AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 19, 2003.
REGISTRATION NO. 333-102045
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
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 TECHNOLOGY 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)..... 49,484,681 Not Applicable $21,002,480 $1,932.23
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</Table>
(1) Based on the product of (a) 49,484,681 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:
<Table>
[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
</Table>
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 PROXY STATEMENT/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 MARCH 19, 2003
PRELIMINARY PROXY STATEMENT/PROSPECTUS
BIOPROGRESS PLC
(INCORPORATED UNDER THE LAWS OF ENGLAND AND WALES)
49,484,681 ORDINARY SHARES
This proxy statement/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 March 31, 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
certain large shareholders (and their affiliates), assuming no exercise of their
outstanding options, hold approximately 33.6% 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. As of the date
of this proxy statement/prospectus there are 49,484,681 shares of BioProgress
Technology International common stock outstanding and entitled to vote.
We will issue a total of 49,484,681 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 6 OF THIS
PROXY STATEMENT/PROSPECTUS.
THIS PROXY STATEMENT/PROSPECTUS DOES NOT COVER ANY RESALES OF OUR COMMON
STOCK RECEIVED BY BIOPROGRESS TECHNOLOGY INTERNATIONAL STOCKHOLDERS. NO PERSON
IS AUTHORIZED TO MAKE ANY USE OF THIS PROXY STATEMENT/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 PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENCE.
THE DATE OF THIS PRELIMINARY PROXY STATEMENT/PROSPECTUS IS MARCH 19, 2003
AND WILL BE MAILED TO THE SHAREHOLDERS OF BIOPROGRESS TECHNOLOGY INTERNATIONAL
ON MARCH , 2003.
This Proxy Statement/Prospectus does not include all of the information
contained in the registration statement of which it is a part. This information
is available on written or oral request. We will provide without charge to each
person to whom this proxy statement/prospectus is delivered, upon written or
oral request, a copy of this information. Requests for such information should
be directed to Elizabeth Edwards, Company Secretary, BioProgress PLC, Hostmoor
Avenue, March, Cambridgeshire, PE15 0AX, United Kingdom.+44.135.465.5674.
TO OBTAIN TIMELY DELIVERY OF ANY REQUESTED COPIES, PLEASE WRITE OR
TELEPHONE NO LATER THAN MARCH 21, 2003.
TABLE OF CONTENTS
<Table>
SUMMARY..................................................... 1
The Companies............................................. 1
The Reincorporation....................................... 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
Conditions to the Reincorporation......................... 3
Regulatory Requirements................................... 3
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
Restrictions on U.S. Persons Holding Ordinary Shares...... 3
Dissenters' Rights........................................ 3
Structure Chart........................................... 4
RISK FACTORS................................................ 6
FORWARD LOOKING STATEMENTS.................................. 13
SOLICITATION OF WRITTEN CONSENT............................. 14
WHERE YOU CAN FIND MORE INFORMATION......................... 14
THE REINCORPORATION......................................... 15
General................................................... 15
Details of the Reincorporation............................ 15
Background and Reasons for the Reincorporation............ 16
The Reincorporation Plan.................................. 16
Conditions to the Merger.................................. 16
Dissenters' Rights........................................ 17
Effective Time............................................ 17
United States Federal Securities Laws Consequences........ 17
Exchange of Share Certificates............................ 17
Description of the CREST System........................... 18
Accounting Treatment...................................... 18
</Table>
i
<Table>
Share Quote............................................... 18
MATERIAL TAX CONSEQUENCES................................... 18
United States Federal Income Tax Consequences............. 18
United States Federal Income Tax Consequences to U.S.
Holders of Current Shares.............................. 19
United States Federal Income Tax Consequences to Non-U.S.
Holders of Current Shares.............................. 20
United States Federal Income Tax Consequences for
BioProgress Technology Limited......................... 21
United Kingdom Tax Consequences........................... 21
DESCRIPTION OF BIOPROGRESS PLC ORDINARY SHARES.............. 24
DESCRIPTION OF BIOPROGRESS PLC PREFERENCE SHARES............ 27
COMPARISON OF STOCKHOLDER RIGHTS............................ 29
BUSINESS.................................................... 40
History................................................... 40
Overview of our Business.................................. 41
Description of Products................................... 43
Clients................................................... 46
Sales and Marketing....................................... 47
Industry Background....................................... 47
Competition............................................... 48
Distribution Methods...................................... 48
Suppliers................................................. 49
Intellectual Property rights.............................. 49
Research and Development.................................. 49
Government Regulation..................................... 50
Employees................................................. 52
Properties................................................ 53
Legal Proceedings......................................... 53
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.... 53
Dividend Policy........................................... 54
Preferred Stock........................................... 54
STOCK OWNERSHIP TABLE....................................... 55
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA.............. 55
CAPITALISATION AND INDEBTEDNESS STATEMENT................... 56
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 57
MANAGEMENT.................................................. 67
AUDIT AND COMPENSATION COMMITTEE............................ 70
DIRECTOR AND EXECUTIVE COMPENSATION......................... 70
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 73
DESCRIPTION OF BIOPROGRESS SHARE OPTION SCHEME.............. 74
LEGAL MATTERS............................................... 76
EXPERTS..................................................... 76
ENFORCEMENT OF CIVIL LIABILITIES AGAINST FOREIGN PERSONS.... 76
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................. F-1
FINANCIAL STATEMENTS........................................ F-2
ANNEX A: Agreement and Plan of Manager...................... A-1
ANNEX B: Form of Written Consent............................ B-1
ANNEX C: Substitute W-9..................................... C-1
</Table>
ii
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.
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" below.
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. The ingestible form can be used for
ingredients such as vitamin, herbal and mineral supplements and as oral delivery
systems for drugs, and the non-ingestible form can be used for paintballs and
toiletries (such as bath and aromatherapy oils). We aim to provide a cost
effective and animal-free encapsulation process for liquids, tablets and
powders, thereby potentially 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. We will not have any assets or liabilities before the
reincorporation. BioProgress Technology International will become our
subsidiary.
1
THE REINCORPORATION
Under the reincorporation:
- BioProgress Holdings Inc. will merge with BioProgress Technology
International, which will become a subsidiary of BioProgress PLC (other
than shares representing approximately 1.27% of the voting and economic
rights in BioProgress Technology International which will continue to be
owned by one of the directors of BioProgress PLC).
- You will receive one of our ordinary shares in exchange for each share
of common stock of BioProgress Technology International which you own.
- Our ordinary shares will be admitted to trading on 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 that due to BioProgress
Technology International's:
- small size and early stage of development,
- location of facilities and management outside the US, and
- control by foreign shareholders,
BioProgress Technology International has experienced low market interest
among analysts and institutional investors in the US. BioProgress Technology
International is proposing the reincorporation so as to become the subsidiary of
a UK company whose shares will be traded on the Alternative Investment Market of
the London Stock Exchange. We believe, based on the advice of our financial
advisor, Collins Stewart Limited, that a UK company with shares traded on the
Alternative Investment Market may potentially generate more market interest in
its home country than in the US and could potentially have better access to
future capital raising in the UK and Europe.
YOUR CONSENT IS NEEDED TO APPROVE THE REINCORPORATION
The reincorporation must be approved by holders of a majority of the common
stock of BioProgress Technology 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 March 28, 2003,
assuming we receive written consents in favor of the transaction representing at
least a majority of the common stock of BioProgress Technology International and
we will issue a press release and file a report on Form 8-K announcing the exact
date the reincorporation becomes effective. We believe that our directors and
officers and certain large shareholders (and their affiliates) intend to support
the reincorporation. We expect them to execute and deliver written consents
that, together, will make up 33.6% of the voting stock. See "Solicitation of
Written Consent".
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.
2
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 remaining effective, receipt of the required
written consents of the shareholders of BioProgress Technology International and
the continued validity of certain UK tax clearances which have been obtained.
REGULATORY REQUIREMENTS
The reincorporation is not subject to any regulatory requirements other
than the US federal securities laws. BioProgress Technology International and
BioProgress PLC 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 London Stock Exchange's
rules relating to the Alternative Investment Market 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 London
Stock Exchange's rules relating to the Alternative Investment Market, 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 of BioProgress
Technology International and the memorandum of association and articles of
association of BioProgress PLC. 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 the
Alternative Investment Market of the London Stock Exchange under the symbol
"BPRG".
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.
RESTRICTIONS ON U.S. PERSONS HOLDING ORDINARY SHARES
Non UK persons are free to acquire and hold BioProgress PLC shares,
however, unless you have or establish a relationship with a broker or nominee
who has an account with CREST, the UK's electronic settlement system, you will
have to hold your ordinary shares and settle in certificated form.
DISSENTERS' RIGHTS
Holders of common stock of BioProgress Technology International will not be
entitled to dissenters' rights under Nevada law in connection with the
reincorporation. See "The Reincorporation -- Dissenters' Rights".
3
STRUCTURE CHART
The following charts shows the corporate structures before and immediately
after the reincorporation:
BEFORE THE REINCORPORATION(1)
[FLOW CHART]
- ---------------
(1) Dormant companies are not shown on this chart
(2) Owned 46.6% by BioProgress Technology International.
(3) Series C Preferred Stock is owned by one US director representing
approximately 1.27% of the voting and economic rights in this Company.
4
AFTER THE REINCORPORATION(1)
[FLOW CHART]
- ---------------
(1) Dormant companies are not shown on this chart
(2) Owned 46.6% by BioProgress Technology International.
(3) Series C Preferred Stock is owned by one US director representing
approximately 1.27% of the voting and economic rights in this Company.
5
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 and the reincorporation contained in this proxy
statement/prospectus.
CERTAIN RISKS ASSOCIATED WITH THE REINCORPORATION
U.S. HOLDERS OF BIOPROGRESS TECHNOLOGY INTERNATIONAL 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
BioProgress PLC ordinary shares in exchange for BioProgress Technology
International 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 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
BioProgress Technology International stock for BioProgress PLC ordinary shares.
Instead, if you would have recognized a loss, your aggregate tax basis in the
BioProgress PLC shares you receive will equal your aggregate tax basis in the
BioProgress Technology International stock you surrender.
YOU MAY BE SUBJECT TO ADDITIONAL TAX IF BIOPROGRESS PLC DECIDES TO PAY
DIVIDENDS.
BioProgress PLC has no immediate plans to pay dividends after the
reincorporation. However, if it does, 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.
IF YOU ARE A U.S. PERSON WHO WILL OWN MORE THAN 10% OF THE ORDINARY SHARES OF
BIOPROGRESS PLC YOU MAY BE SUBJECT TO OTHER TAX CONSEQUENCES.
Shareholders who own more than 10% of the shares of a foreign company may
also be subject to other special complex tax rules not described in this
proxy/statement prospectus. If you are a U.S. person who will hold more than 10%
of BioProgress PLC's ordinary shares, we urge you to consult your own tax
consultant.
BIOPROGRESS PLC COULD BE TAXED IN THE UNITED STATES AS A RESULT OF LEGISLATION
CURRENTLY UNDER CONSIDERATION.
BioProgress Technology International is currently subject to U.S. corporate
income tax on its worldwide income. After the reorganization, BioProgress
Technology International will continue to be subject to U.S. corporate income
tax, including U.S. tax on certain operations of the U.K. subsidiaries of
BioProgress Technology International . If BioProgress PLC 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 originally
were introduced in the prior Congress and would need to be reproposed in the
current
6
Congressional term. Some already have been reproposed, and 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 BioProgress
PLC, 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 BioProgress
PLC to be treated as a domestic corporation. If any of these proposals
ultimately is adopted, BioProgress PLC will be taxed in the United States on its
worldwide income, including certain income earned by its subsidiaries that are
not United States corporations, much as BioProgress Technology International is
now. In addition, we may lose the ability to claim certain tax losses in the
United States.
Under some proposals, BioProgress Technology International 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
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.
Due to the preliminary nature of these proposals and as BioProgress
Technology International has never been profitable and has not paid U.S. tax we
cannot quantify the effect these proposals may have.
U.S. TAX CONSEQUENCES TO HOLDERS OF BIOPROGRESS PLC SHARES COULD CHANGE IF THE
LEGISLATION CURRENTLY UNDER CONSIDERATION IS ENACTED.
If BioProgress PLC is treated as a United States corporation as a result of
the proposed legislation discussed in "Risk Factors -- BioProgress PLC 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."
IF BIOPROGRESS PLC BECOMES A PASSIVE FOREIGN INVESTMENT COMPANY, U.S.
SHAREHOLDERS COULD SUFFER ADVERSE TAX CONSEQUENCES.
If BioProgress PLC acquires significant passive assets, such as cash or
marketable securities, or engages in transactions producing passive income, it
could be classified as a passive foreign investment company or PFIC for United
States federal income tax purposes. A sale of all or most of BioProgress PLC's
business could result in the acquisition of a substantial amount of passive
assets and, in certain circumstances, may result in BioProgress PLC being
classified as a PFIC. If BioProgress PLC becomes a PFIC, United States holders
of its stock would be subject to a special tax regime imposed upon PFICs. If
BioProgress PLC becomes a PFIC, United States holders will be taxed at ordinary
income rates (rather than favorable capital gains rates) when they sell
BioProgress PLC 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.
BioProgress PLC was formed solely to accomplish the reincorporation of
BioProgress Technology International into an English company. The laws of
England and Wales may be materially different than the laws of Nevada, under
which BioProgress Technology International is incorporated. The differences
between the laws of England and Wales and Nevada may materially affect your
interests. For a discussion of material differences between the laws of England
and Wales and Nevada see "Comparison of the Laws of Nevada and England and
Wales" in this document. Examples of important negative differences include the
following:
- English law contains restrictions on BioProgress PLC's ability to make a
distribution (which includes the payment of a dividend to shareholders
and the redemption of its own shares) out of profits available for the
purpose. Although similar requirements exist in Nevada, the specific
requirements of English law, in general, make it more difficult to
declare a dividend.
7
- English law and the provisions of the UK takeover code make it extremely
difficult for management to adopt defenses to unwanted takeovers whereas
in the US takeover defenses are more acceptable.
- Unlike Nevada companies, directors of BioProgress PLC are elected until
they resign or are removed. The constitutional documents of BioProgress
PLC require its directors to resign every three years (staggered among
the different directors), although they are permitted to offer
themselves for re-election by shareholders at the shareholders' meeting
at which they resign. Shareholders may, however, remove directors by a
majority vote at any meeting called for that purpose. This process may
make it more difficult to change the board.
- A quorum for a meeting of shareholders of BioProgress PLC is only two
shareholders present in person or by proxy and who are entitled to vote,
regardless of the number of shares they hold. This could permit
shareholders who own a small percentage of shares to constitute a quorum
to approve resolutions.
- Unless a poll vote is called, voting at shareholders' meetings in a UK
company is by a show of hands (with each shareholder present at the
meeting having one vote) not by a count of the number of shares voting.
A proxy cannot vote on a resolution decided on a show of hands. A poll
may only be called by the chairman of the meeting, or three shareholders
present in person or by proxy or a shareholder present in person or by
proxy holding 10% of the total voting rights of all the shareholders
entitled to attend and vote at the meeting or 10% of the total sum paid
up on the shares conferring a right to attend and vote at the meeting.
Thus, if you vote by proxy, your influence may be less than in a Nevada
company.
- Unlike BioProgress Technology International, BioProgress PLC will need
unanimous approval of any action taken by written consent of
shareholders in lieu of a meeting which could impact the efficiency of
taking corporate action.
YOU MAY NOT BE ABLE TO ENFORCE A U.S. JUDGMENT AGAINST US OR OUR OFFICERS AND
DIRECTORS IN ENGLAND.
BioProgress PLC is an English company and a majority of its 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 U.S. 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. BioProgress PLC will arrange that it 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, as 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. BioProgress 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 of
civil liabilities predicated solely upon the federal securities laws of the
United States.
BIOPROGRESS TECHNOLOGY INTERNATIONAL'S FORMER USE OF ARTHUR ANDERSEN LLP AS ITS
INDEPENDENT PUBLIC ACCOUNTANTS MAY POSE RISKS TO US AND WILL LIMIT YOUR ABILITY
TO SEEK POTENTIAL RECOVERIES FROM THEM RELATED TO THEIR WORK.
Arthur Andersen LLP, independent accountants, were engaged as the principal
accountants to audit BioProgress Technology International's financial statements
until they resigned on July 31, 2002 when BioProgress Technology International
engaged Grant Thornton Limited in their place. In June 2002, Arthur Andersen was
convicted on a federal obstruction of justice charge. Some investors, including
institutional investors, may choose not to invest in or hold securities of a
company whose prior financial statements were audited by Arthur Andersen, which
may serve to, among other things, suppress the price of our shares. In addition,
SEC rules require us to present our audited financial statements in various SEC
filings, along with Arthur Andersen's consent to our inclusion of its audit
report in those filings. The SEC has provided temporary
8
regulatory relief designed to allow companies that file reports with the SEC to
dispense with the requirement to file a consent of Arthur Andersen in certain
circumstances. Notwithstanding the SEC's temporary regulatory relief, the
inability of Arthur Andersen to provide its consent or to provide assurance
services to us with regard to future SEC filings could negatively affect our
ability to, among other things, access capital markets.
We cannot assure you that BioProgress PLC's will be able to continue to
rely on the temporary relief granted by the SEC. If the SEC no longer accepts
financial statements audited by Arthur Andersen, this may affect BioProgress
PLC's ability to access the public capital markets in the future unless
BioProgress PLC's current independent auditors or another independent accounting
firm is able to audit the financial statements originally audited by Arthur
Andersen. Any delay or inability to access the capital markets at a time when
additional capital is needed may have an adverse impact on our business. After
reasonable efforts, BioProgress PLC's has not been able to obtain Arthur
Andersen's consent to the inclusion in this prospectus of its audit reports.
Accordingly, investors will not be able to sue Arthur Andersen under Section 11
of the Securities Act of 1933 for material misstatements or omissions, if any,
in this prospectus or the registration statement including the financial
statements covered by their previously issued reports. Moreover, Arthur Andersen
has ceased operations. Should it declare bankruptcy or avail itself of other
forms of protection from creditors, it is unlikely you would be able to recover
damages from Arthur Andersen for any claim against them.
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 of 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 must be considered. These risks include our ability to
successfully complete the production engineering, manufacture and commissioning
of each of the five 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.
We believe that period-to-period comparisons of our operating results are
not meaningful.
GROWTH OF OUR BUSINESS MAY SUFFER IF NEW CUSTOMERS DO NOT ACCEPT OUR PRODUCT
OFFERINGS.
BioProgress Technology International has historically derived substantially
all of its revenues from XGel(TM) products and associated services. We
anticipate that these sources will continue to account for almost all 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 revenue could
decrease.
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.
9
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.
These markets may not be large enough to generate sufficient revenue for our
products. 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) contributing 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. Our contracts with Bristol-Myers Squibb
expires in 2022. Our contract with Convatec expires in 2022. Our contracts with
Peter Black expire on the later of 2022 or ten years after products using our
technology are first put on the market in the European Union. Our contract with
Farmasierra expires in 2022 and our contract with Boots expires in 2022.
Although we have written agreements with these customers the revenue generated
from these contracts depends upon the successful commercialization of consumer
products using our technology. We cannot be certain that our customers will
continue to do business with us after the contracts expire, 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 our technologies. We do not currently possess the
ability or resources necessary to complete on our own the 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. Although
we attempt to obtain minimum license payments, the amount of revenue we will
earn under our customer contracts is dependant upon our licensee's ability to
commercialize products using our XGel(TM) technology. We may be unable to enter
into additional collaborative arrangements with respect to product development
utilizing our technologies. Existing or future collaborative arrangements may
not lead to successful consumer product sales. Milestones to receive revenue in
such agreements may not be met. 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, products using our technology may not be
commercially successful. 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. Disputes may arise
in the future with respect to the ownership of rights to any technology
developed with third parties. These and other possible disagreements with
collaborators 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.
10
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 beyond this current year 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 of BioProgress PLC.
Cash from operations and the other sources described above may not be
sufficient for our operating needs. We may not be able to achieve profitability
on a consistent basis, if at all and our ability to continue as a going concern
could thus be impaired. 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 restrict 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
additional funding may not be available 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. Due to our limited cash
resources, 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. Acquisitions involve numerous risks, including:
- difficulties in the assimilation of the operations, technologies;
- integration of products and personnel of the acquired company;
- the diversion of our small management team'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.
Any or all of the above could reduce our revenue or delay or restrict the
growth of our business.
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.
As a small company with limited resources to devote to protecting our
intellectual property we may not have protected all of our intellectual property
rights. 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, third parties may still 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
11
agreements. These royalty or licensing agreements, if required, might not be
available on terms acceptable to us or at all.
WE DEPEND ON KEY PERSONNEL FOR OUR SUCCESS, THE LOSS OF ANY OF WHOM COULD
AFFECT THE GROWTH AND DEVELOPMENT OF OUR BUSINESS.
Our success depends upon the continued contributions of our executive
officers and scientific and technical personnel especially Robert Graham Hind,
Malcolm Brown, Louise Mulroy, Stephen Kessel, Edward Nowak and Jason Teckoe.
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 growth and development of our business. We have employment agreements
with each of our senior management and certain key scientific personnel and they
have each confirmed their intention to remain with us following the
reincorporation.
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 certain large
shareholders (and their affiliates), assuming exercise of all of their
outstanding options, held 19,135,035 shares, or approximately 35.0%, or 33.6%
assuming no exercise of options, of BioProgress Technology International's
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 the 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 WHICH COULD BE TIME
CONSUMING AND COSTLY.
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 of 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, products using our technology have not been
distributed widely yet and therefore adverse reactions may 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. Defending these claims, regardless of merit, could entail substantial
expense and require the time and attention of key management personnel.
WE ARE DEPENDENT ON A SMALL NUMBER OF SUPPLIERS.
We currently contract with Speciality Films, George Listers, Monosol and
Polyamer Films, as suppliers to produce the film we use in our XGel(TM) film
system. There are currently no formal agreements in place with any supplier.
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 prevent us from meeting customer orders and
damage our customer relations.
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,
12
upon maintaining a competitive position in the development of products and
technologies in our 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. Future developments by others may
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, such as Banner Pharmacaps, Swiss Caps and Eurocaps GlaxoSmithKline,
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.
RISKS RELATED TO OUR SHARES
EXCHANGE RATE FLUCTUATIONS MAY REDUCE THE VALUE OF BIOPROGRESS PLC SHARES FOR
U.S. HOLDERS.
Individuals and entities located in the U.S. 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 on a market must sell them on the
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.
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
13
- 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
BioProgress Technology International 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. BioProgress Technology
International will bear the cost of the solicitation of written consent from its
stockholders. We understand that directors and officers of BioProgress
Technology International and certain large shareholders (and their affiliates)
holding approximately 33.6% of the common stock intend to give their consent.
Once we have received the written consent of more than 50% of BioProgress
Technology International common stock we intend to complete the reincorporation
as quickly as possible once other conditions have been fulfilled.
WHERE YOU CAN FIND MORE INFORMATION
BioProgress Technology International, 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. 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. 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 a registration statement on Form F-4 to register
its 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
14
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 trading
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.
THE REINCORPORATION
GENERAL
BioProgress PLC and BioProgress Technology International propose the
following reincorporation (the "Reincorporation") of the current business of
BioProgress Technology International. The Reincorporation will be implemented
pursuant to an agreement and plan of merger (the "Reincorporation Plan")
included as Annex A of the proxy statement/prospectus the terms of which are
incorporated herein by reference.
DETAILS OF THE REINCORPORATION
1. BioProgress Holdings, Inc. a wholly owned subsidiary of BioProgress
PLC will be merged with and into BioProgress Technology International (the
"Merger"). Pursuant to the Merger, stockholders will receive one ordinary share
in BioProgress PLC, par value L0.01 for each BioProgress Technology
International share of common stock, par value $.001 per share owned, and one
preference share of BioProgress PLC, par value L0.005, for each BioProgress
Technology International share of Series B preferred stock, par value $.01 per
share owned. Shares of series C Preferred Stock will not be exchanged in the
Reincorporation.
2. BioProgress Technology International will survive the Merger as a
wholly owned subsidiary of BioProgress PLC (other than 1.27% which will be owned
by Larry Shattles, a U.S. director of BioProgress PLC, in the form of Series C
Preferred Stock). The board of directors of BioProgress PLC intend to seek
admission of BioProgress 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 BioProgress
Technology International unanimously approved the terms of the Reincorporation
Plan. The Reincorporation Plan was unanimously approved by the directors of
BioProgress PLC on December 18, 2002.
BioProgress Technology International is requesting that stockholders of
BioProgress Technology International approve the Merger and Reincorporation Plan
by written consent in lieu of a meeting ("Stockholder Action"). BioProgress
Technology International is proposing the Merger be consummated on or about
March 28, 2003 assuming Stockholder Action has occurred by then. Upon
consummation of the Merger, stockholders of BioProgress Technology
International, other than Mr. Shattles, will receive the same number of ordinary
shares and/or preference shares in BioProgress PLC as they currently hold in
BioProgress Technology International. We will issue a press release and file a
report of Form 8-K announcing the exact date on which the reincorporation
occurs.
15
BACKGROUND AND REASONS FOR THE REINCORPORATION
The common stock of BioProgress Technology International is currently
quoted on the Over the Counter Bulletin Board. The average daily trading volume
during the two year period of 2001 and 2002 was approximately 24,000 shares.
Over the entire two year period only approximately 18 million shares were traded
in total. We have not benefited from securities analysts coverage or
institutional interest in our shares. We believe that more than 50% of
BioProgress Technology International shares are owned by non-US persons
(primarily English shareholders). Of those shareholders we believe to be US
persons, we believe that in excess of three quarters of the US shareholders own
only one or two shares (or less than 0.0001% of all outstanding shares of common
stock). Also, our business is conducted and managed in England. We believe the
lack of interest on the part of analysts and US institutions is due to the fact
that BioProgress is essentially a small English business operated and managed
from the UK and controlled by non US shareholders and thus of little interest to
US investors. This lack of general market interest has, we believe, led to
difficulties in maintaining a liquid market for BioProgress Technology
International stock and to raising additional capital on favorable terms. As a
result and based on advice of our financial advisor, Collins Stewart Limited, we
have concluded that if BioProgress Technology International were an English
incorporated company whose shares were traded in London we could potentially
attract more attention from English and European institutions and analysts than
we have historically in the US. As discussed in this proxy statement/prospectus
BioProgress PLC may need to raise additional capital in order to fund operations
until such time as our products are commercialized and produce positive cash
flow. We believe, based on advice of our financial advisor, that as a UK company
whose shares are traded on the Alternative Investment Market in London we may
face better prospects to raise capital on favorable terms than we would as a US
company.
THE REINCORPORATION PLAN
The Reincorporation will be effected by the merger of BioProgress Holdings
into the BioProgress Technology International. The terms of the Merger are set
forth in the Reincorporation Plan which is included herein as Annex A. Pursuant
to the Reincorporation Plan:
- BioProgress Holdings will merge with BioProgress Technology
International and BioProgress Technology International will be the
surviving corporation.
- Each outstanding share of common stock of BioProgress Technology
International will automatically be converted into one ordinary share of
BioProgress PLC.
- Each outstanding share of Series B preferred stock of BioProgress
Technology International will automatically be converted into one
preference share of BioProgress PLC.
- Each share of Series C Preferred Stock will remain outstanding
representing approximately 1.27% of the voting and economic rights of
BioProgress Technology International.
- Any options or warrants exercisable for shares of BioProgress Technology
International common stock issued and outstanding immediately prior to
the effective time will become exercisable for an equal number of
ordinary shares of BioProgress 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;
- the registration statement must remain effective under the Securities
Act of 1933;
- the UK Inland Revenue tax clearances which have been obtained must
remain valid; and
- the documents required by the Nevada Private Corporation Law must be
filed with the Secretary of State in Nevada.
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DISSENTERS' RIGHTS
Provided that at the effective time of the Merger BioProgress Technology
International still has in excess of 2000 record holders, stockholders of
BioProgress Technology International common stock do not have dissenters' rights
with respect to the reincorporation. Holders of BioProgress Technology
International Preferred Stock who properly perfect their right may have
dissenters' rights.
EFFECTIVE TIME
We expect that on or about March 28, 2003, assuming Stockholder Action has
been achieved, the corporate existence of BioProgress Holdings will cease upon
the filing of the Articles of Merger with the Nevada Secretary of State and
BioProgress Technology International will become a subsidiary of PLC. The
Reincorporation Plan provides that the Merger may be abandoned by BioProgress
PLC or BioProgress Technology International 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 BIOPROGRESS
PLC ORDINARY SHARES RECEIVED NOR THE ISSUE OF ANY ORDINARY SHARES PURSUANT TO
THE EXERCISE OF OPTIONS OR 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 BioProgress PLC
under United States federal securities laws at the effective time of the Merger
(unless you have contracted to limit your ability to sell). 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 BioProgress PLC for the above
purposes generally include individuals or entities that control, are controlled
by, or are under common control with BioProgress PLC and may include officers,
directors and principal shareholders of BioProgress Technology International.
EXCHANGE OF SHARE CERTIFICATES
As of the effective time of the Merger, the stockholders of BioProgress
Technology International immediately before the effective time will
automatically become the owners of BioProgress PLC ordinary shares and, as of
the effective time, will cease to be owners of BioProgress Technology
International's common stock. The articles of association of BioProgress PLC
provide that share certificates representing the BioProgress Technology
International's common stock, as of the effective time, will be deemed to
represent an equivalent number of BioProgress PLC ordinary shares. Holders of
the BioProgress Technology International'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
BioProgress PLC, delivery of the share certificate or certificates which
previously represented the BioProgress Technology International's common stock
will be sufficient.
Certificates bearing the name of BioProgress PLC will be issued in the
normal course upon surrender of outstanding BioProgress Technology International
common stock certificates for transfer or exchange. If any stockholder
surrenders a certificate representing BioProgress Technology International'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 BioProgress Technology International'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.
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For those stockholders of BioProgress Technology International 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 ordinary shares in BioProgress 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 BioProgress 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. BioProgress PLC's articles of association will permit the
holding of ordinary shares in BioProgress PLC in uncertificated form under the
CREST system. U.S. and other non UK persons may hold shares in CREST through a
CREST participant in London.
ACCOUNTING TREATMENT
The reincorporation will be accounted for using merger accounting rules
under generally accepted accounting principles in the United Kingdom and as a
recapitalization under US GAAP.
SHARE QUOTE
Application will be made for the ordinary shares of BioProgress PLC to be
admitted to trading on the Alternative Investment Market of the London Stock
Exchange ("AIM") under the symbol "BPRG". 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.
MATERIAL TAX CONSEQUENCES
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes material U.S. federal income tax
consequences of the Reincorporation and ownership of BioProgress PLC shares to
holders of BioProgress Technology International 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 BioProgress Technology
International stock, and will hold BioProgress PLC shares, as a capital asset,
and not through a partnership or other flow-through entity; you do not hedge
your investment in the BioProgress Technology International stock or BioProgress
PLC shares; and you hold less than 10% of the BioProgress Technology
International stock and will continue to hold less than 10% of the BioProgress
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
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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 BIOPROGRESS PLC SHARES
You will have taxable gain, if any, but not loss, upon the receipt of
BioProgress PLC shares in exchange for BioProgress Technology International
stock pursuant to the reorganization. You will not, however, be permitted to
claim a tax loss upon the receipt of BioProgress PLC shares.
Your taxable gain generally will equal the excess, if any, of the fair
market value of BioProgress PLC shares received in exchange for BioProgress
Technology International stock. That gain generally will be taxed as capital
gain, and will be long-term capital gain if you have held the BioProgress
Technology International 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
BioProgress Technology International stock for BioProgress PLC shares. Instead,
if you would have recognized a loss, your aggregate tax basis in the BioProgress
PLC shares will equal your aggregate tax basis in the BioProgress Technology
International common stock you surrender.
We are required to send you a Form 1099-CAP showing, among other things,
the number of BioProgress 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 BIOPROGRESS 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 BioProgress PLC will not be
a U.S. 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 BioProgress PLC may be affected by the
proposed legislation discussed in "U.S. tax consequences for BioProgress
Technology International," 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.
TAXATION UPON SALE OF BIOPROGRESS PLC STOCK
If you sell your BioProgress PLC stock after the Reincorporation, 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
BioProgress Technology International stock, and your basis in the stock
generally will equal the amount you paid for your BioProgress Technology
International stock.
TAXATION IF BIOPROGRESS 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
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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 BioProgress PLC will not be classified
as a PFIC for its current taxable year. BioProgress PLC's status in future years
will depend on its assets and activities in those years. For instance, if
BioProgress PLC were to sell substantially all of its business, it may become a
PFIC.
Presently BioProgress 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, BioProgress PLC cannot ensure that
it will not become a PFIC.
If BioProgress 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 BioProgress 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 BIOPROGRESS 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 BioProgress PLC
shares in exchange for BioProgress Technology International 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 BioProgress PLC shares will equal your
aggregate tax basis in the BioProgress Technology International stock you
surrender.
TAXATION UPON FUTURE RECEIPT OF DIVIDENDS FROM BIOPROGRESS PLC
Under current law, you will not be subject to U.S. taxation on any future
dividends you would receive from BioProgress PLC if you are a Non-US Holder.
However, the treatment of dividends from BioProgress PLC may be affected by the
proposed legislation discussed in "-- U.S. Federal Income Tax Consequences for
BioProgress Technology International ," 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.
TAXATION ON FUTURE DISPOSITION OF BIOPROGRESS 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 BioProgress PLC shares
unless one of the two exceptions described in "-- Taxation upon receipt of the
BioProgress PLC shares" applies.
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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 BIOPROGRESS TECHNOLOGY
INTERNATIONAL
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
BioProgress 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 BioProgress Technology International to BioProgress 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 BioProgress
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 BioProgress
PLC to be treated as a domestic corporation. If any of these proposals
ultimately is adopted, BioProgress PLC will be taxed in the U.S. on its
worldwide income, including certain income earned by its non-U.S. subsidiaries,
much as BioProgress Technology International is now. In addition, BioProgress
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.
UNITED KINGDOM TAX CONSEQUENCES
The following discussion provides a general summary of the current material
U.K. tax consequences of the reincorporation and ownership of BioProgress PLC
shares based on 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 BioProgress 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.
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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 stock for U.K.
tax purposes. Accordingly, the ordinary shares received in BioProgress 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 Reincorporation 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. BioProgress Technology
International 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 BioProgress 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 BioProgress PLC
U.K. resident individual shareholders
Dividends paid by BioProgress 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% but will be able to set off
the tax credit against part of this liability leaving a net income tax liability
equal to 25% 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
BioProgress PLC. Such shareholders will not be able to claim repayment of any
tax credits associated with dividends.
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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 advisors as to their entitlement to utilize the tax credit and
procedures and the tax treatment of dividends received from BioProgress PLC in
those jurisdictions where they are resident.
Taxation of chargeable gains on disposal of the ordinary shares in BioProgress
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 realized on the
disposal of the ordinary shares in BioProgress 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 realized on the disposal of the ordinary shares in BioProgress 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 BioProgress 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.
Stamp Duty
No Stamp Duty will arise on the issue of the ordinary shares in BioProgress
PLC. Stamp duty at 0.5 % of the consideration payable will arise on the
execution of any instrument whereby the ordinary shares in BioProgress PLC are
transferred for value.
SDRT
No SDRT liability will arise on the issue of the ordinary shares in
BioProgress 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.
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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 the material rights of holders of the BioProgress
PLC ordinary shares based on BioProgress 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 BioProgress PLC which are filed as exhibits to the registration
statement of which this proxy statement/prospectus is a part. You are encouraged
to read BioProgress PLC's memorandum and articles of association. See also
"Comparison of Stockholder Rights."
BioProgress PLC has 100,000,000 ordinary shares par value L0.01,
authorized.
Each of the issued BioProgress PLC ordinary shares will be fully paid and
not subject to any further calls or assessments by BioProgress PLC. BioProgress
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. 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
BioProgress PLC may, by ordinary resolution, declare a dividend to be paid
to the shareholders of BioProgress PLC. Any dividends on the BioProgress PLC
ordinary shares must be declared and paid according to the amount paid up on the
BioProgress 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 BioProgress
PLC such interim dividends as appear to the directors to be justified by the
profits of BioProgress 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."
BioProgress PLC's articles of association permit a scrip dividend scheme
under which registered owners of BioProgress PLC ordinary shares may be given
the opportunity to elect to receive fully paid BioProgress 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 BioProgress PLC
involving repayment, the assets of BioProgress PLC available for distribution
among the shareholders shall be divided between the holders of the BioProgress
PLC ordinary shares according to the respective number of shares held by them
and in accordance with the provisions of the Act and the Articles of
Association. The liquidator may, with the sanction of an extraordinary
resolution of BioProgress PLC and subject to the Act, divide among the members
in kind the whole or any part of the assets of BioProgress PLC in such manner as
the liquidator may determine.
VOTING
Voting at any general meeting of BioProgress PLC shareholders is by a show
of hands of shareholders present in person (but not by proxy) unless a poll is
duly demanded. A poll may be demanded by:
- the chairman of the meeting;
- at least three 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 attend and vote at the meeting; or
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- any shareholder(s) present in person or by proxy, who hold shares
providing a right to attend and 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, each holder of BioProgress PLC ordinary shares who is
present in person at a general meeting of BioProgress PLC will have one vote,
and on a poll, every holder of BioProgress PLC ordinary shares who is present in
person or by proxy will have one vote per share of which he 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 (regardless of the number of shares
held), 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 BioProgress 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."
RIGHTS TO RECEIVE A CIRCULAR
The AIM Rules provide that BioProgress PLC must notify a regulatory
information service without delay of information of a price sensitive nature
concerning changes in its financial condition or current or expected business
performance, no later than the information is published elsewhere. The AIM Rules
also provide for the disclosure of information in relation to substantial
transactions (including reverse take-overs) and transactions with related
parties.
If an AIM company or subsidiary proposes to enter into a substantial
transaction, it must inform a regulatory information service without delay as
soon as the terms of the transaction are agreed, disclosing the information
specified by the AIM Rules. A "substantial" transaction is one which, when
measured against any one of the class tests contained in Schedule 3 to the AIM
Rules, exceeds a percentage ratio of 10%. The term "transaction" in this context
excludes transactions of a revenue nature made in the ordinary course of trade
and transactions to raise finance which do not involve a change in fixed assets
of the AIM company or its subsidiaries. The class tests compare the size of the
transaction with the size of the AIM company or group in relation to gross
assets, profits, turnover, consideration and gross capital.
Similar provisions apply where an AIM company proposes to enter into a
transaction with a related party, except that the class test ratio is 5% rather
than 10% and references to "transactions" are not limited in any way. In
addition, information disclosed to a regulatory information service about a
related party transaction must include certain further information about the
related party as set out in the AIM Rules. A "related party" means a person
related to the AIM company or group company as a director, a family, relative of
a director or a substantial shareholder as defined in the AIM Rules. Even if a
transaction with the related party falls below the threshold requiring
notification, it will still require disclosure within the company's annual
accounts where, on any of the class tests, the resulting percentage ratio is in
excess of 0.25%.
Where an AIM company proposes to engage in a reverse takeover, in addition
to informing a regulatory information service, the transaction must be made
conditional upon the sanction of the shareholders in general meeting and the
company must produce an AIM admission document convening a general meeting and
containing all the information required by the AIM Rules. A "reverse take-over"
is an acquisition where there is a class test ratio in excess of 100%, or where
the acquisition would result in a fundamental change to the company's business,
board or control.
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The AIM Rules contain further details in relation to which the company must
inform a regulatory information service without delay. These include any changes
to the board, any material change between the company's actual trading
performance or financial condition and any profit forecast, estimate or
projection included in the Admission Document or otherwise made public by the
company, information notified to the company under sections 198 -- 208 of the
Act by way of disclosure of major interests in the shares, information on the
grant to a director (or any person connected with the director) of any option or
other right over the company shares, including the exercise of any option or
acquisition or disposal of any such rights, the publication of any annual
audited accounts of the company and any change in its accounting reference date
and the resignation, dismissal of change of the company's nominated advisor or
broker.
BioProgress PLC must also publish its annual audited report and accounts
within six months of the end of the financial period to which they relate and
must include the name and address of their for the nominated advisor and broker.
The company must also prepare a report on its activities and results during the
first six months of each financial year. The half yearly report must be prepared
within 3 months of the end of the period to which it relates and a copy must be
sent to a regulatory information service.
In accordance with the Combined Code (which is not required to be complied
with by a company whose shares are admitted to trading on AIM, but whose
principles the Company proposes to have regard to, to the extent applicable to a
company of its size and nature) requires that all directors should be subject to
election by shareholders at the first opportunity after their appointment, and
to re-election thereafter at intervals of no more than three years (and
requirements in this regard are included in the Company's Articles of
Association). The names of directors submitted for election and re-election
should be accompanied by sufficient biographical details to enable shareholders
to take an informed decision on their election. Such details will be included in
any circular the shareholders will be sent with the notice of the company's
annual general meeting in each year.
The Combined Code also recognizes the central role of the annual general
meeting in relation to shareholders. According to the Combined Code, the Company
should use the annual general meeting to communicate with private investors and
should encourage their participation.
SHAREHOLDER PROPOSALS
The Companies Act provides that shareholders representing not less than 5%
of the total voting rights of all the members having a right to vote at a
company's Annual General Meeting or not less than 100 members who hold shares on
which there has been paid up an average sum, per member, of not less than L100,
may requisition the directors of the Company (and it is the duty of the Company
to comply with such request) to give notice to all members of the Company of
resolutions which they intend to propose at the next Annual General Meeting.
Furthermore, upon receipt of a valid requisition, the directors must circulate
to members any statement of not more than 1000 words relating to the matters
referred to in any proposed resolution of all the business to be dealt with at
that meeting. The expense of circulating the resolutions and any attached
statement fall to be met by the requisitionists and not the Company. A company
is not bound to give notice of the resolution or circulate a statement unless a
copy of the requisition (signed by the requisitionists) is deposited at the
registered office of the company not less than six weeks before the meeting in
the event that a resolution is required to be put, or otherwise, not less than
one week before the meeting and there is deposited with the requisition a sum
reasonably sufficient to meet the company's expenses in giving effect to it. The
company is also not bound to circulate a statement if, on the application either
of the company or any other person who claims to be aggrieved, the court is
satisfied that the rights conferred by that section are being abused to secure
needless publicity for defamatory matter.
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,
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equity securities means, BioProgress 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 passing of an ordinary resolution in a
general meeting. Relevant securities as defined in the Act would include
BioProgress PLC ordinary shares or securities convertible into BioProgress PLC
ordinary shares.
VARIATION OF RIGHTS AND SHARE CAPITAL
BioProgress 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, BioProgress 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, BioProgress PLC may by special
resolution reduce its share capital, any capital redemption reserve or any share
premium account. BioProgress PLC may also, subject to such approvals as are
required by the Act and to the passing 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 passing of an extraordinary resolution passed at a separate
meeting of the holders of the shares of that class.
DISCLOSURE OF INTERESTS
The Act gives BioProgress PLC power to require persons who it knows have,
or has reasonable cause to believe have, or to have had within the previous
three years, an interest in its relevant share capital to disclose prescribed
particulars of those interests. For this purpose "relevant share capital" means
issued share capital of BioProgress PLC carrying the right to vote in all
circumstances at a general meeting of BioProgress 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 BioProgress 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 BioProgress PLC in excess of the "notifiable percentage" (currently
3%, or 10% for certain types of interest) is obligated to disclose prescribed
information to BioProgress 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 BioProgress 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 BioProgress PLC ordinary shares or the conduct of
operations of BioProgress 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 BioProgress PLC ordinary shares; provided, however,
that the directors may refrain from sending a circular or any other notice to
any shareholder who has not supplied BioProgress PLC with an address in the
United Kingdom for the service of notices if applicable law would prohibit
BioProgress PLC from mailing such circular or other notice to any particular
jurisdiction.
DESCRIPTION OF BIOPROGRESS PLC PREFERENCE SHARES
The following is a summary of the material rights of holders of the
BioProgress PLC preference shares based on BioProgress 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
27
reference to the Memorandum and Articles of Association of BioProgress PLC which
are filed as exhibits to the registration statement of which this proxy
statement/prospectus is a part. You are encouraged to read BioProgress PLC's
Memorandum and Articles of Association.
Each of the issued BioProgress PLC preference shares will be fully paid and
not subject to any further calls or assessments by BioProgress PLC. BioProgress
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.
BioProgress 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 as of the effective time of
the Merger will be issued and allotted.
DIVIDENDS
BioProgress PLC shall, in priority to any payment of dividend to holders of
all other shares in the capital of BioProgress 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
BioProgress PLC to 31 March 2004, a fixed cumulative preferential dividend at
the rate of 4% per annum on the UK pound sterling equivalent of $2.50 as of the
effective time of the Reincorporation, 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 installments.
RIGHTS IN WINDING-UP
On a return of capital on a winding-up or otherwise the assets of
BioProgress PLC available for distribution to its members shall be applied in
paying to the holders of Convertible Preference Shares and Non-Convertible
Preference Shares in priority to any payment to the holders of all other shares
in the capital of BioProgress PLC a sum equal to the arrears of the preference
dividend and a sum equal to the nominal amount together with any premium paid up
on the 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.
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
BioProgress 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.
BioProgress PLC 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. BioProgress 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 BioProgress Technology
International common stock ("Current Shares") will receive one ordinary share of
BioProgress PLC ("New Shares") for each Current Share owned. BioProgress 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, BioProgress Technology International's
articles of incorporation, BioProgress Technology International's bylaws or
BioProgress PLC's memorandum and articles of association.
A copy of BioProgress PLC's memorandum and articles of association are
exhibits to the registration statement of which this proxy statement/prospectus
forms a part and also 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 BioProgress PLC at the following address:
BioProgress PLC
Hostmoor Avenue
March, Cambridgeshire
PE15 0AX
United Kingdom
+44.1354.655.674
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. BioProgress Technology
International'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 BioProgress PLC articles of association provide
that a poll may be demanded by the chairman of the meeting, at least three
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
attend and vote at the meeting, or any shareholder(s) present in person or by
proxy, who hold shares providing a right to attend and 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. If a poll is not
demanded voting is by show of hands of those shareholders present in person, but
not by proxy. English law does not generally provide for cumulative voting.
BioProgress PLC's articles of association specify that two shareholders present
in person or by proxy and entitled to vote constitute a quorum regardless of the
number of shares held. Any BioProgress 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.
29
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. BioProgress PLC's articles of association contain such a provision.
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 BioProgress
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 BioProgress PLC ordinary shares must approve any final dividend to be
paid by BioProgress PLC at a general meeting of BioProgress PLC but no dividend
can exceed the amount recommended by the BioProgress PLC board. The BioProgress
PLC board has the power under BioProgress PLC's articles of association to
declare and pay interim dividends. BioProgress PLC will 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 .
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.
BioProgress PLC's articles of association permit the issue of redeemable shares
which may be redeemed at the discretion of BioProgress 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 BioProgress PLC,
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.
30
SPECIAL MEETING OF STOCKHOLDERS
Pursuant to Nevada law, 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. 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 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. BioProgress 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. 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 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 a regulatory information service in compliance with the AIM
Rules.
PREEMPTIVE RIGHTS
Pursuant to Nevada law, 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.
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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 BioProgress 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 otherwise 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 the court to cancel the alterations. 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
Under Nevada law 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 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
BioProgress 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 approved 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
32
up voluntarily under which, with the approval 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 so long as BioProgress PLC
is admitted to trading on AIM, must be disseminated through a regulatory
information service. See also "Interested Director Transactions" below.
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. Nevada law
provides that any stockholder who owns fifteen percent (15%) of issued and
outstanding 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 BioProgress
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 law 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. BioProgress Technology
International does not currently have a classified board.
English law permits a company to provide for the classification of the
board of directors. BioProgress PLC's articles of association currently provide
that unless otherwise changed by BioProgress PLC in a general meeting there
shall not be less than two directors. The directors are not subject to a maximum
number. Any director can be removed by the shareholders without cause by
ordinary resolution. 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. BioProgress 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.
33
The process functions in practice much like a classified board in a Nevada
company. 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 regulatory information service in accordance with the AIM
Rules.
In addition to the provisions of BioProgress PLC's articles of association,
BioProgress PLC is expected to confirm its compliance with the principles of
good governance and the 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 regulatory
information service in compliance with the AIM Rules.
VACANCIES ON THE BOARD OF DIRECTORS
Nevada law 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. BioProgress PLC's articles of association
provide that shareholders may, by ordinary resolution of a meeting at which any
director retires by rotation, reappoint that director or a person who is willing
to fill that vacancy as a director. BioProgress 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
34
officer or director in defending an 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 law 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, however, including
judgments against BioProgress PLC, based on the civil liability provisions of
the federal securities laws of the United States, may not be enforceable in
English courts. See "Enforcement of Civil Liabilities Against Foreign Persons."
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. BioProgress Technology International has not opted out of this
law.
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. BioProgress PLC will be subject
to the City Code. 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 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
35
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 BioProgress Technology International has not adopted
a shareholder rights plan or other takeover defenses the board of directors
could adopt one if the need arose.
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 at the time shareholder approval is given in respect of such action) or
in the shareholders being denied an opportunity to decide on its merits. The
rule has effectively discouraged the adoption any U.S. style takeover defenses
by English companies.
DISCLOSURE OF INTERESTS
Acquirors of shares of BioProgress Technology International common stock
are subject to disclosure requirements under Section 13(d) of the Exchange Act
and Regulations 13D and 13G 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 BioProgress Technology International's 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
BioProgress Technology International and to any securities exchange on which the
security is traded within 10 days after the acquisition. Additionally, officers
and directors and beneficial owners of 10% or more common stock of BioProgress
Technology International 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
BioProgress 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 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 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 a 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 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 BioProgress 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 BioProgress
PLC's ordinary shares and details of changes to such shareholding which increase
or decrease the holding through any single percentage must be disseminated
through a regulatory information service in compliance with the AIM Rules.
Under Section 212 of the Act, 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 the share capital.
When such a 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
36
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 BioProgress 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 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 the
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 terms for the
acquisition as it considers appropriate. English law provides stockholders with
rights to dissent in respect of a 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
37
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 disinterested 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 BioProgress PLC, BioProgress 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 BioProgress PLC.
However, BioProgress 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 the AIM Rules, details of any transaction between BioProgress 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 a regulatory
information service 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 the approval of the board and an affirmative vote of shareholders holding
not less than a majority of the voting power.
38
In England, except in relation to shareholder approval required in respect
of a substantial property transaction involving a director as referred to above
and except as may be required pursuant to AIM Rules referred to below, a company
may sell, lease or exchange its property and assets with the approval of the
board. Under the AIM Rules, details of any transaction which exceeds certain
specified size thresholds must be publicly disseminated through an regulatory
information service as soon as the terms of the transaction have been agreed.
Furthermore, under the AIM Rules any 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.
39
BUSINESS
HISTORY
In June 1991, U.S. Flywheel, Inc., a Californian company and a subsidiary
of Sunbird Technologies, Inc., a Utah corporation ("Sunbird Technologies")
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. In May 1996 U.S. Flywheel, Inc. sold all of its assets and
liabilities to Famous Sam's Group, Inc., a Nevada corporation incorporated in
1996, in exchange for shares in Famous Sam's Group, Inc. which were distributed
to the stockholders in U.S. Flywheel Inc. Famous Sam's Group Inc. 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 "BioProgress
Technology Limited Option Agreement") with certain of the shareholders of
BioProgress Technology Limited, an entity incorporated in England and Wales.
BioProgress Technology Colorado acquired approximately 62% of BioProgress
Technology Limited on November 11, 1998, and the remaining approximately 38% of
BioProgress Technology Limited on December 31, 1998, issuing an aggregate of
22,818,446 shares of Common Stock as the sole consideration for the acquisition.
BioProgress Technology Limited is the company originally responsible for
research and development of our product lines. In addition, in November 1997,
BioProgress Technology International and BioProgress Technology Limited entered
into an exclusive distribution agreement pursuant to which the BioProgress
Technology International became the exclusive distributor in the United States
and Canada of any products created by BioProgress Technology Limited. 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 BioProgress Technology Limited'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, BioProgress Technology acquired D.H.A. Nutrition
Limited, a company incorporated in England and Wales, as a wholly owned
subsidiary in exchange solely for 400,000 shares of Common Stock. The agreement
provided that the number of shares which BioProgress Technology issued in the
acquisition of D.H.A. Nutrition Limited could be increased by an aggregate of
600,000 shares based upon cumulative gross revenue targets in respect of D.H.A.
Nutrition Limited's feed and food supply sales, but such targets were not met.
The sole asset of D.H.A. Nutrition Limited 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 D.H.A. Nutrition Limited, which, we believe, will
offer the potential to expand the customer base for a proposed line of
vegetarian soft-capsule dietary supplements by BioProgress Technology Limited.
On February 15, 1999, BioProgress Technology 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. BioProgress Technology 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.
40
On April 5, 1999, BioProgress Technology 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 BioProgress Technology has
subsequently sold).
On July 6, 2001 we announced the completion of the acquisition of ProDesign
Technology Limited. ProDesign Technology Limited is a specialist design house
skilled in the use of Pro-E computer aided design techniques. After the
acquisition this team completed its third party design work and now works
exclusively on our product research and development.
On August 27, 2002 BioProgress Technology International announced that it
had executed an amendment to the license agreement held by EcoProgress.
BioProgress Technology International waived all outstanding royalties due to it
from EcoProgress and agreed to waive all future royalties that would accrue in
respect of sales of all products produced by EcoProgress under the terms of the
Exclusive License Agreement. In addition, BioProgress Technology International
and EcoProgress agreed to a mutual release of all obligations under the Research
and Development Agreement between the parties. In consideration for an agreement
to amend the exclusive License Agreement, EcoProgress has irrevocably waived any
and all rights it may have or may have had to participate in the ownership and
commercialization of BioProgress Technology International's technology as
employed in ostomy products. BioProgress Technology International will pay
EcoProgress 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.
BioProgress Technology International purchased 5,843,750 shares of common
stock, representing approximately 46.6% of the outstanding equity of The Healthy
Forum 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. BioProgress Technology
International has now 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
BioProgress Technology is 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. BioProgress Technology also develops
flushable and biodegradable products for the medical industry. BioProgress
Technology 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
Technology International, "we," "our" or the "Company"). BioProgress Technology
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
41
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 which we believe are 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 involving XGel film or film systems.
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 (Good
Manufacturing Practice facilities are required by the Food and Drug
Administration for companies to produce end products, prescription drugs
or over the counter drug products for consumers), Licensing will
eliminate the need for us to recruit skilled personnel to staff Good
Manufacturing Practice facilities,
- Licensing could 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 could reduce the risk of a competitive
response by industry peers,
- Licensing the manufacture of our technologies and focusing on research
and development will potentially allow us to employ our innovative
technological and engineering skills to maximum advantage, and
- Licensing the manufacture of our technologies will potentially 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
42
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. An ostomy pouch is a bag used to collect human waste
for individuals who have lost the use of all or part of their digestive system.
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 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. In
January 2003 we entered into an agreement with Farmasierra for the purchase of
an additional XGel(TM) film system. Farmasierra has agreed to lend us the funds
needed to begin construction of this system. We are also continuing discussions
to develop and expand our business together.
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 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 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.
On August 27, 2002 we entered into a patent license agreement with
Convatec, a division of Bristol-Myers Squibb Company, in respect of our ostomy
products.
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
43
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. The pharmaceutical
industry, for example, 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.
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 the XGel(TM) film system.
XGel(TM) Film System -- Ingestible Products: the XGel(TM) film 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 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
44
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 current 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, many of which may lead to a cheaper cost for the
encapsulation process overall. These advantages are:
- 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 these resultant
savings more than offset the somewhat higher raw material cost for
XGel(TM) film over gelatin powder. We believe that the net resultant
savings to our customers 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.
We believe our XGel(TM) film system to be a potentially revolutionary
development within the encapsulation industry since it was first established in
1935.
45
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 Convatec.
Commercialization of this product will be handled solely by this licensee and we
are not obligated to contribute to the cost of commercializing the product.
CLIENTS
XGEL(TM) FILM SYSTEM
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 and we have not entered into a new agreement with
them. 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. Historically, revenues have been derived predominantly from
development fees with the customers set forth under "-- Research and
Development."
We have begun to recognize some 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 installments,
$500,000 of which has been paid to date, with the two remaining
installments 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 our
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
systems. Peter Black may sublicense its rights under the license. Peter
Black has agreed to 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
46
agreement shall terminate on the later of the expiration of the last of
the licensed patents in the United Kingdom and the Republic of Ireland,
being 2022, 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.
We are capable of working with potential customers around the world,
although historically our customers have been in the U.S. and the UK.
FLUSHABLE AND BIODEGRADABLE PRODUCTS
We are not currently pursuing additional clients, other than our one
licensee, for our ostomy pouch since we are not focusing our sales, marketing or
creative efforts on these products. Our licensee is our sole customer for the
product and royalties under the license constitute all potential revenues for
this product.
We are capable of working with potential customers around the world,
although historically our customers have been in North America and the UK.
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 ostomy pouch 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 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 conducted in 1997 within the industry, we
believe that the U.S. retail market for vitamins and supplements was in excess
of at least $10 billion at that time. The market for vitamins, minerals and
dietary supplements in the United Kingdom was approximately L348 million in 1999
according to Information Resources Inc. 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.
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
47
that the pharmaceutical and over the counter medicinal sectors will continue to
grow for the same reasons as the vitamin supplement market.
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,
based on population estimates of predominantly Muslim countries, the Muslim
population now stands globally at approximately 935 million.
Certain formulations of XGel(TM) film are 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.
FLUSHABLE AND BIODEGRADABLE PRODUCTS
Based on information provided by our licensee, currently we estimate the
size of the ostomy market to be approximately $1 billion. Within this market, to
our knowledge, our ostomy pouch is the only flushable and biodegradable product.
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 primarily by R.P. Scherer, Pharmagel and others from South Korea
(because of their lower cost). 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 market for ostomy pouches is dominated by a small number of large
producers, none of which to our knowledge 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.
48
FLUSHABLE AND BIODEGRADABLE PRODUCTS
Our ostomy pouch will be manufactured and distributed through our exclusive
licensee, Convatec. 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. We do not
have written agreements with these suppliers to secure any quantity of film. 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 these 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
complete 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 we 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.
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 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 research
and development undertaken is not borne by our customers. Research and
development under certain product development agreements, as discussed below,
where specifically so stated, is borne by the licensees and/or manufacturers who
are our customers. There can be no
49
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(TM),
TabletWrap(TM), NRobe(TM), and Septum(TM) 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.
During February 2000, we executed an Exclusive Evaluation Agreement with
Proctor and Gamble 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, BioProgress Technology Limited 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.
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.
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 over the
counter drugs. FDA regulations require companies to meet relevant Good
Manufacturing Practice regulations for the preparation, packing and storage of
foods and over the counter drugs. Good Manufacturing Practices 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
50
directly regulated, we make efforts to cause our products to comply with
regulations in the various jurisdictions in which our customers are located so
that our customers can apply for regulatory approval to use XGel(TM)film systems
in their products.
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. We are not
currently nor do we expect to be required to obtain regulatory approval from
either the FDA nor the FTC for our XGel(TM) film or XGel(TM) film systems
although our customers may require approval to use them in their products.
U.S. REGULATORY PROCESS
The duration of the governmental approval process for marketing new
pharmaceutical substances, from the commencement of pre-clinical 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 (such
as to integrate XGel(TM) film), 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 by our customers 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 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 Good Manufacturing Practice
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.
The 1994 Dietary Supplement Health and Education Act revised the provisions
of the Federal Food, Drug and Cosmetic Act 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.
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
51
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 over the counter drug monograph. Over the counter 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 over
the counter 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 the 1994 Dietary Supplement Health and Education Act
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
that of our customers 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.
EMPLOYEES
As of December 31, 2002, we had 21 full-time employees and 1 part-time
employee. 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 2002, the number of full
time employees decreased 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 our key technical and senior management personnel and its continuing ability
to attract and retain highly qualified technical and managerial
52
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
BioProgress 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, BioProgress Technology Limited 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 ($526,909.59) in respect of our 5,843,750 shares of The
Healthy Forum, which The Healthy Forum has alleged are partly paid. On October
28, 2002 we served notice on The Healthy Forum that we intended to petition the
court seeking an injunction to restrain The Healthy Forum from taking any action
to forfeit our shares. Upon receiving such notice The Healthy Forum agreed to
defer any action in respect of its allegations pending resolution of the claim.
BioProgress Technology Ltd. has been named as a co-defendant in a
proceeding against our former Chief Financial Officer, Mr. Longley, relating to
shares of BioProgress Technology International allegedly owned by Mr. Longley
but claimed to be the property of the plaintiff. We believe this case to involve
a dispute between these two individuals and not to involve BioProgress
Technology Ltd. and therefore do not believe it will have an adverse effect on
our business. BioProgress International will comply with any valid court order
requiring a transfer on the stock ledger of the ownership of the disputed
shares.
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
BioProgress Technology International's Common Stock is currently quoted on
the Over The Counter Bulletin Board maintained by the National Association of
Securities Dealers, Inc., under the symbol "BPRG.OB." There was no trading in
the Common Stock prior to August 1996. The following table sets forth the range
of high ask and low bid quotations per share of the Common Stock as reported by
IDD Information Services, for the annual, quarterly and monthly periods
indicated.
<Table>
<Caption>
FISCAL YEARS ENDED HIGH ($) LOW ($)
- ------------------ -------- -------
December 31, 1997........................................... 2.00 0.125
December 31, 1998........................................... 1.75 .022
December 31, 1999........................................... 2.4375 0.2656
December 31, 2000........................................... 6.00 1.00
December 31, 2001........................................... 2.88 0.33
</Table>
53
<Table>
<Caption>
FISCAL QUARTERS ENDED HIGH ($) LOW ($)
- --------------------- -------- -------
March 31, 2000.............................................. 6 1
June 30, 2000............................................... 4.75 2.03125
September 30, 2000.......................................... 3.625 1.5
December 31, 2000........................................... 3.046875 1.4375
March 31, 2001.............................................. 2.88 1.5
June 30, 2001............................................... 1.69 1.04
September 30, 2001.......................................... 1.85 0.33
December 31, 2001........................................... 0.82 0.33
March 31, 2002.............................................. 0.92 0.88
June 30, 2002............................................... 0.57 0.48
September 30, 2002.......................................... 0.42 0.31
December 31, 2002........................................... 0.55 0.31
</Table>
<Table>
<Caption>
MONTHS ENDED HIGH ($) LOW ($)
- ------------ -------- -------
February 28, 2002........................................... 0.43 0.30
January 31, 2002............................................ 0.64 0.43
December 31, 2001........................................... 0.82 0.52
November 30, 2001........................................... 0.54 0.34
October 31, 2001............................................ 0.64 0.33
September 31, 2001.......................................... 0.62 0.33
August 31, 2001............................................. 1.15 0.68
</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
BioProgress Technology International has paid no dividends on the Common
Stock since inception and BioProgress PLC does not expect to pay such dividends
on its ordinary shares in the foreseeable future.
PREFERRED STOCK
In 2000, we issued 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.
At the effective time of the merger all outstanding shares of Series B
preferred stock will be converted into preference shares of BioProgress PLC.
54
STOCK OWNERSHIP TABLE
The following table sets forth certain information concerning the
beneficial ownership of BioProgress Technology International'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 2, 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. 9055 Huntcliff
Trace, Atlanta, GA 30350................................ 2,580,000(2) 5.2%
Barry J. Muncaster Woodlands Place, Moulton Road, Kennett,
Suffolk CB8 8QT......................................... 7,853,109(2, 3, 4, 5) 15.8%
Malcolm D. Brown 87 The Lammas, Mundford, Norfolk IP26
5DS..................................................... 4,614,277(4, 5) 9.3%
Graham R.M. Hind Silver Lodge, 22 Twentypence Road,
Wilbunton, Ely, Cambridgeshire CB6 3RN.................. 2,597,773(4, 5, 6) 5.0%
Edward Nowak 4 Davey Close, Impington CB4 4YJ............. 960,065(4, 5) 1.9%
Larry C. Shattles 9055 Huntcliff Trace, Atlanta, GA
30350................................................... 715,993(5) 1.5%
Carey B. Bottom 4901 Kingswood Drive, Greensbono, NC
27410................................................... 2,355,953(7) 4.7%
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
December 2, 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, 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
55
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 BioProgress Technology's historical
capitalization and indebtedness statement as at February 28, 2003 (except for
accumulated deficit and accumulated other income which is as of September 30,
2002). All amounts are unaudited. 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>
BORROWINGS
Bank overdrafts............................................. $ 408,592(1)
PREFERRED STOCK
Redeemable convertible preferred stock, Series B, par value
$2.50..................................................... $ 262,320
STOCKHOLDERS' EQUITY
Common stock................................................ $ 49,749
Additional paid in capital.................................. 26,363,412
Accumulated deficit......................................... (19,103,570)
Accumulated other comprehensive income...................... 124,327
------------
Total stockholders' equity.................................. $ 7,433,918
============
TOTAL CAPITALISATION........................................ $ 8,104,830
</Table>
- ---------------
(1) L258,602 was drawn on this UK pounds sterling denominated facility which
was equivalent to approximately $408,592 using the exchange rate of L1 to
$1.58 which was the closing rate on February 28, 2003.
56
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. Important
factors that could cause the actual results, performance or achievement to
differ materially from our expectations include the following: (1) one or more
of the assumptions or other factors discussed in connection with particular
forward-looking statements 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 products using out technologies; (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 our
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 fees pursuant to research and development
contracts, 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.
We currently have agreements with Peter Black and Farmasierra providing for
the purchase of XGel(TM) film systems, the future supply of film for use in the
film systems and license agreements to allow them to use XGel(TM) technology in
their products. Apart from the XGel(TM) film systems which they have already
committed to purchase, the recognition of revenues from the contracts is
dependent upon them beginning production of consumer products incorporating
XGel(TM) film in commercial quantities at which time we would begin to
57
recognize revenues from the sale of film and in royalty payments under licenses.
In addition we have previously completed, and are currently working on,
development contracts with a number of customers. Pursuant to these contracts we
design and develop consumer products (sometimes adapted from existing products)
which use XGel(TM) technology. The contracts usually involve our producing and
testing samples. In addition to receiving specified payments for completing this
development work, we hope that successful completion of these development
contracts will lead to execution of license, film supply and film system
agreements as development customers put the new or adapted products into
commercial production. See "Business -- Clients" and "-- Research and
Development" and "Risk Factors -- The loss of one of our largest customers could
cause our revenues to drop quickly and unexpectedly."
We have entered into an exclusive agreement with Convatec to commercialize
our flushable and biodegradable ostomy pouch. We are not obligated to fund the
commercialization of this product further although as part of the amendments to
our agreements with EcoProgress we agreed to pay EcoProgress a royalty of 5% of
all proceeds we receives on any account from our ostomy products up to a maximum
cumulative amount of US $1,000,000. See "Business -- History" and "-- Clients'
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
February 28, 2003, we had drawn L258,602 (equivalent to approximately $408,592)
on the overdraft. L300,000 is subject of a personal guarantee by Barry
Muncaster, BioProgress Technology International's former Chief Executive
Officer, and the remaining L100,000 is subject of a personal guarantee by Graham
Hind, BioProgress PLC's Managing Director and we do not expect the facility to
be withdrawn or curtailed in the foreseeable future.
We have reported earlier that BioProgress Technology International'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 three quarters of
2002 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.
58
RESEARCH AND DEVELOPMENT PROJECTS
The following table summarizes information relating to the material
presently ongoing related groups of research and development projects. The table
presents for such groups of projects, the amounts spent in the nine months ended
September 30, 2002 and for fiscal years 2001 and 2000 together with our current
expectation for completion of these projects and current expectations when such
projects will begin generating revenues.
<Table>
<Caption>
AMOUNT OF
R&D AMOUNT OF AMOUNT OF
EXPENDITURE FOR R&D R&D WHEN
THE NINE EXPENDITURE FOR EXPENDITURE FOR EXPECTED REVENUE
MONTHS ENDED THE YEAR ENDED THE YEAR ENDED DATE OF IS EXPECTED TO
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, COMPLETION OF BE REALIZED
PROJECT 2002 2001 2000 PROJECT FROM PROJECT
- ------- --------------- --------------- --------------- ------------- --------------
Liquid Fill Encapsulation......... $59,253.40 $1,191,138.55 $522,875.00 On going 2003
Powder & Solid Encapsulation...... 9,948.32 27,310.51 On going 2004
Ostomy............................ 2,547.27 6,849.94 End of 2003 2003
---------- ------------- -----------
$71,749.00 $1,225,299.00 $522,875.00
========== ============= ===========
</Table>
The above information is based on our current expectations and the results
of the projects thus far and is also contingent on our ability to continue to
devote the cash and other resources to such projects. We cannot assure you that
any of these projects will be completed successfully or even if completed
successfully that customers will decide to commercialize products that are
developed. Thus, even if successful, such projects may not necessarily lead to
our recognizing license, film or film system revenue
COMPARISON OF THE PERIOD FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 TO THE
NINE MONTHS ENDED SEPTEMBER 30, 2001
CONSOLIDATED STATEMENT OF OPERATIONS
As discussed above our operations were streamlined during the first three
quarters of 2002 to reduce cash burn and conserve resources 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 in 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 relating to fees under research
and development agreements.
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 in 2003.
On August 30, 2002 we executed a worldwide exclusive license agreement,
ending April 17, 2021, in respect of a variation of our flushable and
biodegradable technology with Convatec, a division of a 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. We will receive a license fee related to sales of
ostomy products containing our technology.
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 from the first agreement executed in October 2000, which has progressed
to Stage 3 as announced by us during April 2002. 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
59
categories are confidential. Boots will pay us $100,000 in two installments
pursuant to our agreement at key stages in the products development.
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 purposes. Our customers 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. We waived all
outstanding royalties due to us from EcoProgress and agreed to waive all future
royalties that would accrue in respect of sales of all products produced by
EcoProgress under the terms of an exclusive license agreement. In addition, we
and EcoProgress 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, EcoProgress 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 EcoProgress 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 for up to $200,000
paid in four equal installments on commencement of each optional development
program undertaken in the agreement.
On November 27, 2002 we executed a contract with a potential customer
whereby the potential customer paid us $500,000 for certain rights to evaluate
certain of our technologies. Under certain circumstances we may be required to
refund this amount.
On December 18, 2002 we executed a new product development agreement with a
global pharmaceutical company for $40,000 $20,000 of which has been paid and the
remainder is to be paid when we deliver specified sample products.
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 costs
of $25,081. The remaining expense in 2002 included materials purchased by the
ProDesign division to complete a consulting contract in place at the time of
acquisition 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
collaboration with Proctor and Gamble in development of XGel(TM) film system
variants. We do not expect to incur material cost of revenue expense until we
begin shipment of XGel(TM) film systems to customers, or unless we enter into
additional revenue based 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 reduction of expenditure in order to conserve cash
resources following the review and prioritization of projects which was begun in
2001. During 2002 and 2001, we have expensed as operating costs most continuing
research and development expenditures, and intend to
60
capture as cost of revenues only those expenses directly related to inventory of
film and film systems and the sale thereof and identifiable costs of development
contracts.
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 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.
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 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 ProDesign 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 amortize 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 of cost reductions during 2002.
General administration charges are likely to stabilize or slightly decrease
in the short term 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.
61
REALIZED AND UNREALIZED PROFIT (LOSS) ON MARKETABLE SECURITIES
A loss of $134,539 was recognized during the first nine months of 2002 as
compared to a loss of $444,060 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 net loss from operations of $1,766,524
was generated in the first nine months of 2002 compared to a loss of $4,926,383
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 we begin delivering XGel(TM) machines.
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 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% by way of $120,000 cash and $500,000
settlement of debt. Additionally, we provided The Healthy Forum with cash loans
since that time. The Healthy Forum has served notice on the Company alleging
that the 5,843,750 shares of The Healthy Forum 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 The Healthy Forum with a Statement of Claim
demanding, inter alia, that it withdraws its allegation, see "Legal
Proceedings".
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 PREFERRED STOCK
During the first nine months of 2002 a charge of $177,073 was recorded, as
compared to $268,133 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
62
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 to complete 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 development
engagements.
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.
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.
63
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 the notes to
the Consolidated Financial Statements, 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%.
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.
64
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 International 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 December 31, 2002, we had cash and cash
equivalents of $548,034 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
totaled $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 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.
On September 13, 2002 we were informed verbally by an officer of Fusion
Capital of their intention to terminate the contract providing for the purchase
of up to $6.0 million of our common stock 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.
65
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 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 proxy statement/prospectus
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 paid us $500,000 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 to 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. Management estimates that additional financing may be
required in the next twelve months 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 foreign currency exchange rates. We do not use derivative
financial instruments for speculative or trading purposes. The majority of our
operations are with our UK subsidiary. Accordingly, operating results can be
affected by fluctuations in the US dollar exchange rate with the UK pound
sterling. Currency exchange rates are determined by market factors beyond our
control and may vary substantially over a period of time. If the UK pound
sterling were to strengthen in relation to the US dollar, our reported sales
would be higher. The average exchange rate for fiscal 2001 was UKL0.69 per
US$1.00, respectively. A change of 10% in the average exchange rate would have
increased our 2001 net loss by approximately $393,000. As we begin to contract
more in continental Europe we should face similar risks relating to the Euro.
66
MANAGEMENT
The following table sets forth certain information with respect to each of
the directors, executive officers and certain key employees of BioProgress PLC.
On January 31, 2003 Carey B. Bottom resigned as a director of BioProgress PLC
and BioProgress Technology International for personal reasons. Barry J.
Muncaster who has served as the chief executive officer of BioProgress
Technology International has agreed to resign as a director and officer upon
completion of the Reincorporation. Mr. Muncaster will continue to provide advice
to BioProgress PLC as a consultant. Mr. Graham Hind will assume the role of
chief executive officer upon completion of the Reincorporation. Mr. Peter
Glynn-Jones has agreed to join the board of directors of BioProgress PLC as an
independent non-executive director effective upon completion of the
Reincorporation and to serve as chairman of the board and on the audit and
compensation committees. Messrs. Graham Cole and Alan Clarke have agreed to join
the board of directors of BioProgress PLC as independent non-executive directors
effective upon completion of the Reincorporation and to serve on the audit and
compensation committees. Mr. Larry Shattles has agreed to resign as a director
upon completion of the Reincorporation but will remain as a Vice President with
particular responsibility for US affairs. Mr. Malcolm Brown will continue as a
director and Executive Vice President of Research and Development but will
commence work on a part time basis following the Reincorporation. Other than the
foregoing, BioProgress PLC currently does not expect any change in the
management of BioProgress Technology International in connection with the
Reincorporation. See "-- Director Compensation" and "-- Employment Agreements
and Termination of Employment and Change-in-Control Arrangements."
<Table>
<Caption>
NAME AGE POSITIONS
- ---- --- ---------
Peter Glynn-Jones(1)(2)................... 56 Chairman of the Board of Directors
Robert Graham Mason Hind.................. 52 Director, Chief Executive Officer
Elizabeth Edwards......................... 28 Chief Financial Officer, Corporate
Secretary
Malcolm D. Brown.......................... 44 Director, Executive Vice President for
Research and Development
Edward Z. Nowak........................... 49 Head of Research and Development
Larry C. Shattles......................... 59 Executive Vice President
Dr. Stephen Kessel........................ 47 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
Alan Clarke(1)(2)......................... 52 Director
Graham Cole(1)(2)......................... 56 Director
</Table>
- ---------------
(1) Appointment will be effective as of the effective time of the Merger.
(2) Member of the Audit Committee and the Compensation Committee.
Peter Glynn-Jones, 56 has agreed to join the board of directors as its
chairman following the Reincorporation. He brings over thirty years of
pharmaceutical experience. He has worked in a variety of capacities for
SmithKline Beecham plc (formerly Beecham Group plc) since 1971. Since 1992 he
has served as Managing Director & Senior Vice President, Strategic Development
- -- Consumer Healthcare. His experience at SmithKline Beecham has focused on both
UK and international fast moving consumer goods and over the counter medicines.
He has had extensive experience in general management and senior strategic
planning and was one of the members of the Beecham team which negotiated the
merger with SmithKline Beckman. He currently serves as a non-executive director
of Peter Black plc. He received a Bachelor of Science degree in Economics from
the University of Wales at Cardiff.
Robert Graham Mason Hind, 52, is Managing Director of BioProgress PLC and
upon completion of the Reincorporation will function as the chief executive
officer of BioProgress PLC and its Subsidiaries. He has served as a Director and
Vice President of Sales and Marketing since 1998. He previously served as
Managing Director of DHA Nutrition Limited (UK) which was acquired by
BioProgress. 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
67
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 over the counter
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 DHA
Nutrition Ltd. In 1998 BioProgress Technology International acquired DHA
Nutrition Ltd. and Graham became a Director 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.
Elizabeth Edwards, 28, has served as Chief Financial Officer since Mr.
James Longley resigned in March 2002. She also serves as company secretary. She
received a Bachelor of Science degree in Applied Accountancy with honors 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.
Malcolm D. Brown, 44, has served as a Director and Executive Vice President
of Research and Development of the Company since inception in 1996. He has
served in similar positions with DHA Nutrition Limited (UK) since the
acquisition of that entity as a wholly owned subsidiary in August 1998. He is
responsible for the direction and implementation of our research and development
program, the production engineering of our products, and the environmental,
safety and performance compliance of all raw materials used. 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, 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.
Edward Z. Nowak, 49, has served as the Director of Research and Development
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
our encapsulation technology.
Larry C. Shattles, 59 was appointed a Director of the Company and Executive
Vice President of BioProgress Technology 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, 47, 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 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
68
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 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 crystallization. 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 fibers 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
organization 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.
Alan Clarke, 52, has agreed to join the board following the
Reincorporation. He is currently chairman of Venturia Plc for which he has been
a director since July 2002 with responsibility for developing strategic options
and undertaking a review and restructuring of executive management. In 2001 Mr.
Clarke was engaged by both Marsh Finance Ltd. and Highpoint Group to provide
strategic advice and other services. Between 1998 and 2000, Mr. Clarke served as
chief financial officer and a director of Top jobs.net plc During the same time
he served as a director of and was hired to provide strategic, corporate finance
and restructuring advice to the Heyco Group of Companies and its shareholders.
From 1996 to 1998 he served as Finance Director and Managing Director of Fatty
Arbuckles Group. Mr. Clarke is a qualified chartered accountant who was a
partner at Ernst & Young from 1986 to 1996.
Graham Cole, 56, has agreed to join the board of directors following the
Reincorporaiton. He presently serves as a non-executive director and consultant
to a variety of UK growth companies (both private and public). He was a
corporate finance director of Beeson Gregory Ltd., an investment bank focusing
on European growth
69
companies from 1995 to 2002. He currently serves as a non-executive director of
Stage Coach Theatre Arts PLC, Claims People PLC, Vantic PLC, Northamber PLC and
Recruitment Investment Group Ltd. He was a partner at Deloitte Haskins & Sells
(subsequently Coopers & Lybrand) from 1979 to 1995. He is a chartered public
accountant and received a Bachelor of Arts in Economics from Exeter University.
AUDIT AND COMPENSATION COMMITTEE
BioProgress Technology International has not historically had a separate
audit or compensation committee but these functions have been performed by the
full board. BioProgress PLC is establishing an audit and compensation committee
to be comprised solely of independent non-executive directors.
The Audit Committee will oversee the financial reporting process on behalf
of the board of directors and will be composed of independent non-executive
directors who are not officers or employees of the Company. Management has the
primary responsibility for the financial statements and the reporting process,
including the systems of internal controls. In fulfilling its oversight
responsibilities, the Audit Committee will review the audited financial
statements with management, including a discussion of the quality and the
acceptability of financial reporting and controls. The Audit Committee will
review with the independent auditors, who are responsible for expressing an
opinion on the conformity of those audited financial statements with generally
accepted accounting principles, their judgments as to the quality and the
acceptability of financial reporting and such other matters as are required to
be discussed with the Audit Committee under generally accepted auditing
standards. In fulfilling its oversight responsibilities, the Audit Committee
will review the audited financial statements with the independent auditors. The
Audit Committee will discuss with the independent auditors their continued
independence. The Audit Committee will review and approve any non-auditing
services to be provided by the auditors prior to the firm being retained to
perform such services. The Audit Committee will oversee the financial reporting
process on behalf of the Board. Management is responsible for the Company's
financial reporting process including its system of internal control, and for
the preparation of consolidated financial statements in accordance with
generally accepted accounting principles. The independent auditors are
responsible for auditing those financial statements. The Audit Committee's
responsibility is to monitor and review these processes. It is not their duty or
responsibility to conduct auditing or accounting reviews or procedures.
The Compensation Committee will review and set the compensation of the
executive officers of BioProgress PLC. The executive compensation program is
designed to attract and retain highly qualified executives and to motivate them
to contribute to BioProgress PLC's goals and objectives and its overall
financial success. Compensation for executives consists of both cash and
equity-based compensation. In determining executive compensation, the
Compensation Committee will review and evaluates information supplied by
management and base decisions on management recommendations as well as on
BioProgress PLC's performance and on the individual's contribution and
performance. The Compensation Committee will review the salary of each executive
officer in relation to previous salaries, personal performance, and salaries of
executive officers in the industry and general economic conditions. The salaries
will be set at levels intended to motivate and retain highly qualified
executives whom the Board believes are important to the continued success of
BioProgress PLC. Any annual incentive payments to executive officers will be
intended to encourage and reward excellent individual performances by managers
who make significant contributions to the financial success of BioProgress PLC.
BioProgress PLC will grant stock options to provide long-term incentives for the
executive officers. The option grants are designed to better align the interests
of the executive officers with those of the stockholders and to provide each
individual with a significant incentive to manage from the perspective of an
owner and to remain employed by BioProgress PLC. The number of shares subject to
each option grant will be based on the officer's level of responsibility,
relative position within BioProgress PLC, and is approved by the Board of
Directors.
DIRECTOR AND EXECUTIVE COMPENSATION
DIRECTOR COMPENSATION
Mr. Glynn-Jones will be paid an annual director and chairman's fee of
L35,000. In addition Mr. Glynn-Jones will be given an option to subscribe for up
to 20 units on or before December 31, 2006. Each unit will be
70
comprised of 7,500 ordinary shares and warrants to purchase up to 15,000
ordinary shares. The price per unit will be $2,475 (which is equivalent to $0.33
per share). The units may be paid for in dollars or their pounds sterling
equivalent at the time of purchase. The warrants are exercisable at a prices
ranging from $1 to $10 and expire on December 31, 2006. The terms of purchase
and of the warrants will be substantially the same as the terms of a previous
private placement conducted by BioProgress Technology International, Inc.
staring in February 2002 and described under "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Messrs. Clarke and Cole will be paid an annual director's fee of L23,000.
They will also be granted an option to purchase 6 units which are identical to
those offered to Mr. Glynn-Jones. As Mr. Clarke has agreed to be responsible for
establishing the audit committee we may ask him to devote approximately two days
per month over the first six months following the Reincorporaiton to
establishing the audit committee's procedures and to review and if necessary
improve our financial reporting system. We will pay him a per diem amount which
will be agreed with Mr. Clarke for these additional efforts.
Executives will not receive additional compensation for serving on the
board of directors.
EXECUTIVE COMPENSATION
The following summary compensation table sets forth the compensation of
Barry J. Muncaster, the former Chief Executive Officer of BioProgress Technology
International and our other four most highly compensated executive officers (the
"Named Executive Officers") for our last three completed fiscal years.
SUMMARY COMPENSATION TABLE
<Table>
<Caption>
LONG-TERM COMPENSATION
--------------------------------------
AWARDS
ANNUAL COMPENSATION RESTRICTED SECURITIES
-------------------------------- STOCK UNDERLYING ALL OTHER
FISCAL AWARD(S) STOCK COMPENSATION
NAME AND PRINCIPAL YEAR SALARY($) BONUS($)(1) ($) OPTIONS(#) ($)
POSITION ------ --------- ----------- ---------- ---------- ------------
- ------------------
Barry J. Muncaster.............. 2001 284,901(7) -- --(3) --(5)
Chief Executive Officer 2000 149,162(2) 76,338 100,000 1,896
and Chairman 1999 24,000 -- -- 500,000(4) 692(5)
James T.C. Longley.............. 2001 222,563(7) -- -- -- 100,000(3) 1,760(5)
Chief Financial Officer, 2000 112,039(2) 76,338 -- 500,000(4) 513(5)
Treasurer, Secretary, and 1999 24,000 -- -- --
Director
Malcolm D. Brown................ 2001 215,798(7) -- -- --(3) --(5)
Executive Vice President, 2000 111,556(2) 76,338 -- 100,000 1,178
Research and Development, 1999 24,000 -- -- 500,000(4) 1,205(5)
and Director
Greg L. Bowers.................. 2001 157,917(7) -- -- --(3) 4,442(5)
President of BioProgress 2000 125,000(2) 37,500 -- 100,000 14,553(6)
Technology and Director 1999 25,000 -- -- 500,000(4) --
Graham R.M. Hind................ 2001 165,166(7) -- -- --(3) 2,438(5)
Vice President of Sales and 2000 111,556(2) 76,338 -- 100,000 1,731(5)
Marketing and Director 1999 24,000 -- -- 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.
71
(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 $375,000 of compensation listed above was accrued but unpaid
at 12/31/01.
OPTION GRANTS TO NAMED EXECUTIVE OFFICERS
<Table>
<Caption>
INDIVIDUAL GRANTS(1)
-----------------------------------------
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS GRANTED TO
UNDERLYING OPTIONS EMPLOYEES IN FISCAL EXERCISE OR BASE
NAME GRANTED(#) YEAR 2001 PRICE ($/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 BioProgress Technology International 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
BioProgress Technology International has employment agreements with each of
the Named Executive Officers which will continue with BioProgress PLC. 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, BioProgress Technology International 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 the Chief Executive Officer; Mr. Brown is
to serve as our Executive Vice President of Research and Development; Mr. Nowak
is to serve as the Director of Research and Development; and Mr. Hind is to
serve as the Vice President. Each such executive officer serves in a similar
capacity with BioProgress Technology International, BioProgress Technology
Limited and DHA Nutrition Limited (UK), for which he receives no additional
compensation.
72
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.
Barry J. Muncaster has agreed to retire as a director and officer of
BioProgress Technology International and its subsidiaries upon completion of the
Reincorporation. At the effective time of the Merger, Mr. Muncaster's employment
agreement will terminate with no further obligations on either party (other than
the payment of any salary which has been earned but not yet paid or the
reimbursement of any expenses incurred up to such date). Mr. Muncaster has
agreed to continue to assist BioProgress PLC and its subsidiaries as a part time
consultant for one year following the Reincorporation (subject to extension by
agreement of the parties) pursuant to a consultancy agreement between Mr.
Muncaster and BioProgress PLC. Mr. Muncaster has agreed to be available to
provide advice for 12 days per month and will receive a consultancy fee of
L96,000 per annum. BioProgress Technology International and Mr. Muncaster have
agreed to amend the Option Agreement with Mr. Muncaster to provide that Mr.
Muncaster may exercise his outstanding options (in accordance with their other
terms) so long as he is either an employee of or consultant to BioProgress
Technology International, its parent or subsidiaries. Mr. Graham Hind has agreed
to accept the role of Managing Director of BioProgress PLC and after the
Reincorporation to act as chief executive officer of BioProgress PLC and its
subsidiaries. Due to the assumption of these additional duties, Mr. Hind's
annual compensation will be increased to L140,000 per year.
Following the Reincorporation, Mr. Malcolm Brown will reduce his work to a
part time basis (approximately three days per week) and his annual compensation
will thus be reduced to L75,000 per year.
Following the Reincorporation, BioProgress PLC expects to, but has no
binding obligation to, establish a UK pension plan for the executives.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
THE JADE PARTNERSHIP INTERNATIONAL, INC.
Jade is an affiliate of BioProgress Technology International 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 the opinion of
BioProgress Technology International, all transactions were at arms length. This
agreement provided that BioProgress Technology International was to pay $50,000
per month as a fee to Jade which, at the option of Jade, was convertible into
BioProgress Technology International's 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.
BioProgress Technology incurred management charges of $150,000 during 2000 and
$600,000 in 1999 with respect to the agreement. The balance due from Jade to
BioProgress Technology International at December 31, 2001 was $390,703 which
mostly represents amounts advanced by BioProgress Technology International 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.
73
TRUTONA INTERNATIONAL, INC.
TruTona is an affiliate of BioProgress Technology International 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,
other than Mr. Longley, of BioProgress Technology International. On February 15,
1999, BioProgress Technology International acquired from TruTona patents,
licenses and trademarks relating to a broad range of products. BioProgress
Technology International 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, BioProgress Technology International 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 BioProgress Technology International. BioProgress Technology
International 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 our director, Larry Shattles, for a nominal
rent.
LARRY SHATTLES
In February 2003 one of our directors, Larry Shattles, exchanged his and
his family's shares of common stock in BioProgress Technology International for
preferred shares of BioProgress Technology International carrying a right to
approximately 1.27% of the voting, dividend and liquidation rights. These shares
will remain outstanding following the Merger.
DESCRIPTION OF BIOPROGRESS PLC SHARE OPTION SCHEME
BioProgress 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 BioProgress PLC scheme will be a
combination of both.
SUMMARY OF THE PROPOSED BIOPROGRESS PLC SHARE OPTION SCHEME 2003 (THE "PROPOSED
SCHEME").
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.
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 BioProgress PLC
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 authorized committee.
Options are a matter entirely separate from participants' contracts of
employment.
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 BioProgress PLC of its results for any period.
Options may also be granted at other times which the board of directors
considers to be sufficiently exceptional.
74
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.
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 BioProgress PLC's issued ordinary share
capital from time to time. Options granted under any other discretionary share
option scheme operated by BioProgress PLC shall not count for the purposes of
this limit and vice versa.
LIMIT ON INDIVIDUAL PARTICIPATION
No person may, unless the board of directors 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 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 BioProgress PLC shall not exceed L30,000 or such
other limit may apply from time to time.
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.
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 of directors.
Exercise is permitted on a reconstruction, takeover or winding-up of BioProgress
PLC.
The board of directors intends to set performance conditions on the
exercise of options.
RIGHTS ATTACHING TO SHARES
All ordinary shares issued 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 issuance).
VARIATION OF CAPITAL
In the event of any variation of share capital the Board may make such
adjustments as it so determines.
ALTERATIONS TO THE EXECUTIVE SCHEME
The board of directors 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 favorable tax,
exchange control or
75
regulatory treatment for a participant or BioProgress. 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 favorable 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 BioProgress 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 reports 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
BioProgress PLC is a public limited company organized under the laws of
England and Wales. A majority of BioProgress PLC's directors and executive
officers are resident outside of the United States and most of the assets of
BioProgress 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. BioProgress 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 their own behalf against the company, in certain
limited circumstances. See "Comparison of Stockholder Rights."
76
BIOPROGRESS PLC
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
----
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
Fiscal Years 2001 and 2000 Audited Financial Information
Report Of
Independent Public Accountant............................. F-2
Consolidated Balance Sheets as at December 31, 2001 and
2000...................................................... F-3
Consolidated Statements if Cash Flows for the years ended
December 31, 2001 and 2000................................ F-4
Consolidated Statement Of Operations for the years ended
December 31, 2001 and 2000................................ F-6
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2001 and 2000............ F-7
Notes to Consolidated Financial Statements for the years
ended December 31, 2001 and 2000.......................... F-9
Fiscal 2000 and 1999 Audited Financial Information Report Of
Independent Public Accountant............................. F-22
Consolidated Balance Sheets as at December 31, 2000 and
1999...................................................... F-23
Consolidated Statement of Cash Flows for the years ended
December 31, 2000 and 1999................................ F-24
Consolidated Statement Of Operations for the years ended
December 31, 2000 and 1999................................ F-25
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2000 and 1999............ F-26
Notes to Consolidated Financial Statements for the years
ended December 3, 2000 and 1999........................... F-27
Nine Months Ended September 30, 2001 and 2002 Unaudited
Financial Information
Unaudited Consolidated Balance Sheets as at Nine Months
ended September 30, 2002
and December 31, 2001..................................... F-36
Unaudited Consolidated Cash Flow for the Nine Months ended
September 30, 2002 and 2001............................... F-37
Unaudited Consolidated Statements of Operations for the Nine
Months ended September 30, 2002 and 2001.................. F-39
Notes to the Consolidated Interim Financial Statements...... F-40
</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
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 1,250,000 shares authorized; 2,000 (2000: 2,000)
issued and outstanding*................................... 10 3,900 3,120
Redeemable convertible preferred stock, Series B, par value
$2.50 3,750,000 authorized; 127,000 (2000:108,000) issued
and outstanding*.......................................... 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>
- ---------------
* Portions in italics added after the date of the audit by Arthur Andersen LLP
and were therefore not subject to audit procedures.
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, 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
F-9
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
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 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
We generate revenues from licensing the rights to use our intellectual
property in the XGel(TM) FS, the sale of the XGel(TM) FS, 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) are recognized
when there is persuasive evidence of an agreement with a customer,
collectibility is probably, the fee is fixed or determinable, and we have no
continuing obligations relating to the arrangements. These factors vary by
contract, but generally revenue is recognized over the term of the contract
either time based or on some milestone basis.
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.
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%.*
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
- ---------------
* Portions in italics added after the date of the audit of Arthur Andersen LLP
and were therefore not subject to audit procedures.
F-10
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
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 BioProgress
Technology Limited 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:
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
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.
F-11
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
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. Of these advances $120,000 was by way of a capital
contribution to HF, $295,000 was is the form of a loan represented by a loan
agreement providing for interest to accrue at a rate of 3.75 per annum and the
principal is repayable in L5,000 monthly installments commencing May 2003, and
the balance of which HF have agreed to pay out of any future fund raising.*
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.
- ---------------
* Portions in italics added after the date of the audit by Arthur Andersen LLP
and were therefore not subject to audit proceedings.
F-12
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
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 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.
IMPAIRMENT TESTING
The Company evaluates long-lived assets, including goodwill and
identifiable intangible assets, for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future expected undiscounted
cash flows attributable to that asset. The amount of any impairment is measured
as the difference between the carrying value and the fair value of the impaired
asset. Fair value is determined generally based on discounted cash flows. Assets
to be disposed of are reported at the lower of the carrying amount or fair value
less costs to sell. The Company does not have any long-lived assets it considers
to be impaired.*
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
- ---------------
* Portions in italics added after the date of the audit by Arthur Andersen LLP
and were therefore not subject to audit proceedings.
F-13
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
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 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.
F-14
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
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-15
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.
F-16
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
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>
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.
F-17
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
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-18
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.
F-19
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
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.
<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>
F-20
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
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 fair* 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.
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
fair* 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.
- ---------------
* Portions in italics added after the date of the audit by Arthur Andersen LLP
and were therefore not subject to audit proceedings.
F-21
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
F-22
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).................. --
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
1,250,000 authorized; 2,000 (1999: 41,180) issued and
outstanding* (Note 9)..................................... 3,120 51,475
Redeemable convertible preferred stock, Series B, par value
$2.50 3,750,000 authorized, 108,000 (1999: 24,000) issued
and outstanding (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>
- ---------------
* Portions in italics add after the date of the audit by Arthur Andersen LLP and
were therefore not subject to audit procedures.
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated balance sheets.
F-23
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-24
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-25
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-26
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"), and DHA Nutrition
Limited. All significant intercompany transactions and balances have been
eliminated.
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.
ACCOUNTING POLICIES
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 2001. 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 2001. 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
F-27
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
services provided to existing clients, and decreases in operating expenses.
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 20 years (see
Note 4). 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 significant
acceptance criteria exist. If acceptance criteria exist, revenues are recognized
upon the earlier of customer acceptance or the expiration of the acceptance
period.
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 5. 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 arising on the acquisition of BTL in 1998, representing any excess
of the fair value of the consideration given over the fair value of the
identifiable assets and liabilities acquired is capitalized and written-off on a
straight-line basis over its useful economic life, which is considered to be 10
years. The amortization charge for 2000 and 1999 was $678,176 and $678,174
respectively.
EQUITY METHOD OF ACCOUNTING
The Company's 29.9% 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. 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%.
F-28
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
LONG-LIVED ASSETS
The provisions of Statement of Financial Accounting Standards (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.
SHARE-BASED COMPENSATION
The Company has adopted the disclosure provisions of 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 12 for a summary of the
pro-forma effects on reported net loss per share for the years ended December
31, 2000 and 1999 based on the fair value of options and shares granted as
prescribed by SFAS No. 123.
EARNINGS PER SHARE
Effective for the year ended December 31, 1998 the Company adopted 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, 2000 (1999: 3,000,000) 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 foreign currency
transactions, such as those resulting from the settlement of foreign receivables
or payables, are included in the consolidated statement of operations.
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 2000, our
top three customers accounted for 96% of total revenues. For legal reasons we
are unable to disclose the name of one of these customers. The other two
customers are Boots and EcoProgress.
F-29
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for derivative instruments and hedging activities". SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded on the balance sheet as either an asset or liability
measured at its fair value. The statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement or other comprehensive income (depending on the
type of hedge). To adopt hedge accounting a company must formally document,
designate and assess the effectiveness of transactions that receive hedge
accounting. To date the Company has not entered into any derivative instruments.
Thus, the Company anticipates that SFAS No. 133 will not have a material impact
on its consolidated financial statements.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, net of depreciation, and
consist of the following:
<Table>
<Caption>
2000 1999 USEFUL LIVES
---------- ---------- ------------
Freehold property....................................... $ 547,500 $ -- 20 years
Leasehold improvements.................................. 129,117 -- 7
Plant and machinery..................................... 272,732 234,638 4
Equipment under capital leases.......................... -- 4,021 4
Office equipment........................................ 222,743 36,807 4
Laboratory equipment.................................... 60,448 41,065 6
---------- ----------
1,103,423 445,648
Less-Accumulated depreciation........................... (221,960) (119,019)
---------- ----------
Total................................................... $ 881,463 $ 326,629
========== ==========
</Table>
The depreciation expense was $134,120 and $74,544 for 2000 and 1999
respectively.
4. MARKETABLE SECURITIES
Marketable securities consist of the following:
<Table>
<Caption>
2000 1999
-------- --------
Consolidated EcoProgress Technologies Inc................... $168,289 $367,306
Quoted UK investments....................................... 194,134 --
-------- --------
$362,423 $367,306
======== ========
</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.
F-30
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
5. INTANGIBLE ASSETS
<Table>
<Caption>
2000 1999
---------- ----------
Trademarks, licenses, patents............................... $1,368,569 $1,368,569
Less accumulated amortization............................... (274,063) (136,280)
---------- ----------
Net intangible assets....................................... $1,094,506 $1,232,289
========== ==========
</Table>
The licenses were purchased from TruTona International, Inc., a related
party as disclosed in note 10 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 $137,783 and $136,280 for 2000
and 1999, respectively.
6. OPERATING LEASE OBLIGATIONS
During June 2000 the Company purchased the premises it occupies in March,
Cambridge, UK. The lease in relation to this building was canceled as a result
of this purchase. Additionally, the Company signed as of January 31, 2001 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, 2000 are summarized as follows:
<Table>
2000........................................................ $ 102,083
2001........................................................ 175,000
2002........................................................ 175,000
2003........................................................ 175,000
2004........................................................ 175,000
Thereafter.................................................. 3,500,000
----------
Total....................................................... $4,302,083
==========
</Table>
Rental expenses under operating leases totaled $33,600 and $56,000 for the
years ended December 31, 2000 and 1999.
7. INCOME TAXES
The Company does not have any income taxes payable in 2000 or 1999. The
Company has net operating loss carry forwards of approximately $4,200,000
available in the U.S. and approximately $1,200,000 in the UK for 2000 available
to carry forward against taxable profits in each country, subject to agreement
with the relevant tax authorities. These net operating loss carry forwards
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.
8. RELATED PARTIES
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. Certain directors of the Company
are controlling shareholders in Jade. The Company has a contract with Jade,
under which Jade assists the Company in obtaining equity and debt financing, and
provides general business management, administration services, international
licensing and sales and marketing strategies. In the opinion of management, all
transactions are at arm's length.
F-31
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
The Company incurred management charges of $150,000 (1999: $600,000) during the
year. The balance due from Jade to the Company at December 31, 2000 was $111,323
(1999: due to Jade $780,850).
LARRY C. SHATTLES, DIRECTOR
The executive offices of the Company located at 9055 Huntcliff Trace,
Atlanta, Georgia are provided at an arm's length monthly cost of $1,000 by Larry
C. Shattles, a director of the Company.
ORMISTON-GORE SECURITIES LIMITED
Ormiston-Gore Securities Limited ("OGSL"), is a related party by virtue of
its shareholding in the Company. OGSL has entered into a lease agreement dated
March 1, 1999 with the Company for the rental of the premises in March,
Cambridge, U.K. The term of the lease is 15 years and the rental per month is
$5,600 with a security deposit of $16,800. Details of the operating lease
obligations are disclosed in note 7. This lease was canceled during June 2000 as
the Company purchased the premises from OGSL for cash consideration of $547,500.
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 (1999: $88,862) 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 $56,382 (1999: $nil) due to it from TruTona at December 31, 2000.
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 released as is being released to revenue over a period of ten
years.
THE HEALTHY FORUM LIMITED
The Company purchased 29.9% of the share capital of The Healthy Forum
Limited during April 2000 for $50,000. 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. In addition to the
initial investment the Company has loaned The Healthy Forum $198,000 during the
year to help fund working capital requirements. At December 31, 2000 the amount
owed by The Healthy Forum to the group was $198,000.
F-32
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
9. 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, 1999...... 41,180 24,000
Number of shares issued during year.......... -- 3,802,818
Number of shares converted during year....... (39,180) (3,718,818)
---------- ----------
Shares outstanding at December 31, 2000...... 2,000 108,000
========== ==========
Subscription price per share................. $ 1.00 $ 2.50
Value based on redemption rate at December
31, 2000................................... $ 3,120 $ 338,040
Proceeds from issuance....................... $ -- $9,089,546
Conversion date and rate to common shares
From January 1, 2000 on or before December
31, 2000................................... 1:1.0 1:2.5
From January 1, 2001 on or before December
31, 2001................................... 1:0.5 1:1.0
From January 1, 2002 on or before December
31, 2002................................... -- 1:0.5
Expiry of conversion rights.................. After 12/31/2001 After 12/31/2002
Conversion at discretion of.................. Holder Holder
Redemption date and amount per share
From January 1, 2000 on or before December
31, 2000................................... $ 1.56 $ 3.13
From January 1, 2001 on or before December
31, 2001................................... $ 1.95 $ 3.91
From January 1, 2002 on or before December
31, 2002................................... $ -- $ 4.88
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 andDecember
Voting rights................................ None None
Preferential liquidation rights.............. None None
</Table>
A charge has been accreted to accumulated deficit to reflect the $0.56
premium on Series A redeemable convertible preferred shares and the $0.63
premium on Series B redeemable convertible preferred shares.
F-33
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
10. 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, 2000.
<Table>
<Caption>
WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE
OUTSTANDING AS REMAINING WEIGHTED EXERCISABLE AS EXERCISE PRICE
EXERCISE OF DECEMBER 31, CONTRACTUAL LIFE AVERAGE OF DECEMBER 31, OF EXERCISABLE
DATE OF GRANT PRICE 2000 PRICE EXERCISE 2000 OPTIONS
- ------------- -------- --------------- ---------------- -------- ----------------------- --------------
January 25, 1999............ $0.35 600,000 1 year $0.35 600,000 $0.35
January 25, 1999............ $0.75 600,000 1 year $0.75 600,000 $0.75
January 25, 1999............ $1.25 600,000 1 year $1.25 600,000 $1.25
November 27, 2000........... $1.50 700,000 1 year $1.50 700,000 $1.50
January 25, 1999............ $1.75 600,000 1 year $1.75 600,000 $1.75
January 25, 1999............ $2.25 600,000 1 year $2.25 600,000 $2.25
--------- ---------
3,700,000 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 2000:
-- 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 2000 would
have been $773,903 (1999: $561,244). 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,
2000 1999
------------ ------------
Pro-forma net loss.......................................... ($7,659,254) ($3,638,188)
Pro-forma net loss per share applicable to common
stockholders
-- basic and diluted...................................... ($ 0.19) ($ 0.12)
</Table>
11. WARRANTS
On December 1, 2000 the Company issued 5,311,158 warrants to third parties
to acquire shares of common stock at any point after the date of issuance. The
consideration received for these warrants was an undertaking from the third
parties to provide sales and consultancy services with particular focus on
retail and distribution in
F-34
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 2001 AND 2000
Muslim states. The warrants have been 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
fair value of $1.3M and recorded as a prepaid expense in the balance sheet. The
$1.3M is amortized to the Statement of Operations over the two year term of the
warrants.
12. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following information is presented in compliance with the requirements
of SFAS No. 107, "Disclosures about Fair Value of Financial Instruments". The
carrying amounts and fair values of the material financial instruments are shown
below.
<Table>
<Caption>
DECEMBER 31, 2000 DECEMBER 31, 1999
---------------------------- ----------------------------
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
-------------- ---------- -------------- ----------
Cash and cash equivalents............. $3,818,717 $3,818,717 $ 5,818 $ 5,818
Marketable securities................. 362,423 362,423 367,306 367,306
Accounts receivable................... 826,251 826,251 201,803 201,803
Accounts payable...................... (173,185) (173,185) (387,912) (387,912)
</Table>
The fair values of financial instruments are deemed to be equivalent to the
carrying amounts as cash and cash equivalents and marketable securities are
short term items and readily convertible into cash.
13. SUBSEQUENT EVENTS
THE HEALTHY FORUM LIMITED (UK) ('THFL')
Subsequent to a reorganization of the share capital of THFL, on April 1,
2001, the Company exercised its option to purchase additional shares of common
stock, increasing its investment in THFL to 46.6% of the outstanding equity of
THFL for an additional $50,000. The Company now holds 5,843,750 ordinary shares
in THFL.
F-35
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS FOR THE THIRD QUARTER ENDED
SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
<Table>
<Caption>
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
US$ 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-36
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE THIRD QUARTER ENDED
SEPTEMBER 30, 2002 AND 2001
<Table>
<Caption>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2002 2001
-------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................. $ (2,084,240) $ (5,248,826)
Adjustments to reconcile net loss to net cash used in
operating activities Impairment of goodwill............ 167,706 --
Depreciation and amortization............................. 342,863 508,632
Share of loss of associate................................ 317,715 321,931
Realized and unrealized loss on marketable securities....... 210,630 363,840
Loss on disposition of fixed assets....................... 216,252 139,483
Accretion of Warrants..................................... -- (138,000)
Write-off prepaid expense................................. 630,728 --
Changes in operating assets and liabilities:
Accounts receivable....................................... 91,810 399,759
Amounts receivable from related parties................... (120,630) (503,558)
Prepaid expenses and other current assets................. 133,423 (325,394)
Deferred revenue.......................................... (1,276,900) (403,005)
Accounts payable.......................................... 393,912 422,556
Accrued expenses and other current liabilities............ 265,697 206,925
------------ ------------
Net cash used in operating activities..................... (711,034) (3,945,448)
============ ============
Cash flows from investing activities:
Purchases of property and equipment....................... (121,212) 710,074)
Net purchase of investments............................... -- (79,615)
Amounts advanced to equity investment..................... (28,715) (601,400)
Dividends paid............................................ (30,018) --
Cash acquired from acquisition............................ -- 14,908
------------ ------------
Net cash used in investing activities..................... (179,945) (1,376,181)
============ ============
Cash flows from financing activities:
Proceeds from sale of preferred stock..................... -- 1,462,918
Proceeds from sale of new units........................... 792,136 --
Bank overdraft............................................ 247,527 262,099
------------ ------------
Net cash provided by financing activities................. 1,039,663 1,725,017
------------ ------------
Effects of exchange rate changes on cash and cash
equivalents............................................ (143,139) (52,444)
------------ ------------
Net increase (decrease) in cash and cash equivalents...... 5,545 (3,649,056)
Cash and cash equivalents, at beginning of period......... 5,851 3,818,717
------------ ------------
Cash and cash equivalents, at end of period............... 11,396 169,661
============ ============
</Table>
F-37
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
UNAUDITED CONSOLIDATED STATEMENT OF CASHFLOWS FOR THE THIRD QUARTER ENDED
SEPTEMBER 30, 2002 AND 2001
<Table>
<Caption>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2002 2001
-------------- -------------
CASH PAID (RECEIVED) DURING THE PERIOD FOR
Interest.................................................. $ 12,296 $ (51,469)
Income taxes.............................................. -- --
</Table>
NON-CASH INVESTING AND FINANCING ACTIVITIES
The company sold its premises at Norwood Road for a total consideration of
$420,374. This consideration was in the form of a note receivable.
During the period, $502,640 and $1,422,146 of Redeemable convertible
preferred series B stock was converted into common stock during the years ended
31 December 2002 and 2001 respectively
F-38
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTERS ENDED SEPTEMBER 30, 2002 AND 2001
<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-39
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
SEPTEMBER 30, 2002 AND 2001
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
evaluates long-lived assets, including goodwill and identifiable intangible
assets, for impairment whenever events or changes in circumstances indicate that
the carrying value of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an
asset to future expected undiscounted cash flows attributable to that asset. The
amount of any impairment is measured as the difference between the carrying
value and the fair value of the impaired asset. Fair value is determined
generally based on discounted cash flows. Assets to be disposed of are reported
at the lower of the carrying amount or fair value less costs to sell. The
Company does not have any long-lived assets it considers to be impaired. 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 loss....................... $ 474,214 ($ 1,195,018) ($ 2,084,240) ($ 5,248,826)
Add back: Goodwill amortization......... -- 169,544 -- 508,632
--------- ------------ ------------ ------------
Adjusted net loss....................... $ 474,214 ($ 1,025,474) ($ 2,084,240) ($ 4,740,194)
========= ============ ============ ============
Reported net loss per common share...... $ 0.01 $ (0.03) $ (0.04) $ (0.12)
Goodwill amortization................... -- -- $ -- $ (0.02)
--------- ------------ ------------ ------------
Adjusted net loss per common share...... $ 0.01 $ (0.03) $ (0.04) $ (0.10)
========= ============ ============ ============
</Table>
<Table>
<Caption>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2000 1999
------------ ------------ ------------
Reported net loss................................... $ (7,681,978) $ (6,940,351) $ (3,074,944)
Add back: Goodwill amortization..................... $ 678,176 $ 678,176 $ 678,174
------------ ------------ ------------
Adjusted net loss................................... $ (7,003,802) $ (6,262,175) $ (2,396,770)
============ ============ ============
Reported net loss per common share.................. $ (0.17) $ (0.17) $ (0.10)
Goodwill amortization............................... $ 0.02 $ (0.02) $ 0.02
------------ ------------ ------------
Adjusted net loss per common share.................. $ (0.15) $ (0.15) $ (0.08)
============ ============ ============
</Table>
F-40
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, 2002 AND 2001
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.
Note 5. Termination of Fusion Contract. On September 16, 2002 Fusion
terminated its agreement with us. We effectively had a put option whereby Fusion
had agreed to purchase up to $6 million of our common stock as and when we
requested. The commencement of the funding is subject to certain conditions
including the effectiveness of a registration statement. We issued 970,350 to
Fusion as a prepaid expense for entering into the contract. On termination of
the contract, this prepaid expense was reversed. The $630,728 has been recorded
in the income statement within general and administrative expenses.
Note 6. Potential Liability in Healthy Forum Limited
On October 4, 2002 the Company 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 the Company served notice on The Healthy Forum that we
intended to petition the court seeking an injunction to restrain The Health
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.
F-41
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.
A-1
THIS AGREEMENT AND PLAN OF MERGER, dated as of December 20(th), 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 L1,000,850 divided into
100,000,000 ordinary shares, L0.01 par value ("Ordinary Shares"), 90,000 4%
Redeemable Non-Voting Preference Shares par value L.0.05 ("Non-Convertible
Preference Shares") and 80,000 4% Convertible Redeemable Non-Voting Preference
Shares, par value L0.05 ("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:
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;
A-2
(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 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
A-3
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 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 BioProgress Technology International'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.
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;
A-4
(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;
(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 sec. 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
A-5
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 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-6
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 BOTTOM
---------------------------------------------
Name: Carey Bottom
Title: President
ATTEST:
By: /s/ CHRISTINE 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: Chief Financial Officer
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-7
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
This First Amendment ("Amendment") is entered as of the 28 day of February, 2003
among BioProgress PLC, a company organized under the laws of England and Wales
("Parent"), BioProgress Holdings, Inc., a Nevada corporation which is wholly
owned directly or indirectly by Parent ("Holdings"), and BioProgress Technology
International, Inc., a Nevada corporation (the "BPI").
BACKGROUND
Parent, Holdings and BPI entered into an Agreement and Plan of Merger, dated as
of December 20, 2002. The parties desire to amend the Agreement to include
provisions relating to the Series C Preferred Stock par value $0.01 of BPI. In
light of the parties' desire to alter the Merger Consideration, the parties
desire to amend the terms of the Agreement as set forth below.
TERMS
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and other valuable consideration set forth herein, the parties hereto, intending
to be legally bound, hereby agree as follows:
1. Recital B. of the Agreement is hereby amended by deleting and replacing
it in its entirety with the following:
"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") and 627,675 shares, $0.001 par value, of
Series C Preferred Stock ("Series C Preferred Stock"). As of February 28, 2003,
417,601 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, 627,675 shares of Series
C Preferred Stock were issued and outstanding."
2. The following new Section 3.4 is hereby added to the Agreement:
"Series C Preferred Stock. Upon the Effective Date of the Merger, each
share of Series C Preferred Stock issued and outstanding immediately prior
thereto shall, without any action by the Constituent Corporations, the holder of
such shares or any other person, remain designated as Series C Preferred Stock
of the Surviving Corporation."
3. Except as expressly modified by this Amendment, the provisions of the
Agreement shall remain in full force and effect. Execution and delivery of this
Amendment shall not constitute or be deemed to be a waiver by any party of any
rights that such party may have under the Agreement. This Amendment shall be
governed by and construed and enforced in accordance with the laws of the state
of Nevada and, so far as applicable, the merger provisions of the Nevada Private
Corporation Law.
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 BOTTOM
-------------------------------------------
Name: Carey Bottom
Title: President
ATTEST:
A-8
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: Chief Financial Officer
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
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
THIS WRITTEN CONSENT IS BEING SOLICITED BY THE BOARD OF DIRECTORS OF
BIOPROGRESS TECHNOLOGY INTERNATIONAL, INC.
IF YOU APPROVE OF THE TRANSACTIONS DESCRIBED IN THE ENCLOSED PROXY
STATEMENT/PROSPECTUS, 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 IN LIEU OF A MEETING
THE UNDERSIGNED, being a holder of the number of shares of common stock,
par value $0.001, of BioProgress Technology International, Inc., a Nevada
corporation (the "Company"), listed below, hereby consents to the adoption of
the following resolutions, without a meeting in accordance with the procedures
established in Section 78.320(2) of the Nevada General Corporation Law and
hereby consents 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.
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, as amended on March 18, 2003, by and among the Company and
Holdings, is hereby authorized and approved;
RESOLVED, that the Plan is hereby adopted and approved in the form of Annex
A to the Proxy Statement/ Prospectus dated -- , 2003, together with any
amendments, supplements or modification made thereto in accordance with the
terms thereof;
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 to
be filed with the Secretary of State of Nevada which are attached to the Plan
(the "Articles"), 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
with the Secretary of State of the State of Nevada; and
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.
B-1
IN WITNESS WHEREOF, the undersigned have executed this Written Consent on
the date written below.
PLEASE COMPLETE, SIGN, DATE, AND RETURN THIS CONSENT PROMPTLY.
- --------------------------------------------------------------------------------
Print or Type name(s) of stockholders exactly as they appear on the certificate
evidencing stock
- ---------------------------------------------------------------------
Number of shares held of record and as to which consent is given
<Table>
Dated:
- --------------------------------------- ---------------
Signature of Stockholder
Dated:
- --------------------------------------- ---------------
Signature of Stockholder
</Table>
THE SIGNATURE(S) SHOULD BE EXACTLY AS THE NAME(S) APPEARS ON YOUR CERTIFICATE.
IF STOCK IS IN THE NAME OF (I) TWO OR MORE PERSONS, EACH PERSON SHOULD SIGN;
(II) A CORPORATION, THE PRESIDENT OR OTHER AUTHORIZED OFFICER SHOULD SIGN; (III)
A PARTNERSHIP, AN AUTHORIZED PERSON SHOULD SIGN IN THE PARTNERSHIP NAME. PERSONS
SIGNING AS ATTORNEY, EXECUTOR, ADMINISTRATOR, TRUSTEE, GUARDIAN OR OTHER
FIDUCIARY SHOULD STATE THEIR FULL TITLE.
B-2
ANNEX C
PAYER'S NAME:
- --------------------------------------------------------------------------------
<Table>
SUBSTITUTE PART 1 -- PLEASE PROVIDE YOUR
FORM W-9 TIN IN THE BOX AT RIGHT AND Social Security Number
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>
C-1
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE
PAYER.--Social Security numbers have nine digits separated by two hyphens: i.e.
000-00-0000. Employer identification numbers have nine digits separated by only
one hyphen: i.e. 00-0000000. The table below will help determine the number to
give the payer.
<Table>
<Caption>
- ------------------------------------------------------------- -------------------------------------------------------------
GIVE THE GIVE THE
FOR THIS TYPE OF ACCOUNT: SOCIAL FOR THIS TYPE OF ACCOUNT: EMPLOYER
SECURITY IDENTIFICATION
NUMBER OF -- NUMBER OF --
- ------------------------------------------------------------- -------------------------------------------------------------
1. An individual's account The individual 9. A valid trust, estate or The legal entity (Do not
2. Two or more individuals pension trust furnish the identifying
(joint account) The actual owner of the 10. Corporate account number of the personal
3. Husband and wife account or, if combined 11. Religious, charitable, representative or trustee
(joint account) funds, any one of the or educational unless the legal entity
4. Custodian account of a individuals (1) organization account itself is not designated in
minor (Uniform Gift to The actual owner of the 12. Partnership account held the account title.) (5)
Minors Act) account or, if joint funds, in the name of the
5. Adult and minor (joint either person (1) business The corporation
account) The minor (2) 13. Association, club or The organization
6. Account in the name of other tax-exempt
guardian or committee for organization
a designated ward, minor The adult or, if the minor is 14. A broker or registered The partnership
or incompetent person the only contributor, the nominee
7. a. The usual revocable minor (1) 15. Account with the
savings trust account The ward, minor or Department of The organization
(grantor is also incompetent person (3) Agriculture in the name
trustee) of a public entity
b. So-called trust account (such as a state or The broker or nominee
that is not a legal or local government,
valid trust under state The grantor-trustee (1) school district, or The public entity
law prison) that receives
8. Sole proprietorship agricultural program
account payments
The actual owner (1)
The Owner (4)
- ------------------------------------------------------ ------------------------------------------------------
</Table>
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's social security number.
(3) Circle the ward's, minor's or incompetent person's name and furnish such
person's social security number.
(4) Show the name of the owner.
(5) List first and circle the name of the legal trust, estate or pension trust.
NOTE: If no name is circled when there is more than one name, the number will
be considered to be that of the first name listed.
C-2
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
OBTAINING A NUMBER
If you do not have a taxpayer identification number or you do not know your
number, obtain Form SS-5, Application for a Social Security Number Card, or Form
SS-4, Application for Employer Identification Number, at the local office of the
Social Security Administration or the Internal Revenue Service and apply for a
number.
PAYEES EXEMPT FROM BACKUP WITHHOLDING
- An organization exempt from tax under section 501(a), or an individual
retirement plan, or a custodial account under Section 403(b)(7).
- The United States or any agency or instrumentality thereof.
- A state, the District of Columbia, a possession of the United States, or
any subdivision or instrumentality thereof.
- A foreign government, a political subdivision of a foreign government,
or any agency or instrumentality thereof.
- An international organization or any agency, or instrumentality thereof.
PAYEES THAT MAY BE EXEMPT FROM BACKUP WITHHOLDING:
- A corporation.
- A foreign central bank of issue.
- A dealer in securities or commodities required to register in the United
States, the District of Columbia, or a possession of the United States.
- A futures commission merchant registered with the Commodity Futures
Trading Commission.
- A real estate investment trust.
- An entity registered at all times during the tax year under the
Investment Company Act of 1940.
- A common trust fund operated by a bank under section 584(a).
- A financial institution.
- A middleman known in the investment community as a nominee or custodian.
- A trust exempt from tax under section 664 or described in section 4947.
PAYMENTS OF DIVIDENDS AND PATRONAGE DIVIDENDS NOT GENERALLY SUBJECT TO BACKUP
WITHHOLDING INCLUDE THE FOLLOWING:
- Payments to nonresident aliens subject to withholding under section
1441.
- Payments to partnerships not engaged in a trade or business in the
United States and which have at least one nonresident alien partner.
- Payments made by certain foreign organizations.
- Payments of patronage dividends not paid in money.
- Section 404(k) distributions made by an ESOP.
C-3
PAYMENTS OF INTEREST NOT GENERALLY SUBJECT TO BACKUP WITHHOLDING INCLUDE THE
FOLLOWING:
- Payments of interest on obligations issued by individuals. Note: You may
be subject to backup withholding if this interest is $600 or more and is
paid in the course of the payer's trade or business and you have not
provided your correct taxpayer identification number to the payer.
- Payments of tax-exempt interest (including exempt-interest dividends
under section 852).
- Payments described in section 6049(b)(5) to non-resident aliens.
- Payments on tax-free covenant bonds under section 1451.
- Payments made by certain foreign organizations.
- Mortgage or student loan interest paid to you.
Exempt payees described above should file a Substitute Form W-9 to avoid
possible erroneous backup withholding. FILE THIS FORM WITH THE PAYER, FURNISH
YOUR TAXPAYER IDENTIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE OF THE FORM,
SIGN AND DATE THE FORM AND RETURN IT TO THE PAYER.
Payments that are not subject to information reporting are also not subject to
backup withholding. For details, see regulations under sections 6041, 6041A,
6042, 6044, 6045, 6049, 6050A, and 6050N.
Privacy Act Notice. -- Section 6109 requires most recipients of dividends,
interest, or other payments to provide identifying number for identification
purposes and to help verify the accuracy of your return. Payers must be given
the numbers whether or not recipients are required to file tax returns. Payers
must generally withhold 30% (subject to minor reductions in the future) of
taxable interest, dividends, and certain other payments to a payee who does not
furnish a taxpayer identification number to a payer. Certain penalties may also
apply.
PENALTIES.
(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER. -- If you
fail to furnish your taxpayer identification number to a payer, you are subject
to a penalty of $50 for each such failure unless your failure is due to
reasonable cause and not to willful neglect.
(2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING. -- IF YOU
MAKE A FALSE STATEMENT WITH NO REASONABLE BASIS WHICH RESULTS IN NO IMPOSITION
OF BACKUP WITHHOLDING, YOU ARE SUBJECT TO A PENALTY OF $500.
(3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION. -- FALSIFYING CERTIFICATIONS
OR AFFIRMATIONS MAY SUBJECT YOU TO CRIMINAL PENALTIES INCLUDING FINES AND/OR
IMPRISONMENT.
FOR ADDITIONAL INFORMATION, CONTACT YOUR TAX CONSULTANT
OR THE INTERNAL REVENUE SERVICE.
C-4
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 BioProgress PLC shall be entitled to be
indemnified out of the assets of BioProgress PLC 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 favor
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 BioProgress PLC. 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 BioProgress PLC 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 favor 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 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.
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(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, BioProgress 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 BioProgress PLC for use herein.
II-2
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 -- BioProgress Limited
10.5 Employment Agreement -- Malcolm D. Brown(5)
10.6 Employment Agreement -- Edward I. Nowak(5)
10.7 Employment Agreement -- Graham Hind(5)
10.8 Professional Services Agreement -- The Jade Partnership
International, Inc.(5)
10.9 Professional Services Agreement -- Company and Ormiston-Gore
Securities Limited(5)
10.10 Professional Services Agreement -- BioProgress Technology
Limited and Ormiston-Gore Securities Limited(5)
10.11 TruTona Purchase Agreement(5)
10.12 Exclusive Evaluation Agreement, dated February 18, 2000
between the Company and the Fortune 500 company(6)
10.13 Technology Collaboration Agreement for the Development of
Non-Gelatin Paintballs, dated March 7, 2000 between the
Company and JT USA(6)
10.14 Agreement for Supply of Prototype Machine, dated July 24,
2000 between the Company and Peter Black(7)
10.15 Machine Supply Agreement, dated July 24, 2000 between the
Company and Peter Black(7)
10.16 Patent License Agreement, dated July 24, 2000 between the
Company and Peter Black(7)
10.17 Guarantee by BioProgress Technology Limited in favor of
Peter Black, dated July 24, 2000(7)
10.18 Option Agreement -- Barry J. Muncaster(7)
10.19 Option Agreement -- Edward Nowak(7)
10.20 Option Agreement Gregory L. Bowers(7)
10.21 Option Agreement -- Graham R.M. Hind(7)
10.22 Option Agreement -- James T.C. Longley(7)
10.23 Option Agreement -- Larry C. Shattles(7)
10.24 Option Agreement -- Malcolm D. Brown(7)
10.25 Stock Purchase Agreement -- Fusion Capital(7)
10.26 Premises lease -- Hostmoor property(8)
10.27 Agreement to lease -- Hostmoor property(8)
10.28 Agreement for Supply of Prototype Machine, dated July 10th,
2001 between the Company and Farmasierra, S.A.(8)
10.29 Machine Supply Agreement, dated July 10th, 2001 between the
Company and Farmasierra, S.A.(8)
10.30 Patent License Agreement, dated July 10th, 2001 between the
Company and Farmasierra, S.A.(8)
10.31 Film Supply Agreement, dated July 10th, 2001 between the
Company and Farmasierra, S.A.(8)
10.32 Consultant Supply Agreement, dated July 10th, 2001 between
the Company and Farmasierra, S.A.(8)
10.33 2002 Common Stock Offering of up to 600 units, including
warrants(8)
</Table>
II-3
<Table>
10.34 Product Development Agreement, dated November 26, 2001
between the Company and Boots(11)
10.35 Product Development Agreement (Stage 1), dated April 19,
2002 between the Company The Boots Company plc(11)
10.37 License Agreement between Convatec, a division of E.R.
Squibb & Sons LLC and BioProgress Technology International,
Inc. dated 27 August 2002 together with an amendment dated
11 November 2002(11) *
10.38 Consultancy Agreement between Barry J. Muncaster and the
Company, dated March 10, 2003
99.1 Letter to commission pursuant to temporary Note 3T(8)
99.2 Letter to Arthur Anderson LLP(9)
99.3 Agreement and Plan of Merger and First Amendment thereto
(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-KSB 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 Previously
(10) Filed as an Annex to the Prospectus.
(11) Filed herewith
</Table>
* Certain portions of the identified Exhibit have been omitted and separately
filed with the Commission based upon a request for confidential treatment.
(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) 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
II-4
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.
(c) 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.
(5) The undersigned registrant hereby undertakes:
(i) To respond to requests for information that is
incorporated by reference into the prospectus pursuant
to Items 4, 10(b), 11 or 13 of this form, within one
business day of receipt of such request, and to send
the incorporated documents by first class mail or
other equally prompt means; and (ii) to arrange or
provide for a facility in the U.S. for the purpose of
responding to such requests. The undertaking in
subparagraph (i) above includes information contained
in documents files subsequent to the effective date of
the registration statement through the date of
responding to the request.
II-5
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 March 19, 2003.
BIOPROGRESS PLC
By: /s/ ROBERT GRAHAM HIND
--------------------------------------
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 March 19, 2003.
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Robert Graham Mason Hind and Elizabeth Edwards,
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/ ROBERT GRAHAM HIND Chief Executive Officer (principal executive
- --------------------------------------------- officer) and Director
Robert Graham Hind
/s/ ELIZABETH EDWARDS Chief Financial Officer (principal financial
- --------------------------------------------- and accounting officer)
Elizabeth Edwards
/s/ LARRY SHATTLES Director
- ---------------------------------------------
Larry Shattles
/s/ MALCOLM DAVID BROWN Director
- ---------------------------------------------
Malcolm David Brown
</Table>
II-6
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 Kingdom, on March 18, 2003.
BIOPROGRESS TECHNOLOGY
INTERNATIONAL, INC.
By: /s/ BARRY J. MUNCASTER
--------------------------------------
Name: Barry J. Muncaster
Title: President
II-7