCL between a corporation and a person (individually
or in association with others) who is deemed an "interested shareholder" because
such person (i) has acquired 10% or more of the voting power of the
corporation's shares, or (ii) has certain affiliations or associations with the
corporation and previously owned 10% or more of such voting shares. Such
business combinations are prohibited for a three-year period specifically
prescribed by the BCL unless certain prior approvals by the corporation's board
of directors have been obtained. After expiration of the three-year period, such
business combinations are still prohibited unless certain prior approvals by the
corporation's board of directors or disinterested shareholders have been
obtained or certain fair value requirements are met.
There are no similar provisions under English law.
CLASS VOTING
Under Nevada law, class voting is not required except in certain
circumstances: (1) if an amendment to the articles of incorporation would alter
or change any preferences or any relative or other right given to any class or
series of outstanding shares, then the amendment must be approved by the vote,
in addition to the affirmative vote otherwise required, of the holders of shares
representing a majority of the voting power of each class or series affected by
the amendment regardless of limitation or restrictions on the voting power
thereof; or (2) if a plan of merger contains an amendment to the articles of
incorporation that adversely change any preference or right of a class or series
of outstanding shares then the merger must be approved by the vote, in addition
to the affirmative vote otherwise required, of the holders of shares
representing a majority of the voting power of each class or series affected by
the amendment regardless of restrictions on the voting power thereof.
Under English law, the rights attached to any class of securities (unless
otherwise provided by the terms of issue of that class) may only be varied with
the written consent of the holders of three-fourths in nominal value of the
issued shares of that class, or with the sanction of an extraordinary resolution
passed at a separate meeting of the holders of shares of that class.
DISSENTERS' RIGHTS
Under Nevada law, a stockholder of a corporation is entitled to dissent
from, and obtain payment of the fair value of his/her shares in the event of
certain types of plans of merger where stockholder approval is required and
shareholder is entitled to vote on such merger. Any corporate action taken
pursuant to a vote of stockholders to the extent that the articles of
incorporation, bylaws or resolutions of the board provide that voting and
non-voting stockholders are entitled to dissent and obtain payment for their
shares.
Stockholders of a corporation participating in certain majority corporate
transactions may, under varying circumstances, be entitled to receive cash equal
to their fair value of the shares held by the stockholder, in lieu of the
consideration such stockholder would otherwise receive in the transaction.
While English law does not generally provide for appraisal rights, if a
shareholder applies to a court as described in the section entitled "Shareholder
Votes on Certain Transactions" above, the court may specify such
28
terms for the acquisition as it considers appropriate. English law provides
stockholders with rights to dissent in respect of an reorganization of a company
under section 110 of the Insolvency Act 1986. In addition, dissenters' rights
exist where an offeror who, pursuant to a takeover of a company, has acquired or
contracted to acquire not less than nine-tenths in value of the shares to which
the offer relates, seeks to compulsorily acquire outstanding minority
shareholdings.
DISSOLUTION
Under Nevada law the directors must recommend the dissolution of a
corporation to the stockholders, The corporation shall notify each stockholder
entitled to vote on the dissolution and the stockholders entitled to vote must
approve the dissolution.
Under English law the directors have the power in the name and on behalf of
the company to present a petition to the Court for the company to be wound-up. A
company may be wound-up by the court on one or more of the specified grounds set
out in section 122 of the Insolvency Act 1986 or if the company itself opts for
winding up by special resolution. In addition, a company may voluntarily resolve
by ordinary resolution to wind up the company. Under the Insolvency Act 1986,
creditors have certain rights in respect of the winding up.
INTERESTED DIRECTOR TRANSACTIONS
Under Nevada law no contract or transaction shall be void or voidable if
such contract or transaction is between the corporation and one or more of its
officers or directors, or between the corporation and any other corporation,
partnership, association, or organization in which one or more of its directors
or officers are directors or officers, or have a financial interest, if either
the shareholders or the board of directors approve any such contract or
transaction after full disclosure of the material facts, or absent the approval
of the shareholders or of the disinterested board of directors, the contract or
transaction is "fair" to the corporation.
Under English law the Act provides that where a director, in his personal
capacity, is buying something from or selling something to the company, then the
prior consent of the shareholders by ordinary resolution is necessary if the
asset being bought or sold is of 'requisite value', and therefore amounts to a
substantial property transaction for the purposes of the Act. If the asset in
question is worth less than L2,000, it is not of requisite value and the
transaction will not be a substantial property transaction. If the asset is
worth more than L100,000, it will always be a substantial property transaction.
If the asset being bought or sold is worth between L2,000 and L100,000 then it
will qualify as being requisite value if it is worth more than 10 per cent. of a
company's net relevant assets (the net assets figure shown on the latest set of
accounts). If a substantial property transaction takes place without the
shareholders' authority being obtained in advance, the contract is voidable by
the company and the director who was party to the transaction and any other
director who authorized the transaction become liable to indemnify the company
for any loss it has suffered and to account to the company for any gain they
have made.
If any director has an interest in any contract or transaction (whether
directly or indirectly) with PLC, PLC's articles of association provide that the
director concerned must declare the nature of such interest to the directors at
the board meeting at which such contract or transaction is to be approved or, in
any other case, at the first board meeting after he knows that he is or has
become so interested. Provided such disclosure has been made, and subject to the
requirements of the Act concerning shareholder approval for substantial
transactions involving directors referred to above, a director can be a party to
a contract or transaction with PLC. However, PLC's articles of association also
provide that a director will not, save in certain cases set out in the articles
of association, be permitted to vote in respect of any board resolution
concerning any contract or arrangement in which he (or any person with whom he
is connected) has a material interest nor shall such director be counted in the
quorum at a board meeting concerning such a contract or arrangement.
Under AIM Rules, details of any transaction between PLC and a director (or
any associate of the director (as defined in the AIM Rules) which exceeds a
specified size must be publicly disseminated through an RIS as soon as the terms
of such transaction has been agreed.
SALE OF ASSETS
The corporation may sell, lease or exchange all of its property and assets
with an action taken by the board and an affirmative vote of shareholders
holding not less than a majority of the voting power.
In England, save in relation to shareholder approval required in respect of
a substantial property transaction involving a director as referred to above and
save as may be required pursuant to AIM Rules referred to below, a company may
sell, lease or exchange its property and assets with an action of the board.
Under the AIM Rules, details of any transaction which exceeds certain specified
size thresholds must be publicly disseminated through an RIS as soon as the
terms of the transaction have been agreed. Furthermore, under the AIM Rules any
29
agreement which would effect a reverse takeover (broadly a transaction which
exceeds 100 per cent. in any of the size tests set out in the AIM Rules or which
results in a fundamental change in the company's business, board or voting
control) must be conditional on the consent of shareholders being given in
general meeting and must be accompanied by the publication of an AIM admission
document in respect of the proposed enlarged entity.
30
BUSINESS
HISTORY
BioProgress Technology International, Inc. was incorporated in California
on March 5, 1990, under the name of U.S. Flywheel, Inc., as a subsidiary of
Sunbird Technologies, Inc., a Utah corporation ("Sunbird Technologies"). In June
1991, U.S. Flywheel, Inc. acquired three patents and a license relating to
flywheel technology from Sunbird Technologies and its affiliates in exchange for
common shares, par value $.001 per share, of U.S. Flywheel, Inc. "Common Stock".
These shares of Common Stock were subsequently distributed to the shareholders
of Sunbird Technologies after registration with the U.S. Securities and Exchange
Commission ("Commission"). U.S. Flywheel, Inc. subsequently transferred its
flywheel technology to a partnership in exchange for a minority interest in the
partnership. The partnership interest of U.S. Flywheel, Inc. was subsequently
sold, after which U.S. Flywheel, Inc. began its search for a business in which
to engage U.S. Flywheel, Inc. changed its name to Famous Sam's Group Inc. in
July 1996 and briefly was a restauranteur.
On November 17, 1997, Famous Sam's Group Inc. entered into an agreement
(the "Reorganization Agreement") with BioProgress Technology, Inc., a Colorado
corporation ("BioProgress Technology Colorado"). Pursuant to the Reorganization
Agreement, Famous Sam's Group Inc. acquired all of the outstanding capital stock
of BioProgress Technology Colorado in exchange for 4,000,000 post-split shares
of Common Stock, after giving effect to a reverse one for five stock split
approved by the then majority shareholder of Famous Sam's Group Inc. on October
21, 1997.
In conjunction with the execution and delivery of the Reorganization
Agreement, Famous Sam's Group Inc. entered into an agreement (the "BTL Option
Agreement") with certain of the shareholders of BioProgress Technology Limited,
an entity incorporated in England and Wales ("BTL"). BioProgress Technology
Colorado acquired approximately 62% of BTL on November 11, 1998, and the
remaining approximately 38% of BTL on December 31, 1998, issuing an aggregate of
22,818,446 shares of Common Stock as the sole consideration for the acquisition.
BTL is the original research and development arm of the Company and has
developed our product lines. In addition, in November 1997, the Company and BTL
entered into an exclusive distribution agreement pursuant to which the Company
became the exclusive distributor in the United States and Canada of any products
created by BTL. Currently, these products are XGel(TM) film system and XGel(TM)
film. The exclusive distribution agreement terminates upon the later of 20 years
from the first commercial sale of BTL's products or the expiration of the last
valid utilized patent.
In December 1997, Famous Sam's Group Inc. changed its name to BioProgress
Technology International, Inc.
On August 12, 1998, the Company acquired DHA Nutrition Limited (UK), a
company incorporated in England and Wales ("DNL"), as a wholly owned subsidiary
in exchange solely for 400,000 shares of Common Stock. The agreement provided
that the number of shares which the Company issued in the acquisition of DNL
could be increased by an aggregate of 600,000 shares based upon cumulative gross
revenue targets in respect of DNL's feed and food supply sales, but such targets
were not met. The sole asset of DNL on the date of acquisition was an agreement
with Martek Biosciences Corporation, a U.S. corporation whose securities trade
on the Nasdaq National Market System, which is currently inactive. However, we
gained direct access to several leading retailers in the United Kingdom by
acquiring DNL, which, we believe, will offer the potential to expand the
customer base for a proposed line of vegetarian soft-capsule dietary supplements
by BTL.
On February 15, 1999, the Company acquired from TruTona International,
Inc., a privately-held Atlanta-based corporation ("TruTona"), patents, licenses
and trademarks relating to a broad range of products, including an award winning
range of flushable and biodegradable disposable products designed by TruTona. We
paid the sellers of TruTona $1,500,000 in the acquisition, half in the form of
1,875,000 shares of Common Stock and half in cash.
On April 5, 1999, we entered into a license with EcoProgress, a Canadian
company with securities traded on the Vancouver Stock Exchange. The license was
granted for the sum of $1,500,000, and gives EcoProgress the exclusive right to
manufacture, sell and distribute anywhere in the world a line of flushable and
biodegradable disposable products employing the intellectual property that we
acquired from TruTona. The transaction also included the sale to EcoProgress of
assets acquired from TruTona, including trademarks and certain products.
EcoProgress paid $380,000 cash at closing and the remaining $1,120,000 was paid
through the issuance of 1,066,667 shares of registered common stock in
EcoProgress (which the Company has subsequently sold).
31
On August 27, 2002 we announced that we had executed an amendment to the
license agreement held by Consolidated EcoProgress Technologies ("CES"). We
waived all outstanding royalties due to us from CES and agreed to waive all
future royalties that would accrue in respect of sales of all products produced
by CES under the terms of the Exclusive License Agreement. In addition, we and
CES agreed to a mutual release of all obligations under the Research and
Development Agreement between the parties. In consideration of our agreement to
amend the exclusive License Agreement, CES has irrevocably waived any and all
rights it may have or may have had to participate in the ownership and
commercialization of BioProgress' technology as employed in ostomy products.
BioProgress will pay CES a royalty of 5% of all proceeds it receives on any
account from its ostomy products to a maximum cumulative amount of US
$1,000,000.
We purchased 5,843,750 shares of common stock, representing approximately
46.6% of the outstanding equity of The Healthy Forum for $100,000 during April
2000 and April 2001. The Healthy Forum is designing a range of food products,
dietary supplements and mineral beverages, and promoting selected supplemental
products not necessarily designed by The Healthy Forum, to be marketed under the
Health Matters(TM) brand and targeted at the well-being segment of the mass food
and beverage market. [We have agreed to grant The Healthy Forum an exclusive
license to employ a version of the XGel(TM) film system Septum(TM) technology to
produce some of The Healthy Forum's unique formulations.
OVERVIEW OF OUR BUSINESS
We are engaged in the research, development, marketing, sales and
distribution of products that use water soluble and biodegradable films for the
dietary supplement, pharmaceutical, recreational and cosmetic industries and
other applications. We also develop flushable and biodegradable products for the
medical industry. BioProgress operates through four wholly owned subsidiaries,
BioProgress Technology, Inc., BioProgress Technology Limited (UK), ProDesign
Technology Limited (UK) and DHA Nutrition Limited (UK) (collectively with
BioProgress, "we," "our" or the "Company"). We also own a significant minority
interest in The Healthy Forum Limited. Our principal research and development
operations are in England.
Our primary focus is on the development and commercialization of our unique
and proprietary process, the XGel(TM) film system ("XGel(TM)"), which comprises
the equipment used to encapsulate ingredients in our XGel(TM) film. The first
commercial version of the XGel(TM) film system, known as Swallow(TM), is used to
produce soft capsules that are free from gelatin and other animal by-products.
Soft capsules are commonly recognized as products that contain a wide variety of
non-liquid fillings in ingestible form, such as vitamin, herbal and mineral
supplements and as oral delivery systems for drugs. We have also developed a
non-ingestible form, known as NIM(TM) for applications such as paintballs and
toiletries (such as bath and aromatherapy oils). Three additional versions of
the XGel(TM) film system are in development and available in prototype form. The
first additional version, known as TabletWrap(TM), aims to replace coating
processes employed in the production of tablets. The second additional version,
known as NRobe(TM), aims to encapsulate powders in a continuous process thereby
eliminating the need for two piece hard shell capsules. The third additional
version, known as Septum(TM), enables the encapsulation of two noncompatible
active ingredients in the same capsule separated by a membrane of XGel(TM) film.
Collectively, the five versions of the XGel(TM) film system aim to provide a
cost effective and animal-free encapsulation process for liquids, tablets and
powders, thereby addressing the needs of the entire existing market for oral
dosage forms while providing novel delivery mechanisms not possible with
traditional processes.
We believe there is an increasing demand for our non-gelatin capsules.
Gelatin is a protein which is predominantly derived from animal renderings. A
number of industry and consumer trends are driving the need to replace gelatin
as an encapsulation material. Among them are:
- Health and safety concerns,
- Religious, ethnic and moral beliefs,
- Efficacy of the material and process, and
- New product development.
Our current business model envisions the following elements:
- Sell licenses to use our intellectual property vested in the XGel(TM)
film systems,
- Sell XGel(TM) film systems,
- Sell XGel(TM) film for use with XGel(TM) film systems,
- Offer research and development services to assist licensees to gain
maximum benefit from the license and,
- Offer research and development services to customers seeking new
product innovations.
32
We anticipate that the resultant business model will benefit our business
in the following ways:
- Licensing will eliminate the requirement for us to make a large
capital investment to establish Company-owned Good Manufacturing
Practices ("GMP") (GMP facilities are required by the Food and Drug
Administration for companies to produce products, prescription drugs
or over the counter drug products for consumers), Licensing will
eliminate the need for us to recruit skilled personnel to staff GMP
facilities,
- Licensing will facilitate the rapid introduction of the XGel(TM) film
system on a global basis by a large group of companies who already
have in place the infrastructure and resources to produce and deliver
products to consumers,
- The ability for a rapid rollout will reduce the risk of a competitive
response by industry peers,
- Licensing the manufacture of its technologies and focusing on
research and development will allow us to employ our innovative
technological and engineering skills to maximum advantage, and
- Licensing the manufacture of our technologies will enable us to
maintain a low cost base.
During 2001, we took several major steps toward commercializing the
XGel(TM) film system. We demonstrated the first ingestible product version of
the XGel(TM) film system, named "Swallow(TM)", through batch trials of a wide
range of XGel(TM) films and active ingredients. We designed Swallow(TM), which
is the subject of various patent applications, and we had a system manufactured
by specialist sub-contractors. Having the ability to demonstrate Swallow(TM) in
operation to potential customers has generated interest from more than 40
international corporations interested in potentially purchasing licenses and the
XGel(TM) film system.
On June 4, 2001, we opened our purpose built research and development
facility at Hostmoor, in March, Cambridgeshire, England. The 27,000 square feet
facility houses special cubicles, termed "pods", in which development work can
be conducted in isolation, thereby enabling us to progress development work
simultaneously with several customers, and on our own account, while maintaining
strict confidentiality.
Also, during June 2001, we commenced user trials of our flushable and
biodegradable ostomy pouch. We believe that initial feedback from users is
extremely encouraging. As a result of the feedback received during Q3 of 2001,
we produced a large batch of ostomy pouches in order to expand the number of
trials with a view to collecting sufficient data to determine the efficacy of
the current design. Following receipt and study of the data collected from
trials during Q4 of 2001, we determined that our ostomy pouch appeared to have
commercial potential.
During July, 2001 we demonstrated laboratory produced samples to potential
customers for our NRobe(TM) and Septum(TM) technologies currently under
development. NRobe(TM) and Septum(TM) technologies are the subject of filed but
unpublished patent applications.
On July 6, 2001 we announced the completion of the acquisition of ProDesign
Technology Limited ("PTL"). PTL is a specialist design house skilled in the use
of Pro-E computer aided design techniques. We intend to expand the resources of
PTL to meet the growing needs of our research and development program. On July
10, 2001 we completed four agreements with a Spanish pharmaceutical company,
Farmasierra, S.L., for: the sale of a full scale XGel(TM) film system; the grant
of a non-exclusive license to use our patents in respect of the XGel(TM)
technology; the future supply of additional XGel(TM) film systems; and, the
future supply of XGel(TM) film for use with the XGel(TM) film systems. We
believe that the technology covered by these agreements may revolutionize the
pharmaceutical industry. The pharmaceutical industry currently uses three types
of gelatin-based dosage forms: gelatin soft capsules for liquids, coated tablets
and two-piece hard gelatin capsules for powders. Two of these processes exist
because the soft capsule process is essentially wet, and therefore not suitable
for use with powders. With the development of a powder fill version of the
XGel(TM) film system, pharmaceutical companies would be able to employ just the
one process to deliver both liquid and powder products. Further, our Septum(TM)
technology enables both liquids and powders to be combined in a single capsule
and to be released at different times and or sites in the digestive system.
On November 28, 2001, we announced that we had reached a commercial
agreement with The Boots Company plc (LSE: BOOT) ("Boots") whereby Boots would
use our XGel(TM) film system to produce samples for consumer trials of an
innovative oral dosage form. On April 2, 2002 we announced the execution of
stage three of our first Product Development Agreement with Boots following
successful consumer acceptability trials of the newly developed products. The
Product Development Agreement was first executed in October 2000 and proceeded
to stage two during November 2001. The aim of the Product Development Agreement
is to develop a
33
range of innovative new consumer products utilizing our unique XGel(TM) FS
encapsulation technology. For commercial reasons the specific products and
categories are confidential.
On December 6, 2001 we announced that engineering tests conducted by Peter
Black Healthcare Limited on its XGel(TM) film system under order had proved
successful and that stability trials of capsules produced on the system had
commenced. We announced that the XGel(TM) film system had successfully produced
10 minim size capsules at a rate of 80,000 per hour. On March 26, 2002 we
announced that Peter Black Healthcare Limited had accepted the XGel(TM) film
system under contract. Further, such acceptance triggered a contract for a
second system. In addition, we announced that Peter Black Healthcare Limited had
executed an option to acquire 5 NRobe(TM) versions of the XGel(TM) film system.
Subsequent to this announcement, Peter Black Healthcare increased to 10 the
number of NRobe(TM) XGel(TM) film systems under option.
On March 28, 2002 following eighteen months of development work and
evaluation studies, we entered into an agreement with Worldwide Consumer
Medicines, a division of Bristol-Myers Squibb Company, in respect of a novel
application of the XGel(TM) film system. For commercial reasons the specific
products and categories are confidential.
DESCRIPTION OF PRODUCTS
Our primary focus is to commercialize our XGel(TM) film system.
XGEL(TM) FILM SYSTEM
The gelatin capsule market is divided into two sectors: "hard" or "soft,"
according to the nature of the capsule shell. We have developed and
commercialized a version of the XGel(TM) film system for the manufacture of soft
capsules. Soft capsules are formed and filled simultaneously and predominantly
carry liquid fills which enables their use in a far wider variety of products
than hard capsules, including pharmaceutical, vitamin, herbal and mineral,
toiletries and paintballs.
The soft capsule consists of shell and contents. The shell is a means of
transporting the contents from the manufacturer to the consumer. Some soft
capsule manufacturers produce the contents as well as the shell and sell the
finished product under their own brand or for use in private label brands. Other
manufacturers simply act as sub-contract or "toll" suppliers to the proprietors
of main brands.
Over the past several years, we have increased our knowledge base of
natural and water-soluble materials and the means of processing them to form
soft capsules, to enrobe, or coat, tablets and to produce and encapsulate powder
forms. Initially, one base material and one means of processing were developed
to serve the needs of the market. From our own research and from discussions
with actual and potential customers, we have developed an extensive library of
XGel(TM) films and five specific constructions of the XGel(TM) film system
designed to maximize the efficacy of the production process. The five current
versions of the XGel(TM) film system are:
- NIM(TM): For production of soft capsules for non-ingestible
applications.
- Swallow(TM): For production of ingestible capsules.
- NRobe(TM): For coating and enrobement of solid dose and powder forms.
- TabletWrap(TM): For replacing the coating processes employed in the
production of tablets.
- Septum(TM): For the encapsulation of two noncompatible active
ingredients in the same capsule separated by a membrane of Xgel(TM)
film
We believe that our XGel(TM) film system has significant advantages over
traditional gelatin-based soft capsule production machinery.
XGel(TM) Film System -- Non-Ingestible Products: XGel(TM) film, the raw
material used in the process, is made from a water-soluble and biodegradable
polymer, which is naturally resistant to oils. This version of XGel(TM) film
exhibits good elasticity and forms a very strong bond when sealed during the
encapsulation process. The first products to be produced using the XGel(TM) film
system comprise a range of moisturizing bath oils. There are four different soft
capsules in the range, each containing a different fragrance designed to deliver
a relaxing, refreshing or invigorating ambience to the bathroom. We are also
developing paintballs for recreational use using XGel(TM) film system.
XGel(TM) Film System -- Ingestible Products: XGel(TM) film system also can
be made from drug regulatory body-approved natural and sustainable ingredients,
and are, therefore, ingestible. These materials are processed to form XGel(TM)
films. XGel(TM) films are produced in a format that enables them to be processed
using similar machinery as used for non-ingestible soft capsules. Using
proprietary techniques, XGel(TM) films may be formulated and/or coated to
produce an encapsulation medium with broad ranging characteristics that
facilitate
34
the oral delivery of oils, pastes and powders by time or at site within the
human body. XGel(TM) films are processed using the XGel(TM) film system. We have
developed a comprehensive range of films suitable for vitamin, herbal and
mineral supplements as well as pharmaceutical products.
Gelatin is a protein which is predominantly derived from animal renderings.
For many years, gelatin has proven to be an acceptable and cost-effective
encapsulation medium for soft capsules. However, a number of industry and
consumer trends are driving the need to replace gelatin as an encapsulation
material. Among them are:
- Health and safety concerns -- The outbreak of "mad cow" disease has
caused worldwide concern over animal products, particularly in
Europe.
- Religious, ethnic and moral beliefs -- Many groups, because of belief
or culture, refuse to consume gelatin derived from cows or pigs, or
in some cases, from any animal source.
- Efficacy of the material and process -- use of the XGel(TM) film
system and XGel(TM) film has lower raw material costs, requires
reduced capital investment and manpower, includes a multi-task
encapsulating head, enables improved speed of processing and reduced
drying time as compared to gelatin encapsulation technology.
Following the outbreak in Europe of Bovine Spongiform Encephalopathy
("BSE"), commonly known as "mad cow" disease, all animal-derived food and
by-products have come under the scrutiny of the scientific community and
legislators for fear that BSE may have entered the human food chain. The reason
for concern is that BSE may be linked to Creutzfeldt Jakob Disease ("CJD"),
which is fatal to humans. Since the first recorded deaths in 1995, about 100
people have succumbed to CJD, the vast majority in the United Kingdom, where 15
died in 1999 and 27 died in 2000, according to the U.K. Department of Health. A
further six cases in living persons were subsequently identified. During 2000,
cases of BSE were recorded in France, Germany, Poland and Spain, and during 2001
the first case of BSE was recorded in Japan. Australia and New Zealand have
refused imports of bovine-derived materials and by-products.
We believe that our XGel(TM) film system is one of a limited number of
viable full-market alternative for consumers who wish to switch to animal-free
products in the global market for soft capsules. Market research carried out in
the United States and in Europe has indicated that in excess of 30% of all
families are making efforts, on a regular basis, to remove animal products from
their diet.
The XGel(TM) film system not only provides consumers with the choice of an
animal-free soft capsule, but we believe its unique and novel design may deliver
significant advantages in the manufacturing process when compared to traditional
encapsulation processes. These advantages are:
- Lower Raw Material Costs: The raw material for XGel(TM) film is in a
film format ("XGel(TM) Film"). The cost of XGel(TM) Film per ton is
currently marginally less than that of gelatin in powder forms. There
are no additional costs incurred to deliver XGel(TM) Film to the
encapsulating head in the XGel(TM) film system, whereas gelatin has
to be mixed with glycerin to form a liquid film.
- Reduced Capital Investment and Manpower: The nature of XGel(TM) Film
eliminates the need for mixing containers and vats currently used to
prepare gelatin for the encapsulation machine. In addition, expensive
machinery is needed to maintain the viscosity of gelatin during its
transportation to the encapsulation machine. We believe that the
resultant savings to our customers in terms of capital investment and
human resources by switching from gelatin based systems are
potentially significant.
- Multi-Task Engine: A modular design of the filling, sealing, and
cutting head, the "engine", makes it possible to produce capsules
having a range of shapes and sizes on the same XGel(TM) film system
without a lengthy changeover procedure. Traditional machinery using
gelatin cannot deliver this flexibility.
- Improved Speed of Processing: To achieve the correct viscosity for
processing, gelatin requires wide changes in temperature prior to its
being fed to the encapsulation machine. The time taken to achieve
this change in temperature is one of the controlling factors that
determine the speed at which the encapsulation machine can produce
products. XGel(TM) Film requires no such temperature variation, and
its use can potentially increase processing speeds significantly to a
level dependent upon the rate of injection of the material to be
encapsulated.
- Reduced Drying Time: Gelatin soft capsules require up to 48 hours in
which to dry after being made. This lengthy process requires a
substantial resource in terms of material handling equipment and
storage facilities. XGel(TM) soft capsules require less than one hour
to dry.
35
We believe our XGel(TM) film system to be a potentially revolutionary
development within the encapsulation industry since it was first established in
1935.
FLUSHABLE AND BIODEGRADABLE PRODUCTS
Although XGel(TM) is our primary focus, we also hold two patents for ostomy
products. We believe that our flushable and biodegradable colostomy pouch offers
colostomists a safe, hygienic and convenient product, which equals or exceeds
the in-use performance of existing products. We commenced user trials of our
colostomy pouch during the third quarter of 2001. We believe that initial
feedback from users is extremely encouraging. As a result of the feedback
received during Q3 of 2001, we produced a large batch of ostomy pouches in order
to expand the number of trials with a view toward collecting sufficient data to
determine the efficacy of the current design. In 2002, we have executed an
exclusive worldwide license which includes minimum royalty payments for each of
the first two years for one version of our ostomy pouch to a global medical
device supplier. Commercialization of this product will be handled soley by this
licensee and we are not obligated to contribute to the cost of commercializing
the product.
CLIENTS
XGEL(TM) FILM SYSTEM
We have historically and are currently dependent on a small number of
manufacturers as customers. The Proctor and Gamble Company, one of the
manufacturers in the non-ingestible market accounted for 43.1% of our overall
revenues in 2001. Our agreement with Proctor and Gamble has been completed
successfully and we have not entered into an additional agreement with Proctor
and Gamble. Our revenues have been derived predominantly from license and
development fees with the customers set forth under "-- Research and
Development."
We also have certain revenues from machine sales of the XGel(TM). On July
24, 2000, we entered into several agreements with Peter Black Healthcare Limited
("Peter Black"), the United Kingdom's leading supplier of private label vitamin,
mineral and herbal supplements, as follows:
- Under an agreement for the supply of a prototype machine, we have
agreed to sell to Peter Black a form fill and seal encapsulation
machine and have agreed to provide services as necessary to upgrade
such machine according to certain specifications. Peter Black has
agreed to pay $1,000,000 for a machine and services in four equal
instalments, $500,000 of which has been paid to date, with the two
remaining instalments tied to acceptance of the machine, its delivery
and first commercial use of products manufactured by the machine.
- Under a film supply agreement, we have agreed to sell to Peter Black
ingestible films compatible with the form fill and seal machine
described above within certain specifications. This agreement
terminates upon the termination of the patent license agreement,
described below.
- Under a machine supply agreement, we have agreed to supply form fill
and seal machines subject to certain specifications to Peter Black.
Peter Black has agreed to pay us for such machines based upon the
number of machines ordered by Peter Black in decreasing prices per
machine as the number of machines ordered increases. The machine
supply agreement terminates upon termination of the patent license
agreement, described below.
- Under a patent license agreement, we have granted Peter Black an
exclusive license to manufacture, sell or otherwise deal in dietary
supplements and non-prescription medicines using XGel(TM) film
compatible with the machine and manufactured under the license, in
the United Kingdom and the Republic of Ireland, and a non-exclusive
license to the same elsewhere in the European Union and Switzerland,
with provision for this to be extended to the rest of the world with
written consent. We have agreed to use reasonable efforts to cause
Peter Black to be the contract manufacturer outside of the United
Kingdom and the Republic of Ireland to any third party who expresses
an interest in dietary supplements and non-prescription medicines
using XGel(TM) film system. Peter Black may sublicense its rights
under the license. Peter Black shall pay a fee for such license based
upon the number of form fill and seal machines ordered by Peter
Black, payable annually in decreasing increments. The patent license
agreement shall terminate on the latter of the expiration of the last
of the licensed patents in the United Kingdom and the Republic of
Ireland and ten years from the date products manufactured by the form
fill and seal machines are first put on the market anywhere in the
European Union.
FLUSHABLE AND BIODEGRADABLE PRODUCTS
- We are not currently pursuing additional clients, other than our one
licensee, for our flushable and biodegradeable product since we are
not focusing our sales, marketing or creative efforts on these
36
products. Our licensee is our sole customer for the product and
royalties under the license constitute all revenues for this product.
SALES AND MARKETING
XGEL(TM) FILM SYSTEM
Our marketing and sales strategy is focused on providing engineering
processes and proprietary materials to enable cost efficient, flexible and high
capacity novel dosage forms to manufacturers of pharmaceuticals, vitamins herbs
and minerals, and fast moving consumer goods. In addition, we anticipate that
new markets for our products will be developed as future versions of our
XGel(TM) film system are proven. We only use our website and a corporate
brochure to market and develop our products.
FLUSHABLE AND BIODEGRADABLE PRODUCTS
The marketing and sales strategy for our flushable and biodegradable
products is to market through our sole licensee, and receive royalties on sales
made by such licensees.
INDUSTRY BACKGROUND
XGEL(TM) FILM SYSTEM
We have targeted our XGel(TM) film system technology primarily at the
global encapsulation and delivery markets for pharmaceutical, vitamins, herbs,
minerals and over the counter ("OTC") medicine products. In addition, a
variation of the XGel(TM) film system is capable of producing novel delivery
solutions for a wide range of fast moving consumer goods, such as laundry
products and cosmetics. Our immediate customer target is the manufacturer of
such products.
Based upon informal surveys within the industry, we believe that the U.S.
retail market for vitamins and supplements to be in excess of $10 billion
annually. Fifty-two week trends ended August 2001, however, shows a flat market
in vitamins/supplements while showing a decline of approximately 8% for herbs.
The market for dietary supplements in the United Kingdom was approximately L345
million in 2001. The leading producer of dietary supplements in the United
Kingdom is Peter Black, which accounts for approximately 34% of the entire
market. Whilst the other markets are materially smaller than those for vitamins,
minerals, supplements and pharmaceuticals in terms of size, they are still
significant. We estimate that the annual market for paintballs in the United
States alone is in excess of 7 billion paintballs. The market for household
products other than cosmetics is currently less developed, but we believe it has
enormous potential and we have various novel applications under development. The
market for cosmetic applications is more mature, but smaller, than the other
markets, with an estimated market size in the region of 2 billion capsules
annually for items such as bath beads.
We believe that the market for vitamins and other nutritional supplements
is likely to continue to grow as the world's demographics continue to shift
towards a more senior-aged population, which has a greater tendency to use
vitamins on a regular basis. According to the U.S. Census, the segment of the
U.S. population aged 45 and above will continue to grow, increasing 42% by the
year 2030. We believe that as consumers grow older, chronic health problems will
become more of a concern. Most significant among these are cancer, lack of
energy, cardiovascular problems, joint pain and high cholesterol. We believe
that more senior-aged consumers will seek alternative treatments for these
health problems, as well as invest in preventative measures. Likewise, we
believe that the pharmaceutical and OTC medicinal sectors will continue to grow
for the same reasons as the vitamin supplement market as well as new product
development.
Upon entering the capsule market, we believe that our XGel(TM) film system
gelatin-free soft capsule will be extremely attractive to vegetarians and
certain ethnic and religious groups, such as Muslims, Hindus, Jews and Seventh
Day Adventists. These groups represent large potential markets. For example, the
Muslim population now stands globally at 935 million. There are an estimated 2
million vegetarians in the United States, and 250,000 in the United Kingdom. In
addition, market research has indicated that in excess of 29 million households
in the United States qualify as "meat reducers" by making a regular effort to
remove animal products from their diet.
Certain formulations of XGel(TM) Film is likely to enable its use as a drug
delivery system. We have executed agreements with several global corporations
engaged in the marketing of oral dose forms. In addition we continue discussions
with several leading pharmaceutical companies regarding the sale of XGel(TM)
film system licenses. It is too early in our development to comment in more
detail on the possibilities within this market sector and no assurances can be
made that any such discussions will result in additional formal agreements with
any of such pharmaceutical companies.
37
FLUSHABLE AND BIODEGRADABLE PRODUCTS
We estimate the size of the ostomy market to be $1 billion. Within this
market, to our knowledge, our ostomy pouch is the only flushable and
biodegradable product.
ACQUISITIONS
We have made no acquisitions in the year 2002.
COMPETITION
In each of our markets, we face significant competition from other
companies that are better capitalized, have greater name recognition, have more
background and experience in the industry, have greater financial, technical,
marketing and other resources, and have better facilities.
XGEL(TM) FILM SYSTEM
The gelatin soft capsule market is currently dominated by two companies,
namely R.P. Scherer Inc., a subsidiary of Cardinal Healthcare Inc., and Banner
Pharmacaps Inc., a subsidiary of Sobel NV. The softgel machines have been
manufactured by R.P. Scherer, Pharmagel (Italy) and many from Korea (because of
their lower cost). All other customers for soft capsule machines purchase from a
small, globally diverse list of producers. Companies such as Pharmagel are
recognized as being providers of high speed and high quality machines. Any or
all of these companies may be developing alternative processes to compete with
the XGel(TM) film system. We are aware of two competitors that have made
attempts to modify traditional soft capsule machines and materials in order to
produce animal-free or non-gelatin soft capsules, one of which has successfully
launched a starch based product.
FLUSHABLE AND BIODEGRADABLE PRODUCTS
The ostomy market for ostomy pouches is dominated by a small number of
large producers none of which we believe produce a flushable and biodegradable
ostomy pouch.
DISTRIBUTION METHODS
XGEL(TM) FILM SYSTEM
Soft capsules reach consumers via a multitude of distribution channels. In
the United States, dietary supplements and pharmaceuticals are sold through
traditional over-the-counter outlets, as well as "in-store" locations at large
food retailers. In general terms, the sales and distribution channels that we
plan to use will be through licensed manufacturers, are mature and can be easily
identified.
FLUSHABLE AND BIODEGRADABLE PRODUCTS
Our ostomy pouch with be manufactured and distributed through our exclusive
licensee, a global medical device supplier. We will receive a royalty based on
total sales of the product per annum.
SUPPLIERS
XGEL(TM) FILM SYSTEM
We contract the production of XGel(TM) Film with four suppliers. It would
take a significant period of time to qualify a new supplier to start production
of XGel(TM) Film. We believe that there are currently only a limited number of
suppliers capable of producing our XGel(TM) Film. We attempt to manage this risk
by spreading our requirements over four suppliers. We contract with several
equipment manufacturers to construct the XGel(TM) film system. We believe that
there is currently a large number of manufacturers capable of constructing
XGel(TM) film systems to our specifications.
INTELLECTUAL PROPERTY RIGHTS
We value highly our intellectual property and precautions have been, and
will be taken to ensure its security. No discussions have, or will be held with
third parties without the protection of a confidential disclosure agreement. Our
future sales revenues are heavily dependent upon our procuring and maintaining
broad protection of our intellectual property. There can be no guarantee that
such protection will be afforded to any or all of our processes and materials.
We hold 15 patents and have applications in progress for an additional 27
patents.
XGEL(TM) FILM SYSTEM
Application has been made to have our trademark XGel(TM) , NRobe(TM) and
Septum(TM) registered, and intend to make an application for TabletWrap(TM), in
the major markets in which we intend to operate. The technology used in XGel(TM)
film systems is the subject of 13 patents and 27 international patent
applications. Furthermore, we are in the process of preparing four additional
patent applications relating to its XGel(TM) film system process and the soft
capsules produced thereon.
We have licensed our XGel(TM) film system processes to several customers,
as discussed above.
38
FLUSHABLE AND BIODEGRADABLE PRODUCTS
We hold two patents in respect of flushable and biodegradable colostomy
pouches. As described above we have entered into an exclusive license agreement
for one of these patents with a global device manufacturer.
RESEARCH AND DEVELOPMENT
XGEL(TM) FILM SYSTEM
We are committed to a research and development program intended to produce
new products for licensees and new variations of, and improvements to the
XGel(TM) film system. We seek to explore the use of alternative materials and
formulations and to test their suitability to form capsules suitable for
ingestion and drug delivery by time and at site. In parallel with the
formulation work, we aim to expand the processing abilities of the XGel(TM) film
system. We spent $3,580,845 in 2001, as compared to $2,522,000 in 2000 and
$1,602,322 in 1999 on research and development. In general, the cost of the
research and development undertaken is not borne by our customers. Research and
development under certain product development agreements, where specifically so
stated, is borne by the licensees and/or manufacturers who are our customers.
There can be no guarantee that our research and development work will produce
products that are saleable to our targeted customers.
Research and development expenditure in the first three quarters of 2002
decreased by 92% from $1,082,421 in 2001 to $71,749 in 2002. The reason for the
decrease in 2002 is a result of the increased research and development efforts
funded by customers in developing new variations of the XGel(TM) film system
specifically, the ingestible products prototype machines (Swallow, TabletWrap,
NRobe, and Septum engine) and film development. During 2002 and the latter
quarters of 2001, we took several major steps toward commercializing the
XGel(TM) film system. During 2002 and 2001, we have expensed as operating costs
most continuing research and development expenditures not funded by customers,
and intend to report as cost of revenues only those expenses directly related to
inventory of equipment and sale thereof and identifiable costs of consulting
engagements.
During February 2000, we executed an Exclusive Evaluation Agreement with
P&G in respect of a specific application of the XGel(TM) film system. The
Exclusive Evaluation Agreement provided for ourselves and this customer to work
together to develop a novel delivery system for a new mass market consumer
product. During October 2000, we announced that the Exclusive Evaluation
Agreement executed earlier that year had been completed and a new Joint
Development Agreement was effective. Fees paid during 2000 under this agreement
represented 67.5% of our revenue in 2000. We completed work on the Joint
Development Agreement during August, 2001.
On March 7, 2000, we announced an agreement with JT USA, LP ("JT USA") and
Dye Precision, Inc., whereby we will develop a unique range of paintballs using
XGel(TM) film system technology for exclusive worldwide distribution by JT USA
for six years, subject to certain minimum orders. The term of the agreement was
six months but the agreement was extended by mutual oral agreement and we
received fees of $45,000 to date, with additional monthly payments of $5,000 to
be made to us during the term, in addition to payments for orders placed by JT
USA.
On October 20, 2000, BTL executed an exclusive agreement with Boots in
respect of an application of its XGel(TM) film system encapsulation technology.
Boots is funding research on this technology. On July 9, 2001, we extended our
product development agreement with Boots and negotiated ongoing commercial terms
to enable new product concepts to enter consumer trials. The Product Development
Agreement was executed in October 2000 to develop a range of innovative new
consumer products utilizing our unique XGel(TM) film system encapsulation
technology. For commercial reasons, the specific products and categories are
confidential. On April 2, 2001 we announced that Boots had executed stage three
of the product development agreement which, in line with our business model,
includes a technology licensing agreement, the design and supply of production
machines and the on-going supply of the proprietary film materials necessary to
manufacture the new products. Boots Healthcare International's existing brands
have leading positions in France and Germany, a strong profile in Australia, and
have recently become available in China and Latin America. Boots Contract
Manufacturing is Europe's largest healthcare, cosmetics and toiletry
manufacturer.
FLUSHABLE AND BIODEGRADABLE PRODUCTS
We are not currently conducting any further research and development on our
ostomy product, however if we observe other opportunities in this market we may
decide to participate.
39
GOVERNMENT REGULATION
Research and development activities and the manufacturing and marketing of
products using our ingestible XGel(TM) film system technology are subject to the
laws, regulations, guidelines and, in some cases, regulatory approvals of
governmental authorities in the United States and other countries in which the
products will be marketed. Specifically, in the United States, the Food and Drug
Administration ("FDA"), among other areas, regulates new drug product approvals
to establish the safety and efficacy of these products. FDA also regulates the
formulation, manufacture and labeling of foods, dietary supplements and OTC
drugs. FDA regulations require companies to meet relevant GMP regulations for
the preparation, packing and storage of foods and OTC drugs. GMPs for dietary
supplements have yet to be promulgated but are expected to be proposed.
Governments in other countries have similar requirements for testing and
marketing of drug products, foods and dietary supplements. Although we are not
directly regulated, we make efforts to cause our products to comply with
regulations in the various jurisdictions in which our customers are located.
In the United States, the processing, formulation, packaging, labeling and
advertising of the ingestible products used in conjunction with our technologies
are subject to regulation by one or more federal agencies, including the FDA, by
the Federal Trade Commission ("FTC"), the Consumer Product Safety Commission,
the U.S. Department of Agriculture and the U.S. Environmental Protection Agency.
These activities are also regulated by various agencies of the states,
localities, and countries in which ingestible products are sold.
U.S. REGULATORY PROCESS
New Drugs. The duration of the governmental approval process for marketing
new pharmaceutical substances, from the commencement of preclinical testing to
the receipt of a governmental final letter of approval for marketing a new
substance, varies with the nature of the product and with the country in which
such approval is sought. For entirely new drugs, the approval process could take
eight to ten years or more; however, for reformulations of existing drugs, the
process is typically shorter. In either case, the procedures required to obtain
governmental approval to market new drug products are costly and time-consuming,
requiring rigorous testing of the new drug product. There can be no assurance
that even after such time and expenditures, regulatory approval will be obtained
for any products that are developed by other companies using our ingestible
XGel(TM) film system technology. While we are actively seeking development
partners, there are currently no ongoing clinical trials of new drugs using our
ingestible XGel(TM) film system technology.
The steps required before a new human pharmaceutical product can be
marketed or shipped commercially in the United States include, in part,
preclinical testing, the filing of an IND, the conduct of clinical trials and
the filing with the FDA of either a New Drug Application, or NDA, for drugs or a
Product License Application, or ("PLA"), for biologics. These steps are
cumbersome and time-consuming.
The facilities of each company involved in the manufacturing, processing,
testing, control and labeling must be registered with and approved by the FDA.
Continued registration requires compliance with GMP regulations. The FDA
conducts periodic establishment inspections to confirm continued compliance with
its regulations.
We and/or our subcontractors are also subject to various federal, state and
local laws, regulations and recommendations relating to such matters as
laboratory and manufacturing practices and the use, handling and disposal of
hazardous or potentially hazardous substances used in connection with research
and development work. Although we believe we are in compliance with these laws
and regulations in all material respects, there can be no assurance that we or
our subcontractors will not be required to incur significant costs to comply
with environmental and other laws or regulations in the future.
Dietary Supplements. The 1994 Dietary Supplement Health and Education Act
("DSHEA") revised the provisions of the Federal Food, Drug and Cosmetic Act
("FFDCA") concerning the composition and labeling of dietary supplements. The
legislation creates a new statutory class of "dietary supplements." This new
class includes vitamins, minerals, herbs, amino acids and other dietary
substances for human use to supplement the diet, and the legislation
grandfathers, with some limitations, dietary ingredients that were on the market
before October 15, 1994. A dietary supplement that contains a dietary ingredient
that was not on the market before October 15, 1994 will require evidence of a
history of use or other evidence of safety establishing that it is reasonably
expected to be safe. Manufacturers of dietary supplements that make specified
types of statements on dietary supplements, including some product performance
claims, must have substantiation that the statements are truthful and not
misleading. Our ingestible XGel(TM) film system technology is being used (or is
in development for use) in formulating dietary supplements.
40
The adoption of new regulations in the United States or in any of our
international markets, or changes in the interpretation of existing regulations,
could have a material adverse effect on the business of our customers. In some
markets, including the United States, claims made with respect to dietary
supplements may change the regulatory status of the products. In the United
States, for example, it is possible that the FDA could take the position that
claims made for some of the dietary supplements incorporating our ingestible
XGel(TM) film system technology places those products within the scope of an FDA
OTC drug monograph. OTC monographs prescribe permissible ingredients and
appropriate labeling language, and require the marketer or supplier of the
products to register and file annual drug listing information with the FDA. In
the event that the FDA asserted that product claims for other products caused
them to fall within the scope of OTC monographs, we would be required either to
comply with the applicable monographs or to change the claims made in connection
with the products. We cannot be sure that we could do so effectively, or that
any changes would not adversely affect sales and marketing of an affected
product.
There can be no assurance that the FDA will accept the evidence of safety
for any new dietary ingredient that we or our customers may decide to use, and
the FDA's refusal to accept such evidence could result in FDA requiring costly
safety testing. Also, while DSHEA authorizes the use of statements of
nutritional support in the labeling of dietary supplements, the FDA is required
to be notified of such statements, and there can be no assurance that the FDA
will not consider particular labeling statements used by our customers to be
drug claims rather than acceptable statements of nutritional support,
necessitating approval of a costly new drug application, or re-labeling to
delete such statements.
Regardless of how products incorporating our ingestible XGel(TM) film
system technology are regulated, the Federal Food, Drug, and Cosmetic Act and
other federal statutes and regulations govern or influence the research,
testing, manufacture, safety, labeling, storage, record keeping, approval,
distribution, use, reporting, advertising and promotion of such products. We are
currently required to submit a type 4 DMF form to the FDA for XGel(TM) Film to
be used in any drug product. Noncompliance with applicable requirements by any
company involved in the manufacturing, processing, testing, control, labeling,
promotion or advertising, etc., can result in civil penalties, recall,
injunction or seizure of products, refusal of the government to approve or clear
product approval applications or to allow such company to enter into government
supply contracts, withdrawal of previously approved applications and criminal
prosecution.
Our customers must also comply with product labeling and packaging
regulations that vary from country to country. Failure to comply with these
regulations can result in a product being removed from sale in a particular
market, either temporarily or permanently, which would indirectly have a
materially adverse effect on our business. The FTC, which in the United States
exercises jurisdiction over the advertising of the products used in conjunction
with our technology, has in the past several years instituted enforcement
actions against several dietary supplement companies for false and misleading
advertising of some of their products. These enforcement actions have resulted
in consent decrees and monetary payments by the companies involved. In addition,
the FTC has increased its scrutiny of the use of testimonials. Although we have
not been the target of FTC enforcement action for the advertising of our
products, we cannot be sure that the FTC will not question our advertising or
other operations in the future. In November 1998, the FTC issued a guide for the
dietary supplement industry, describing how the FTC applies the law that it
administers to advertisements for dietary supplements. It is unclear whether the
FTC will subject advertisements of this kind to increased surveillance to ensure
compliance with the principles set forth in the guide.
In addition, we cannot predict whether new legislation or regulations
governing our activities will be enacted by legislative bodies or promulgated by
agencies regulating our activities, or what the effect of any such legislation
or regulations on our business would be.
REGULATION OF FOREIGN SALES
Laws and regulations imposed in the United States and in other countries
where we plan to commence or expand our business may prevent or delay us from
selling or shipping its products into or doing business in a particular country
or countries. We intend to comply with all relevant laws and regulations in the
United States and in other countries where we do business.
EMPLOYEES
As of November 30, 2002, we had 27 full-time employees and 1 part-time
employees. As of December 31, 2001, we had 36 full-time employees and two
part-time employees, including thirteen primarily engaged in research and
development and four in sales and marketing. During the first three quarters of
2002, the number of
41
full time employees decreased to 27 as a result of continued restructuring of
business operations which began in the third quarter of 2001, and more
specifically as a result of reduced headcount for our ProDesign Technology
division acquired in June, 2001.
Our future success depends in significant part upon the continued service
of its key technical and senior management personnel and its continuing ability
to attract and retain highly qualified technical and managerial personnel.
Competition for such personnel is intense and there can be no assurance that we
can retain its key managerial and technical employees or that it can attract,
assimilate or retain other highly qualified technical and managerial personnel
in the future. Collective bargaining units represent none of our employees and,
to date, we have not experienced a work stoppage. We believe that our employee
relations are good.
PROPERTIES
PLC's chief executive offices are located at Hostmoor Avenue, March,
Cambridgeshire, United Kingdom PE15 0AX and the telephone number at this address
is +44 (0)1354 655 674. Our US offices are being provided by one of our
directors for a nominal rent.
In November 2000, BTL entered into a 25 year lease agreement in respect of
25,000 square feet of new purpose built manufacturing facility located at
Hostmoor, March, Cambridgeshire, United Kingdom. The new building has been
custom built to serve as the final assembly, test and commission base for our
range of XGel(TM) film systems. The main area of the facility houses five
cubicles called "pods", which have been designed to allow our customers to carry
out commission work in a confidential manner. We anticipate being able to
commission fifty XGel(TM) film systems annually from existing resources and
space is available to double that rate if and when required. Two different
versions of the XGel(TM) film system are already on site and three more are
expected.
LEGAL PROCEEDINGS
On October 4, 2002 we received notice from The Healthy Forum calling on us
to pay L337,459.71 ($526,909.59) in respect of our 5,843,750 shares of The
Healthy Forum , which The Healthy Forum has alleged are partly paid. On October
28, 2002 we served notice on The Healthy Forum that we intended to petition the
court seeking an injunction to restrain The Healthy Forum from taking any action
to forfeit our shares. Upon receiving such notice The Healthy Forum agreed to
defer any action in respect of its allegations pending resolution of the claim.
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our Common Stock is currently quoted on the Over The Counter Bulletin Board
maintained by the National Association of Securities Dealers, Inc., under the
symbol "BPRG.OB." There was no trading in the Common Stock prior to August 1996.
The following table sets forth the range of high ask and low bid quotations per
share of the Common Stock as reported by IDD Information Services, for the
quarterly period indicated during the last two fiscal years and the first three
quarters of this fiscal year.
<Table>
<Caption>
FISCAL QUARTERS ENDED HIGH ($) LOW ($)
- --------------------- -------- -------
March 31, 2000.............................................. 6 1
June 30, 2000............................................... 4.75 2.03125
September 30, 2000.......................................... 3.625 1.5
December 31, 2000........................................... 3.046875 1.4375
March 31, 2001.............................................. 2.88 1.5
June 30, 2001............................................... 1.69 1.04
September 30, 2001.......................................... 1.85 0.33
December 31, 2001........................................... 0.82 0.33
March 31, 2002.............................................. 0.92 0.88
June 30, 2002............................................... 0.57 0.48
September 30, 2002.......................................... 0.42 0.31
</Table>
The above prices represent inter-dealer quotations without retail mark-up,
mark-down or commission, and may not necessarily represent actual transactions.
As of December 2, 2002, there were 2,648 holders of record for Common
Stock.
DIVIDEND POLICY
We have paid no dividends on the Common Stock since inception and do not
expect to pay such dividends in the foreseeable future.
42
PREFERRED STOCK
In 2000, we issued approximately 3,802,818 shares of Series B Preferred
Stock to approximately 231 accredited investors at a price of $2.50 per share.
Each share of Series B Preferred Stock were converted into such number of shares
of Common Stock on the following schedule: on or before December 31, 2000, two
and one half shares of Common Stock; from December 31, 2000 to on or before
December 31, 2001, one share of Common Stock; and from December 31, 2001 to on
or before December 31, 2002, one half of one share of Common Stock. Thereafter,
all conversion rights of the Series B Preferred Stock expire.
In 2001, we issued approximately 422,720 shares of Series B Preferred Stock
to approximately 20 accredited investors at a price of $2.50 per share. Each
share of Series B Preferred Stock issued during 2001 may be converted into such
number of shares of Common Stock on the following schedule: on or before
December 31, 2001, two and one half shares of Common Stock; from December 31,
2002 to on or before December 31, 2002, one share of Common Stock; and from
December 31, 2002 to on or before December 31, 2003, one half of one share of
Common Stock. Thereafter, all conversion rights of the Series B Preferred Stock
expire.
All outstanding shares of preferred stock will be converted into preference
shares of BioProgress PLC.
43
STOCK OWNERSHIP TABLE
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information concerning the
beneficial ownership of the Company's Common Stock by the directors, Named
Executive Officers, all directors and executive officers as a group, and each
person known by us to own more than 5% of our Common Stock as of December 3,
2002. Beneficial ownership is determined in accordance with the rules and
regulations of the Securities and Exchange Commission, including Rule 13d-3
under the Exchange Act.
<Table>
<Caption>
NAME AND ADDRESS OF AMOUNT PERCENT OF
BENEFICIAL OWNER BENEFICIALLY OWNED CLASS(1)
- ------------------- --------------------------- ----------
The Jade Partnership International Inc.................... 2,580,000(2) 5.2%
9055 Huntcliff Trace, Atlanta, GA 30350
Barry J. Muncaster........................................ 7,853,109(2, 3, 4, 5) 15.8%
Woodlands Place, Moulton Road, Kennett, Suffolk CB8 8QT
Malcolm D. Brown.......................................... 4,614,277(4, 5) 9.3%
87 The Lammas, Mundford, Norfolk IP26 5DS
Graham R.M. Hind.......................................... 2,597,773(4, 5, 6) 5.0%
Silver Lodge, 22 Twentypence Road, Wilbunton, Ely,
Cambridgeshire CB6 3RN
Edward Nowak.............................................. 960,065(4, 5) 1.9%
4 Davey Close, Impington CB4 4YJ
Larry C. Shattles......................................... 715,993(5) 1.5%
9055 Huntcliff Trace, Atlanta, GA 30350
Carey B. Bottom........................................... 2,355,953(7) 4.7%
4901 Kingswood Drive, Greensbono, NC 27410
Directors and Executive Officers as a Group (11 people)... 19,135,035(2, 3, 4, 5, 6, 7) 35.0%
</Table>
- ---------------
(1) Based on 49,230,101 shares of Common Stock issued and outstanding on
November 30, 2002.
(2) The Jade Partnership is a Delaware corporation, the equity ownership of
which is as follows: (i) 42.49% -- Barry J. Muncaster; (ii) 21.22% -- Joe
Muncaster, the son of Barry J. Muncaster; (iii) 7.06% -- Linda Zangus, the
wife of Barry J. Muncaster; and (iv) 29.23% -- Malcolm D. Brown. All
2,580,000 shares of Common Stock owned by Jade are attributed to Mr.
Muncaster for this table.
(3) These shares include 3,808,634 shares owned directly by Barry J. Muncaster
and 864,475 shares held by his wife, as well as the 2,580,000 shares held by
the Jade Partnership.
(4) These shares include an option granted on January 25, 1999, which allows the
holder to acquire up to 500,000
shares of Common Stock at any time on or before December 31, 2003.
(5) These shares include an option granted on November 27, 2000, which allows
the holder to acquire up to 100,000
shares of Common Stock at any time on or before November 27, 2005.
(6) These shares include an option granted on October 10, 2002, which allows the
holder to acquire up to 1,650,000
shares of Common Stock at any time on or before December 31, 2005.
(7) These shares include an option granted on October 10, 2002, which allows the
holder to acquire up to 1,250,000 shares of Common Stock at any time on or
before December 31, 2005.
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following selected consolidated financial data as at and for the years
ended December 31, 1997, 1998, 1999, 2000, and 2001 are derived from the
financial statements of BioProgress Technology International, Inc., which have
been audited by Arthur Andersen LLP, independent chartered accountants. The
selected consolidated financial data as at and for the nine month periods ended
September 30, 2001 and 2002 is unaudited but, in the opinion of management,
reflect all adjustments (consisting of normal recurring adjustments) necessary
for a fair presentation of the information included therein. The financial data
set out below should be read in conjunction with the Consolidated Financial
Statements and Notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations, included elsewhere in this proxy
statement/prospectus. The
44
results for the nine month period ended September 30, 2002 are not necessarily
indicative of results that may be expected for the full year.
<Table>
<Caption>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------------------- -------------------------
1997 1998 1999 2000 2001 2001 2002
--------- ----------- ----------- ----------- ----------- ----------- -----------
Statement of operations
data:
Net revenues........... $ -- $ 28,118 $ 293,582 $ 925,351 $ 966,738 $ 724,774 $ 2,070,756
Loss from Operations... (123,173) (905,286) (3,017,529) (4,346,962) (6,549,490) (4,926,383) (1,766,524)
Other income, net...... -- -- -- -- -- -- --
Net loss............... (905,286) (3,017,529) (4,376,479) (6,990,507) (5,248,826) (2,084,240)
Net loss per common
share
outstanding/diluted... (0.14) (0.06) (0.10) (0.17) (0.17) (0.12) (0.05)
Weighted average number
of common shares
outstanding/diluted... -- 14,317,657 30,159,566 40,401,395 45,730,823 45,657,091 48,207,530
</Table>
<Table>
<Caption>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------------------- -----------------------
1997 1998 1999 2000 2001 2001 2002
--------- ---------- ---------- ----------- ----------- ---------- ----------
Balance sheet data:
Current assets........... $ -- $ 147,151 $ 636,101 $ 7,112,268 $ 2,250,141 $1,881,054 $1,309,724
Current Liabilities...... -- 1,213,852 2,753,571 2,358,720 3,667,001 3,072,394 3,297,237
Total assets............. 124,000 7,118,251 8,298,584 14,534,108 10,066,310 9,968,318 8,233,949
Stockholders' equity..... (124,000) 5,802,485 5,418,418 11,884,228 5,792,439 5,375,630 4,670,252
</Table>
CAPITALISATION AND INDEBTEDNESS STATEMENT
The following table sets forth our historical capitalisation and
indebtedness statement as at September 30, 2002. The historical capitalisation
as at September 30, 2002, presented below has been prepared for illustrative
purposes only and, because of its nature, may not give a true picture of our
financial position or results. This table should be read in conjunction with the
sections "Selected Consolidated Financial and Other Data", "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Financial Statements included in this proxy statement/prospectus.
<Table>
<Caption>
SEPTEMBER 30, 2002
------------------
BORROWINGS
Bank overdrafts............................................. $ 332,738
------------
Total borrowings............................................ $ 332,738
PREFERRED STOCK
Redeemable convertible preferred stock, Series A, par value
$1.00..................................................... 3,900
Redeemable convertible preferred stock, Series B, par value
$2.50..................................................... 602,970
------------
Total preferred stock....................................... $ 606,870
STOCKHOLDERS' EQUITY
Common stock................................................ 47,632
Additional paid in capital.................................. 24,724,050
Accumulated deficit......................................... (19,103,570)
Accumulated other comprehensive income...................... 124,327
------------
Total stockholders' equity.................................. $ 5,792,439
============
TOTAL CAPITALISATION........................................ $ 6,722,047
</Table>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following description of "Management's Plan of Operation" constitutes
forward-looking statements for purposes of the Securities Act and the Exchange
Act and as such involves known and unknown risks, uncertainties and other
factors that may cause our actual results, performance or achievements to be
materially different from future results, performance or achievements expressed
or implied by such forward-looking statements. The words "expect", "estimate",
"anticipate", "predict", "believes", "plan", "seek", "objective" and similar
expressions are intended to identify forward-looking statements or elsewhere in
this report. Important factors that could cause the our actual results,
performance or achievement to differ materially from our
45
expectations include the following: (1) one or more of the assumptions or other
factors discussed in connection with particular forward-looking statements or
elsewhere in this report prove not to be accurate; (2) we are unsuccessful in
increasing sales through our anticipated marketing efforts; (3) mistakes in cost
estimates and cost overruns with respect to our products or services; (4) our
inability to obtain financing for general operations including the marketing of
our technology and products, and acquisitions; (5) non-acceptance, generally of
our technology or one or more of our products in the marketplace for whatever
reason; (6) our inability to supply any of our technology or products to meet
market demand; (7) generally unfavorable economic conditions that would
adversely effect purchasing decisions by purchasers of our technology or
distributors, resellers or consumers of our products; (8) development of a
similar competing product at a similar price point; (9) the inability to
negotiate a favorable agreement for or to adequately protect our intellectual
property; (10) if we experience labor and/or employment problems such as the
loss of key personnel, inability to hire and/or retain competent personnel; (11)
if we experience unanticipated problems and/or force majeure events (including
but not limited to accidents, fires, acts of God etc.), or we are adversely
affected by problems of our suppliers, shippers, customers or others; and (12)
our revenues could be negatively affected by the loss of a major client. Our
risk factors are described in the section entitled "Risk Factors" contained
herein. All written or oral forward-looking statements attributable to us are
expressly qualified in their entirety by such factors. We undertake no
obligation to publicly release the result of any revisions to these
forward-looking statements which may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
The following discussion should be read in conjunction with the
Consolidated Financial Statements, including the notes thereto.
OVERVIEW
We are a development stage company engaged primarily in the research,
development, manufacturing, marketing, sales and distribution of products that
use water soluble and biodegradable films for the dietary supplement,
pharmaceutical, recreational and cosmetic industries and other applications. Our
research and development operations are located in the United Kingdom. During
2000, 2001 and 2002 our primary focus remained and remains on the development
and commercialization of our unique and proprietary process, the XGel(TM) film
system.
We generate revenues from licensing the rights to use our intellectual
property in the XGel(TM) film system, the sale of the XGel(TM) film system, the
sale of XGel(TM) film to use in the film system and research and development
services to assist customers in gaining maximum benefit from the license.
Revenues from license arrangements and the sale of XGel(TM) film system are
recognized when there is persuasive evidence of an agreement with a customer,
collectibility is probable and the fee is fixed or determinable. Revenues from
research and development contracts are recognized ratably over the period to
which the contract relates, unless significant acceptance criteria exist. If
acceptance criteria exist, revenues are recognized upon the earlier of customer
acceptance or the expiration of the acceptance period.
Since inception, we have incurred substantial operating losses and we
expect operating losses to continue in the near term as we continue our product
development efforts, conduct trials and undertake marketing and sales activities
for the XGel(TM) film system. Our ability to achieve profitability is dependent
upon our ability to successfully execute our marketing and sales plan for the
XGel(TM) film system and various versions of XGel(TM) Film, and to complete in
an efficient and timely manner development work on other versions of the
XGel(TM) film system.
We have reviewed our operations -- in particular, the projects and products
under development being undertaken together with a full review of our overheads
with regard to cash burn, financial resources and the amount of funds required
until cash flow break-even. As a result of this review, projects and product
development have been re-prioritized with a view to bringing those projects to
market more quickly which will have a positive cash flow impact. As an
indication of the depth and quality of our intellectual property rights and
products in various stages of development, we did not feel that any projects
should be shelved completely, as all the projects could earn significant future
revenues for our business. We have decided to seek third party investors or
joint venture partners for certain projects to mitigate current cash outflows
and to bring these projects to commercialization more quickly.
We arranged a bank overdraft with Barclays Bank PLC for L400,000. As of
November 30, 2002, we had drawn L221,321 on the overdraft. L300,000 is subject
of a personal guarantee by Barry Muncaster, our Chief Executive Officer, and the
remaining L100,000 is subject of a personal guarantee by Graham Hind a Director
and
46
we do not expect the facility to be withdrawn or curtailed in the foreseeable
future. We reported in earlier reports that we were expecting to receive
clearance from the Internal Revenue Service during our 2002 second quarter in
respect of U.S. withholding tax on our licenses, which will enable the
receivable due from Peter Black Healthcare Limited (Peter Black), one of our
licensees, to be collected and which will be a blanket clearance for all
licenses written of a similar nature. As at the date of this proxy
statement/prospectus we are still awaiting such clearance.
We have reported earlier that Company's directors and the directors of all
of our operating subsidiaries had taken a 66.6% pay cut for the twelve month
period commencing July 1, 2001, after which period the salaries would be
reviewed. We have conducted such a review and will retain the pay cut for the
foreseeable future. The London office, opened in early 2001, has been closed and
the Norwood Road premises were leased, then sold during Q1 of 2002 to The
Healthy Forum Limited. Stronger and improved internal financial controls
implemented earlier and prioritization of projects has resulted in decreased
costs. We have gradually reduced cash burn from operations throughout the final
six months of 2001 and through the first half of this year and we intend to
closely control and plan our cash outlay moving forward. We believe that we
continue to manage our working capital effectively.
On September 9, 2002 Ms. Elizabeth Edwards, Group Accountant, agreed to act
temporarily as the Company's Chief Financial Officer.
On July 28, 2002 we received notice from Arthur Andersen that its business
would cease to exist on July 31, 2002 and, therefore, it would resign as our
auditors effective that date. We have appointed Grant Thornton to succeed Arthur
Andersen as auditors.
As a result of the foregoing, together with our revised financial
projections, we initiated a program to raise an additional maximum of $3 million
by way of the issue of unregistered common stock and warrants, which will enable
us to reach operational cash flow break-even, estimated at between 6 to 9 months
from now. We believe that this amount may prove conservative and that, barring
any protracted delays to contracts in hand, such funds will be sufficient for
current plans. Based on actual sales to investors in 2002, management believes
that it will be able to raise necessary funds.
COMPARISON OF THE PERIOD FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 TO THE
NINE MONTHS ENDED SEPTEMBER 30, 2001
CONSOLIDATED STATEMENT OF OPERATIONS
Our operations were streamlined during the first three quarters of 2002 and
are expected to remain stabilized at current levels in terms of premises and
other overhead throughout 2002. This has resulted in overall decreases in all
material headline expense figures in the profit and loss account. We expect to
recruit between 10 and 15 additional research, design and production engineering
staff during the first quarter of 2003 in order to deliver contracts in hand and
at the late stage of negotiations.
REVENUES
Our total revenues increased to $2,070,756 from $724,774 in the first nine
months of 2001. The increase in total revenues in the first nine months of 2002
was a result of recognition of deferred revenue.
The following is a summary of major contracts signed during 2001 and the
first three quarters of 2002 that have had a major impact on our revenues and
which are expected to lead to the generation of material revenues later in 2002
and 2003.
On August 30, 2002 we executed a worldwide exclusive license agreement in
respect of a variation of our XGel(TM) technology with a division of major
medical device manufacturer. As a result of this agreement, we have ceased
exploring commercial opportunities for our ostomy pouch. For the time being,
details of the Worldwide Exclusive License agreement are to be held in strictest
confidence at the request of our Licensee.
On May 21, 2002 we announced that we had executed another new product
development agreement with Boots. This is the second Agreement with Boots and is
separate to the first agreement executed in October 2000, which has progressed
to Stage 3 as announced by us during April of this year. Once again the aim is
to develop a range of innovative new consumer products utilizing our unique
XGel(TM) film system. This new agreement will focus on the new NRobe(TM) version
of the XGel(TM) technology. For commercial reasons the specific products and
categories are confidential.
On May 23, 2002 we announced we had gained Kosher approval for our XGel(TM)
film system. Dayan M. D. Elzas, Rabbi in charge of the Kashrus Board of the
London-based Federation of Synagogues issued a letter stating the XGel(TM) film
system is capable of Kosher Certification. After thorough research into both
ingredients and manufacturing processes, Dayan M. D. Elzas concluded that the
XGel(TM) film system is suitable for Kosher
47
purposes. Customers of BioProgress will be able to apply for Kosher
Certification, which will be readily forthcoming provided their own products
meet the necessary requirements.
On August 27, 2002 we announced that we had executed an amendment to the
license agreement held by Consolidated EcoProgress Technologies ("CES"). We
waived all outstanding royalties due to us from CES and agreed to waive all
future royalties that would accrue in respect of sales of all products produced
by CES under the terms of the Exclusive License Agreement. In addition, we and
CES agreed to a mutual release of all obligations under the Research and
Development Agreement between the parties. In consideration of our agreement to
amend the exclusive License Agreement, CES has irrevocably waived any and all
rights it may have or may have had to participate in the ownership and
commercialization of BioProgress' technology as employed in ostomy products.
BioProgress will pay CES a royalty of 5% of all proceeds it receives on any
account from its ostomy products to a maximum cumulative amount of US
$1,000,000.
On September 30, 2002 we announced that we had executed a new product
development agreement with a global pharmaceutical company.
On November 27, 2002 we executed a contract with a potential customer
whereby the potential customer agreed to pay $1,500,000 for certain rights to
evaluate certain of our technologies. Details of the contract are to be held
strictly confidential for the time being.
On December 18, 2002 we executed a new product development agreement with a
global pharmaceutical company.
We are continuing to work with major international corporations engaged in
pharmaceuticals, consumer durables and confectionery products to determine the
suitability of the XGel(TM) film system to replace traditional encapsulation
processes and, in some cases, to facilitate new product development not possible
with competitive technologies. Most, if not all of our customers are the owners
of major product brands. Market sensitivities surrounding such brands call for a
high degree of confidentiality. We respect the needs of our customers and
therefore refrain from naming them unless we have their full prior approval to
do so.
COST OF REVENUES
Our cost of revenues decreased from $88,459 in 2001 to $61,315 in 2002. The
cost for 2002 primarily consisted of expenditures made by our recently acquired
(in 2001) ProDesign Technologies Limited division, including direct labor of
$25,081. The remaining expense in 2002 included materials purchased by PTL in
satisfaction of a consulting contract and direct materials purchased for use in
the XGel(TM) film system. The cost for the 2001 period were primarily comprised
of direct labor and materials cost related to development contracts, the largest
being our 12 collaboration with Proctor and Gamble in development of XGel(TM)
film systemvariants. We do not expect to incur material cost of revenue expense
until we begin shipment of XGel(TM) film system to customers, or unless we enter
into additional revenue based consulting and development agreements with our
customers.
RESEARCH AND DEVELOPMENT EXPENDITURE
Research and development expenditure in the first three quarters of 2002
decreased by 92% from $1,082,421 in 2001 to $71,749 in 2002. The reason for the
decrease in 2002 is a result of the increased research and development efforts
funded by customers in developing new variations of the XGel(TM) film system
specifically, the ingestible products prototype machines (Swallow, TabletWrap
and NRobe, and Septum engine) and film developments. During 2002 and the latter
quarters of 2001, we took several major steps toward commercializing the
XGel(TM) film system. During 2002 and 2001, we have expensed as operating costs
most continuing research and development expenditures not funded by customers,
and intend to capture as cost of revenues only those expenses directly related
to inventory of equipment and sale thereof and identifiable costs of consulting
engagements.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses have increased to $3,175,527 in the
first nine months of 2002 from $2,967,405 in the nine months 2001. The material
balances classified within general and administrative expenses are discussed
below:
DIRECTORS AND SENIOR MANAGEMENT COSTS
Payments in relation to directors and senior management services have
decreased to $369,623 during the first three quarters of 2002 from $1,018,492
during the comparable period of 2001. Since July 1, 2001, the salaries of
directors were cut by two thirds and all bonus provisions reversed for a period
of twelve months, at which time the salaries were reviewed again and the status
quo maintained. Management also continues to pursue
48
other cost cutting measures, and accepted resignation from our Chief Financial
Officer, James T.C. Longley. Mr. Longley's responsibilities are being absorbed
by Elizabeth Edwards our acting Chief Financial Officer, which is expected to
result in lower cost overall during the second half of the year.
AMORTIZATION AND DEPRECIATION
Amortization and depreciation. Amortization and depreciation costs have
decreased in the nine months of 2002. The charge during the nine months of 2002
was $474,974 compared to $805,709 in the nine months of 2001. The charge for the
first half of 2002 includes increased depreciation resulting from higher fixed
asset levels which have resulted from our purchase of ProDesign Technology
Limited ("PTL") in June of 2001, and the write-off of the goodwill of $167,706
which arose upon that acquisition. Such write-off was deemed appropriate in the
current period as a result of the significantly reduced headcount, revenue and
operations of the PTL division. The reduction against the first half of 2001 is
a result of the charge for amortization of goodwill that arose following the
reverse acquisition of Bioprogress Technology Limited in 1998, in 2002 being $0
compared to $339,088 in 2001. We have applied the provisions of SFAS 142 and
accordingly no longer amortizes the goodwill.
STAFF RELATED COSTS
Staff related costs, which consist primarily of salary costs (other than
directors and senior management), recruitment, and traveling have increased to
$812,412 in 2002 from $733,451 in 2001. This increase is a result of increases
in the headcount as we develop different variations of the XGel(TM) film system
and an increase in travelling costs.
OTHER GENERAL AND ADMINISTRATIVE COSTS
Other costs within the general and administrative area have increased to
$1,085,468 in the nine months to September 2002 from $629,125 in the equivalent
period of 2001. The following are the major reasons for the changes: A write-off
of prepaid costs in respect of the common stock purchase agreement entered into
with Fusion Capital Fund II, LLC has meant $630,728 has been charged in the
first nine months of 2002 compared with $0 in the 2001. Foreign exchange gains
during the nine months of 2002 were $92,002. In the comparable period of 2001,
foreign exchange losses were $55,823. As cash balances have been reducing, we
have not been as adversely affected by adverse foreign currency fluctuations.
Other expenses within this category, which include such items as office
overheads (rent, stationery, maintenance and similar categories) decreased in
line with expectations due to our review of operations in 2001 and
implementation during 2002.
General administration charges are likely to stabilize or slightly decrease
during the latter half of 2002 as a result of our review of operations and cost
reduction measures and controls implemented in late 2001. We continue to make
efforts to minimize day-to-day overheads and periodic reviews of overhead costs
continue to be undertaken internally.
REALIZED AND UNREALIZED PROFIT (LOSS) ON MARKETABLE SECURITIES
A gain of $8,443 was incurred during the first half of 2002 as compared to
a loss of $211,331 in 2001. We have now disposed of all marketable securities.
The holdings were sold to provide working capital and the downwards movements in
the capital markets meant that significant losses were realized.
PROFESSIONAL FEES
Professional fees decreased to $394,150 in the first nine months of 2002
from $1,068,821 in the nine months ended of 2001. The amount during 2001 was
caused largely by increased corporate advice fees related to leverage of our
capital structure and other potential equity transactions.
LOSS FROM OPERATIONS
The result of the above is that a loss from operations of $2,276,488 was
generated in the first nine months of 2002 compared to a loss of $5,516,959 in
the first nine months of 2001. We expect that costs will stabilize or slightly
decrease during the forthcoming quarters as a result of management review of
operations and cost reduction measures and controls implemented in late 2001 and
as the frequency in delivery of machines increases. At the end of the third
quarter of 2002 there is currently $50,000 of deferred income that is expected
to be released in December 2002 and beyond as revenue recognition criteria are
met.
SHARE OF LOSS OF EQUITY INVESTMENT
During 2000, we invested an initial $50,000 in The Healthy Forum. We
continue to offer financial support by way of loan. The Healthy Forum has been
formed to build a global well-being brand in the complimentary medical and
specialty food sectors. The principal products of The Healthy Forum are feminine
hygiene, beneficial foods and vitamins, minerals and supplements. During the
first half of 2002, we have taken a charge to profit and
49
loss in respect of our share of the losses of The Healthy Forum of $199,790, as
compared to $209,390 in the first half of 2001. In April 2001, we increased our
shareholding in The Healthy Forum from 29.9% to 46.6% for a total of $620,000 by
way of $120,000 cash and $500,000 settlement of debt. Additionally, we provided
The Healthy Forum with cash loans throughout since that time, including first
half of 2002 advances totaling $28,000, and accepted a note receivable for
$420,378 for their purchase on March 28, 2002 of our property at Norwood Road,
March, Cambridgeshire, UK. We loaned The Healthy Forum an additional $130,500
during the first half of 2001. The Healthy Forum has served notice on the
Company alleging that the 5,843,750 shares of THF owned by the Company are
partly paid and requested the payment of L337,459.71 ($526,909.59), failing
which, the shares owned by the Company would be forfeited. We vehemently dispute
this allegation and have served THF with a Statement of Claim demanding, inter
alia, that it withdraws its allegation, see "Litigation".
PROVISION FOR INCOME TAXES
No provision has been made for income taxes in 1999, 2000 or 2001 or the
first three quarters of 2002 as a result of the losses we have incurred. We have
provided a 100% valuation allowance against the deferred tax asset arising on
the net operating losses due to the uncertainty of their ultimate realization.
DIVIDENDS PAYABLE AND ACCRETION OF COMMON STOCK
During the first nine months of 2002 a charge of $177,073 was recorded, as
compared to $167,963 for the first nine months in 2001, for accretion of
preferred stock to increase the loss available to common shareholders. This is
incurred due to a substantially increased issuance of Series B Preferred Stock
during 2001, with the difference that arises between the subscription price and
redemption value being charged to equity. Dividends of $15,178 were paid during
the first three quarters of 2002 compared to $0 in the prior year.
COMPARISON OF THE PERIOD FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2001 TO THE
TWELVE MONTHS ENDED DECEMBER 31, 2000
CONSOLIDATED STATEMENT OF OPERATIONS
REVENUES
Our total revenues increased 4.5% from $925,351 in 2000 to $966,738 in 2001
as compared to revenue growth of 215%, or $631,739, from 1999 to 2000. A number
of factors contributed to the increase in total revenues in 2000 including new
product development agreements and the first sales of licenses in respect of the
XGel(TM) film system. Revenues generated in relation to an evaluation agreement
and a product development agreement with Proctor and Gamble contributed 67.5% of
the total revenues in 2000 and 43.1% for 2001, and is the main contributor to
the increased revenues for 2000 as compared to 1999. The remaining revenues were
generated from research and development collaboration agreements and the receipt
of ongoing license fees from its Canadian licensee for the TruTona products,
EcoProgress. The levels of these other revenues in 2001 have increased as
compared with 2000 and 1999 as a result of consulting revenue generated by
ProDesign Technologies Limited, which we acquired in July, 2001.
COST OF REVENUES
Our cost of revenues increased from $20,902 in 2000 to $208,585 in 2001,
and were at similar levels in 2000 compared to $21,458 in 1999. The increase in
2001 over 2000 was primarily due to costs incurred by our newly acquired (in
2001) ProDesign Technologies Limited division, including direct labor of $39,518
and the remainder being hardware purchased in satisfaction of a consulting
contract with their largest customer (VAX).
RESEARCH AND DEVELOPMENT EXPENDITURE
Research and development expenditure in 2001 increased by 134% from
$522,875 in 2000 to $1,225,299 in 2001. The majority of the increase in 2001 is
a result of the increased research and development effort in developing new
variations of the XGel(TM) film system specifically, the ingestible products
prototype machine. During 2001, we took several major steps toward
commercializing the XGel(TM) film system. During 2000 and 2001, we have expensed
as operating costs most continuing research and development expenditures and
intend to capture, as cost of revenues, only those expenses directly related to
inventory of equipment and sale thereof and identifiable costs of consulting
engagements.
50
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses (including the management fee of Jade
for 2000 of $150,000) have increased from $3,932,402 in 2000 to $4,454,924 in
2001, an increase of 13%. The material balances classified within general and
administrative expenses are discussed below:
DIRECTORS AND SENIOR MANAGEMENT COSTS
For 2001, directors and senior management costs were $1,500,708 compared
with $1,533,528 in 2000. The latter included the $150,000 management charge
referred to in the paragraph below and bonus amounts totaling approximately
$350,000, which were not expenses in 2001. From July 1, 2001, the salaries of
directors were cut by two thirds and all bonus provisions reversed for a period
of twelve months, at which time the salaries will be reviewed again.
Management charges -- Management charges payable to Jade ceased on March
31, 2000. During the first quarter of 2000, management charges of $150,000 were
paid but none were paid in the second quarter of 2000 and thereafter.
AMORTIZATION AND DEPRECIATION
The charge for 2001 was $1,093,133 compared to $953,203 in 2000. The
increase is entirely due to increased depreciation on fixed asset expenditure.
The majority of the charge in both years relates to the amortization of goodwill
generated following the reverse acquisition of BioProgress Technology Limited in
1998.
STAFF RELATED COSTS
Staff related costs, which consist primarily of salary costs (other than
directors and senior management), recruitment, and traveling have increased to
$848,670 in 2001 from $563,434 in 2000. This increase is a result of increases
in the headcount as we develop different variations of the XGel(TM) film system
and a significant increase in traveling costs.
OTHER GENERAL AND ADMINISTRATIVE COSTS
Other costs within the general and administrative area have increased to
$1,012,413 in 2001 from $882,237 in 2000. The following are the major reasons
for the movement:
- Foreign exchanges losses during 2001 were $134,266 compared to losses
of $357,073 in 2000. As cash balances have been reducing, we have not
been as adversely affected by adverse foreign currency fluctuations.
- Warrant accounting charges of $311,535 have been incurred in 2001 in
relation to new warrants issued during the year.
- Decreases in warrant accounting charges for warrants issued in prior
years and losses on sale of fixed assets of approximately $110,000
and $100,000, respectively have been offset by increases in
entertainment and rent of approximately $85,000 and $237,000,
respectively. The decreased warrant accounting charges result from
the decreased market price of our stock in 2001 and are more fully
explained in other sections of this document, while increased rent
and entertainment expenses in 2001 result from our newly leased
location at Hostmoor and increased travel, investor relations,
recruitment and marketing activities by senior management during
2001.
- Other expenses within this category which include such things as
office overheads (rent, stationery, maintenance and similar items)
increased in line with expectations due to our increased levels of
activity.
REALIZED AND UNREALIZED (PROFIT) LOSS ON MARKETABLE SECURITIES
A loss of $422,784 was incurred during 2001 as compared to a gain of
$46,369 in 2000. We have now disposed of all of our holdings in marketable
securities. The holdings in 2001 were sold to provide working capital and the
downwards movements in the capital markets meant that significant losses were
realized.
PROFESSIONAL FEES
Professional fees increased by 43% to $1,204,636 in 2001 from $842,293 in
2000. The amount during 2001 is caused largely by increased corporate advice
fees related to leverage of our capital structure and other potential equity
transactions.
LOSS FROM OPERATIONS
The result of the above is that a loss from operations of $6,549,490 was
generated in 2001 compared to a loss of $4,346,962 in 2000, which represents an
increase of 51%.
51
SHARE OF LOSS OF EQUITY INVESTMENT
During 2000, we invested an initial $50,000 in The Healthy Forum. We
continue to offer financial support by way of loan. The Healthy Forum has been
formed to build a global well-being brand in the complimentary medical and
specialty food sectors. The principal products of The Healthy Forum are feminine
hygiene, beneficial foods and vitamins, minerals and supplements. During the
2001 year, we have taken a charge to profit and loss in respect of our share of
the losses of The Healthy Forum of $441,017, as compared to $29,517 in 2000. In
April 2001, we invested an additional $75,000 in The Healthy Forum increasing
our shareholding from 29.9% to 46.6%. Additionally, we provided The Healthy
Forum with loans of $706,400 and $198,000 during 2001 and 2000.
PROVISION FOR INCOME TAXES
No provision has been made for income taxes in 1999, 2000 or 2001 as a
result of the losses we have incurred. We have provided a 100% valuation
allowance against the deferred tax asset arising on the net operating losses due
to the uncertainty of their ultimate realization.
DIVIDENDS PAYABLE
During 2001 a decreased charge of $691,471, as compared to $2,563,872 in
2000, for accretion of preferred stock was taken to increase the loss available
to common shareholders. This is incurred due to a substantially decreased
issuance of Series B Preferred Stock during 2001, with the difference that
arises between the subscription price and redemption value being charged to
equity.
COMPARISON OF THE PERIOD FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2000 TO THE
TWELVE MONTHS ENDED DECEMBER 31, 1999
RESULTS OF OPERATIONS
There were two significant transactions affecting the Company's operations
during 1999. These were (1) the purchase of the Trutona assets primarily in
exchange for Common Stock and the incurrence of debt which was paid prior to
year end, and (2) the license of these assets to EcoProgress. As a result, the
assets of the Company increased significantly, with a smaller but corresponding
increase in equity, due to the purchase of these assets in significant part
through the issuance of Common Stock.
BioProgress Technology was reorganized in late 1997 and was in the
development stage during 1997 and 1998. The Company incurred significantly
higher losses in 1999. This was primarily due to the following:
1. Expansion of day-to-day operations.
2. An increase in general and administrative expenses which includes
goodwill amortization of $678,174, an increase in other depreciation and
amortization charges, higher expenses from US operations, moving costs to new
premises, and amortization of the Trutona investment.
3. An unrealized loss in the EcoProgress securities of $752,694.
4. Increased management charges.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily through the sale of preferred
stock to accredited investors. As at September 30, 2002, we had cash and cash
equivalents of $11,396 compared with $5,851 at December 31, 2001.
Since its inception, we have financed our operations primarily through the
private sale of preferred stock to accredited investors and more recently
through sales of common stock units on a private placement basis. As at
September 30, 2002 and December 31, 2001, we had a net bank overdraft which
totalled $580,265 and $326,887, respectively. During the first three quarters of
2002, we received $722,183 from sale of units and of Series B Preferred Stock
shares at par value as compared to $1,462,918 from the sale of units and of
Series B Preferred Stock during the first three quarters of 2001. These proceeds
were used for general working capital purposes, including research & development
and the building, design and upgrade of further plant and machinery for our new
Hostmoor location.
In December, 2001 we entered into a common stock purchase agreement with
Fusion Capital Fund II, LLC a Chicago based institutional investor, whereby
Fusion Capital agreed to buy up to $6.0 million of our common stock. The
commencement of the funding is subject to certain conditions including the
effectiveness of a registration statement. We issued 970,350 shares to Fusion
Capital as a prepaid cost of the transaction. The proceeds from the funding will
be used for working capital and general corporate purposes. We have the right to
control the timing and the amount of stock sold to Fusion Capital. The purchase
price of the shares to be sold to Fusion Capital will be based upon the market
price of our common stock at the time of sale without any fixed discount.
BioProgress intends to periodically evaluate market conditions and its capital
needs in order to
52
determine the timing and the amount of stock it will sell to Fusion Capital. We
intend to sell shares of common stock to Fusion Capital opportunistically only
under favorable market conditions. On September 13, 2002 we were informed
verbally by an officer of Fusion Capital of their intention to terminate the
contract on September 16, 2002. On September 16, 2002 we received from Fusion
Capital formal notification that it had terminated the contract. At the time we
filed our quarterly report for the period ending June 30, 2002 we reported that
our directors had not had time to consult on the matter with counsel. In any
event, at a meeting of the directors held on September 9, 2002 it was resolved
that, because of general market conditions and other funding initiatives
commenced and in hand, we would not be progressing with the Fusion contract in
the foreseeable future, if at all. Accordingly, we believe that termination of
the Fusion contract, if in fact it is terminated, will have immaterial or no
impact on our plans. In the event of termination, Fusion Capital retains the
970,350 shares previously issued. Our directors have subsequently formed the
view that Fusion Capital has no grounds for terminating the contract.
Accordingly, we intend to serve notice on Fusion Capital demanding the return to
the Company of the 970,350 shares issued to Fusion pursuant to the contract.
Starting in February, 2002, the Company has entered into agreements with
certain accredited investors for the issue of a total of 1,070,750 shares common
stock and 2,141,500 warrants, exercisable at various prices for a term of five
years, for cash consideration totaling $713,500, which was received in the first
half of 2002. The agreements are pursuant to an offering by us for the sale up
to 600 "units" of equity at a price of $5,000 per unit. Each unit is comprised
of 7,500 shares of unregistered common stock and 6 warrants, each such warrant
expiring on December 31, 2006 and each exercisable for 2,500 common shares at
purchase prices which range from $1.00 up to $10.00. We believe the warrants
currently have a nominal fair value and accordingly no fair value has been
assigned to the warrants issued. We have committed to have declared "effective"
the registration of the common shares issued in this private placement by
September 30, 2002, or otherwise issue an additional 1/10th unit (to a maximum
of 90%) for each full month beyond that date through such time as declaration of
effectiveness has been achieved. At the time of this report we have not
registered the common shares subject of the units and will, therefore, be
issuing additional 1/10th units as appropriate and in due course. Since the
registration statement of which this prospectus is a part is registering
ordinary shares to be received by the investors for their unregistered common
stock, we have fulfilled our obligation to register their common stock.
We are in discussion with several parties regarding joint ventures, license
agreements and distribution agreements for its XGel(TM) film system and derived
products. On November 27, 2002 we executed an agreement with a potential
customer who agreed to pay a sum of $1,500,000 in three installments, of which
one installment of $500,000 has been received for certain rights to evaluate
certain of our technologies. If a transaction does not proceed with this
potential customer we may, in certain circumstances, be required to return any
amounts paid by us. We also continue to investigate a number of other long-term
funding scenarios and opportunities. We may require additional financing in
order to fund the growth potential of the Company. At September 30, 2002 we had
cash and cash equivalents of $11,396 and management estimates that additional
financing may be required to fulfill our working capital requirements for a
period up to the point at which net sales revenues could sustain the our day to
day operations and also enable us to further accelerate its growth both
organically and maybe through acquisition. There can, however, be no assurance
that any additional financing, either debt or equity financing, will be
available, if and when needed, or that, if available, such financing could be
completed on commercially favorable terms. Failure to obtain additional
financing if and when needed, could have a material adverse affect on our
business, results of operations and financial condition.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The following discussion about our market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements. We are exposed to market risk
related to changes in interest rates and foreign currency exchange rates. We do
not use derivative financial instruments for speculative or trading purposes.
FOREIGN CURRENCY EXCHANGE RISK
With sales and services offices in the United States and the United
Kingdom, we face exposure to adverse movements in foreign currency exchange
rates. These exposures may change over time as business practices evolve and
could have a material adverse impact on our financial results. Historically, our
primary exposure has been non-dollar-denominated operating expenses and sales by
our U.K. subsidiary. The introduction of the Euro as a common currency for
members of the European Monetary Union, of which the United Kingdom is not a
member, occurred in January 1999. To date, we have not seen any impact of the
Euro on foreign exchange
53
exposure. We are prepared to hedge against fluctuations in the British Sterling,
Euro or other foreign currency if the exposure becomes material. As of September
30, 2002, our material non-dollar-denominated assets and liabilities primarily
consisted of cash, accounts receivable and accounts payable denominated in
British Sterling.
54
MANAGEMENT
DIRECTORS AND SENIOR EXECUTIVES
The following table sets forth certain information with respect to each of
the directors, executive officers and certain key employees of the Company.
<Table>
<Caption>
NAME AGE POSITIONS
- ---- --- ---------
Barry J. Muncaster........................ 57 Directors, Chairman of the Board, Chief
Executive Officer
Carey B. Bottom........................... 52 Director and President of BioProgress
Technology Inc.
Malcolm D. Brown.......................... 43 Director, Executive Vice President for
Research and Development of BPTII
Robert Graham Mason Hind.................. 52 Director, Vice President of Sales and
Marketing of BPTII
Edward Z. Nowak........................... 47 Head of Research and Development of BTL
Larry C. Shattles......................... 59 Director, Executive Vice President of
BPTII
Dr. Stephen Kessel........................ 46 Project Manager of XGel(TM) Film System
Dr. Louise Mulroy......................... 30 Project Manager Research Specialist Films
Dr. Jason Teckoe.......................... 31 Project Manager of XGel(TM) and NRobe(TM)
Simon Jones............................... 38 Manager, Intellectual Property
Elizabeth Edwards......................... 27 Chief Financial Officer
</Table>
Barry J. Muncaster, 57, has served as Chairman of the Board of Directors
and Chief Executive Officer of BioProgress Technology International, Inc. and
BioProgress Technology Limited since November 1997. Mr. Muncaster also served
BioProgress Technology as President since its inception in 1996 until the
engagement of Mr. Bowers in 1999. He has served in similar positions with DNL
since the acquisition of that entity as a wholly owned subsidiary in August
1998. Mr. Muncaster trained as a telecommunications engineer with British
Telecom, and obtained a diploma in Telecommunications Engineering in 1970 from
the Cambridge College of Arts and Technology. Since 1970, Mr. Muncaster has been
involved at the executive and senior executive level with companies engaged in
the development and commercialization of high technology products, which include
laser-based systems employed in high energy physics experiments, electronic taxi
meters, personal computer systems and home banking systems. He is a co-founder,
and served as Chief Executive Officer, of Oric Products International, Limited
which, within three years of its start-up, manufactured and sold in excess of
300,000 personal computers, achieving annual sales revenues in excess of
$45,000,000 prior to its sale in 1983 to an investment company quoted on the
London Stock Exchange. Since 1987, Mr. Muncaster has been a Managing Director
and shareholder in Jade Partnership International, Inc. ("Jade"), a firm of
management consultants which specializes in assisting developmental companies
engaged in high technology activities. Jade was the sole shareholder of
BioProgress Technology Limited prior to its acquisition by BioProgress
Technology International, Inc. and now owns a substantial portion of the
outstanding shares of Common Stock.
Carey B. Bottom, Ph.D., 52, has served as Director and President of the US
subsidiary, BioProgress Technology, Inc., since September 2002. He served as a
non-employee Director of the Company from July 2001 through August 2002. Dr.
Bottom is a consultant to the pharmaceutical industry on matters of drug
delivery, analytical methods development and regulatory affairs. Prior to his
consulting practice and from October 2000 to July 2001, Dr. Bottom was employed
as the President and Chief Executive Officer of PharmaCore, Inc., a start-up
company engaged in the synthesis and distribution of unique chemical building
blocks for the drug discovery industry. From May, 1999 to August 2000, Dr.
Bottom served as the Chief Operating Officer of LDS Technologies, Inc., a drug
delivery company engaged in the development of microemulsion-based liquid
formulations useful for enhancing the absorption of water-soluble, poorly
permeable drugs (BCS Class 3). He was instrumental in negotiating the sale of
LDS Technologies to a large multi-national drug delivery company in August 2000.
From March 1994 to March 1999, Dr. Bottom was employed as senior vice-president
of Research and Development with the Banner Pharmacaps Division of Sobel, NV. He
was responsible for all product development and scientific activities for
pharmaceutical, nutritional, gelatin, and gelatin-alternative technologies.
During the period March 1992 to March 1994, Dr. Bottom was employed as senior
vice-president and Chief Scientific Officer for Chase Pharmaceutical Company, a
predecessor company to Banner Pharmacaps. In this position, he was responsible
for quality control, quality assurance, regulatory affairs and product
development for all lines of products including soft gelatin capsules and
immediate/sustained release solid dosage for Ms. Prior to
55
1992, Dr. Bottom served in management and scientific positions with
Schering-Plough, Marion Laboratories, Inc. and the Drackett division of
Bristol-Myers. He is a member of the American Chemical Society, American
Association of Pharmaceutical Scientists and the Controlled Release Society. In
1998, Dr. Bottom was distinguished by the FDA and received the FDA
Commissioner's Special Citation for sustained outstanding regulatory research
efforts in resolving significant product quality issues related to dissolution
failures for gelatin capsule drug products. Dr. Bottom received his BS, MS and
Ph.D. degrees in Chemistry from the University of Missouri at Rolla. He is the
author of numerous scientific publications, a book chapter and holds several
patents covering pharmaceutical and household product applications.
Malcolm D. Brown, 43, has served as a Director and Executive Vice President
of Research and Development of the Company since November 1997, and for
BioProgress Technology and BTL from each of their inception in 1996. He has
served in similar positions with DNL since the acquisition of that entity as a
wholly owned subsidiary in August 1998. He is responsible for the direction and
implementation of the research and development program of BTL, the production
engineering of its products, and the environmental, safety and performance
compliance of all raw materials used by such entity. Mr. Brown received a
Bachelor of Science Degree (Honors) in Applied Biology from Northeast London
University in 1984 and a Masters of Science Degree in Microbiology from London
University in 1986. Prior to his affiliation with BioProgress Technology and
BTL, Mr. Brown held senior research positions with Gestetner Corporation and
Ferrisgate Limited, where he worked on the formulation of specialist inks and
coating used in industrial processes. Mr. Brown is also a director, officer and
shareholder of The Jade Partnership.
Robert Graham Mason Hind, 52, has served as a Director and Vice President
of Sales and Marketing of the Company since 1998. He has served as Managing
Director of DNL since 1997 and Managing Director of BTL since 2000. He has more
than thirty years experience in managing and expanding scientific nutrition
companies. In the mid 1970's and 80's he was responsible for establishing the
Milupa baby food brand in the UK from introduction to brand leadership with
sales of over L30 million. In the early 1990's he joined Royal Numico, forming
and heading up their new division for dietary supplements and OTC medicines
which following the further acquisitions of GNC and Rexel Sundown in the USA is
becoming one of the largest Dietary Supplement business's in the World. In the
mid 1990's he founded DHA Nutrition Ltd a company involved in developing
functional foods and Nutraceuticals using long chain polyunsaturated fatty
acids. From 1994 until 1997, Mr. Hind served as Managing Director of Functional
Nutrition Ltd. In 1998 BioProgress Technology International Inc acquired DHA
Nutrition Ltd and Graham became a Director of the US holding company with
responsibility for global technology licensing. He was also appointed Managing
Director of the UK subsidiary BioProgress Technology Ltd with responsibility for
research and development.
Edward Z. Nowak, 47, has served as the Director of Research and Development
of BTL since 1997. He received a Bachelor of Science Degree in Applied Chemistry
from Stockport University in the United Kingdom in 1978. Mr. Nowak then joined
Ciba Geigy agrochemical and industrial chemical divisions, where he worked for
12 years. He headed up formulations groups and pioneered technology in
micro-emulsions, granulation and polymer seed coatings. In 1989, Mr. Nowak
joined Jeyes Group, where he was research and development manager. In 1992,
until 1997, Mr. Nowak joined Bush Boake Allen's fragrance division as European
technical manager. He developed a number of new products for launch within the
personal care and household sectors for both Jeyes and Bush Boake Allen. Mr.
Nowak has been responsible for much of the product and process development of
encapsulation technology at BTL.
Larry C. Shattles, 59 was appointed a Director of the Company and Executive
Vice President of BioProgress Technology, Inc. in July 1999. Prior to that date
he was President of TruTona International, Inc., which sold its assets to us in
1999. Mr. Shattles has been active in arranging funding for us during our R&D
phase in addition to sales responsibilities in the nutraceuticals market,
oversight of Investor Relations, and Media Relations in the US. He has over 30
years experience in sales and marketing including Presidency of Shattles &
Associates, a publishers' representative firm, and 12 years with Time, Inc. (now
AOL/Time Warner). Mr. Shattles is a co-founder and member of the Board of
Directors of FundraisingINFO.com, an internet based fundraising consulting firm
serving non-profit organizations worldwide. He holds a Bachelor of Arts degree
from Oglethorpe University.
Dr. Stephen Kessel, 46, has served as Project Manager of XGel(TM) film
system for ingestible products since July 2000. Dr. Kessel has a BSc (Hons)
degree in aeronautical engineering and a PhD in mechanical engineering. He began
his career in 1977 working for Lucas CAV Ltd of Gillingham as a development
engineer, where he had hands-on involvement in the development of new fuel
injection systems for small diesel cars. In 1981, he joined
56
Thames Polytechnic School of Engineering as a research fellow and then as a
lecturer. During his time there, Dr. Kessel undertook research, undergraduate
teaching, consultancy and teaching of specialist courses for industry. In
January 1988, Dr. Kessel joined Cryovac Company in St. Neots as a sales
engineer, where he provided technical support to the U.K. sales force in the
application of packaging machines and design of packaging systeMs. In 1989, Dr.
Kessel moved to Cryovac's packaging and technical center in Milan, Italy, as
European safety manager where, among other things, he was responsible for
ensuring that all current Cryovac machines complied with Machinery Safety
Directive, which came into force in 1995. In 1997, Dr. Kessel moved to Cryovac's
customer equipment center in Kriens, Switzerland as the safety and technical
documentation manager. In January 1999, he became Cryovac's safety and special
project manager, still based in Switzerland. Dr. Kessel is a member of the
Institute of Mechanical Engineers.
Dr. Louise Mulroy, 30, has served as Project Manager in charge of research
into specialist films for use in disposable medical products since July 2000.
Dr. Mulroy has a PhD in physical chemistry and a BSc (Hons), joint honors in
chemistry and geology. She began her career working as a postdoctoral research
assistant in the chemistry department of Keele University, Staffordshire, where
she worked on a project that investigated the development of age related macular
degeneration, which was funded by Wellcome Trust. She worked there from May 1997
until March 1998, when she became a CIMIT Research Fellow at the Wellman Labs of
Photomedicine, at Massachusetts General Hospital, Harvard Medical School,
Boston, Massachusetts. There, Dr. Mulroy managed a project that investigated
photochemical tissue bonding and its application in corneal surgery. She was
awarded a fellowship from the Center for Innovative Minimally Invasive Therapy
and a patent has been submitted for the technique developed.
Dr. Jason Teckoe, 31, has served as Project Manager responsible for
developing the XGel(TM) film system and NRobe(TM) tablet and powder technologies
since April 2001. He joined Bioprogress Technology Ltd from Porvair Advanced
Materials in Kings Lynn, where he was New Product Development Leader responsible
for formulation development and manufacture of synthetic microporous plastic
moulds for use in the ceramics industry. Prior to that, Dr. Teckoe was a
postdoctoral research assistant at the University of Reading, where he
investigated the fundamentals of polymer crystallisation. Dr. Teckoe gained his
PhD in polymer physics from the University of Reading in 1998. Part of his
research involved developing a new model for the internal microstructure of
advanced polymer fibres and their composites. Before that, Dr. Teckoe gained an
MSc in polymer science from the University of Lancaster, following several
months work at the SINTEF research organisation in Oslo, Norway, where he
synthesized and developed a range of novel biodegradable polymers for the
agrochemical industry. Dr. Teckoe also has a BSc (Hons) in chemistry with
computer-based technology from the University of Warwick and is a member of the
Royal Society of Chemistry, the Society of Chemical Industry and the Institute
of Physics.
Simon F. Jones, 38, has served as Intellectual Property Manager for the
Company since June 1991. He has received a Bachelor of Science Degree (Hons) in
Applied Chemistry (4 year degree) from Hertford University in 1987 and also a
Master of Science Degree in Management of Intellectual Property from Queen Mary
and Westfield College, University of London, in 1994. Prior to his affiliation
with the Company, he has had experience in industrial chemical and
pharmaceutical laboratories, sales and purchasing, and immediately prior to his
master's Degree, spent over three years working for Derwent Publications, as an
Information Scientist. Subsequent to completing his Master's Degree and
immediately before taking up his position with the Company, he spent
approximately 5 years training in a private law firm, (including 1 year outpost
position in the chemical industry, to assist a client) to qualify as an
Intellectual Property Lawyer.
Elizabeth Edwards, 27 has served as Chief Financial Officer since Mr James
Longley resigned in March 2002. She received a Bachelor of Science degree in
Applied Accountancy with honours from Oxford University. She is a member of the
Association of Chartered and Certified Accountants and a member of the
Association of Accounting Technicians. She has experience of raising Private
Equity Finance including funds from Venture Capital Trusts. She was a member of
a management team, which successfully completed a L13 million management buy-out
of a company in the environmental management sector.
AUDIT AND COMPENSATION COMMITTEE
We have not historically had a separate audit or compensation committee but
these functions have been performed by the full board. We are in the process of
searching for independent directors to form an audit committee and compensation
committee.
57
DIRECTOR AND EXECUTIVE COMPENSATION
DIRECTOR COMPENSATION
Due to the cash considerations of the Company it has been agreed that for
the present cash compensation will not be paid to directors for their service as
directors.
EXECUTIVE COMPENSATION
The following summary compensation table sets forth the compensation of
Barry J. Muncaster, our Chief Executive Officer and our other four most highly
compensated executive officers (the "Named Executive Officers") for our last
three completed fiscal years.
SUMMARY COMPENSATION TABLE
<Table>
<Caption>
LONG-TERM COMPENSATION
--------------------------------------
AWARDS
ANNUAL COMPENSATION RESTRICTED SECURITIES
-------------------------------- STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL FISCAL AWARD(S) STOCK COMPENSATION
POSITION YEAR SALARY($) BONUS($)(1) ($) OPTIONS(#) ($)
- ------------------ ------ --------- ----------- ---------- ---------- ------------
Barry J. Muncaster.............. 2001 284,901(7) -- -- 1,896(5)
Chief Executive Officer 2000 149,162 76,338 100,000(3) 692(5)
and Chairman 1999 24,000(2) -- -- 500,000(4) --
James T.C. Longley.............. 2001 222,563(7) -- -- -- 1,760(5)
Chief Financial Officer, 2000 112,039 76,338 -- 100,000(3) 513(5)
Treasurer, Secretary, and
Director 1999 24,000(2) -- -- 500,000(4) --
Malcolm D. Brown................ 2001 215,798(7) -- -- -- 1,178(5)
Executive Vice President, 2000 111,556 76,338 -- 100,000(3) 1,205(5)
Research and Development, 1999 24,000(2) -- -- 500,000(4) --
and Director
Greg L. Bowers.................. 2001 157,917(7) -- -- -- 4,442(5)
President of BioProgress 2000 125,000 37,500 -- 100,000(3) 14,553(6)
Technology and Director 1999 25,000(2) -- -- 500,000(4) --
Graham R.M. Hind................ 2001 165,166(7) -- -- -- 2,438(5)
Vice President of Sales and 2000 111,556 76,338 -- 100,000(3) 1,731(5)
Marketing and Director 1999 24,000(2) -- -- 500,000(4) --
</Table>
- ---------------
(1) The figures reported in the bonus column represent amounts earned and
accrued for each year and do not include amounts paid in each year which
were earned and accrued in the prior year.
(2) Consists of directors' remuneration.
(3) Consists of an option granted on November 27, 2000 to purchase 100,000
shares of Common Stock at an exercise price of $1.50 per share exercisable
prior to December 31, 2005.
(4) Consists of an option granted on January 25, 1999 exercisable at any time
before December 31, 2003 for up to 100,000 shares of Common Stock at a price
of $0.35 per share, up to 100,000 shares of Common Stock at a price of $0.75
per share, up to 100,000 shares of Common Stock at a price of $1.25 per
share, up to 100,000 shares at a price of $1.75 per share and up to 100,000
shares of Common Stock at a price of $2.25 per share.
(5) Consists of health insurance and membership fees.
(6) Consists of a $9,000 automobile allowance, $881.40 for life insurance and
$4,671.60 for health insurance.
(7) Approximately $375,000 of compensation listed above was accrued at 12/31/01.
58
OPTION GRANTS TO NAMED EXECUTIVE OFFICERS
<Table>
<Caption>
INDIVIDUAL GRANTS(1)
-----------------------------------------
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS GRANTED TO
UNDERLYING OPTIONS EMPLOYEES IN FISCAL EXERCISE OR BASE
NAME GRANTED(#) YEAR 2001 PRICE ($/SH) EXPIRATION DATE
- ---- ------------------ -------------------- ---------------- ---------------
Barry J. Muncaster............ -- -- -- --
James T.C. Longley............ -- -- -- --
Malcolm D. Brown.............. -- -- -- --
Greg L. Bowers................ -- -- -- --
Graham R.M. Hind.............. -- -- -- --
</Table>
- ---------------
(1) There were no options granted to the named officers during 2001.
EXERCISE OF OPTIONS
On November 18, 2002 certain directors and officers exercised options to
purchase common stock of the Company as follows:
<Table>
<Caption>
NAME POSITION OPTIONS EXERCISED AT $0.35 OPTIONS EXERCISED AT $0.75
- ---- -------------- -------------------------- --------------------------
Barry J. Muncaster.............. Chairman & CEO 100,000 20,000
Graham R. Hind.................. Director 100,000
Malcolm D. Brown................ Director 100,000 20,000
</Table>
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
We have employment agreements with each of our Named Executive Officers.
The following summary of certain provisions of the employment agreements does
not purport to be complete and is subject to and is qualified in its entirety by
reference to the actual text of the employment agreements, copies of which are
exhibits to the registration statement of which this proxy statement/prospectus
is a part. Each of such executive officers waived the salary due to him in 1999
by virtue of his respective employment agreement.
Employment Agreements with Barry J. Muncaster, Malcolm D. Brown, Edward D.
Nowak and Graham R.M. Hind
On January 25, 1999, we entered into an employment agreement with each of
Barry J. Muncaster, Malcolm D. Brown, Edward D. Nowak and Graham R.M. Hind. All
of the terms of such employment agreements are the same, except for the
positions held by such executive officers, as follows: Mr. Muncaster is to serve
as our Chief Executive Officer; Mr. Brown is to serve as our Executive Vice
President of Research and Development; Mr. Nowak is to serve as our Director of
Research and Development; and Mr. Hind is to serve as our Vice President. Each
such executive officer serves in a similar capacity with BioProgress Technology,
BTL and DNL, for which he receives no additional compensation.
Each employment agreement is for a term of five (5) years. Pursuant to the
employment agreement, the executive officer is entitled to receive cash
compensation of $2,000 per month, subject to upward revision by the Board of
Directors every six months during the term of the employment agreement. The
employment agreement also provides for a grant to the executive officer of an
option which is exercisable on or before December 31, 2003. This option grants
the executive officer the right to purchase up to 500,000 shares Common Stock in
100,000 share increments at prices per share of $0.35, $0.75, $1.25, $1.75 and
$2.25, respectively. The executive officer must be an employee of the Company at
the time that the options are exercised. In addition, under Mr. Nowak's
employment agreement, these shares are to be registered under applicable
securities laws before issuance.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
THE JADE PARTNERSHIP INTERNATIONAL, INC.
Jade is an affiliate of the Company because at the time of the transaction
discussed below, Messrs. Muncaster and Brown were, and continue to be,
controlling shareholders, directors and officers in Jade, and Jade was, and
continues to be, a major shareholder in our common stock.
On April 1, 1998, we entered into a consulting and option agreement with
Jade. According to the agreement, Jade assisted us in obtaining equity and debt
financing, and provided general business management, administration services,
international licensing and sales and marketing strategies. In our opinion, all
transactions were at arms length. This agreement provided that we were to pay
$50,000 per month as a fee to Jade which, at the option of Jade, was convertible
into our Common Stock at a price of $0.28 per share. On December 16, 1999, Jade
elected to convert $356,595 of fees outstanding under the agreement into
1,273,556 shares of the Common Stock.
59
We incurred management charges of $150,000 during 2000 and $600,000 in 1999 with
respect to the agreement. The balance due from Jade to us at December 31, 2001
was $390,703 which mostly represents amounts advanced by us to Jade, with
$111,323 due from Jade at December 31, 2000. This agreement was canceled on
March 31, 2000 and no further amounts will be paid by us to Jade under the
agreement.
TRUTONA INTERNATIONAL, INC.
Trutona is an affiliate of the Company since Messrs. Muncaster, Longley and
Brown were at the time of the transaction, and continue to be, directors,
officers and significant shareholders of Trutona and of the Company. On February
15, 1999, we acquired from Trutona patents, licenses and trademarks relating to
a broad range of products. We paid Trutona $1,500,000 in the acquisition, half
in the form of 1,875,000 shares of Common Stock and half paid on or before
December 31, 1999 in cash.
In connection with the acquisition of such patents, licenses and
trademarks, we have recognized license fee revenues of approximately $2,000 in
2001 and $133,600 in 2000, relating to a previous license agreement between
Trutona and EcoProgress that has been assigned to us. We had a balance of
$58,382 due from Trutona at December 31, 2001, and $56,382 due to it in 2000.
U.S. PROPERTY
Our US offices are provided by Larry Shattles for a nominal rent.
DESCRIPTION OF PLC SHARE OPTION SCHEME
PLC is proposing to adopt a share option scheme under the terms set forth
below. In the United Kingdom, a share option scheme can be either an Approved
Scheme (approved by the Inland Revenue of the United Kingdom) or an Unapproved
Scheme or a combination of both. The PLC scheme will be a combination of both.
SUMMARY OF THE PROPOSED BIOPROGRESS PLC SHARE OPTION SCHEME 2003 (THE "PROPOSED
SCHEME").
1. GENERAL
The Proposed Scheme is divided into two parts, of which one will be
approved by the Inland Revenue under the Income and Corporation Taxes Act 1988
(which will confer certain tax reliefs on participants) and the other will not.
The two parts are identical in all material respects unless indicated to the
contrary in this summary.
2. ELIGIBILITY
Employees (regardless of their hours of work) and directors (who are
obliged to devote at least 25 hours a week to their duties) of the Company and
its subsidiaries and who are not within two years of their contractual
retirement age and who are not otherwise excluded by the relevant legislation
will be eligible to participate in the Proposed Scheme. Decisions relating to
the Proposed Scheme will be made by the Board or a duly authorised committee.
Options are a matter entirely separate from participants' contracts of
employment.
3. GRANT OF OPTIONS
Options may be granted at any time within 42 days after the approval of the
Proposed Scheme by the Inland Revenue and thereafter within the 42 days
following the announcement by the Company of its results for any period. Options
may also be granted at other times which the Board considers to be sufficiently
exceptional.
No payment will be required for the grant of an option. Options are not
transferable other than where, virtue of a participant's death, they may be
exercised by his personal representatives.
4. LIMIT ON THE ISSUE OF SHARES UNDER THE EXECUTIVE SCHEME
The maximum number of Shares over which options may be granted under the
Proposed Scheme shall be 5% of the Company's issued ordinary share capital from
time to time. Options granted under any other discretionary share option scheme
operated by the Company shall not count for the purposes of this limit and vice
versa.
5. LIMIT ON INDIVIDUAL PARTICIPATION
No person may, unless the Board determines otherwise, in a calendar year be
granted options over shares worth more than 100 per cent. of his annual
remuneration. This limit is four times remuneration in respect of the first
grant of options to an eligible executive after he joins the Group.
The aggregate market value (as at the date of grant) of shares which may be
held under option by an individual at any one time under the Inland Revenue
approved part of the Proposed Scheme or any other approved executive share
option scheme established by the Company shall not exceed L30,000 or such other
limit may apply from time to time.
60
6. OPTION PRICE
The price per Ordinary Share payable on the exercise of an option will not
be less than the higher of:
(a) the average middle-market quotation for an Ordinary Share as derived
from the Official List on the three dealing days before the option
was granted -- in respect of options granted under the Inland Revenue
approved part of the Proposed Scheme, for so long as the Company's
shares shall be admitted to trading on AIM options will not be
granted at less than the then market value as agreed with the Shares
Valuation Division of the Inland Revenue; and
(b) the nominal value of an Ordinary Share.
7. EXERCISE OF OPTIONS
An option will not normally be exercisable until three years from its
grant. Options will lapse 10 years from the date granted. On termination of the
employment of an option holder by reason of death an option will remain
exercisable for [12] months from death. On termination of employment by reason
of redundancy, ill health or disability an option will remain exercisable for
[6] months from termination. Exercise of options following termination of
employment in other circumstances will be at the discretion of the Board.
Exercise is permitted on a reconstruction, takeover or winding-up of the
Company.
The Board intends to set performance conditions on the exercise of options.
8. RIGHTS ATTACHING TO SHARES
All Ordinary Shares allotted under the Proposed Scheme will rank equally
with all other Ordinary Shares for the time being in issue (except for any
rights arising by reference to a record date before the date of allotment).
9. VARIATION OF CAPITAL
In the event of any variation of share capital the Board may make such
adjustments as it so determines.
10. ALTERATIONS TO THE EXECUTIVE SCHEME
The Board may not alter the Proposed Scheme to the advantage of
participants without the prior consent of shareholders in general meeting (save
for minor changes to benefit the administration of the Proposed Scheme to take
account of a change in legislation or to obtain or maintain favourable tax,
exchange control or regulatory treatment for a participant or group company.
Amendments may be made to options to reflect overseas taxation, securities or
exchange control laws provided that the overall terms of such options are not
more favourable as a result than those granted to other executives. Prior Inland
Revenue approval is required to any change to the approved part of the scheme.
LEGAL MATTERS
The validity of the PLC ordinary shares offered hereby will be passed upon
by Dechert.
EXPERTS
The financial statements in this proxy statement/prospectus for the
calendar years ended December 31, 2001, 2000 and 1999 have been included in
reliance on the report of Arthur Andersen LLP, independent public accountants,
given on the authority of said firm as experts in auditing and accounting.
Arthur Andersen LLP has not consented to the inclusion by of their report in
this proxy statement/prospectus, and we have dispensed with the requirement to
file their consent in reliance on Rule 437 under the Securities Act. Because
Arthur Andersen LLP has not consented to the incorporation of their report in
this proxy statement/prospectus, you may not be able to recover against Arthur
Andersen LLP under Section 11 of the Securities Act for any untrue statement of
a material fact contained in the financial statements audited by Arthur Andersen
LLP or any omissions to state a material fact required to be stated in those
financial statements.
ENFORCEMENT OF CIVIL LIABILITIES AGAINST FOREIGN PERSONS
PLC is a public limited company organized under the laws of England and
Wales. A majority of PLC's directors and executive officers are resident outside
of the United States and most of the assets of PLC are located outside of the
United States. It may not be possible for investors: (1) to effect service of
process upon certain of our directors and officers, or (2) to enforce judgements
of courts of the United States predicated upon the civil liability of such
persons under the United States securities laws against any such persons in the
courts of a foreign jurisdiction including the United States. PLC has been
advised by its English legal counsel, Dechert, that there is also doubt as to
the direct enforceability in England against any of these persons, in an
original action or in an action for enforcement of judgments of United States
courts, of civil liabilities predicated solely upon the federal securities laws
of the United States. Individual stockholders of an English company, including
U.S. persons, have the right under English law to bring lawsuits on behalf of
the company in which they are a stockholder, and on
61
their own behalf against the company, in certain limited circumstances. See
"Comparison of Stockholder Rights."
62
BIOPROGRESS PLC
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
----
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
2001 and 2002 Audited Financial Information
Report Of Independent Public Accountant..................... F-2
Consolidated Balance Sheets December 31, 2001 and 2000...... F-3
Consolidated Statements if Cash Flows December 31, 2001 and
2000...................................................... F-4
Consolidated Statement Of Operations December 31, 2001 and
2000...................................................... F-6
Consolidated Statements of Changes in Stockholders' Equity
December 31, 2001 and 2000................................ F-7
Notes to Consolidated Financial Statements December 31, 2001
and 2000.................................................. F-9
2000 and 1999 Audited Financial Information
Report Of Independent Public Accountant..................... F-21
Consolidated Balance Sheets December 31, 2000 and 1999...... F-22
Consolidated Statement of Cash Flows December 31, 2000 and
1999...................................................... F-23
Consolidated Statement Of Operations December 31, 2000 and
1999...................................................... F-24
Consolidated Statements of Changes in Stockholders' Equity
December 31, 2000 and 1999................................ F-25
2001 and 2002 Unaudited Financial Information
Unaudited Consolidated Balance Sheets for the Third Quarter
ended September 30, 2002 and December 31, 2001............ F-26
Unaudited Consolidated Statements of Operations for the
Quarters ended
September 30, 2001 and 2002............................... F-27
</Table>
F-1
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000
TOGETHER WITH AUDITORS' REPORT
REPORT OF INDEPENDENT PUBLIC ACCOUNTANT
To BioProgress Technology International, Inc:
We have audited the accompanying consolidated balance sheets of BioProgress
Technology International, Inc. (a Nevada corporation) and subsidiaries as of
December 31, 2001 and 2000, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatements. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of BioProgress
Technology International, Inc. and subsidiaries as of December 31, 2001 and
2000, and the results of their operations and their cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the consolidated financial statements, the Company has suffered recurring
losses from operations that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to this matter are
also described in Note 2. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
ARTHUR ANDERSEN LLP
New York, New York
May 9, 2002
Max Brausdorfor
New York, New York
F-2
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
<Table>
<Caption>
AS OF AS OF
DECEMBER 31, DECEMBER 31,
NOTE 2001 2000
---- ------------ ------------
US$ US$
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. 5,851 3,818,717
Marketable securities..................................... 4 210,630 362,423
Accounts receivable....................................... 193,388 826,251
Amounts due from related parties.......................... 9 484,085 365,705
Prepaid expenses and other current assets................. 6 1,356,187 1,739,172
----------- -----------
Total current assets................................... 2,250,141 7,112,268
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, net.......................... 3 1,383,673 881,463
EQUITY INVESTMENTS, net..................................... 559,377 20,482
GOODWILL, net............................................... 2 4,914,919 5,425,389
INTANGIBLE ASSETS, net...................................... 5 958,200 1,094,506
----------- -----------
Total assets........................................... 10,066,310 14,534,108
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank overdraft............................................ 332,738 --
Accounts payable.......................................... 749,594 173,185
Amounts owed to related parties........................... 9 377,219 --
Accrued rent deposit...................................... 362,899 --
Accrued expenses and other current liabilities............ 517,651 422,230
Deferred revenue.......................................... 1,326,900 1,763,305
----------- -----------
Total current liabilities.............................. 3,667,001 2,358,720
----------- -----------
Total liabilities...................................... 3,667,001 2,358,720
Redeemable convertible preferred stock, Series A, par value
$1.00..................................................... 10 3,900 3,120
Redeemable convertible preferred stock, Series B, par value
$2.50..................................................... 10 602,970 288,040
606,870 291,160
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value --
75,000,000 shares authorized; 47,631,527 (2000:
45,611,541) shares issued and outstanding.............. 47,632 45,612
Additional paid-in capital................................ 24,724,050 23,195,285
Accumulated deficit....................................... (19,103,570) (11,421,592)
Accumulated other comprehensive income.................... 124,327 64,923
Total stockholders' equity............................. 5,792,439 11,884,228
----------- -----------
Total liabilities and stockholders' equity............. 10,066,310 14,534,108
=========== ===========
</Table>
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated balance sheets.
F-3
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
DECEMBER 31, 2001 AND 2000
<Table>
<Caption>
AS OF AS OF
DECEMBER 31, DECEMBER 31,
2001 2000
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss before taxation................................. $(6,990,507) $(4,376,479)
Adjustments to reconcile net loss to net cash used in
operating activities-
Changes in operating assets and liabilities-
Depreciation and amortization......................... 1,093,133 950,079
Loss on disposal of fixed assets...................... 140,607 113,042
Share of loss of equity investment.................... 441,017 29,517
Realized and unrealized loss on marketable
securities.......................................... 422,784 49,928
Compensation charge for stock options................. -- 105,000
Accretion of warrants................................. 256,535 55,000
Bank overdraft........................................ 332,738 --
Decrease (increase) in accounts receivable............ 428,372 (624,448)
Increase in net amounts receivable from related
parties............................................. (314,380) (948,555)
Increase in prepaid expenses and other current
assets.............................................. (354,337) (37,498)
(Decrease) increase in deferred revenue............... (436,405) 541,351
Increase (decrease) in accounts payable............... 541,233 (184,750)
Increase in accrued expenses and other current
liabilities......................................... 617,154 50,465
----------- -----------
Net cash used in operating activities................. (3,822,056) (4,277,348)
----------- -----------
CASH FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment............ (741,648) (825,787)
Purchase of investments............................... (75,000) (95,045)
Advances to The Healthy Forum......................... (706,400) (198,000)
Net sale of marketable securities..................... 48,116 --
Cash acquired from acquisition........................ 14,907 --
----------- -----------
Net cash used in investing activities................. (1,460,025) (1,118,832)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of preferred stock................. 1,424,300 9,089,546
----------- -----------
Net cash provided by financing activities............. 1,424,300 9,089,546
----------- -----------
Effects of exchange rate changes on cash and cash
equivalents......................................... 44,915 119,533
----------- -----------
Net (decrease) increase in cash and cash
equivalents......................................... (3,812,866) 3,812,899
CASH AND CASH EQUIVALENTS, beginning of year............... 3,818,717 5,818
----------- -----------
CASH AND CASH EQUIVALENTS, end of year..................... $ 5,851 $ 3,818,717
=========== ===========
</Table>
Supplemental disclosure of cash flow information
<Table>
<Caption>
2001
Acquisition of ProDesign Technology Limited ---------
Fair value of equity issued................................. $ 166,250
Assets acquired............................................. (235,943)
Liabilities assumed......................................... 237,399
Net non-cash investment..................................... 167,706
---------
Cash acquired............................................... 14,907
=========
Net cash acquired from acquisition.......................... 14,907
=========
</Table>
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated statements.
F-4
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
DECEMBER 31, 2001 AND 2000
NON CASH TRANSACTIONS
During the 2001 fiscal year 363,720 of Series B preferred stock were
converted to 909,300 common shares in accordance with the subscription
agreements. See note 10 to the financial statements.
During the 2001 fiscal year 15,336 shares of common stock were issued in
lieu of dividends on the Series B preferred shares.
On January 18,2001 the company received 853,177 shares in Consolidated
EcoProgress Technology, Inc. in settlement of outstanding debt of $238,889. On
July 6, 2001 the company completed the acquisition of ProDesign Technology
Limited. The initial consideration payable in respect of the acquisition was
125,000 shares of common stock. See note 2 for further details.
On December 12, 2001 the Company entered into a common stock purchase
agreement with Fusion Capital Fund II LLC. In connection with this agreement
970,350 shares of common stock were issued, although these shares cannot be
sold, transferred or assigned until an effective registration statement has been
filed.
The Company issued equity for debt of $29,977 in 2000 in relation to
services provided by Mark Pierce in his role as the Company's attorney in 2000.
The total number of common shares allocated was 32,703.
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated statements.
F-5
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC
CONSOLIDATED STATEMENT OF OPERATIONS
DECEMBER 31, 2001 AND 2000
<Table>
<Caption>
AS OF AS OF
DECEMBER 31, DECEMBER 31,
2001 2000
------------ ------------
NET REVENUE................................................. $ 966,738 $ 925,351
COST AND EXPENSES:
Cost of revenues.......................................... 208,585 20,902
Research and development costs............................ 1,225,299 522,875
General and administrative expenses....................... 4,454,924 3,782,402
Realized and unrealized loss (profit) on marketable
securities............................................. 422,784 (46,369)
Professional fees......................................... 1,204,636 842,293
Management fee............................................ -- 150,000
----------- -----------
Total cost and expenses................................ 7,516,228 5,272,313
----------- -----------
LOSS FROM OPERATIONS........................................ (6,549,490) (4,346,962)
Share of loss from equity investment...................... (441,017) (29,517)
----------- -----------
NET Loss.................................................... (6,990,507) (4,376,479)
Dividends payable and accretion of preferred stock........ (691,471) (2,563,872)
----------- -----------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS.................. (7,681,978) (6,940,351)
=========== ===========
NET LOSS PER COMMON SHARE -- BASIC AND DILUTED.............. $ (0.17) $ (0.17)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING........ 45,730,823 40,401,395
=========== ===========
</Table>
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated statements.
F-6
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
DECEMBER 31, 2001 AND 2000
<Table>
<Caption>
COMMON
-------------------- ADDITIONAL
SHARE AMOUNT PAID-IN CAPITAL
---------- ------- ---------------
BALANCE at December 31, 1999.............................. 36,002,800 $36,002 $ 9,861,562
Net loss................................................ -- -- --
Currency translation adjustment......................... -- -- --
Comprehensive loss................................... -- -- --
Dividends payable....................................... -- -- --
Conversion of Series A preferred stock.................. 97,950 98 58,166
Conversion of Series B preferred stock.................. 9,297,046 9,298 11,630,604
Accretion of Series A and Series B preferred stock to
redemption rate at December 31, 2000................. -- -- --
Issuance of options..................................... -- -- 105,000
Issuance of common shares............................... 213,745 214 211,953
Issuance of warrants.................................... -- -- 1,328,000
---------- ------- -----------
BALANCE at December 31, 2000.............................. 45,611,541 45,612 23,195,285
Net loss.................................................. -- -- --
Currency translation adjustment......................... -- -- --
Comprehensive loss................................... -- -- --
Dividends payable....................................... -- -- --
Conversion of Series B preferred stock.................. 909,300 909 1,421,235
Accretion of Series A and Series B preferred stock to
redemption rate at December 31, 2001................. -- --
Issuance of common shares............................... 1,110,686 1,111 860,388
Reversal of charge for warrants......................... -- -- (1,328,000)
Issuance of warrants.................................... -- -- 575,142
---------- ------- -----------
BALANCE at December 31, 2001.............................. 47,631,527 $47,632 $24,724,050
========== ======= ===========
</Table>
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated statements.
F-7
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
DECEMBER 31, 2001 AND 2000
<Table>
<Caption>
ACCUMULATED TOTAL
OTHER STOCKHOLDERS'
ACCUMULATED COMPREHENSIVE EQUITY
DEFICIT (LOSS) INCOME (DEFICIT)
------------ ------------- -------------
BALANCE at December 31, 1999......................... $ (4,481,241) $ 2,095 $ 5,418,418
Net loss........................................... (4,376,479) -- (4,376,479)
Currency translation adjustment.................... -- 62,828 62,828
-----------
Comprehensive loss.............................. -- -- (4,313,651)
-----------
Dividends payable.................................. (158,425) -- (158,425)
Conversion of Series A preferred stock............. -- -- 58,264
Conversion of Series B preferred stock............. -- -- 11,639,902
Accretion of Series A and Series B preferred stock
to redemption rate at December 31, 2000......... (2,405,447) -- (2,405,447)
Issuance of options................................ -- -- 105,000
Issuance of common shares.......................... -- -- 212,167
Issuance of warrants............................... -- -- 1,328,000
------------ -------- -----------
BALANCE at December 31, 2000......................... (11,421,592) 64,923 11,884,228
Net loss........................................... (6,990,507) -- (6,990,507)
Currency translation adjustment.................... -- 59,404 59,404
-----------
Comprehensive loss.............................. -- -- (6,931,103)
-----------
Dividends payable.................................. (10,415) -- (10,415)
Conversion of Series B preferred stock............. -- -- 1,422,144
Accretion of Series A and Series B preferred stock
to redemption rate at December 31, 2001......... (681,056) (681,056)
Issuance of common shares.......................... -- -- 861,499
Reversal of charge for warrants.................... -- -- (1,328,000)
Issuance of warrants............................... -- -- 575,142
------------ -------- -----------
BALANCE at December 31, 2001......................... $(19,103,570) $124,327 $ 5,792,439
============ ======== ===========
</Table>
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated statements.
F-8
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2000
1. BACKGROUND AND ORGANIZATION
HISTORY
BioProgress Technology International, Inc. (the "Company"), was
incorporated in California on March 5, 1990, under the name of U.S. Flywheel,
Inc., as a subsidiary of Sunbird Technologies, Inc., a Utah corporation
("Sunbird Technologies"). In June, 1991, the Company acquired three patents and
a license relating to flywheel technology from Sunbird Technologies and its
affiliates in exchange for common shares of the Company "Common Stock". These
shares of Common Stock were subsequently distributed to the stockholders of
Sunbird Technologies after registration with the U.S. Securities and Exchange
Commission ("Commission"). The Company subsequently transferred its flywheel
technology to a partnership (the "Partnership") in exchange for a minority
interest in the Partnership. The Partnership interest of the Company was
subsequently sold, after which the Company began its search for a business in
which to engage.
The Company changed its name to Famous Sam's Group Inc and briefly traded
as a restaurateur under the name of Famous Sam's. The business subsequently
ceased to trade and in 1997 the Company acquired its interest in BioProgress
Technology Inc, as described in note 3.
OPERATIONS
The Company has a limited operating history and is engaged primarily in the
research, development, manufacturing, marketing, sales and distribution of
products that use water soluble and biodegradable films for the dietary
supplement, pharmaceutical, recreational and cosmetic industries and other
applications. The Company's research and development operations are in the
United Kingdom. The Company operates in one market segment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the financial
statements of the Company and its wholly owned subsidiaries: BioProgress
Technology, Inc., BioProgress Technology Limited ("BTL"), DHA Nutrition Limited
and ProDesign Technology Limited. All significant intercompany transactions and
balances have been eliminated.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year classifications.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles 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 amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
LIQUIDITY
The Company's consolidated financial statements have been prepared assuming
that it will continue as a going concern. The Company has incurred recurring
operating losses and negative operating cash flows since its inception and will
require additional financing within the next 12 months. In addition, the Company
will need to increase cash flows from operations and/or obtain financing in
order to fund its working capital requirements for fiscal year 2002. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. Management is actively pursuing increases to cash flows and
additional sources of financing and believes that such increases and additional
financing will generate sufficient cash flow to fund the Company's operations
through fiscal year 2002. Management's plan to increase the Company's cash flows
from operations relies significantly on increases in revenue generated from its
license agreements and research and development services provided to existing
clients, sale of equipment and related supplies, containment of operating
expenses and opportunistic leverage of capital markets. However, there are no
assurances that such matters will be successfully consummated.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation of property,
plant and equipment is provided for using the straight-line method over the
estimated useful lives of the respective assets, ranging from 4 to
F-9
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
20 years (see Note 3). Amortization of leasehold improvements is provided for
over the lesser of the useful life or the related lease term.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents represent all highly liquid investments with
maturities of three months or less when purchased.
REVENUE RECOGNITION
The Company generates revenues from licensing the rights to use its
intellectual property in the XGel(TM) Film System, the sale of XGel(TM) Film
Systems, and research and development services to assist customers in gaining
maximum benefit from the license. Revenues from license arrangements and the
sale of XGel(TM) Film Systems are recognized when there is persuasive evidence
of an agreement with a customer, collectibility is probable and the fee is fixed
or determinable. Revenues from research and development contracts are recognized
ratably over the period to which the contract relates unless specific acceptance
criteria exist. If acceptance criteria exist, revenues are recognized upon the
earlier of customer acceptance or the expiration of the acceptance period.
Deferred revenue represents cash which has been received by the Company,
but has not been recorded as revenue as it has not met the revenue recognition
criteria. At December 31, 2001, 72% relates to one customer (see Note 9).
MARKETABLE SECURITIES
Marketable securities represent the Company's investment in the common
stock of Consolidated EcoProgress Technology Inc, and UK quoted investments as
described in Note 4. Management considers these securities as trading
securities. The value of these investments is marked to market value at each
period end with any unrealized gain or loss included in the statement of
operations in the period to which it relates.
INTANGIBLES
Licenses are included at cost and depreciated in equal annual installments
over a period of 10 years which is their estimated useful economic life.
Provisions are made for any known impairments.
GOODWILL
Goodwill of $6,781,739 resulted from the acquisition of BTL in 1998 and
represents the excess of the fair value of the consideration given over the fair
value of the identifiable assets and liabilities acquired. It is being amortized
on a straight-line basis over its useful economic life, which is considered to
be 10 years. The amortization charge for 2001 and 2000 was $678,176 and
$678,176, respectively.
On July 6, 2001 the Company completed the acquisition of ProDesign
Technology Limited ("PTL"). Completion of the acquisition, which has been
accounted for under the purchase method in accordance with Statement of
Financial Accounting Standard ("SFAS") 141, follows the execution of a letter of
intent announced on March 16, 2001 and, accordingly, the results of operations
have been included in the accompanying financial statements since the date of
acquisition. Initial consideration payable in respect of the acquisition is
125,000 shares of common stock in the Company ("Consideration Shares"). Goodwill
of $167,706 arose on the acquisition. Under SFAS 142, no amortization is
required and this goodwill is subject to impairment review. Consideration Shares
are restricted from sale for a period of one year from the date of issue.
Additional consideration ("Deferred Consideration") shall be payable by the
Company in accordance with the following and any future payments will be
reflected as an increase in the purchase price as they fall due:
1. If at any time on or before December 31, 2001, the cumulative sales
revenues of PTL derived from third parties exceed $500,000, the
Company shall issue the number of ordinary shares of common stock in
the Company determined in accordance with the following provisions,
price being the closing price of the Company's common stock on the
relevant date:
(i) if the price is $2.50 or more -- 100,000 shares
(ii) if the price is $1.66 or less -- 150,000 shares
(iii) if the price is between $1.66 and $2.50 -- a figure equal to the
result of dividing 250,000 by the price
F-10
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
2. If at any time on or before December 31, 2002, the cumulative sales
revenues of PTL derived from third parties exceed $1,000,000, the
Company shall issue the number of ordinary shares of common stock in
the Company determined in accordance with the following provisions,
price being the closing price of the Company's common stock on the
relevant date:
(i) if the price is $2.50 or more -- 100,000 shares
(ii) if the price is $1.66 or less -- 150,000 shares
(iii) if the price is between $1.66 and $2.50 -- a figure equal to the
result of dividing 250,000 by the price
As of December 31, 2001, these targets have not been met and no
purchase price adjustments have been made.
EQUITY METHOD OF ACCOUNTING
The Company's investment in the Healthy Forum Limited ("HF") is accounted
for under the equity method of accounting whereby the investment is carried at
the cost of acquisition adjusted for the Company's share of undistributed
earnings or losses since acquisition. Advances to HF amounted to $904,400 and
have been included in Equity Investments in the accompanying balance sheet as of
December 31, 2001.
Subsequent to the reorganization of the share capital of HF on April 1,
2001 the Company exercised its option to purchase additional shares of common
stock, increasing its shareholding to 46.6% from 29.9%. The net cash investment
related to this option was $75,000.
LONG-LIVED ASSETS
The provisions of SFAS No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" requires, among other
things, that an entity review its long lived assets and certain related
intangibles for impairment whenever changes in circumstances indicate that the
carrying amount of an asset may not be fully recoverable. Management does not
believe that any such change in circumstances has occurred.
INCOME TAXES
The Company applies the deferred method of accounting for income taxes
whereby deferred taxes are recognized for tax consequences of temporary
differences by applying enacted statutory tax rates to differences between
financial statements carrying amounts and the tax bases of existing assets and
liabilities.
STOCK-BASED COMPENSATION
The Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards (SFAS) No. 123 "Accounting for Stock-Based Compensation."
As permitted by the provisions of SFAS No. 123, the Company applies Accounting
Principles Board Opinion 25 and related interpretations in accounting for its
employee share option plans. As a result, compensation expense related to
options granted is measured based on the intrinsic value of the underlying
common stock. See Note 11 for a summary of the pro-forma effects on reported net
loss per share for the years ended December 31, 2001 and 2000 based on the fair
value of options and shares granted as prescribed by SFAS No. 123.
EARNINGS PER SHARE
The Company applies SFAS No. 128 "Earnings Per Share". The adoption of SFAS
No. 128 requires the presentation of basic earnings per share and diluted
earnings per share. Basic and diluted loss per common share were calculated
based upon the net loss available to common stockholders divided by the weighted
average number of shares of common stock outstanding during the period. There
are 3,700,000 stock options outstanding at December 31, 2001 (2000: 3,700,000)
which are not included in the earnings per share calculation as they would be
anti-dilutive.
FOREIGN CURRENCY TRANSLATION
The functional currency of foreign operations is the local currency. The
financial statements of the foreign subsidiaries are translated into U.S.
dollars using the exchange rate in effect at year end for balance sheet accounts
and the average exchange rate in effect during the year for revenue and expense
accounts with currency translation adjustments reflected in other comprehensive
loss in stockholders' equity. Gains and losses from
F-11
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
foreign currency transactions, such as those resulting from the settlement of
foreign receivables or payables, are included in the consolidated statement of
operations. The foreign currency loss was $134,266 and $387,073 in 2001 and
2000, respectively.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash investments and trade
receivables. The Company has cash investment policies that limit investments to
investment grade securities and marketable securities. The Company performs
ongoing credit evaluations of its customers' financial positions.
In 2001, our top five customers accounted for 93% of total revenues, with
Proctor and Gamble accounting for 43% and the four other customers (Boots,
EcoProgress, Peter Black and VAX) contributed the remaining 50%.
In 2000, our top three customers (Proctor and Gamble, Boots and
EcoProgress) accounted for 96% of total revenues.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair values of financial instruments are deemed to be equivalent to the
carrying amounts as cash and cash equivalents, bank overdraft, marketable
securities, accounts payable and accounts receivable are short term items and
readily convertible into cash.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" ("SFAS
No. 141"). SFAS No. 141 changes the accounting for business combinations,
requiring that all business combinations be accounted for using the purchase
method and that intangible assets be recognized as assets apart from goodwill if
they arise from contractual or other legal rights, or if they are separable or
capable of being separated from the acquired entity and sold, transferred,
licensed, rented or exchanged. SFAS No. 141 is effective for all business
combinations initiated after June 30, 2001. The adoption of SFAS No. 141 did not
have a material impact on our financial statements.
In July 2001, the FASB issued SFAS 142, "Goodwill and Other Intangibles"
("SFAS No. 142"). SFAS No. 142 specifies financial accounting and reporting for
acquired goodwill and other intangible assets. Goodwill and intangible assets
with indefinite useful lives will not be amortized but rather will be tested at
least annually for impairment. SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001. SFAS No. 142 requires that the useful lives
of intangible assets acquired on or before June 30, 2001 be reassessed and that
the remaining amortization periods be adjusted accordingly. SFAS No. 142 also
requires that previously recognized intangible assets deemed to have indefinite
lives are to be tested for impairment. Goodwill recognized on or before June 30,
2001, is to be assigned to one or more reporting units and is to be tested for
impairment as of the beginning of the fiscal year in which SFAS No. 142 is
initially applied in its entirety. The Company is finalizing its evaluation of
the effect that adoption of the provisions of SFAS No. 142 that are effective
for January 1, 2002 will have on its results of operations and financial
position.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS No. 143"), which is effective October 1, 2003.
SFAS No. 143 requires, among other things, the accounting and reporting of legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development, or normal operation of a long-lived
asset. The Company is currently assessing, and has not yet determined, the
effect of SFAS No. 143 on its financial position and results of operations. In
October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," ("SFAS No. 144"). SFAS 144 is effective October
1, 2002, but may be early adopted. SFAS No. 144 addresses accounting and
reporting of all long-lived assets, except goodwill, that are either held and
used or disposed of through sale or other means. The Company is currently
assessing the impact of SFAS 144 on its financial position
F-12
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
and results of operations, but believes its adoption will not have a material
impact on its results of operation or financial position.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, net of depreciation, and
consist of the following:
<Table>
<Caption>
ESTIMATED 2001 2000 USEFUL LIVES
-------------- ---------- ------------
Freehold property...................................... $ 547,500 $ 547,500 20 years
Leasehold improvements................................. 230,610 -- 7
Plant and machinery.................................... 385,350 272,732 4
Office equipment....................................... 638,886 222,743 4
Laboratory equipment................................... 106,974 60,448 6
---------- ----------
1,909,320 1,103,423
---------- ----------
Less -- Accumulated depreciation....................... (525,647) (221,960)
---------- ----------
Total.................................................. $1,383,673 $ 881,463
========== ==========
</Table>
The depreciation expense was $278,651 and $134,120 for 2001 and 2000,
respectively.
4. MARKETABLE SECURITIES
Marketable securities consist of the following:
<Table>
<Caption>
2001 2000
-------- --------
Consolidated EcoProgress Technologies Inc................... $210,630 $168,269
Quoted UK investments....................................... -- 194,134
-------- --------
$210,630 $362,423
======== ========
</Table>
The above investments are classified as trading securities and marked to
market value at each period end, and any gain or loss is taken to the Statement
of Operations.
5. INTANGIBLE ASSETS
<Table>
<Caption>
2001 2000
---------- ----------
Trademarks, licenses, patents............................... $1,368,569 $1,368,569
Less accumulated amortization............................... (410,369) (274,063)
---------- ----------
Net intangible assets....................................... $ 958,200 $1,094,506
========== ==========
</Table>
The licenses were purchased from TruTona International, Inc., a related
party as disclosed in Note 9 and are being depreciated in equal annual
installments over a period of 10 years which is their estimated useful economic
life. The amortization expense for the year was $136,306 and $137,783 for 2001
and 2000, respectively.
6. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
<Table>
<Caption>
2001 2000
---------- ----------
Fusion prepaid deal costs................................... $ 630,728 $ --
Rent deposit................................................ 362,899 --
Warrants issued to third parties (see Note 12).............. 263,607 1,273,000
Series B preferred shares subscriptions due................. -- 367,500
Prepaid expenses and other current assets................... 98,953 98,672
---------- ----------
$1,356,187 $1,739,172
========== ==========
</Table>
F-13
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
7. COMMITMENTS AND CONTINGENCIES
A) OPERATING LEASE OBLIGATIONS
On January 31, 2001 the Company signed a new lease agreement to lease new
purpose built manufacturing facilities at a site known as Hostmoor, located in
March, Cambridge, UK. Minimum future lease payments under the non-cancelable
operating lease entered into for Hostmoor subsequent to December 31, 2001 are
summarized as follows:
<Table>
<Caption>
2001
----------
2002........................................................ $ 178,867
2003........................................................ 178,867
2004........................................................ 178,867
2005........................................................ 178,867
2006........................................................ 178,867
Thereafter.................................................. 3,398,473
----------
$4,292,808
==========
</Table>
Rental expenses under operating leases totaled $291,890 and $33,600 for the
years ended December 31, 2001 and 2000, respectively.
B) EMPLOYEE AGREEMENTS
The Company has a number of agreements with directors and senior management
which result in the following committed payments subsequent to December 31,
2001:
<Table>
<Caption>
2001
--------
2002........................................................ $245,000
2003........................................................ 245,000
2004........................................................ 62,000
--------
$552,000
========
</Table>
C) BANK OVERDRAFT
During 2001, the Company arranged a bank overdraft facility of $362,500
((pound) 250,000) with a UK bank which has been secured by a personal guarantee
from one of the Company's executives.
8. INCOME TAXES
The Company does not have any income taxes payable in 2001 or 2000. The
Company has net operating loss carry forwards of approximately $10,000,000
available in the U.S. and approximately $100,000 in the UK for 2001 available to
carry forward against taxable profits in each country, subject to agreement with
the relevant tax authorities. These net operating loss carry forwards begin to
expire in the fiscal year ending 2015. The Company has provided a 100% valuation
allowance against the deferred tax asset arising on the net operating losses due
to the uncertainty of their ultimate realization.
9. RELATED PARTIES
The following table provides a breakdown of amounts due from and owed to
related parties. A summary of the transactions is shown after the table:
<Table>
<Caption>
AMOUNTS DUE FROM AMOUNTS OWED TO
RELATED PARTIES RELATED PARTIES
$ $
---------------- ---------------
Jade Partnership International, Inc......................... 390,703 --
TruTona International, Inc.................................. 58,382 --
Cavan Bickell (CEO of Healthy Forum)........................ 35,000 --
Directors................................................... -- 377,219
------- -------
484,085 377,219
======= =======
</Table>
F-14
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
The balance of $904,400 due from The Healthy Forum Limited (see below) is
included within equity investments.
The amounts due to directors relates to unpaid compensation for services
provided during 2001. Due to cash flow constraints these amounts could not be
paid to the directors, but have been accrued for payment once the cash flow
position improves.
THE JADE PARTNERSHIP INTERNATIONAL, INC
On April 1, 1998, the Company entered into a consulting and option
agreement with The Jade Partnership International, Inc. ("Jade"), a Delaware
Corporation. This agreement was canceled on March 31, 2000 and no further
amounts will be paid by the Company to Jade. The Company received short term
funding from Jade to meet bridge financing needs, and advances similar funding
to Jade. Funds transferred to Jade exceeded monies received from Jade during
2001.
Certain directors of the Company are controlling shareholders in Jade. The
Company incurred management charges of nil (2000: $150,000) during the year. The
balance due from Jade to the Company at December 31, 2001 was $390,703 (2000:
$111,323).
TRUTONA INTERNATIONAL, INC
Certain directors of the Company are also directors of TruTona
International, Inc. ("TruTona"), a privately held Atlanta based corporation.
On February 15, 1999, the Company acquired from TruTona patents, licenses
and trademarks relating to a broad range of products, including a range of
flushable and biodegradable disposable products designed by TruTona. The
consideration payable to TruTona by the Company was $1,500,000 in the
acquisition, of which $750,000 was paid through the delivery of 1,875,000 shares
of Common Stock at an agreed price of $0.40, with the remainder paid in cash.
In connection with the acquisition of the above patents, licenses and
trademarks, the Company has recognized license fee revenues of $133,600 (2000:
$133,600) in the year relating to a previous license agreement between TruTona
and Consolidated EcoProgress Technology Inc. that has been assigned to the
Company.
The Company has a balance of $58,382 (2000: $56,382) due to it from TruTona
at December 31, 2001.
CONSOLIDATED ECOPROGRESS TECHNOLOGIES, INC
Consolidated EcoProgress Technologies, Inc, ("EcoProgress"), is a related
party by virtue of its shareholding in the Company.
On April 5, 1999, the Company completed the sale of a license to
EcoProgress, a Canadian company with securities traded on the Vancouver Stock
Exchange. The license was sold for the sum of $1,500,000 and granted EcoProgress
the exclusive right to manufacture, sell and distribute in the US a line of
flushable and biodegradable disposable products utilizing the intellectual
property that the Company recently acquired from TruTona International Inc (see
above). EcoProgress paid $380,000 in cash and the remaining $1,120,000 was paid
through the issuance of 1,066,666 shares of free trading common stock in
EcoProgress at the market value of $1.05 per share. The value of the license is
included within the deferred income balance and is being amortized to revenue
over a period of ten years.
THE HEALTHY FORUM LIMITED
The Healthy Forum aims to build a world leading and world-friendly brand in
the complimentary medical and specialty food sectors. The product categories of
the company will be feminine hygiene, beneficial foods and vitamins, minerals
and supplements. During the year the Company increased its investment to 46.6%
from its original holding of 29.9%.
In addition to the equity investment the Company has loaned The Healthy
Forum $706,400 in 2001 and $198,000 during 2000 to help fund working capital
requirements. At December 31, 2001 the amount owed by The Healthy Forum to the
group was $904,400 which is included in Equity Investments in the accompanying
balance sheet.
F-15
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
10. REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Series A and B redeemable convertible preferred stock are recorded in
the accompanying balance sheet outside the stockholders' equity section due to
their mandatory redemption feature.
<Table>
<Caption>
SERIES A SERIES B
REDEEMABLE REDEEMABLE
CONVERTIBLE PREFERRED STOCK CONVERTIBLE PREFERRED STOCK
--------------------------- ---------------------------
Number of shares authorized.................. 1,250,000 3,750,000
========== ==========
Shares outstanding at December 31, 2000...... 2,000 108,000
Number of shares issued during year.......... -- 422,720
Number of shares converted during year....... -- (363,720)
---------- ----------
Shares outstanding at December 31, 2001...... 2,000 167,000
========== ==========
Subscription price per share................. $ 1.00 $ 2.50
Value based on redemption rate at December
31, 2001................................... $ 3,900 $ 602,970
Proceeds from issuance....................... $ -- $1,424,300
Conversion date and rate to common shares
From January 1, 2001 to December 31, 2001.... 1:0.5 1:1.0 (issued in 2000)
1:2.5 (issued in 2001)
From January 1, 2002 to December 31, 2002.... -- 1:0.5 (issued in 2000)
1:1.0 (issued in 2001)
From January 1, 2003 to December 31, 2003.... -- 1:0.5 (issued in 2001)
Expiry of conversion rights.................. 12/31/2001 12/31/2002 (issued in 2000)
12/31/2003 (issued in 2001)
Conversion at discretion of.................. Holder Holder
Redemption date and amount per share
From January 1, 2001 to December 31, 2001.... $ 1.95 $ 3.91
From January 1, 2002 to December 31, 2002.... $ -- $ 4.88
From January 1, 2003 to December 31, 2003.... $ -- $ 5.19
Redemption at discretion of.................. Company Company
Mandatory redemption date.................... After March 31, 2002 After March 31, 2003
Mandatory redemption price................... $ 2.07 $ 5.19
Dividend rate................................ 4% per annum of 4% per annum of
subscription amount subscription amount
computed quarterly in computed quarterly in
arrears March, June, arrears March, June,
September and December September and
December
Voting rights................................ None None
Preferential liquidation rights.............. None None
</Table>
A charge has been accreted to accumulated deficit to reflect the $0.95
premium on Series A redeemable convertible preferred shares and the $1.41
premium on Series B redeemable convertible preferred shares.
11. STOCK OPTION PLAN
The Company granted 3,000,000 stock options to executives on January 25,
1999 and a further 700,000 on November 27, 2000. The options vest immediately
and have a life of three years and five years respectively.
The following table summarizes information about stock options outstanding
at December 31, 2001.
F-16
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
<Table>
<Caption>
NUMBER
OUTSTANDING AND WEIGHTED
EXERCISABLE AS OF AVERAGE
DECEMBER 31, REMAINING
DATE OF GRANT EXERCISE PRICE 2001 CONTRACTUAL LIFE
- ------------- -------------- ----------------- ----------------
January 25, 1999.................................... $0.35 600,000 25 Days
January 25, 1999.................................... $0.75 600,000 25 Days
January 25, 1999.................................... $1.25 600,000 25 Days
November 27, 2000................................... $1.50 700,000 4 years
January 25, 1999.................................... $1.75 600,000 25 Days
January 25, 1999.................................... $2.25 600,000 25 Days
---------
3,700,000
=========
</Table>
As permitted under SFAS No. 123 "Accounting for Stock Based Compensation",
the Company has elected to follow Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB No. 25") in accounting for
share-based awards to employees, for options granted. There is no compensation
charge arising on the options issued during 1999 as these options were not
granted at less than fair market value. However, the options issued on November
27, 2000 were issued at below fair market value and resulted in a compensation
charge of $105,000.
Pro-forma information regarding net loss and net loss per share is required
by SFAS No. 123 and has been determined as if the Company had accounted for its
employee share options and the options granted by shareholders under the fair
value method consistent with the method prescribed by that Statement. The fair
value of these options was estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions for 2001:
-- Risk-free interest rate of 7%;
-- dividend yield of 0%;
-- volatility factor of 100%; and
-- an expected life of the option of three years and five years for 1999
and 2000 grants respectively.
Had the Company's option plan and the options granted to stockholders been
accounted for under SFAS No. 123, the Company's charge to income for 2001 would
have been $nil (2000: $773,903). Net loss and loss per share would have been
increased to the following pro-forma amounts.
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2001 2000
------------ ------------
Pro-forma net loss applicable to common shareholders........ ($7,681,978) ($7,714,254)
Pro-forma net loss per share applicable to common
stockholders
-- basic and diluted...................................... ($ 0.17) ($ 0.19)
=========== ===========
</Table>
12. WARRANTS
On December 1, 2000 the company issued 5,311,158 warrants to a third party
to acquire shares of common stock at any point after the date of issuance at an
exercise price of $1.50. The consideration for these warrants was an undertaking
from the third parties to provide sales and consultancy services with particular
focus on retail and distribution in the Muslim states. The warrants were valued
in accordance with the guidance in EITF 96-18 "Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services" at a value of $1.3 million and recorded as a prepaid
expense in the balance sheet. However, due to changes in the market value of the
shares the value of the warrants has fallen to nil. As a result the $1.3 million
credited to additional paid-in capital and the remaining prepaid expenses have
been reversed in 2001. The $138,000 that had been expensed to the Statement of
Operations, $55,000 of which was recorded in 2000, has also been reversed in
2001.
F-17
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
On December 1, 2001 the Company cancelled the above agreement and a new
agreement was executed. This agreement related to the issuance of 2,522,800
warrants to the same third party to acquire shares of common stock at any point
after the date of issuance at an exercise price of $0.50. These warrants have a
value of $575,142 of which $311,535 has been expensed in the Statement of
Operations in 2001. The balance of $263,607 is recorded as a prepaid expense and
will be released during 2002. The value of these new warrants is being spread
over the same period as the cancelled options since these warrants have been
issued as a replacement for the originals due to movements in the market price
of the Company's common stock.
13. SUBSEQUENT EVENTS
On March 28, 2002, the Company sold its Norwood Road Property to Healthy
Forum for GBP295,000, including chattel. The Company has recorded an interest
bearing Promissory Note issued by THF for the entire purchase amount, the terms
of which provided for monthly payments beginning in May, 2003 and, at the
issuer's option, payments in the form of shares of THF common stock.
F-18
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANT
To the Board of Directors and Stockholders of
BioProgress Technology International, Inc:
We have audited the accompanying consolidated balance sheets of BioProgress
Technology International, Inc. (a Nevada corporation) and subsidiaries as of
December 31, 2000 and 1999, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatements. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of BioProgress
Technology International, Inc. and subsidiaries as of December 31, 2000 and
1999, and the results of their operations and their cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the consolidated financial statements, the Company has suffered recurring
losses from operations that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to this matter are
also described in Note 2. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
ARTHUR ANDERSEN LLP
New York, New York
May 21, 2001
Max Brausdorfor
New York, New York
F-19
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
<Table>
<Caption>
2000 1999
----------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 3,818,717 $ 5,818
Marketable securities (Note 4)............................ 362,423 367,306
Accounts receivable....................................... 826,251 201,803
Amounts due from related parties (Note 8)................. 365,705 --
Prepaid expenses and other current assets................. 1,789,172 61,174
----------- ----------
Total current assets................................... 7,162,268 636,101
PROPERTY, PLANT AND EQUIPMENT, net (Note 3)................. 881,463 326,629
EQUITY INVESTMENTS, net..................................... 20,482 --
GOODWILL, net (Note 2)...................................... 5,425,389 6,103,565
INTANGIBLE ASSETS, net (Note 5)............................. 1,094,506 1,232,289
----------- ----------
Total assets........................................... $14,584,108 $8,298,584
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Deferred revenue.......................................... $ 1,763,305 $1,221,954
Accounts payable.......................................... 173,185 387,912
Amounts owed to related parties (Note 8).................. -- 780,850
Accrued expenses and other current liabilities............ 422,230 362,855
----------- ----------
Total current liabilities.............................. 2,358,720 2,753,571
----------- ----------
Total liabilities...................................... 2,358,720 2,753,571
----------- ----------
Redeemable convertible preferred stock, Series A, par value
$1.00 (Note 9)............................................ 3,120 51,475
Redeemable convertible preferred stock, Series B, par value
$2.50 (Note 9)............................................ 338,040 75,120
----------- ----------
341,160 126,595
----------- ----------
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value-
50,000,000 shares authorized; 45,611,541 (1998:
36,002,800) shares issued and outstanding.............. 45,612 36,002
Additional paid-in capital................................ 23,195,285 9,861,562
Accumulated deficit....................................... (11,421,592) (4,481,241)
Accumulated other comprehensive income.................... 64,923 2,095
----------- ----------
Total stockholders' equity............................. 11,884,228 5,418,418
----------- ----------
Total liabilities and stockholders' equity............. $14,584,108 $8,298,584
=========== ==========
</Table>
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated balance sheets.
F-20
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
DECEMBER 31, 2000 AND 1999
<Table>
<Caption>
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss before taxation.................................. $(4,376,479) $(3,017,529)
Adjustments to reconcile net loss to net cash used in
operating activities --
Changes in operating assets and liabilities --
Depreciation and amortization.......................... 950,079 888,998
Loss on disposal of fixed assets....................... 113,042 --
Share of loss of equity investment..................... 29,517 --
Realized and unrealized loss on marketable
securities............................................ 49,928 752,694
Compensation charge for stock options.................. 105,000 --
(Increase) in accounts receivable...................... (624,448) (189,128)
(Increase) in amounts receivable from related
parties............................................... (1,146,555) --
Decrease (Increase) in prepaid expenses and other
current assets........................................ 17,502 (8,816)
Increase (decrease) in deferred revenue................ 541,351 (12,502)
(Decrease) increase in accounts payable................ (184,750) 1,476
Increase in accrued expenses and other current
liabilities........................................... 50,465 1,054,075
----------- -----------
Net cash used in operating activities.................. (4,475,348) (530,732)
----------- -----------
CASH FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment............. (825,787) (244,381)
Purchase of investments................................ (95,045) --
Purchase of intangibles................................ -- (650,880)
----------- -----------
Net cash used in investing activities.................. (920,832) (895,261)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of preferred stock.................. 9,089,546 1,175,235
Proceeds from sale of intangibles...................... -- 164,000
Net cash provided by financing activities.............. 9,089,546 1,339,235
Effects of exchange rate changes on cash and cash
equivalents........................................... 119,533 10,457
----------- -----------
Net increase (decrease) in cash and cash equivalents... 3,812,899 (76,301)
CASH AND CASH EQUIVALENTS, beginning of year................ 5,818 82,119
----------- -----------
CASH AND CASH EQUIVALENTS, end of year...................... $ 3,818,717 $ 5,818
=========== ===========
</Table>
NON CASH TRANSACTIONS
The Company issued equity for debt of $29,977 (1999: nil) in relation to
services provided by Mark Pierce in his role as the Company's attorney in 2000
and to The Jade Partnership International, Inc. in 1999. The total number of
common shares allocated was 32,703 (1999: 2,708,448).
As disclosed in Note 8, in 1999 the Company gave up common stock and paid
cash to Trutona in exchange for patents, licenses and trademarks. Additionally
in 1999, the Company completed the sale of a license to EcoProgress for cash and
shares in EcoProgress.
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated statements.
F-21
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
DECEMBER 31, 2000 AND 1999
<Table>
<Caption>
2000 1999
----------- -----------
NET REVENUE................................................. $ 925,351 $ 293,582
COST AND EXPENSES:
Cost of revenues.......................................... 543,987 21,458
General and administrative expenses....................... 3,782,402 1,602,322
Realized and unrealized (profit) loss on marketable
securities............................................. (46,369) 752,694
Professional fees......................................... 842,293 334,637
Management fee............................................ 150,000 600,000
----------- -----------
Total cost and expenses................................ 5,272,313 3,311,111
----------- -----------
LOSS FROM OPERATIONS........................................ (4,346,962) (3,017,529)
Share of loss from equity investment...................... (29,517) --
----------- -----------
LOSS BEFORE AND AFTER TAXATION.............................. (4,376,479) (3,017,529)
Dividends payable and accretion of preferred stock........ (2,563,872) (59,415)
----------- -----------
LOSS APPLICABLE TO COMMON SHAREHOLDERS...................... (6,940,351) (3,076,944)
=========== ===========
NET LOSS PER COMMON SHARE -- BASIC AND DILUTED.............. $ (0.17) $ (0.10)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES.................... 40,401,395 30,159,566
=========== ===========
</Table>
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated statements.
F-22
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
DECEMBER 31, 2000 AND 1999
<Table>
<Caption>
COMMON ADDITIONAL
--------------------- PAID-IN
SHARES AMOUNT CAPITAL
---------- ------ ----------
Balance at December 31, 1998 28,484,214.. 28,484 7,186,660
Net loss.................................................. -- -- --
Currency translation adjustment........................... -- -- --
Comprehensive loss...................................... -- -- --
Dividends payable......................................... -- -- --
Conversion of Series A preferred stock to common stock.... 2,935,138 2,935 1,171,120
Accretion of preferred stock to redemption rate at
December 31, 1999....................................... -- -- --
Debt to equity conversion................................. 2,708,448 2,708 755,657
Issuance of common shares................................. 1,875,000 1,875 748,125
---------- ------ ----------
BALANCE at December 31, 1999................................ 36,002,800 36,002 $9,861,562
Net loss.................................................. -- --
Currency translation adjustment........................... -- -- --
Comprehensive loss...................................... -- -- --
Dividends payable......................................... -- -- --
Conversion of Series A preferred stock.................... 97,950 98 58,166
Conversion of Series B preferred stock.................... 9,297,046 9,298 11,630,604
Accretion of Series A and Series B preferred stock to
redemption rate at December 31, 2000.................... -- -- 19,085
Issuance of options....................................... -- -- 105,000
Issuance of common shares................................. 213,745 214 211,953
Issuance of warrants...................................... -- -- 1,328,000
---------- ------ ----------
BALANCE at December 31, 2000 45,611,541.. 45,612 21,195,285
========== ====== ==========
</Table>
<Table>
<Caption>
ACCUMULATED TOTAL
OTHER STOCKHOLDERS'
ACCUMULATED COMPREHENSIVE EQUITY
DEFICIT (LOSS) INCOME (DEFICIT)
----------- ------------- -------------
Balance at December 31, 1998................................ (1,404,297) (8,362) 5,802,485
Net loss.................................................. (3,017,529) -- (3,017,529)
Currency translation adjustment........................... -- 10,457 10,457
-----------
Comprehensive loss...................................... -- -- (3,007,072)
-----------
Dividends payable......................................... (34,000) -- (34,000)
Conversion of Series A preferred stock to common stock.... -- -- 1,174,055
Accretion of preferred stock to redemption rate at
December 31, 1999....................................... (25,415) -- (25,415)
Debt to equity conversion................................. -- -- 758,365
Issuance of common shares................................. -- -- 750,000
----------- ------- -----------
BALANCE at December 31, 1999................................ $(4,481,241) $ 2,095 $ 5,418,418
Net loss.................................................. (4,376,479) -- (4,376,479)
Currency translation adjustment........................... -- 62,828 62,828
-----------
Comprehensive loss...................................... -- -- (4,313,651)
-----------
Dividends payable......................................... (158,425) -- (158,425)
Conversion of Series A preferred stock.................... -- -- 58,264
Conversion of Series B preferred stock.................... -- -- 11,639,902
Accretion of Series A and Series B preferred stock to
redemption rate at December 31, 2000.................... (2,405,447) -- (2,405,447)
Issuance of options....................................... -- -- 105,000
Issuance of common shares................................. -- -- 212,167
Issuance of warrants...................................... -- -- 1,328,000
----------- ------- -----------
BALANCE at December 31, 2000................................ (11,421,592) 64,923 11,884,228
=========== ======= ===========
</Table>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
F-23
UNAUDITED CONSOLIDATED BALANCE SHEETS
FOR THE THIRD QUARTER ENDED SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
US$ US$
CURRENT ASSETS:
Cash and cash equivalents................................. 11,396 5,851
Marketable securities..................................... -- 210,630
Accounts receivable....................................... 101,578 193,388
Amounts due from related parties.......................... 604,715 484,085
Prepaid expenses and other current assets................. 592,035 1,356,187
----------- -----------
Total current assets................................... 1,309,724 2,250,141
PROPERTY, PLANT AND EQUIPMENT, net.......................... 627,621 1,383,673
EQUITY INVESTMENTS, net..................................... 693,420 559,377
INTANGIBLE ASSETS
Trademarks, licenses, patents, net........................ 855,971 958,200
Goodwill.................................................. 4,747,213 4,914,919
----------- -----------
Total assets........................................... 8,233,949 10,066,310
=========== ===========
CURRENT LIABILITIES:
Bank overdraft............................................ 580,265 332,738
Accounts payable.......................................... 1,143,506 749,594
Amounts owed to related parties........................... 534,653 377,219
Accrued expenses and other current liabilities............ 988,813 880,550
Deferred revenue.......................................... 50,000 1,326,900
----------- -----------
Total liabilities...................................... 3,297,237 3,667,001
Redeemable convertible preferred stock, Series A, par value
$1.00..................................................... 4,140 3,900
Redeemable convertible preferred stock, Series B, par value
$2.50..................................................... 262,320 602,970
----------- -----------
266,460 606,870
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value --
75,000,000 shares authorized; 49,028,879 (200: 47,631,527)
shares issued and outstanding.......................... 49,029 47,632
Additional paid-in capital................................ 26,017,424 24,724,050
Accumulated deficit....................................... (21,380,058) (19,103,570)
Accumulated other comprehensive income.................... (16,143) 124,327
Total stockholders' equity............................. 4,670,252 5,792,439
----------- -----------
Total liabilities and stockholders' equity............. 8,233,949 10,066,310
=========== ===========
</Table>
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated balance sheets.
F-24
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTERS ENDED SEPTEMBER 30, 2001 AND 2002
<Table>
<Caption>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001
------------- -------------
NET REVENUE................................................. $ 2,070,756 $ 724,774
COST AND EXPENSES:
Cost of revenues.......................................... 61,315 88,459
Research and development costs............................ 71,749 1,082,412
Professional fees......................................... 394,150 1,068,821
Realized and unrealized loss (profit) on marketable
securities............................................. 134,539 444,060
General and administrative expenses....................... 3,175,527 2,967,405
Total cost and expenses................................ 3,837,280 5,651,157
----------- -----------
LOSS FROM OPERATIONS........................................ (1,766,524) (4,926,383)
Share of loss from equity investment...................... (317,716) (322,443)
----------- -----------
NET Loss.................................................... (2,084,240) (5,248,826)
Dividends payable and accretion of preferred stock........ (192,248) (268,133)
----------- -----------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS.................. (2,276,488) (5,516,959)
=========== ===========
NET LOSS PER COMMON SHARE -- BASIC AND DILUTED.............. $ (0.05) $ (0.12)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING --
BASIC AND DILUTED......................................... 48,207,530 45,657,091
=========== ===========
</Table>
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated statements.
F-25
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation of the
financial condition of registrant have been included.
Note 1. A summary of significant accounting policies is currently on file
with the U.S. Securities and Exchange Commission in registrant's Form 10-KSB,
which is incorporated herein by reference. Certain reclassifications have been
made to the 2001 financial statements to conform to the 2002 presentation.
Note 2. The accompanying unaudited financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all
information and footnotes required by generally accepted accounting principles
in the United States for complete financial statements.
Note 3. In July 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141, Business Combinations (FAS
141) and No. 142, Goodwill and Other Intangible Assets (FAS 142). FAS 141
requires all business combinations initiated after June 30, 2001 to be accounted
for using the purchase method. Under FAS 142, goodwill and intangible assets
with indefinite lives are no longer amortized but are reviewed annually (or more
frequently if impairment indicators arise) for impairment. Separable intangible
assets that are not deemed to have indefinite lives will continue to be
amortized over their useful lives (but with no maximum life). The amortization
provisions of FAS 142 apply to goodwill and intangible assets acquired after
June 30, 2001. With respect to goodwill and intangible assets acquired prior to
July 1, 2001, the Company adopted FAS 142 effective January 1, 2002. The Company
has applied the provisions of FAS 142 in the current periods. The following
table shows the effect of adopting this standard:
<Table>
<Caption>
THREE MONTHS ENDED SEPT 30, NINE MONTHS ENDED SEPT 30,
---------------------------- ---------------------------
2002 2001 2002 2001
----------- -------------- ------------ ------------
Reported net profit (loss).............. $ 474,214 ($ 1,195,018) ($ 2,084,240) ($ 5,248,826)
Goodwill amortization................... (169,544) 169,544 (508,632) 508,632
--------- ------------ ------------ ------------
Adjusted net profit (loss).............. $ 304,670 ($ 1,025,474) ($ 2,592,872) ($ 4,740,194)
========= ============ ============ ============
Reported net profit (loss) per common
share................................. $ 0.01 $ (0.03) $ (0.04) $ (0.12)
Goodwill amortization................... -- -- $ (0.01) $ (0.02)
--------- ------------ ------------ ------------
Adjusted net profit (loss) per common
share................................. $ 0.01 $ (0.03) $ (0.05) $ (0.10)
========= ============ ============ ============
</Table>
In June, 2002, the FASB issued Statement 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS 146 replaces previous
accounting guidance provided by EITF 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)", and requires companies to recognize
costs associated with Exit or disposal activities only when a liability for
these costs are incurred (subsequent to a commitment to a plan) rather than at
the date of a commitment to an exit or disposal plan. Examples of costs covered
by the Statement include lease termination costs and certain employee severance
costs that are associated with a restructuring, discontinued operations, plant
closings, or other initiated after December 31, 2002. Although management
believes the adoption of SFAS 146 will not have a material impact on the
Company's financial statements, adoption of the Statement will result in timing
differences in the recognition and measurement of expenses relating to exit and
disposal activities.
Note 4. During the first and subsequent quarters to date of 2002, the
Company has entered into agreements with various accredited investors for the
issue of 1,294,352 shares common stock and 2,125,500 warrants, exercisable at
various prices for a term of five years, for cash consideration totaling
$792,136. The agreements are pursuant to an offering by the Company for the sale
up to 600 "units" of its equity at a price of $5,000 per unit. Each unit is
comprised of 7,500 shares of unregistered common stock and 6 warrants, each such
warrant expiring on December 31, 2006 and each exercisable for 2,500 common
shares at purchase prices which range from $1.00 up to $10.00. The Company
committed to have declared "effective" the registration of the common shares
issued in this offering by September 30, 2002, or otherwise issue an additional
1/10th unit (to a maximum of 90%) for each full month beyond that date through
such time as declaration of effectiveness has been achieved. At the date of this
report the Company has not registered the shares issued in this offering and
therefore will be issuing an additional 2/10th unit to subscribers in due
course.
F-26
Annex A
AGREEMENT AND PLAN OF MERGER
BIOPROGRESS HOLDINGS, INC.,
A NEVADA CORPORATION,
AND
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.,
A NEVADA CORPORATION
AND
BIOPROGRESS PLC
A COMPANY INCORPORATED UNDER THE LAWS OF ENGLAND AND WALES.
THIS AGREEMENT AND PLAN OF MERGER, dated as of December 20, 2002 (the
"Agreement"), is entered into by and between BIOPROGRESS HOLDINGS, INC., a
Nevada corporation ("Holdings") with its principal address at 165 West Liberty
Street, Suite 210, Reno, Nevada 89501, BIOPROGRESS TECHNOLOGY INTERNATIONAL,
INC., a Nevada corporation ("BPI") with its principal address at 9055 Huntcliff
Trace, Atlanta, Georgia 30350-1935 and BIOPROGRESS PLC, a company organized
under the laws of England and Wales ("Parent") with its registered address at
Hostmoor Avenue, March, Cambs., PE15 0AX, United Kingdom. Holdings and BPI are
sometimes referred to herein as the "Constituent Corporations."
RECITALS
A. Holdings is a corporation duly organized and existing under
the laws of the State of Nevada and has an authorized capital of 100 shares,
$0.001 par value, of common stock ("Holdings Common Stock"). As of the date
hereof 100 shares of Holdings Common Stock were issued and outstanding, all of
which are held by Parent.
B. BPI is a corporation duly organized and existing under the
laws of the State of Nevada and has an authorized capital of 50,000,000 shares,
$0.001 par value, of common stock ("BPI Common Stock") and 5,000,000 shares,
$0.01 par value of Series B Redeemable Convertible Preferred Stock, par value
$.01, which are subdivided into shares which are convertible on or before
December 31, 2002 ("Series B-1 Preferred Stock") and shares which are
convertible on or before December 31, 2003 ("Series B-2 Preferred Stock" and
together with the Series B-1 Preferred Stock, the "Preferred Stock"). As of
December 3, 2002, 49,230,101 shares of BPI Common Stock were issued and
outstanding and 88,000 shares of Series B-1 Preferred Stock were issued and
outstanding and 79,000 shares of Series B-2 Preferred Stock were issued and
outstanding.
C. Parent is a company duly organized and existing under the
laws of England and Wales and has an authorized share capital of Pound Sterling
1,000,850 divided into 100,000,000 ordinary shares, Pound Sterling 0.01 par
value ("Ordinary Shares"), 90,000 4% Redeemable Non-Voting Preference Shares par
value Pound Sterling 0.05 ("Non-Convertible Preference Shares") and 80,000 4%
Convertible Redeemable Non-Voting Preference Shares, par value Pound Sterling
0.05 ("Convertible Preference Shares" together with the Non-Convertible
Preference Shares, the "Preference Shares"). As of the date hereof, 2 Ordinary
Shares and 0 Preference Shares of Parent were issued and outstanding and
4,999,998 Ordinary Shares have been allotted but not yet issued .
D. The Board of Directors of BPI has determined that, for the
purpose of effecting the reincorporation of BPI in the United Kingdom, it is
advisable and in the best interests of BPI and its stockholders that Holdings
merge with and into BPI upon the terms and conditions herein provided.
NOW, THEREFORE, in consideration of the mutual agreements,
representations, warranties and covenants set forth herein, Holdings, BPI and
Parent hereby agree, subject to the terms and conditions hereinafter set forth,
as follows:
A-2
ARTICLE I
MERGER
1.1. Merger. In accordance with the provisions of this Agreement,
and the Nevada Private Corporation Law, Holdings shall be merged with and into
BPI (the "Merger"), the separate existence of Holdings shall cease and BPI shall
survive the Merger and shall continue to be governed by the laws of the State of
Nevada, and BPI shall be, and is herein sometimes referred to as, the "Surviving
Corporation," and the name of the Surviving Corporation shall be "BioProgress
Technology International, Inc."
1.2. Filing and Effectiveness. Consummation of the Merger shall be
subject to the completion of the following actions:
(a) This Agreement and the Merger shall have been adopted and
approved by the stockholders of each Constituent Corporation in accordance with
the requirements of the Nevada Private Corporation Law;
(b) The issue of the Ordinary and Preference Shares to be
issued in connection with the Merger shall be duly authorized and approved by
the board of directors of Parent and the board of directors shall have allotted
such Ordinary and Preference Shares;
(c) The Registration Statement registering the issue of the
Ordinary Shares in connection with the Merger has become effective under the
Securities Act of 1933, as amended;
(d) All of the conditions precedent to the consummation of
the Merger specified in this Agreement shall have been satisfied or duly waived
by the party entitled to the satisfaction thereof;
(e) Parent and BPI shall have received both a clearance
letter from the United Kingdom Inland Revenue confirming that section 137 of the
Taxation of Chargeable Gains Act 1992 should not apply to the Merger and a
clearance letter from the United Kingdom Inland Revenue under section 707 of the
Income and Corporation Taxes Act 1988 that the Merger does not create any UK tax
advantages which should be cancelled.
(f) Any required notice or waiting period before the Merger
may be consummated, pursuant to Regulation 14A of the Securities Exchange Act of
1934, as amended, and all regulations promulgated thereunder, shall have
expired; and
(g) Executed Articles of Merger or an executed counterpart of
this Agreement meeting the requirements of the Nevada Private Corporation Law
shall have been filed with the Secretary of State of the State of Nevada.
The date and time when the Merger shall become effective in
accordance with the Nevada Private Corporation Law is herein called the
"Effective Date of the Merger."
1.3. Effect of the Merger. Upon the Effective Date of the Merger,
the separate existence of Holdings shall cease and BPI, as the Surviving
Corporation, (i) shall continue to
A-3
possess all of its assets, rights, powers and property as constituted
immediately prior to the Effective Date of the Merger, (ii) shall be subject to
all actions previously taken by its and Holdings' Boards of Directors, (iii)
shall succeed, without other transfer, to all of the assets, rights, powers and
property of Holdings in the manner as more fully set forth in Section 92A.250 of
the Nevada Revised Statues, (iv) shall continue to be subject to all of its
debts, liabilities and obligations as constituted immediately prior to the
Effective Date of the Merger, and (v) shall succeed, without other transfer, to
all of the debts, liabilities and obligations of Holdings in the same manner as
if BPI had itself incurred them, all as more fully provided under the applicable
provisions of the Nevada Revised Statues.
ARTICLE II
CHARTER DOCUMENTS, DIRECTORS AND OFFICERS
2.1. Articles of Incorporation. The Articles of Incorporation of
BPI as in effect immediately prior to the Effective Date of the Merger shall
continue in full force and effect as the Articles of Incorporation of the
Surviving Corporation until duly amended in accordance with the provisions
thereof and applicable law.
2.2. Bylaws. The Bylaws of Holdings as in effect immediately prior
to the Effective Date of the Merger shall continue in full force and effect as
the Bylaws of the Surviving Corporation until duly amended in accordance with
the provisions thereof and applicable law.
2.3. Directors and Officers. The directors and officers of
Holdings immediately prior to the Effective Date of the Merger shall become the
directors and officers of the Surviving Corporation until their respective
successors shall have been duly elected and qualified or until as otherwise
provided by law, or by the Certificate of Incorporation or the Bylaws of the
Surviving Corporation.
ARTICLE III
MANNER OF CONVERSION OF STOCK
3.1. BPI Common Stock. Upon the Effective Date of the Merger, each
share of BPI Common Stock issued and outstanding immediately prior thereto
shall, by virtue of the Merger and without any action by the Constituent
Corporations, the holder of such shares or any other person, be changed and
converted into one fully paid Ordinary Share of Parent.
3.2. Series B-1 Preferred Stock. Upon the Effective Date of the
Merger, each share of Series B-1 Preferred Stock issued and outstanding
immediately prior thereto shall, by virtue of the Merger and without any action
by the Constituent Corporations, the holder of such shares or any other person,
be changed and converted into one fully paid Non-Convertible Preference Share of
Parent.
3.3. Series B-2 Preferred Stock. Upon the Effective Date of the
Merger, each share of Series B-2 Preferred Stock issued and outstanding
immediately prior thereto shall, by virtue of the Merger and without any action
by the Constituent Corporations, the holder of such
A-4
shares or any other person, be changed and converted into one fully paid
Convertible Preference Share of Parent.
3.4. BPI Options and Other Outstanding Stock-Based Grants.
(a) Upon the Effective Date of the Merger, each outstanding
and unexercised option, warrant or other right to purchase or security
convertible into BPI Common Stock shall become an option, warrant or right to
purchase or a security convertible into Ordinary Shares of Parent on the basis
of one Ordinary Share of Parent for each share of BPI Common Stock issuable
pursuant to such option, warrant, stock purchase right or convertible security,
on the same terms and conditions and at an exercise price per share equal to the
exercise price applicable to any such BPI option, warrant, stock purchase right
or convertible security on the Effective Date of the Merger.
(b) Upon the Effective Date of the Merger, Parent shall
assume and continue BPI's Stock Option Plan and shall reserve a number of
Ordinary Shares of Parent for issuance under those plans equal to the number of
shares of BPI Common Stock so reserved immediately prior to the Effective Date
of the Merger. The execution of this Agreement shall constitute an amendment to
those plans to reflect the Parent as the corporation referenced in such employee
benefit plans notwithstanding the actual references therein to BPI.
(c) A number of Ordinary Shares of Parent shall also be
reserved for issuance upon the exercise of any other options, warrants, stock
purchase rights and convertible securities equal to the number of shares of BPI
Common Stock so reserved immediately prior to the Effective Date of the Merger.
3.5. BPI Benefit Plans. Upon the Effective Date of the Merger, the
Surviving Corporation shall assume and continue all non-stock related employee
benefit plans of BPI. The execution of this Agreement shall constitute an
amendment to each of the employee benefit plans to reflect the Surviving
Corporation as the corporation referenced in such employee benefit plans
notwithstanding the actual references therein to BPI.
3.6. Holdings Common Stock. Upon the Effective Date of the Merger,
each share of Holdings Common Stock issued and outstanding immediately prior
thereto shall, by virtue of the Merger and without any action by Holdings, be
converted into one share of BPI Common Stock.
3.7. Exchange of Share Certificates. As of the Effective Date of
the Merger, the stockholders of both the BPI Common Stock and Preferred Stock
before the Effective Date of the Merger will automatically cease to be holders
of BPI Common Stock and Preferred Stock and shall cease to have any rights as
stockholders of BPI and will automatically become the owners of Ordinary Shares,
Non-Convertible Preference Shares or Convertible Preference Shares, as
applicable. Share certificates representing BPI Common Stock, Series B-1
Preferred Stock or Series B-2 Preferred Stock, as of the Effective Date of the
Merger, will be deemed to represent an equivalent number of Ordinary Shares,
Non-Convertible Preference Shares or Convertible Preference Shares,
respectively.
A-5
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.1. Representations and Warranties of BPI. BPI hereby represents
and warrants that it:
(a) is a corporation duly organized, validly existing and in
good standing under the laws of the State of Nevada, and has all the requisite
power and authority to own, lease and operate its properties and assets and to
carry on its business as it is now being conducted;
(b) is duly qualified to do business as a foreign person, and
is in good standing, in each jurisdiction where the character of its properties
or the nature of its activities make such qualification necessary;
(c) is not in violation of any provisions of its articles of
incorporation or bylaws; and
(d) has full corporate power and authority to execute and
deliver this Agreement and consummate the Merger and the other transactions
contemplated by this Agreement.
4.2. Representations and Warranties of Holdings. Holdings hereby
represents and warrants that it:
(a) is a corporation duly organized, validly existing and in
good standing under the laws of the State of Nevada, and has all the requisite
power and authority to own, lease and operate its properties and assets and to
carry on its business as it is now being conducted;
(b) is duly qualified to do business as a foreign person, and
is in good standing, in each jurisdiction where the character of its properties
or the nature of its activities make such qualification necessary;
(c) is not in violation of any provisions of its articles of
incorporation or bylaws; and
(d) has full corporate power and authority to execute and
deliver this Agreement and consummate the Merger and the other transactions
contemplated by this Agreement.
4.3. Representations and Warranties of Parent. Parent hereby
represents and warrants that:
(a) it is a corporation duly organized and validly existing
under the laws of England and Wales, and has all the requisite corporate power
and authority to own, lease and operate its properties and assets and to carry
on its business as it is now being conducted;
A-6
(b) it is duly qualified to do business as a foreign person,
and is in good standing, in each jurisdiction where the character of its
properties or the nature of its activities make such qualification necessary;
(c) it is not in violation of any provisions of its
certificate of incorporation or memorandum and articles of association;
(d) it has full corporate power and authority to execute and
deliver this Agreement and consummate the Merger and the other transactions
contemplated by this Agreement; and
(e) on the Effective Date of the Merger, the Ordinary Shares
and Preference Shares to be issued in connection with the Merger will be duly
authorized and validly issued and allotted.
ARTICLE V
TAX CONSEQUENCES
5.1 It is the intent of the Constituent Corporations that (i) the
Merger will constitute a transfer of the stock of BPI to Parent in a transaction
described in section 351(a) of the Internal Revenue Code of 1986, as amended
(the "Code"), subject to the limitations set forth in sections 351(g) and 367(a)
of the Code and Treasury Regulation Section 1.367(a)-3(c) applicable to
shareholders that are subject to U.S. tax as citizens or residents. The
Constituent Corporations shall treat and report the transactions consistently
with this intention for all purposes; provided, however, that the Constituent
Corporations intend that BPI and its counsel, and Holdings and its counsel, and
Parent and its counsel, shall have no liability to the stockholders of either of
the Constituent Corporations if, for any reason, the Merger does not constitute
a transfer of stock in a transaction described in section 351(a) of the Code.
ARTICLE VI
GENERAL
6.1. Entire Agreement; Modification. This Agreement and the
documents referred to herein are intended by the parties as a final expression
of their agreement with respect to the subject matter hereof, and are intended
as a complete and exclusive statement of the terms and conditions of that
agreement, and there are no other agreements or understandings, written or oral,
among the parties, relating to the subject matter hereof. This Agreement
supercedes all prior agreements and understandings, written or oral, among the
parties with respect to the subject matter hereof.
6.2. Further Assurances. From time to time, as and when required
by Parent or by its successors or assigns, there shall be executed and delivered
on behalf of BPI such deeds and other instruments, and there shall be taken or
caused to be taken by Parent and BPI such further and other actions, as shall be
appropriate or necessary in order to vest or perfect in or conform of record or
otherwise by Parent the title to and possession of all the property, interests,
assets, rights, privileges, immunities, powers, franchises and authority of BPI
and otherwise to carry out the purposes of this Agreement, and the officers and
directors of Parent are fully
A-7
authorized in the name and on behalf of BPI or otherwise to take any and all
such action and to execute and deliver any and all such deeds and other
instruments.
6.3. Covenants of Holdings. Holdings covenants and agrees that it
will, on or before the Effective Date of the Merger take such other actions as
may be required by Nevada law to accomplish the Merger, including appointing an
agent for service of process in the State of Nevada if and to the extent
required under provisions of Nevada law.
6.4. Abandonment. At any time before the filing of the Articles of
Merger with the Secretary of State of the State of Nevada, this Agreement may be
terminated and the Merger may be abandoned for any reason whatsoever by the
Board of Directors of either BPI or Parent, or both, notwithstanding the
approval of this Agreement by the stockholders of BPI or the sole stockholder of
Holdings.
6.5. Amendment. The Boards of Directors of the Constituent
Corporations and Parent may amend this Agreement at any time prior to the filing
of Articles of Merger with the Secretary of State of the State of Nevada,
provided that an amendment made subsequent to the adoption and approval of this
Agreement and the Merger by the stockholders of BPI shall not: (1) alter or
change the amount or kind of shares, securities, cash, property and/or rights to
be received in exchange for or on conversion of all or any of the shares of BPI,
or (2) alter or change any of the terms and conditions of this Agreement if such
alteration or change would materially adversely affect the holders of any shares
of BPI.
6.6. Registered Office. The registered office of the Surviving
Corporation in the State of Nevada is located at 9055 Huntcliff Trace, Atlanta,
Georgia 30350-1735.
6.7. Agreement. Executed copies of this Agreement will be on file
at the principal place of business of the Surviving Corporation at 9055
Huntcliff Trace, Atlanta, Georgia 30350-1735, and copies thereof will be
furnished to any stockholder and to any creditor of a Constituent Corporation,
upon request and without cost.
6.8. Governing Law. This Agreement shall in all respects be
construed, interpreted and enforced in accordance with and governed by the laws
of the State of Nevada and, so far as applicable, the merger provisions of the
Nevada Private Corporation Law.
6.9. Counterparts. In order to facilitate the filing and recording
of this Agreement, the same may be executed in any number of counterparts, each
of which shall be deemed to be an original and all of which together shall
constitute one and the same instrument.
A-8
IN WITNESS WHEREOF, this Agreement is hereby executed on behalf of
each of the parties hereto and attested by their respective officers thereunto
duly authorized.
BIOPROGRESS HOLDINGS, INC.,
a Nevada corporation
By: /s/ Carey L. Bottom
----------------------------------------------
Name: Carey L. Bottom
Title: President
ATTEST:
By: /s/ Christine L. Bottom
----------------------------------------------
Name: Christine L. Bottom
Title: Company Secretary
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.,
a Nevada corporation
By: /s/ Barry Muncaster
----------------------------------------------
Name: Barry Muncaster
Title: President
ATTEST:
By: /s/ Elizabeth Edwards
----------------------------------------------
Name: Elizabeth Edwards
Title: Company Secretary
A-9
BIOPROGRESS PLC
a company incorporated in England and Wales
By: /s/ Barry Muncaster
----------------------------------------------
Name: Barry Muncaster
Title: Chief Executive Officer
ATTEST:
By: /s/ Elizabeth Edwards
----------------------------------------------
Name: Elizabeth Edwards
Title: Company Secretary
A-9
Annex B
PLEASE RETURN THE COMPLETED CONSENT TO:
BioProgress Technology International, Inc.,
Hostmoor Avenue, March, Cambridgeshire, PE15 0AX
United Kingdom
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
WRITTEN CONSENT OF STOCKHOLDERS
THE UNDERSIGNED, being the holders of the majority of issued and
outstanding capital stock of BioProgress Technology International, Inc., a
Nevada corporation (the "Company"), hereby consent to the adoption of the
following resolutions attached hereto as Exhibit A, without a meeting in
accordance with the procedures established in Section 78.320(2) of the Nevada
General Corporation Law and hereby consent to the taking of the actions referred
to in such resolutions and agree that such actions and resolutions shall have
the same force and effect as though duly taken and adopted at a meeting of the
stockholders of the Company duly called and legally held.
IN WITNESS WHEREOF, the undersigned have executed this Written Consent
this ___ day of December, 2002.
EXHIBIT A
RESOLUTIONS ADOPTED BY THE
STOCKHOLDERS OF BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
BY WRITTEN CONSENT ON DECEMBER __, 2002
MERGER OF BIOPROGRESS HOLDINGS, INC. INTO THE COMPANY
RESOLVED, that the merger of BioProgress Holdings, Inc., a Nevada
Corporation ("Holdings"), with and into the Company, pursuant to the terms and
conditions set forth in the Agreement and Plan of Merger (the "Plan"), dated as
of December 20, 2002, by and among the Company and Holdings, is hereby
authorized and approved;
RESOLVED, that the Plan is hereby adopted and approved in the form
attached hereto as Exhibit A.
RESOLVED, that the merger of Holdings with and into the Company, with
the Company being the surviving corporation and assuming all of the obligations
of Holdings according to the terms set forth in the form of Articles of Merger
attached hereto as Exhibit B, is hereby approved;
RESOLVED, that in accordance with the Plan, the officers of the
Company are hereby authorized, on behalf of the Company, to execute and file the
Articles of Merger with the Secretary of State of the State of Nevada;
GENERAL AUTHORIZATION TO CARRY OUT RESOLUTIONS
RESOLVED, that, with respect to the foregoing resolution, any one or
more of the officers of the Company are, and each of them hereby is,
authorized, empowered and directed on behalf of the Company, in the
Company's name and on its behalf, to (i) make, enter into, execute,
deliver, file and record any and all agreements, consents and other
documents and instruments, (ii) pay or cause to be paid any and all
expenses and fees and disburse such other funds of the Company and (iii)
take any and all such other actions as any such officer or officers may
determine in his or their sole discretion to be necessary or advisable to
carry out the terms, provisions, purposes or intent of the foregoing
resolution and the transactions contemplated thereby, the taking of any
such action to constitute conclusive evidence of the exercise of such
discretionary authority.
ANNEX C
PAYER'S NAME: THE BANK OF NEW YORK
- --------------------------------------------------------------------------------
<Table>
SUBSTITUTE PART 1 -- PLEASE PROVIDE YOUR
FORM W-9 TIN IN THE BOX AT RIGHT AND Social Security Number or
DEPARTMENT OF THE TREASURY CERTIFY BY SIGNING AND DATING ------------------------------
INTERNAL REVENUE SERVICE BELOW Employer Identification Number
- ----------------------------------------------------------------------------------------------
CERTIFICATION -- UNDER PENALTIES OF PERJURY, I CERTIFY THAT:
PAYER'S REQUEST FOR TAXPAYER (1) The number shown on this form is my correct Taxpayer
IDENTIFICATION NUMBER Identification Number (or I am waiting for a number to be
("TIN") issued to me) and
(2) I am not subject to backup
withholding either because
(a) I am exempt from
backup withholding; or (b)
I have not been notified
by the Internal revenue
Service (the "IRS") that I
am subject to backup
withholding as a result of
failure to report all
interest or dividends, or
(c) the IRS has notified
me that I am no longer
subject to backup
withholding.
- ----------------------------------------------------------------------------------------------
PART II -- AWAITING TIN "PART III -- EXEMPT"
CERTIFICATION INSTRUCTIONS -- You must cross out item (2)
above if you have been notified by the IRS that you are
subject to backup withholding because of under-reporting
interest or dividends on your tax return. However, if after
being notified by the IRS that you were subject to backup
withholding you receive another notification from the IRS
stating that you are no longer subject to backup withholding,
do not cross out item (2). If you are exempt from backup
withholding check the box in Part III.
Signature: Date:
--------------------------- ------------------------------
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
PAYER'S REQUEST FOR TAXPAYER IDENTIFICATION NUMBER (TIN)
Please file out your name and address below:
- ------------------------------------------------------------------------------------------
Name
- ------------------------------------------------------------------------------------------
Address (Number and street)
- ------------------------------------------------------------------------------------------
City, State and Zip Code
- ----------------------------------------------------------------------------------------------
NOTE: PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER OF SUBSTITUTE FORM W-9. YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU
CHECKED THE BOX IN PART II OF SUBSTITUTE FORM W-9.
- ----------------------------------------------------------------------------------------------
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has not been issued
to me, and either (a) I have mailed or delivered an application to receive a taxpayer
identification number to the appropriate Internal Revenue Service Center or Social Security
Administration Office or (b) I intend to mail or deliver an application in the near future. I
understand that if I do not provide a taxpayer identification number to the payer by the time
of payment, 31% of all reportable payments made to me will be withheld until I provide a
number and that, if I do not provide my taxpayer identification number within 60 days, such
retained amounts shall be remitted to the IRS as backup withholding.
Signature Date
- -------------------------------------------------------------- ------------------------------
- ----------------------------------------------------------------------------------------------
</Table>
REGISTERED OFFICE AND PRINCIPAL PLACE OF BUSINESS OF THE COMPANY
BIOPROGRESS PLC
Hostmoor Avenue
March, Cambridgeshire,
P15 0AX
United Kingdom
<Table>
FINANCIAL ADVISOR TO THE COMPANY AUDITOR TO THE COMPANY
COLLINS STEWART LIMITED GRANT THORNTON
9(th) Floor, 88 Wood Street 8, West Walk
London, EC2V 7QR Leicester Leicestershire
United Kingdom LE1 7NH
United Kingdom
</Table>
LEGAL ADVISORS TO THE COMPANY
As to the laws of the United States
and the United Kingdom
DECHERT
2 Serjeants' Inn
London, EC4Y 1LT.
United Kingdom
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Article 135 of the Articles of Association of BioProgress plc provides that
subject to provisions of the Companies Act 1985 (as amended) but without
prejudice to any indemnity to which a director may otherwise be entitled, every
director or other officer or auditor of the Company shall be entitled to be
indemnified out of the assets of the Company against all costs, charges, losses,
expenses and liabilities incurred by him in the execution of his duties or in
relation thereto, including any liability incurred by him in defending any
proceedings, whether civil or criminal, in which judgement is given in his
favour or in which he is acquitted or the proceedings are otherwise disposed of
without any finding or admission of any material breach of duty on his part or
in connection with any application in which relief is granted to him by the
court from liability for negligence, default, breach or duty or breach of trust
in relation to the affairs of the Company. Article to provide that the directors
may purchase and maintain insurance against any liability falling upon its
directors or other officers or auditors which arises out of their respective
duties to the Company or in relation to its affairs.
Section 310 of the Companies Act 1985 (as amended by Section 137(i) of the
Companies Act 1989) provides as follows:
"310. PROVISIONS EXEMPTING OFFICERS AND AUDITORS FROM LIABILITY
(1) This section applies to any provision, whether contained in a
company's articles or in any contract with the company or
otherwise, for exempting any officer of the company or any person
(whether an officer or not) employed by the company as auditor
from, or indemnifying him against, any liability which by virtue of
any rule of law would otherwise attach to him in respect of any
negligence, default, breach or duty or breach of trust of which he
may be guilty in relation to the company.
(2) Except as provided by the following subsection, any such provision
is void.
(3) This section does not prevent a company --
(a) from purchasing and maintaining for any such officer or
auditor insurance against any such liability, or
(b) from indemnifying any such officer or auditor against any
liability incurred by him --
(i) in defending any proceedings (whether civil or
criminal) in which judgment is given in his favour or
he is acquitted, or
(ii) in connection with any application under section 144(3)
or (4) (acquisition of shares by innocent nominee) or
section 727 (general power to grant relief in case of
honest and reasonable conduct) in which relief is
granted to him by the court."
Section 727 of the Companies Act 1985 provides as follows:
"727. POWER OF COURT TO GRANT RELIEF IN CERTAIN CASES
(1) If in any proceedings for negligence, default, breach of duty or
breach of trust against an officer of a company or a person
employed by a company as auditor (whether he is or is not an
officer of the company) it appears to the court hearing the case
that that officer or person is or may be liable in respect of the
negligence, default, breach of duty or breach of trust, but that he
has acted honestly and reasonably, and that having regard to all
the circumstances of the case (including those connected with his
appointment) he ought fairly to be excused for the negligence,
default, breach of duty or breach of trust, that court may relieve
him, either wholly or partly, from his liability on such terms as
it thinks fit.
II-1
(2) If any such officer or person as above-mentioned has reason to
apprehend that any claim will or might be made against him in
respect of any negligence, default, breach of duty or breach of
trust, he may apply to the court for relief; and the court on the
application has the same power to relieve him as under this section
it would have had been a court before which proceedings against
that person for negligence, default, breach of duty or breach of
trust had been brought.
(3) Where a case to which subsection (1) applies is being tried be a
judge with a jury, the judge, after hearing the evidence, may, if
he is satisfied that the defendant or defender ought in pursuance
of that subsection to be relieved either in whole or in part from
the liability sought to be enforced against him, withdraw the case
in whole or in part from the jury and forthwith direct judgement to
be entered for the defendant or defender on such terms as to costs
or otherwise as the judge may think proper."
To the extent permitted by English law, PLC will indemnify and hold
harmless its respective directors, officers and representatives who sign the
Registration Statement from and against certain civil liabilities based on
information supplied by PLC for use herein.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<Table>
3.1 Certificate of Incorporation(9)
3.2 Memorandum and Articles of Association(9)
3.3 Articles of Merger(11)
4.1 Specimen Share certificate.(11)
5.1 Opinion of Dechert(11)
10.1 Reorganization Agreement between the Company and BioProgress
Technology.(4)
10.2 Acquisition Agreement -- DHA Nutrition(5)
10.3 Acquisition Agreement -- BioProgress Limited (UK)(5)
10.4 Amendment to Acquisition Agreement -- BioProgess Limited
(UK)(5)
10.5 Employment Agreement -- Barry J. Muncaster(5)
10.6 Employment Agreement -- Malcolm D. Brown(5)
10.7 Employment Agreement -- Edward I. Nowak(5)
10.8 Employment Agreement -- Graham Hind(5)
10.9 Professional Services Agreement -- The Jade Partnership
International, Inc.(5)
10.10 Professional Services Agreement -- Company and Ormiston-Gore
Securities Limited(5)
10.11 Professional Services Agreement -- BTL and Ormiston-Gore
Securities Limited(5)
10.12 TruTona Purchase Agreement(5)
10.13 Exclusive Evaluation Agreement, dated February 18, 2000
between the Company and the Fortune 500 company(6)
10.14 Technology Collaboration Agreement for the Development of
Non-Gelatin Paintballs, dated March 7, 2000 between the
Company and JT USA(6)
10.15 Agreement for Supply of Prototype Machine, dated July 24,
2000 between the Company and Peter Black(7)
10.16 Machine Supply Agreement, dated July 24, 2000 between the
Company and Peter Black(7)
10.17 Patent License Agreement, dated July 24, 2000 between the
Company and Peter Black(7)
10.18 Guarantee by BTL in favor of Peter Black, dated July 24,
2000(7)
10.19 Option Agreement -- Barry J. Muncaster(7)
10.20 Option Agreement -- Edward Nowak(7)
10.21 Option Agreement Gregory L. Bowers(7)
</Table>
II-2
<Table>
10.22 Option Agreement -- Graham R.M. Hind(7)
10.23 Option Agreement -- James T.C. Longley(7)
10.24 Option Agreement -- Larry C. Shattles(7)
10.25 Option Agreement -- Malcolm D. Brown(7)
10.26 Stock Purchase Agreement -- Fusion Capital(7)
10.27 Premises lease -- Hostmoor property(8)
10.28 Agreement to lease -- Hostmoor property(8)
10.29 Agreement for Supply of Prototype Machine, dated July 10th,
2001 between the Company and Farmasierra, S.A.(8)
10.30 Machine Supply Agreement, dated July 10th, 2001 between the
Company and Farmasierra, S.A.(8)
10.31 Patent License Agreement, dated July 10th, 2001 between the
Company and Farmasierra, S.A.(8)
10.32 Film Supply Agreement, dated July 10th, 2001 between the
Company and Farmasierra, S.A.(8)
10.33 Consultant Supply Agreement, dated July 10th, 2001 between
the Company and Farmasierra, S.A.(8)
10.34 2002 Common Stock Offering of up to 600 units, including
warrants(8)
10.35 Product Development Agreement, dated November 26, 2001
between the Company and Boots(11)
10.36 Product Development Agreement (Stage 1), dated April 19,
2002 between the Company The Boots Company plc(11)
10.37 Share Option Scheme(11)
99.1 Letter to commission pursuant to temporary Note 3T(11)
99.2 Letter to Arthur Anderson LLP(9)
99.3 Agreement and Plan of Merger(10)
99.4 Form of Written Consent(10)
99.5 Substitute W-9(10)
99.6 Press Release filed on Form 8-K
- -----
(1) Filed as an exhibit to the Company's Registration Statement
on Form 10-SB dated August 23,1994, or October 21, 1994
(Registration No. 0-24736).
(2) Filed as an exhibit to the Company's Form 10-KSB for the
year ended December 31, 1995.
(3) Filed as an exhibit to the Company's Form 10-KSB for the
year ended December 31, 1996.
(4) Filed as an exhibit to the Company's Form 10-KSB for the
year ended December 31, 1997.
(5) Filed as an exhibit to the Company's Form 10-KSB for the
year ended December 31, 1998.
(6) Filed as an exhibit to the Company's Form 10-KSB for the
year ended December 31, 1999.
(7) Filed as an exhibit to the Company's Form 10-KSB for the
year ended December 31, 2000.
(8) Filed as an exhibit to the Company's Form 10-KSB for the
year ended December 31, 2001.
(9) Filed herewith
(10) Filed as an Annex to the Prospectus.
(11) To be filed as an amendment.
</Table>
(b) Financial Statement Schedules
[None.]
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
II-3
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate,
represent a fundamental change in the information set
forth in the registration statement. Notwithstanding
the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of
securities offered would not exceed that which was
registered) and any deviation from the low or high end
of the estimated maximum offering range may be
reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of
Registration Fee" table in the effective registration
statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in
the registration statement or any material change to
such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(4) To file a post-effective amendment to the registration
statement to include any financial statements required by Item
8.A. of Form 20-F at the start of any delayed offering or
throughout a continuous offering.
(b) The undersigned registrant hereby undertakes to supply
by means of a post-effective amendment all information
concerning a transaction and the company being acquired
involved therein, that was not the subject of and
included in the registration statement when it became
effective.
(h) Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to
directors, officers or persons controlling the
registrant pursuant to the foregoing, the registrant has
been informed that in the opinion of the Securities and
Exchange Commission such indemnification is against
public policy as expressed in the Act and is therefore
unenforceable. In the event that a claim for
indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid
by a director, officer or controlling person of the
registrant in the successful defense of any action, suit
or proceeding) is asserted by such director, officer or
controlling person in connection with the securities
being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification
by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such
issue.
II-4
SIGNATURES
Pursuant to the requirements of the US Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form F-4 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of London, England on December 20, 2002.
BIOPROGRESS PLC
By: /s/ BARRY J. MUNCASTER
--------------------------------------
Pursuant to the requirements of the US Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities indicated on December 20, 2002.
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints and, severally, such person's true and lawful
attorney-in-fact and agent, with full power of substitution and revocation, for
such person and in such person's name, place and stead, in any and all
capacities to sign any and all amendments (including post-effective amendments)
to this Registration Statement and any registration statements filed pursuant to
Rule 462 promulgated under the US Securities Act of 1933 and to file the same
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as such
person might or could do in person, hereby ratifying and confirming all that
said attorney-in-fact and agent or his substitute or substitutes, may lawfully
do or cause to be done by virtue thereof.
<Table>
<Caption>
SIGNATURE TITLE
--------- -----
/s/ BARRY J. MUNCASTER Chief Executive Officer (principal executive
- --------------------------------------------- officer) and Director
Barry J. Muncaster
/s/ ELIZABETH EDWARDS Chief Financial Officer (principal financial
- --------------------------------------------- and accounting officer)
Elizabeth Edwards
/s/ LARRY SHATTLES Director
- ---------------------------------------------
Larry Shattles
/s/ CAREY BOTTOM Director
- ---------------------------------------------
Carey Bottom
/s/ MALCOLM DAVID BROWN Director
- ---------------------------------------------
Malcolm David Brown
/s/ ROBERT GRAHAM HIND Director
- ---------------------------------------------
Robert Graham Hind
</Table>
II-5
SIGNATURE OF AUTHORIZED REPRESENTATIVE
Pursuant to the US Securities Act of 1933, as amended, the undersigned, the
duly authorized representative in the United States of America has signed this
Registration Statement in the United Kindom, on December 20, 2002.
BIOPROGRESS TECHNOLOGY
INTERNATIONAL, INC.
By:
--------------------------------------
Name: /s/ BARRY J. MUNCASTER
Title: President
II-6