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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark one)
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 [Fee Required]
For the fiscal year ended December 31, 1998
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from ________________to________________
Commission file number 0-5576
BIOSPHERICS(R) INCORPORATED
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(Exact name of registrant as specified in its Charter)
Delaware 52-0849320
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
12051 Indian Creek Court, Beltsville, Maryland 20705
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(Address of principal executive offices)
Registrant's telephone number, including area code: 301-419-3900
Securities registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None
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Securities registered under Section 12(g) of the Act:
Common Stock ($.005 par value per share)
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(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |X|
The Registrant's revenues for its most recent fiscal year: $16,013,897.
As of February 26, 1999, the aggregate market value of the voting stock
was $59,542,744, of which $38,603,636 was held by non-affiliates of the
Registrant, based on the closing price of the such stock, as quoted by NASDAQ on
such date.
There were 8,987,584 shares of the Registrant's Common Stock outstanding
as of February 26, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Biospherics Incorporated definitive Proxy Statement to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A of
the Securities Exchange Act of 1934 not later than 120 days after the end of the
fiscal year to which this report relates, are incorporated herein by reference
into Part III of this Form 10-KSB.
Transitional Small Business Disclosure Format (Check One): Yes |_| No |X|
Page 1 of 31
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Biospherics Incorporated
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PART I
Certain statements contained in Form 10-KSB, including without limitation,
statements containing the words "believes," "estimates," "expects" and words of
similar import, constitute "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Such words and expressions are intended to identify such
forward looking statements, but are not intended to constitute the exclusive
means of identifying such statements. Such forward looking statements involve
known and unknown risks, uncertainties and other factors that may cause the
actual results, performance or achievements of the Company, or industry results,
to be materially different from any future results, performance or achievements
expressed or implied by such forward looking statements. Given these
uncertainties, prospective investors are cautioned not to place undue reliance
on such forward looking statements. The Company disclaims any obligation to
update any such factors or to publicly announce the results of any revisions to
any of the forward looking statements contained herein to reflect any events or
developments.
Item 1. DESCRIPTION OF BUSINESS
General
Biospherics Incorporated (the "Company" or "Registrant"), a Delaware
corporation, was founded in 1967. The Company consists of an Information
Services Division ("ISD"), Technical Services Division ("TSD"), and a BioTech
Programs Unit ("BioTech"). As part of BioTech, the Company is also developing
its own proprietary products.
The principal executive offices of the Company are located at 12051 Indian
Creek Court, Beltsville, Maryland 20705, and its telephone number is (301)
419-3900. The Company's internet website address is http://www.biospherics.com.
The Company's Common Stock trades on the NASDAQ National Market System under the
symbol BINC.
Information Services Division
ISD's information professionals operate information-centers providing
materials and information to the public on various health and socially
beneficial subjects, as well as other information services, such as reservation
and tourism services. ISD researches, collects, organizes and disseminates
information by providing customized information-center services combining
advanced data collection systems, expert decision support systems, and
tele-support utilizing live operators, audio libraries, and advanced
telecommunication technologies like Interactive Voice Response (IVR) and
Computer Telephony Integration (CTI). ISD answers millions of calls annually
from professionals and the public nationwide. It operates two Maryland-based
information-centers (Beltsville and Cumberland, MD) that efficiently manage and
track high volumes of data and calls. Coupling ISD's expert staff with its
advanced technologies results in an efficient and effective system to collect
and disseminate large amounts of information at reduced cost.
The health and commercial projects provide computerized health,
pharmaceutical, medical data, and clinical trials management services ranging
from in-bound and out-bound telesupport for information gathering and
dissemination, to health-professional operated decision support systems
servicing health organizations. ISD specializes in health issues and provides
information services on a wide range of diseases and disabilities, disease
prevention, and education. Areas of expertise include Alzheimer's disease, AIDS,
cancer, diabetes, heart disease, stroke, smoking, aging, and environmental
hazards such as mishandling of pesticides. Programs are staffed by health
professionals and other information specialists who are given extensive training
and strict quality control guidelines. The Company's clients have included many
of the major U.S. pharmaceutical companies, as well as government departments
that deal with health or education, such as the National Institutes of Health,
other agencies in the Department of Health and Human Services, the Department of
the Navy, and the General Services Administration. Contracts with
non-governmental parties are typically obtained following private negotiations.
Projects range from months to years in duration. Contracts with governmental
parties are obtained after a competitive bidding process and are most often for
terms ranging from two to three years, with additional option years.
During 1998, the Company expanded its traditional information-center
services business to include demand mangement information services to HMOs,
other group health organizations, insureers and employees in company health
plans. Biospherics' demand mangement service uses the Company's proprietary
algorithm software to give accurate and fast information to callers with health
problems through our trained nurses. A separate marketing and managerial
infrastructure was created with the intent of creating a new subsidiary,
CQHealth, to assume the Company's demand management and portions of the
traditional ISD business. Plans to form the subsidiary in partnership with a
West Coast physician group were not transacted due to a lack of strategic
benefit and the inability to resolve geographic issues. The CQHealth venture has
produced insufficient revenues to offset the increased costs, the Company has
reduced the marketing and related administrative costs by realigning these
services with the Company's Information Services Division.
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Biospherics Incorporated
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ISD accounted for 98% of the Company's total revenues in 1998. While
contracts are numerous, most of ISD's revenue traditionally has been generated
by a few large government and commercial contracts. See Note 1, "Receivables" of
the Notes to the Financial Statements included herein pursuant to Part II of
this Form 10-KSB. During 1998, government business accounted for approximately
70% of ISD's business. The Company was awarded a contract for the National Park
Service's National Park Reservation Service, which commenced on March 15, 1998.
This is a two-year, firm-fixed-price contract aggregating $5 million, with a
provision for three option years. On October 15, 1998, the Company was awarded
the Maryland 800 Call Center Services contract for 2 years plus 3 option years,
at potentially $1,200,000 per year.
Government contract awards are from time to time subject to protest
proceedings by competitive bidders. As of December 31, 1998, none of the
Company's awards were under protest. On September 30 and November 30, 1998,
respectively, the Company completed contracts for the Forest Service and for the
Corporation for National Service. On February 18, 1999, the Company was awarded
an information center contract for the Federal Trade Commission, which commenced
March 1, 1999. This is a one-year contract, with provisions for two option
years, aggregating $2,700,000 if all options are exercised.
Technical Services Division
TSD provides internal and external technical services including software
engineering, telecommunications, network infrastructure, internet provision, and
all other services of a computer or systems technology nature. TSD has
engineered three products that have been used to deliver services via ISD.
Historically and strategically, services and products of the TSD are utilized
and/or delivered via ISD. TSD products include the following: ReserveSuite,
InfoSuite, and HealthSuite. ReserveSuite is a comprehensive system for reserving
elements of an inventory, with reporting and full management capability, client
server based in Oracle as well as Web-enabled. ReserveSuite is used by ISD on
the National Park Service contract, where the inventory consists of parks,
campgrounds, tours, and other resources, which are reserved via customer service
representatives, park operators, and the public. InfoSuite is a database and
search-engine product, client-server based in Oracle and Web-enabled, used to
handle large volumes of data, categorize and cross-reference data, perform
expert searches, present results of data searches, and other various related
functions. Currently ISD utilizes InfoSuite to service its Maryland 800 Call
Center contract, performing referral and data-housing and searching services.
HealthSuite is a comprehensive product targeting clinical information support in
the health industry, providing advanced database management capabilities with
clinical data. HealthSuite provides tools for clinical management, clinical
demographics, demand management, disease management, algorithmic expert system
functions, and other related capabilities. HealthSuite is currently used on
several pharmaceutical and health service commercial contracts in ISD; it is
client-server based and Web-capable.
BioTech Programs Unit
BioTech is the Company's research and development arm, dedicated to
developing proprietary products and services with a view toward economic
commercial applications. The Company has accumulated a number of patents on its
products.
D-Tagatose as a Bulk Sweetener. BioTech has patented the use of a
naturally occurring sugar, D-tagatose, as a full bulk, low-calorie sweetener. It
is a true sugar that looks, feels, and tastes like table sugar. D-Tagatose is
present in small amounts in a number of foods, including dairy products.
Biospherics has been developing the product since receiving a patent for its use
as a low-calorie sweetener in foods and beverages in 1988, and two patents for
its production process (1991 and 1992).
In January 1997, the Company completed a license agreement with MD Foods
Ingredients amba (MDFI) of Denmark for the exclusive worldwide rights to
manufacture, market, and distribute D-tagatose as a food ingredient in return
for a non-refundable up-front payment and a royalty schedule based upon net
sales of the sugar. In return for the exclusive license, MDFI took
responsibility for all future marketing and development expenses, including the
cost of constructing and operating production plants. MDFI manufactures a wide
variety of dairy products, foods and food ingredients. The Danish dairy company
ranks as one of the largest dairy products companies in the world. It has the
largest whey protein processing plant, the by-product of which is raw material
for making D-tagatose. MDFI is widely regarded as a manufacturer of high quality
products and has the capability for worldwide distribution.
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Biospherics Incorporated
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Total payments received from MDFI were $2.5 million, $1 million of which
is a non-refundable advance against future royalties. Biospherics will receive
running royalties once commercial sales of D-tagatose begin. To strengthen their
cooperative efforts, the two companies established an advisory committee to plan
and review progress in bringing D-tagatose to its various world market sectors.
The committee consists of three MDFI representatives and one Biospherics
representative. The committee proposes strategies and actions for MDFI
management's consideration. MDFI has funded Biospherics for technological
support in excess of $500,000 since the signing of the license agreement.
MDFI expects to enter the U.S. sweetener market. A panel of experts has
been retained to determine whether D-tagatose qualifies as Generally Recognized
as Safe (GRAS) which, under FDA regulation, would permit its sale in the U.S.
MDFI has designed a commercial plant to manufacture D-tagatose, but construction
has yet to begin. The GRAS Expert Panel has been reviewing the extensive safety
data submitted to it. Following a meeting with the Panel in early March 1999,
MDFI reported that the Panel will complete its review in the near future.
The Company believes that D-tagatose will be declared GRAS, and will fill
a market not currently accessible to other sweetener products. That market may
initially include chewing gum, chocolate candy, confections, ice cream, frozen
desserts, diet sodas, cereals, and frosting. Later, market applications may
broaden to include baked goods, heat-processed foods, and other dairy products,
and other products in which the full bulk of sugar is required. Biospherics
believes that chocolate candies and chewing gum are excellent introductory uses
for its nonfattening sugar because each constitutes a large market and each uses
sugar as a major ingredient. Manufacturers have long sought a low-calorie,
full-bulk substitute for table sugar in chocolate candy; however, none has been
as successful in emulating the flavor of table sugar as has D-tagatose. Also,
unlike table sugar, D-tagatose has been shown to cause no tooth decay.
D-Tagatose as an Anti-hyperglycemic Agent. The Company has received
additional key patents for the use of D-tagatose as an anti-hyperglycemic agent
to prevent the formation of advanced glycosylation end-products, which is one of
the major causes of aging (1994). The use of D-tagatose as a treatment for
diabetes has been clinically demonstrated and patented (1995). These patent
rights are retained by Biospherics. Studies are ongoing at the University of
Maryland School of Medicine. The Company is discussing the possibility of
licensing the use of D-tagatose for drug uses with pharmaceutical and
nutritional products companies. Other uses for D-Tagatose outside the scope of
the license to MDFI are being pursued.
Safe-for-Humans Pesticides. The increasing concern over pesticide hazards in
foods and the general environment indicates a market for an economical and
effective product that poses no human threat. The Company has received two U.S.
patents for its safe-for-humans pesticides and insecticides. The pesticides were
invented by the Company in response to the EPA's initiative urging the
development of alternatives to the "hard chemicals" commonly used in agriculture
and animal husbandry. These chemicals are known to be carcinogenic or otherwise
toxic to humans, and pose a risk to consumers of food products containing
traces. The new pesticide is made from compounds that are safe, even when
directly ingested by humans or other animals. They were developed for use
against house flies, on which testing has been concentrated, but additional
susceptible insects may include other types of flies, ants, mites, and related
insects. Work performed in 1998 advanced one of these products for which
trademark application has been made for the brand name, "FlyCracker." However,
additional use studies need to be performed.
Biospherics' research efforts and investment are largely devoted to
continuing to assist MDFI in the development of D-tagatose because of the
near-term favorable prospects for this product. However, studies of the
effectiveness of D-tagatose against diabetes, and further development of the
pesticides are other active projects. While other BioTech proprietary products
show promise, the continued development thereof is dependent upon many factors,
including but not limited to, the Company's having sufficient funds and
resources to pursue them.
Industry Segments
See Note 9 "Information by Business Segment" of the Notes to the Financial
Statements included herein pursuant to Part II of this Form 10-KSB for industry
segment information of the Company, which information is incorporated herein by
reference.
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Biospherics Incorporated
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Competition
The information systems industry is subject to rapid and significant
technological change. The Company is in competition with other information
services companies across the Nation. Many of these competitors have
substantially greater financial and technical resources than the Company. While
acknowledging strong competition from other information services firms,
Biospherics has developed a specialized niche by concentrating on high quality,
personalized service combined with computerization for efficiency and
cost-effectiveness. The Company has established a reputation for rapidly
starting up information projects to meet its clients' critical needs, while not
compromising high quality and reasonable pricing. Over the past two years, the
Company has invested over $2 million in state-of-the-art computer telephony
integration (CTI) systems and over $2 million in the development of specialized
computer software products to improve its competitive position.
Competitors of BioTech are numerous and include, among others, major
pharmaceutical, chemical, consumer, and biotechnology companies, specialized
firms, universities and other research institutions. There can be no assurance
that the Company's competitors will not succeed in developing technologies and
products that are more effective than any that are being developed by the
Company or that would render the Company's technology and potential products
obsolete and noncompetitive. Many of these competitors have substantially
greater financial and technical resources and production and marketing
capabilities than the Company.
Over the past several years, various sugar alcohols have been used in food
products as bulk sweeteners. However, none has the taste of table sugar and most
are more caloric than D-Tagatose. Bulk sweeteners are used in products where the
bulk of sugar is essential, such as baked goods, chocolates, and ice cream. High
intensity sweeteners, such as aspartame and saccharin, do not provide the bulk
needed for these products. Recently, another high-intensity sweetener,
Erythritol, has become poised to enter the U.S. market as a self-affirmed
Generally Recognized as Safe (GRAS) product. It is deemed low-calorie, but has a
cooling taste unlike table sugar or D-tagatose.
Sales Backlog
Sales backlog at December 31, 1998, and 1997, were as follows ($000s):
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
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Current Long-Term Total Current Long-Term Total
---------- -------------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Information Services Division $ 10,588 $ 14,040 $ 24,628 $ 11,070 $ 10,539 $ 21,609
BioTech Programs Unit 200 1,000 1,200 200 1,000 1,200
---------- ------------- ------------ ------------ ----------- -----------
$ 10,788 $ 15,040 $ 25,828 $ 11,270 $ 11,539 $ 22,809
---------- ------------- ------------ ------------ ----------- -----------
</TABLE>
Patents and Trademarks
The Company has established a strong worldwide patent position for
D-tagatose and an economical process for its manufacture. The Company's 1988
U.S. patent for the use of D-tagatose as a low-calorie sweetener/bulking agent
has subsequently been obtained or filed in many countries. The Company developed
a proprietary method for manufacture of D-tagatose that is protected by two U.S.
patents, issued in 1991 and 1992. In October 1994, the Company received a patent
for the discovery that D-tagatose is effective in reducing hyperglycemia, one of
the principal causes of physical and mental aging. In September 1995, it
received a patent for the use of D-tagatose in treating diabetes.
In November 1992, a U.S. patent was awarded to the Company for its
safe-for-humans pesticide. In December 1997, the Company received a U.S. patent
on another safe-for-humans pesticide. The Company has also applied for foreign
patents for these products.
With respect to all of its inventions, the Company has received
approximately 100 patents, including foreign issues. It has several patents
pending and many additional invention disclosures. In addition to its strong
patent position, the Company also relies on the common law protection of such
information as trade secrets and on confidentiality agreements to protect the
value of these assets.
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Biospherics Incorporated
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Governmental Regulation
The business activities of the Company are subject to a variety of Federal
and state compliance, licensing, and certification requirements. Management
believes that the Company is, and has been at all times, in full compliance with
Federal and state environmental protection and worker safety laws. The Company
has not incurred significant expense in complying with such laws and does not
anticipate material expense, except for the FDA approval for commercialization
of D-tagatose (which is to be borne by MDFI). Commercialization of D-tagatose in
the United States for use as food additives will require FDA approval. As of
this date, Biospherics believes the results of its test program warrant
continuing the development efforts to provide a broad family of low-calorie
sweeteners. To the Company's knowledge, there is no current government
regulation of the services to be provided via the healthcare information
services. However, there can be no assurances that such regulations will not be
initiated, which could adversely affect the Company's pursuit of these services.
Research and Development
BioTech expenditures for research and development were approximately
$411,000 and $557,000 in 1998 and 1997, respectively. These expenditures were
incurred primarily in the ongoing efforts to commercialize D-tagatose, including
its development for drug uses, with a minor portion to develop the Company's
safe-for-humans pesticides.
Employees
In 1998, the Company employed an average of 342 persons on a full or part
time basis. Of this total, approximately 195 were full-time employees. The
Company's employees are not currently unionized, and management believes that
its relations with the Company's employees are harmonious.
Item 2. DESCRIPTION OF PROPERTY
In November 1997, the Company signed a new lease agreement effective May
1, 1998, for 51,625 square feet of office/call center/research labs/warehouse
space in the same Beltsville, Maryland, facility previously occupied, under the
terms of a lease that expires on April 30, 2008. This facility contains
corporate administration, human resources, accounting, sales and marketing,
technical services, research labs, warehousing, and call center operations.
The Company currently leases space for its ISD telesupport services in a
15,230 square foot facility in Cumberland, Maryland.
Item 3. LEGAL PROCEEDINGS
Information required by this Item 3 is included in Note 6 "Commitments and
Contingencies" of the Notes to Financial Statements included herein pursuant to
Part II of this Form 10-KSB.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted by the Company during the fourth quarter
of 1998 to a vote of security holders, through solicitation of proxies, or
otherwise.
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Biospherics Incorporated
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PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded in the over-the-counter market and is
quoted in the NASDAQ National Market System under the symbol BINC. No cash
dividends were paid in 1998 or 1997. The Company's loan agreement with its bank
does not expressly restrict the payment of dividends; however, no such payments
are anticipated in the near future.
As of February 26, 1999, the number of shareholders of record of the
Company's common stock was approximately 4,800. The following table sets the
high and low sales prices of the Company's common stock for each quarter during
the two year period ended December 31, 1998, as reported on the NASDAQ National
Market System.
High Low
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1st Quarter 1998 $8 1/2 $4 1/8
2nd Quarter 1998 $5 1/2 $3 3/4
3rd Quarter 1998 $7 $3 1/4
4th Quarter 1998 $8 1/4 $3 3/4
1st Quarter 1997 $7 7/8 $5 7/8
2nd Quarter 1997 $6 5/8 $4 3/4
3rd Quarter 1997 $12 1/2 $3 7/16
4th Quarter 1997 $8 1/16 $4 5/16
In December 1997, the Company completed a $3 million private offering of
375,000 units to a single institutional investor. Each unit consisted of two (2)
shares of Common Stock and two (2) warrants, with exercise prices of $4.00 and
$4.50 per share, respectively. The warrants are exercisable for a three (3) year
period. During 1998, 75,000 shares of the Company's common stock were purchased
through the exercise of these warrants.
The transaction was effected in compliance with the exemption from
securities registration afforded by the provisions of Regulation D as
established by the United States Securities and Exchange Commission and the
Securities Act of 1933. In connection with this private placement, the Company
issued warrants to various placement agents which could result in up to an
additional 120,000 shares of Common Stock being issued. During 1998, 57,501
shares of the Company's common stock were purchased through the exercise of
these warrants.
The Company filed, on March 23, 1998, a Registration Statement on Form S-3
for the resale of the registrable securities covered by these transactions. See
Note 4 to the financial statements included herein pursuant to Part II of the
Form 10-KSB.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations--1998 Compared with 1997
The Company reported a net loss of $1,980,594 ($0.23 per share) on sales
of $16,013,897 for the year ended December 31, 1998, compared with a net loss of
$141,852 ($0.02 per share) on sales of $13,639,319 in 1997. Results for 1998
included approximately $900,000 in unrecovered costs associated with the
Company's CQHealth venture, approximately $850,000 in start-up costs related to
the National Park Service contract, $240,000 in unrecovered costs associated
with the Company's BioTech Programs Unit, as well as increased depreciation
expense. Results for 1997 included a $750,000 payment from MD Foods Ingredients
amba of Denmark (MDFI) under the terms of the September
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Biospherics Incorporated
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27, 1996, Licensing Agreement for the exclusive, worldwide use, manufacture and
sale of the Company's nonfattening sugar, D-tagatose, as a sweetener.
Revenue from ISD increased $3,089,000 (24%) from $12,677,000 in 1997 to
$15,766,000 in 1998 primarily as a result of the addition of the National Park
Service contract, as well as increases from commercial contracts related to the
Company's pharmaceutical/health services. Decreased revenue in the fourth
quarter was a result of the seasonal nature of the Company's reservation
business, which typically peaks in the second and third quarters. The following
schedule summarizes the break-down of ISD revenue between government and
commercial contracts (in $000's):
For the Year Ended December 31
1998 1997
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Government $11,094 $8,598
Commercial 4,672 4,079
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$15,766 $12,677
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The Company has taken steps to evolve and make more efficient the
activities of CQHealth, the Company's venture, that resulted in approximately
$900,000 in unrecovered costs. The Company will realign this professional
expertise and advanced technologies within ISD's Health and Commercial Projects
department to augment the expanding pharmaceutical business by providing disease
management, case management, compliance and medical surveys for the health
industry. CQHealth has been integrated into the Company's Information Services
Division, Health and Commercial Projects Department to achieve these ends. This
integration will alleviate non-cost recovering activities, leveraging existing
and ever-developing Health and Pharmaceutical business, and increase service
capabilities and market potential.
ISD also incurred start-up costs of approximately $850,000 during 1998 in
relation to the National Park Service contract, which the Company does not
expect to incur in future years. The rapid implementation of the National Park
Reservation Service resulted in start up costs of approximately $850,000 in the
form of significant use of contract labor and telephone connectivity charges
which the Company does not expect to incur in subsequent years.
Certain of the Company's commercial contracts provide pharmaceutical and
medical information for a specific drug or product. The success of a particular
drug or product will often determine whether the Company's contract is extended
or renewed. In other cases, the Company was unsuccessful in securing contract
renewals in competitive rebids of its commercial contracts. Sales and marketing
efforts have been intensified to re-establish and increase the Company's share
of commercial business in response to the high level of public interest in
health information.
Revenue from BioTech Programs decreased $714,000 (74%) from $962,000 in
1997 to $248,000 in the current year. The prior year included a $750,000 payment
under the licensing agreement with MDFI. The Company is providing technical
support to MDFI to effect the commercialization of D-tagatoses of which $232,000
and $212,000 was recognized in contract revenue in 1998 and 1997, respectively.
The Company also received an additional payment aggregating $1,000,000 in the
first quarter of 1997 under the MDFI License Agreement representing a
non-refundable advance against future royalties. This payment is classified as
deferred revenue in the balance sheet.
As part of the Beltsville building renovation, a new suite of laboratories
was constructed for our BioTech Programs Unit. The laboratory was designed to
accommodate BioTech's planned lines of research in the development of new
products. These products center about the Company's scientific and engineering
expertise. The major scope of products under development or consideration is
limited to low-molecular weight carbohydrates, frequently involving chiral
specificities. Generally simple molecules, but frequently rare, these compounds
produce novel beneficial effects. For the near term, laboratory research and
development will focus on the Company's strong position in D-tagatose. In
addition to its use in foods and in the treatment for diabetes, early research
has indicated a number of other uses. Products for heavy metal, including lead,
detoxification, and calcium absorption are envisioned. Simple carbohydrates are
also thought to be useful in providing a very rapid means for detecting
microbial infection of meat, seafood and other consumed products of current
concern to health authorities. One of the laboratories is suitable for the
safe-for-humans pesticides development program. A small pilot plant allows for
modest production for test purposes.
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Biospherics Incorporated
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Selling, general and administrative expenses ("S,G&A") increased $439,000
(13%) from $3,360,000 in 1997 to $3,799,000 in 1998. This increase was due to
increased costs associated with the Company's technology labor as well as
increased facility costs allocated to S,G&A.
Depreciation and amortization expense increased $680,000 from $631,000 in
1997 to $1,311,000 in 1998. These investments are necessary to maintain a
competitive position in the Company's information services business and have
been instrumental in the Company's ability to win new contracts.
Other income, net of other expenses, decreased $173,000 from a net income
of $36,000 in 1997 to a net loss of $137,000 in 1998. The decrease was the
result of increased interest expense connected with the financing of capital
equipment.
The Company's sales backlog as of December 31, 1998, was $25,828,000
compared to $22,809,000 as of December 31, 1997.
Liquidity and Capital Resources
The Company renewed its Loan Agreement (the "Agreement") with NationsBank
N.A. (the "Bank") on May 18, 1998, which provides for borrowing up to $2
million, subject to advance rates as defined in the Agreement. Outstanding
borrowings under the Agreement aggregated $1,148,006 at December 31, 1998, and
are collateralized by the Company's accounts receivable. The interest rate is
the Bank's prime rate plus .75% per annum. The Loan Agreement contains covenants
that require the Company to meet certain tangible net worth and cash flow
coverage ratios. The Company was in violation of the bank covenants as of
December 31, 1998. The violation was waived by the Bank. The line expires on May
31, 1999, but the Company anticipates that the line will be renewed in 1999.
However, if the Company is unable to extend the line of credit and obtain
adequate financing, material adverse consequences could result.
The Company also renewed on May 18, 1998, a commitment from the Bank to
assist in financing equipment purchases related to potential new contracts. This
arrangement consists of a series of loans for the acquisition of computer
systems and related telecommunication equipment not to exceed a maximum
aggregate of $1 million. Additional terms include repayment of each loan in
thirty-six (36) equal monthly installments at a fixed interest rate equal to the
Treasury Index plus 275 basis points. Outstanding borrowings under this
commitment aggregated $826,238 at December 31, 1998, and is collateralized by
the equipment purchased.
In October 1997, the Company signed a $500,000 Promissory Note (the
"Note") with ORIX USA Corporation ("ORIX") to finance the acquisition of
telecommunication software to be used in the Company's call center operations.
Repayment of the Note will consist of thirty-five (35) equal monthly principal
and interest payments of $14,012 with a final payment of $114,012 due on October
15, 2000. Outstanding borrowings under this Note aggregated $359,836 at December
31, 1998. The Note is collateralized by certain telemanagement software licensed
to the Company by Genesys Telecommunications Laboratories, Inc. and has an
interest rate of 11% per annum.
Cash flow for the year ended December 31, 1998, reflects a net cash
outflow of $2.9 million consisting of $1.1 million used in operating activities,
$3.9 million used in investing activities, and $2.1 provided by financing
activities. Cash flow from operating activities in 1998 decreased $3.6 million
from those of the prior year due to unrecovered costs of approximately $900,000
associated with the Company's entry into demand management and to substantial
start-up costs of approximately $850,000 related to the National Park Service
contract in the current year. The Company has taken steps to significantly
reduce costs related to the marketing and administration of the demand
management services by integrating CQHealth into the Company's Information
Services Division. Prior year activity included one-time payments of $750,000
and $1,000,000 received from MDFI in the first half of 1997 under the Licensing
Agreement for D-tagatose. Investment in property and equipment aggregated
$3,867,313, in upgrading the Company's information and telecommunications
systems, and in developing the Company's new software products used by ISD. The
Company considers the development of these products nearly complete and does not
anticipate continued capital investment at this level. The above investments
were financed in part through a Regulation D issuance of common stock and
borrowings under the Bank's operating and equipment lines of credit.
-9-
<PAGE>
Biospherics Incorporated
--------------
Working capital as of December 31, 1998, was $277,964, which represents a
$4.0 million decrease from working capital of $4.2 million at December 31, 1997.
This decrease was the result of continued investment in telecommunication and
computer systems, the development of computer software products to improve the
Company's long-term competitive position, and the Company's entry into the
healthcare Demand Management business.
The Company considers the upgrading of its information and
telecommunications systems nearly complete, and adequate for the near term.
Future capital needs to start new contracts and maintain existing programs,
while upgrading its information and telecommunication systems will be
proportionally less. The Company is anticipating sufficient cash flow from
operating activities during 1999 to cover its continuing capital needs, but will
continue to seek additional intermediate and long-term financing alternatives.
It is also anticipated that royalties on sales by MDFI could begin in 2000.
There can be no assurances that the Company will obtain any or all such
necessary funding. No dividends were paid in 1998 and none are anticipated in
1999.
Year 2000 Compliance
General
Biospherics Incorporated utilizes software, information systems and
infrastructure components that may be affected by Year 2000 issues. During
fiscal year 1998, the Company began to implement plans to ensure those systems
continue to meet its internal and external requirements via its Y2K Project
(Project). During fiscal year 1998, the Company's largest division, ISD,
completed modifications and testing of its primary information systems. These
systems modifications included a complete modernization of the Company's
infrastructure systems, such as its Cisco networks and Unix and NT Servers, as
well as testing and modification to all critical and secondary enterprise
systems.
The Company is in the process of developing questionnaires and obtaining
determination documentation from vendors for Year 2000 impact. The Company will
monitor its vendors, suppliers, and clients to evaluate progress and impact. The
Company has started to evaluate its non-information systems components; such as,
facility systems, telephone services, and the like. To date, evaluations have
yielded marked progress in all third party areas with no evidence of critical
issue or impact.
Project
Biospherics' Project is designed to address internal and external
components. It is phased, running from the third quarter of 1998 and concluding
in the second quarter of 1999. The project includes a detailed milestone and
project timeline. Biospherics' Project is on target and schedule, ending the
year 1998 with milestones slightly ahead of its project timeline. Phase one of
the Project was completed with the development of an inventory of all systems
internal and external to the company. Phase two of the project was completed
with an assessment of the inventory of systems internal to the company. Phase
three and phase four run parallel in timeline; phase three is on target for
completion in the first quarter of 1999 with the plan and schedule for any and
all remediation for systems internal to the company. Phase four is on target for
completion in the first quarter of 1999 with the assessment of all systems
external to the company. Phases five and six, completion of the internal and
external phases, respectively, of the Project, are on schedule for completion by
second quarter end 1999.
Conclusion and Costs
Based on the progress the Company has made in addressing its Year 2000
issues and the Company's plan development and timeline to complete its
compliance program, the Company does not foresee significant risks associated
with its Year 2000 compliance at this time. As the Company's plan is to address
its significant Year 2000 issues prior to being affected by them, it has
developed a contingency plan consisting of a budgetary set-aside. Projected
expenses of remediation efforts and updates total less than $450,000. However,
if the Company identifies significant risks related to its Year 2000 compliance
or its progress deviates from the anticipated timeline, the Company will develop
more in-depth contingency plans as deemed necessary at that time.
-10-
<PAGE>
Risks
The failure to successfully complete the Biospherics Y2K Project,
identifying and remedying all critical potential failures internal and external
to the Company, could result in an interruption in normal business processes or
sub-processes. Such failures could negatively impact the Company's operations
and, as a result, impact the Company's financial condition. The Y2K industry
problem holds inherent uncertainty, due to this it is not possible for
Biospherics to affirm with certainty the level of impact from vendors,
suppliers, and clients. The Project is designed to reduce this level of
uncertainty with regard to Y2K compliance and readiness of internal and external
systems. Biospherics believes that with the continued on schedule progress of
the Project, the possibility of negative impact and operational interruptions
will be significantly reduced.
Item 7. FINANCIAL STATEMENTS
Financial statements and supplementary data required by this Item 7
follow.
Index to Financial Statements Page
Statements of Operations for the years ended December 31,
1998 and 1997...............................................................12
Balance Sheet as of December 31, 1998.........................................13
Statements of Changes in Stockholders' Equity for the years
ended December 31, 1998 and 1997............................................14
Statements of Cash Flows for the years ended December 31,
1998 and 1997...............................................................15
Notes to Financial Statements.................................................16
Report of Independent Accountants.............................................28
-11-
<PAGE>
Biospherics Incorporated
Statements of Operations
For the years ended December 31, 1998 and 1997
1998 1997
------------ ------------
Revenue
Contract revenue $ 16,013,897 $ 12,889,319
Licensing fee revenue -- 750,000
------------ ------------
Total revenue 16,013,897 13,639,319
------------ ------------
Operating expense
Direct contract and operating costs 12,457,277 9,350,399
Selling, general and administrative expense 3,799,150 3,360,208
Research and development expense 410,827 557,264
Depreciation and amortization expense 1,310,849 631,451
------------ ------------
Total operating expense 17,978,103 13,899,322
------------ ------------
Loss from operations (1,964,206) (260,003)
------------ ------------
Other (expense) income, net
Interest, net (137,233) 36,088
Other, net -- 200
------------ ------------
(137,233) 36,288
Loss before taxes (2,101,439) (223,715)
Income tax benefit (120,845) (81,863)
------------ ------------
Net loss $ (1,980,594) $ (141,852)
------------ ------------
Net loss per share, basic $ (0.23) $ (0.02)
============= =============
Net loss per share, diluted $ (0.23) $ (0.02)
============= =============
Weighted average shares outstanding, basic 8,790,050 8,031,785
============= =============
Weighted average shares outstanding, diluted 8,790,050 8,031,785
============= =============
See accompanying notes to financial statements
-12-
<PAGE>
Biospherics Incorporated
Balance Sheet
As of December 31, 1998
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets
Cash and cash equivalents $ 2,288,834
Trade accounts receivable, net of allowance for
doubtful accounts of $145,000 1,642,820
Other receivables 210,188
Deferred income taxes 114,532
Prepaid expenses and other assets 558,070
------------
Total current assets 4,814,444
Property and equipment, net of accumulated depreciation
of $2,756,472 6,435,581
Deferred income taxes 185,468
Patents, net of accumulated amortization of $85,506 and $72,435 128,745
Deposit 70,000
------------
Total assets $ 11,634,238
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank line of credit $ 1,148,006
Accounts payable and accrued expenses 1,636,602
Accrued salaries and benefits 699,781
Notes payable 513,144
Capital lease obligations 394,143
Deferred revenue 144,804
------------
Total current liabilities 4,536,480
Non-current liabilities
Notes payable 672,930
Capital lease obligations 649,447
Deferred rent 106,923
Deferred revenue 1,000,000
------------
Total liabilities 6,965,780
------------
Commitments and contingencies --
Redeemable common stock 325,710
------------
Stockholders' equity
Preferred stock, $0.01 par value, 2,000,000 shares authorized;
none issued and outstanding --
Common stock, $0.005 par value, 18,000,000 shares authorized;
8,973,691 issued, 8,933,085 outstanding, of which
3,213,506 shares are classified as redeemable common stock 28,801
Paid-in capital in excess of par value 4,912,744
Treasury stock, 40,606 shares, at cost (267,369)
Accumulated deficit (331,428)
------------
Total stockholders' equity 4,342,748
------------
Total liabilities and stockholders' equity $ 11,634,238
============
</TABLE>
See accompanying notes to financial statements
-13-
<PAGE>
Biospherics Incorporated
Statements of Changes in Stockholders' Equity
For the years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Common Stock Paid-in
---------------------------- Capital in
Shares Amount Excess of Par
------------- ------------- --------------
<S> <C> <C> <C>
Balance, December 31, 1996 7,957,468 $ 23,690 $ 1,309,799
Issuance of common stock
Exercise of employee stock options 146,122 730 545,382
Sale of common stock, net of offering costs of
$312,298, in private placement 750,000 3,750 2,683,952
Acquisition of treasury stock in connection
with option exercises -- -- --
Issuance of treasury stock in payment of expense -- -- 10,265
Cancellation of treasury stock (24,400) (122) (139,627)
Net reclassification for redeemable common stock -- 30 (158,420)
Tax benefit of stock options -- -- 151,853
Net loss -- -- --
----------- ----------- -----------
Balance, December 31, 1997 8,829,190 28,078 4,403,204
Issuance of common stock
Exercise of employee stock options 12,000 60 40,690
Exercise of stock warrants 132,501 663 529,341
Offering costs of the December 12, 1997
private placement -- -- (60,491)
Net loss -- -- --
----------- ----------- -----------
Balance, December 31, 1998 8,973,691 $ 28,801 $ 4,912,744
=========== =========== ===========
<CAPTION>
Retained
Treasury Stock Earnings
----------------------- (Accumulated Stockholders'
Shares Amount Deficit) Equity
----------------------- ------------ -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 43,006 $ (261,603) $ 1,791,018 $ 2,862,904
Issuance of common stock
Exercise of employee stock options -- -- -- 546,112
Sale of common stock, net of offering costs of
$312,298, in private placement -- -- -- 2,687,702
Acquisition of treasury stock in connection
with option exercises 26,000 (159,250) -- (159,250)
Issuance of treasury stock in payment of expense (4,000) 13,735 -- 24,000
Cancellation of treasury stock (24,400) 139,749 -- --
Net reclassification for redeemable common stock -- -- -- (158,390)
Tax benefit of stock options -- -- -- 151,853
Net loss -- -- (141,852) (141,852)
----------- ----------- ----------- -----------
Balance, December 31, 1997 40,606 (267,369) 1,649,166 5,813,079
Issuance of common stock
Exercise of employee stock options -- -- -- 40,750
Exercise of stock warrants -- -- -- 530,004
Offering costs of the December 12, 1997
private placement -- -- -- (60,491)
Net loss -- -- (1,980,594) (1,980,594)
----------- ----------- ----------- -----------
Balance, December 31, 1998 40,606 $ (267,369) $ (331,428) $ 4,342,748
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements
-14-
<PAGE>
Biospherics Incorporated
Statements of Cash Flows
For the years ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- ------------
<S> <C> <C>
Cash flows from operating activities
Net loss $(1,980,594) $ (141,852)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,310,849 631,451
Loss on sale or writedown of assets 99,209 132,128
Treasury stock issued in payment of expense -- 24,000
Deferred compensation (18,869) (28,975)
Changes in assets and liabilities:
Trade accounts receivable (266,473) 560,527
Provision for uncollectible accounts receivable 60,000 30,000
Other receivables (99,875) 192,150
Prepaid expenses and other assets (131,541) (21,391)
Deferred income taxes 175,526 (393,218)
Accounts payable and accrued expenses (34,549) 412,686
Income taxes payable (215,226) 112,448
Deferred rent (10,336) (84,747)
Deferred revenue (30,471) 1,032,386
----------- -----------
Net cash (used in) provided by operating activities (1,142,350) 2,457,593
----------- -----------
Cash flows from investing activities
Purchases of property and equipment (3,867,313) (1,511,156)
Restricted cash, security deposit 27,408 --
Deposit (70,000) --
Additions to patent costs (4,810) (1,446)
----------- -----------
Net cash used for investing activities (3,914,715) (1,512,602)
----------- -----------
Cash flows from financing activities
Net change on bank line of credit 1,138,006 (225,000)
Net change in book overdraft 552,407 (226,883)
Proceeds from notes payable 678,922 915,139
Payments on notes payable (475,168) (147,365)
Payments on capital lease obligations (287,304) (54,639)
Proceeds from issuance of common stock 570,754 3,386,862
Tax benefit of stock options exercised -- 151,853
Cost of issuance of common stock (60,491) (312,298)
----------- -----------
Net cash provided by financing activities 2,117,126 3,487,669
----------- -----------
Net (decrease) increase in cash and cash equivalents (2,939,939) 4,432,660
Cash and cash equivalents, beginning of year 5,228,773 796,113
----------- -----------
Cash and cash equivalents, end of year $ 2,288,834 $ 5,228,773
=========== ===========
Supplemental cash flow information
Income taxes (refunded) paid $ (62,674) $ 46,115
Interest paid $ 336,345 $ 108,930
Common stock accepted as payment under
stock option exercises $ -- $ 159,250
Property and equipment financed by capital leases $ 795,260 $ 590,273
Property and equipment financed by accounts payable $ 55,181 $ 257,995
</TABLE>
-15-
<PAGE>
Biospherics Incorporated
Notes to Financial Statements
----------
1. Summary of Significant Accounting Policies
Nature of Business
Biospherics Incorporated was founded in 1967, is incorporated in Delaware,
and maintains two facilities in Maryland. The Company consists of an Information
Services Division ("ISD"), a Technical Services Division ("TSD"), and a BioTech
Programs Unit ("BioTech"). ISD operates information-center services providing
materials and information to the public as well as reservation and tourism
services. TSD provides software engineering, telecommunications, network
infrastructure, internet provision, and other computer system services via ISD.
BioTech is dedicated to research and development of proprietary products.
Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. At December 31, 1998,
the Company had approximately $2,210,254 in investments with a maturity of three
months or less in one bank, which exceeds FDIC insured limits by $2,110,254. The
Company has not experienced any losses on its investments.
Receivables
Three major contracts constitute 68% of the trade accounts receivable, the
components of which are 30%, 26%, and 12%. No other single contract was greater
than 10% of total trade accounts receivable. Receivables from Federal and state
agencies represented 53% of the total trade accounts receivable.
Included in trade accounts receivable is $65,000 in costs and estimated
earnings in excess of billings on contracts that represent revenues recognized
that are not billable as of December 31, 1998, under the terms of the contracts.
There are no significant contract retainages as of December 31, 1998.
Use of Estimates and Assumptions
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles. This requires management to make
estimates and assumptions that affect certain reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the period. Accordingly, actual results could differ from those estimates and
assumptions.
Property and Equipment and Depreciation
Property and equipment are stated at cost and consist of office furniture
and equipment, computer hardware and software, leasehold improvements, and
capital leases. Computer hardware and software include the cost of internally
developed software programs which have long-term benefits. It is the Company's
policy to capitalize software developed for internal use. The Company computes
depreciation and amortization under the straight line method over the following
estimated useful lives of the related assets.
Office furniture and equipment 3 to 10 years
Computer hardware and software 5 years
Leasehold improvements are depreciated or amortized over the lesser of the
term of the related lease or the estimated useful lives of the assets (generally
5 to 10 years). Major additions, improvements and renewals are capitalized and
ordinary repairs, maintenance, and renewals are expensed in the year incurred.
Gains or losses from the sale or retirement of property and equipment result
from the difference between sales proceeds (if any), and the assets' net book
value, and are recorded in the Statement of Operations.
-16-
<PAGE>
Biospherics Incorporated
Notes to Financial Statements
----------
1. Summary of Significant Accounting Policies (continued)
Patent Costs
Legal costs incurred in connection with patent applications and costs of
acquiring patents are capitalized when incurred. When patents are granted, costs
are amortized over a term representing the lesser of the life of the patent or
the projected sales period of the product or process.
Long-Lived Assets
The Company assesses the potential impairment of long-lived assets, when
events or circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company recorded a loss in connection with the disposal of
obsolete assets of $99,209 in 1998 and $132,128 in 1997 associated with computer
hardware and software technologies. The Company uses an estimate of its future
undiscounted cash flows to evaluate whether the long-lived assets are
recoverable. The amount of impairment, if any, is measured based on projected
discounted cash flows.
Deferred Rent
The Company entered into a new lease for its headquarters and research
facilities in 1998. The excess of the rent expense over the cash payments for
rent is recorded as deferred rent and is being amortized over the life of the
lease.
Revenue Recognition
Revenue is recognized using the following methods depending upon the terms
of the contracts: time and materials, fixed price, or cost-plus-fixed-fee.
Revenue recognized under time and materials contracts is based upon direct labor
hours and other direct costs incurred. Revenue for fixed-price contracts is
recognized using the percentage-of-completion and unit-of-delivery methods.
Revenue for cost-plus-fixed-fee contracts is recognized based on the allowable
total costs incurred plus a pro rata share of the fee. Losses, if any, on
contracts are recorded during the period when first determined.
License Fees and Advance Royalties
License fees and royalties are recognized as revenue over the fixed term
of the contract. Non-refundable fees are recognized when they are earned in
accordance with the applicable contractual terms. Payments received that are
related to future performance are deferred and recorded as revenue as they are
earned over contractually specified future performance periods. See Note 6.
Pursuant to the contractual terms, the advance will be recovered and therefore
recognized as revenue at the rate of 50% of such future royalties. As
commercialization of the products subject to the royalties is not expected until
the year 2000, the deferred revenue has been classified as noncurrent.
Income Taxes
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year end, based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
Fair Value Information
The estimated fair value of the Company's financial instruments, which
include cash, receivables, accounts payable, long-term notes payable, and
short-term notes payable reported in the balance sheet, approximate their
carrying value.
-17-
<PAGE>
Biospherics Incorporated
Notes to Financial Statements
----------
1. Summary of Significant Accounting Policies (continued)
Net Loss Per Share
Basic earnings per common share have been computed by dividing net loss by
the weighted-average number of common shares outstanding during the year.
Diluted earnings per common share have been computed by dividing net loss by the
weighted-average number of common shares outstanding without an assumed increase
in common shares outstanding for common stock equivalents.
New Accounting Standards
The Company has adopted the disclosure requirements of SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, which
requires financial and descriptive information with respect to operating
segments of an entity based on the way management disaggregates the entity for
making internal operating decisions.
The Financial Accounting Standards Board has issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which becomes
effective for years beginning after June 15, 1999. SFAS No. 133 requires that
every derivative instrument be recorded in 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 in earnings unless specific hedge
accounting criteria are met. The Company will adopt SFAS No. 133 by January 1,
2000. Because the Company does not currently invest in derivatives, management
does not anticipate that adoption of this statement will have a material effect
on the earnings or financial position of the Company.
Reclassification
Certain costs of sales, previously reported as direct contract and
operating costs, have been reclassified to selling, general and administrative
expense in order to conform with the current year presentation. The effect of
this reclassification was an increase in selling, general and administrative
expense of $531,143 and a corresponding decrease in direct contract and
operating costs for the year ended December 31, 1997.
2. Property and Equipment
The components of property and equipment as of December 31, 1998, at cost
are:
Accumulated
Depreciation
and
Cost Amortization Net Book Value
--------- ------------ -----------
Computer software $3,878,852 $ 595,680 $3,283,172
Computer hardware 2,924,033 1,253,485 1,670,548
Office furniture and equipment 505,111 280,390 224,721
Leasehold improvements 498,524 300,873 197,651
Capital leases 1,385,533 326,044 1,059,489
========== ========== ----------
$9,192,053 $2,756,472 $6,435,581
========== ========== ==========
3. Debt
Line of Credit
In May 1998, the Company renewed its Loan Agreement with NationsBank N.A.
(the "Bank"). The Loan Agreement, which expires on May 31, 1999, provides for
borrowings of 80% of trade accounts receivable up to $2 million, subject to an
advance rate as defined in the Agreement. The amount outstanding under the
Agreement aggregated $1,148,006 as of December 31, 1998, accrues interest at the
Bank's prime rate plus .75% per annum (8.5%
-18-
<PAGE>
Biospherics Incorporated
Notes to Financial Statements
----------
3. Debt (continued)
at December 31, 1998), and is collateralized by the Company's eligible accounts
receivable. The Loan Agreement contains covenants that require the Company to
meet certain tangible net worth and cash flow coverage ratios. The Company was
in violation of the covenants as of December 31, 1998. The violation was waived
by the Bank. The total amount available to the Company was $1,308,639 under this
Agreement at December 31, 1998. The Company anticipates that the line will be
renewed in 1999. However, if the Company is unable to extend the line of credit
and obtain adequate financing, material adverse consequences could result.
Notes Payable to Bank
On May 31, 1997, the Company entered into an Equipment Line of Credit
Agreement ("Equipment Line") with the Bank to assist in financing equipment
purchases related to new contracts. The Equipment Line consists of a series of
loans for the acquisition of computer hardware and telecommunication equipment
not to exceed a maximum aggregate amount of $1 million. Additional terms include
repayment of each loan in thirty-six (36) equal monthly installments at a fixed
interest rate equal to the Treasury Index plus 275 basis points at the time of
loan origination. The facility is collateralized by the equipment purchased with
the loan proceeds. As part of this Equipment Line, the Company has entered into
the following notes payable with the Bank:
<TABLE>
<CAPTION>
Balance Principal Payments
Original Interest Rate As of ------------------------------
Date of Note Amount Per Annum 12/31/98 1999 2000 2001
------------ ------ --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
April 15, 1996 $118,878 8.81% $ 13,208 $ 13,208 $ -- $ --
August 31, 1997 $112,724 8.78% 62,625 37,575 25,050 --
December 3, 1997 $302,415 8.59% 193,209 100,805 92,404 --
March 11, 1998 $120,240 8.33% 93,520 40,080 40,080 13,360
April 29, 1998 $460,572 8.44% 371,017 153,525 153,524 63,968
October 20, 1998 $ 98,110 6.66% 92,659 32,703 32,703 27,253
-------- -------- -------- --------
$826,238 $377,896 $343,761 $104,581
======== ======== ======== ========
</TABLE>
Notes Payable to ORIX
In October 1997, the Company signed a $500,000 Promissory Note (the
"Note") with ORIX USA Corporation ("ORIX") to finance the acquisition of
telecommunication software to be used in the Company's call center operations.
Repayment of the Note will consist of thirty-five (35) equal monthly principal
and interest payments of $14,012 with a final payment of $114,012 due on October
15, 2000. Outstanding borrowings under this Note aggregated $359,836 at December
31, 1998, of which $135,248 matures in 1999 and $224,588 matures in 2000. The
Note is collateralized by certain telemanagement software licensed to the
Company by Genesys Telecommunications Laboratories, Inc. and has an interest
rate of 11% per annum.
Other
On January 14, 1998, the Company issued a $500,000 irrevocable letter of
credit payable in favor of the U.S. Department of Interior (National Park
Service) as a contract performance requirement under the contract awarded in
December 1997, and on September 30, 1998, the Company issued a $250,000
irrevocable letter of credit payable in favor of the State of Maryland,
Department of Budget and Management under the Maryland Information Center
contract. On February 18, 1999, the two irrevocable letters of credit were
replaced with two performance bonds in the amount of $500,000 and $250,000 for
the respective contracts.
Included in accounts payable is $850,933 related to a book overdraft at
December 31, 1998.
-19-
<PAGE>
Biospherics Incorporated
Notes to Financial Statements
----------
4. Private Placement
On December 12, 1997, the Company sold 375,000 units for $3 million (each
unit consisting of two shares of common stock and two warrants with exercise
prices of $4.00 and $4.50, respectively) in a private offering to a single
institutional investor. Net of offering costs of $372,789, the placement
resulted in proceeds to the Company of $2,627,211. The transaction was effected
in reliance upon the exemption from securities registration afforded by the
provisions of Regulation D, as established by the U.S. Securities and Exchange
Commission ("SEC") and the Securities Act of 1933. Additionally, warrants to
purchase 120,000 shares of common stock at $4.00 per share were issued to
various placement agents. The warrants are exercisable for a three-year period
after the date of closing. The Company has filed a Registration Statement on
Form S-3 with the SEC for the resale of all registrable securities covered by
this transaction. During 1998, warrants for the purchase of 132,501 shares, at
$4.00 per share, of the Company's common stock were exercised, resulting in
proceeds of $530,004. Warrants for the purchase of 362,499 and 375,000 shares at
$4.00 and $4.50, respectively, are outstanding at December 31, 1998.
5. Income Taxes
The benefit for income taxes in 1998 and 1997 consists of:
Year Ended December 31,
---------------------
1998 1997
---------- ---------
Current
Federal $ 53,297 $(254,152)
State 11,598 (56,264)
--------- ---------
Total current benefit (provision) 64,895 (310,416)
========= =========
Deferred
Federal 45,809 321,177
State 10,141 71,102
--------- ---------
Total deferred benefit 55,950 392,279
--------- ---------
Total income tax benefit $ 120,845 $ 81,863
========= =========
The tax effect of significant temporary differences representing deferred tax
assets as of December 31, 1998, is as follows:
Current Non-Current
----------- -----------
Property and equipment $ -- $ (956,422)
Deferred rent 14,260 --
Accrued vacation 45,278 --
Allowance for doubtful accounts 55,999 --
Deferred revenue -- 386,200
NOL carryforward -- 1,513,810
Other (1,005) --
----------- -----------
114,532 943,588
Valuation allowance -- (758,120)
----------- -----------
Deferred tax asset $ 114,532 $ 185,468
=========== ===========
-20-
<PAGE>
Biospherics Incorporated
Notes to Financial Statements
----------
5. Income Taxes (continued)
The Company has $3,920,000 of U.S. net operating loss carryforwards which
will be available to offset regular taxable U.S. income during the carryforward
period through the year 2018. Based on the Company's losses in recent years and
its accumulated deficit, the Company has provided a valuation allowance against
the net deferred tax asset.
Reconciliation between actual tax expense and tax computed at the
statutory Federal rate of 34 percent for 1998 and 1997 are as follows:
1998 1997
--------- ---------
U.S. Federal income tax rate at 34% $(714,489) $ (76,063)
State taxes, net of federal tax benefit (192,691) (9,793)
Establishment of valuation allowance 758,120 --
Expenses not deductible for tax purposes 5,431 3,993
Adjustment for prior year taxes 22,784 --
--------- ---------
Income tax benefit $(120,845) $ (81,863)
========= ---------
6. Commitments and Contingencies
Government Contracts
The financial statements include revenues under U.S. Government contracts
that are subject to post award audits and potential price redeterminations. The
Defense Contracts Audit Agency ("DCAA") has completed its audits for all years
through 1997. The Company believes that no material adjustments to the financial
statements will arise from the unaudited year.
The principal portion of the Company's revenue has been generated
traditionally by the Information Services Division. Several of the Company's
contracts that provide these revenues (principally contracts with the U.S.
Government) are from time to time subject to protest proceedings. These
contracts are awarded pursuant to a competitive bidding process. As of December
31, 1998, none of the Company's contracts were under protest.
Leases
The Company has various commitments under capital and operating leases
through 2008 relating to computer hardware and software, office equipment, its
call center facility in Cumberland, Maryland, and its call center and
administrative offices in Beltsville, Maryland.
Future minimum rentals as of December 31, 1998, under noncancellable
leases are as follows:
-21-
<PAGE>
Biospherics Incorporated
Notes to Financial Statements
----------
6. Commitments and Contingencies (continued)
Capital Operating
Year Ending December 31, Leases Leases
-------------------------------- -----------------------
1999 $ 528,192 $ 887,131
2000 401,627 796,550
2001 235,463 653,085
2002 155,149 560,905
2003 16,898 543,460
Thereafter 1,102 2,547,729
---------- ----------
1,338,431 $5,988,860
==========
Less: executory costs 107,115
Less: amount representing interest 187,726
----------
Capital lease obligations 1,043,590
Less current portion 394,143
----------
Long-term obligations $ 649,447
==========
These future minimum rentals do not include CPI adjustments to which some
of the leases are subject. The Company incurred rental expenses of $1,253,373 in
1998 and $1,478,179 in 1997 under operating leases.
The Company recorded rental income of $154,703 in 1998 and $511,866 in
1997, under sublease agreements, which is offset against rent expense in the
accompanying financial statements.
Related Party Transactions
Stock Redemption Agreements
In August 1978, the Company, with stockholders' approval, entered into
agreements, which were restated on January 15, 1996, with two
officer-stockholders (the "Principal Stockholders") who beneficially own over
35% of the outstanding common stock. Under the agreement, upon their deaths, the
Company may be required to redeem from their estates the number of shares of the
Company's stock necessary to pay estate taxes and administrative expenses of the
estate, if any, up to $5,000,000. Shares would be redeemed at the then-current
market price. Redeemable common stock, as of December 31, 1998, consisted of
3,213,506 shares with a par value of $0.005 per share. The Company is the
beneficiary of an insurance policy on the lives of these individuals, which the
Company maintains to provide benefits of $5,000,000 for this agreement.
Employee Contract
The Company has entered into an employment agreement with its Chair, CEO,
President and Treasurer, who is a Principal Stockholder, that provides for
certain benefits should he be terminated within the terms of the agreement for
other than specific reasons. Benefits to be provided under this agreement
include continued life, disability, accident and health insurance and severance
payments equal to his annual base compensation through the term of the
agreement. The agreement expires on December 31, 1999. The maximum contingent
liability under this agreement as of December 31, 1998, aggregates approximately
$271,000.
Deferred Compensation and Consulting Agreements
The Company has entered into agreements with the Principal Stockholders,
whereby these individuals agreed to serve as full-time employees of the Company
until their respective retirements. Under the agreements, upon retirement, these
individuals will receive deferred compensation equal to 70% of their average
annual total compensation less the
-22-
<PAGE>
Biospherics Incorporated
Notes to Financial Statements
----------
6. Commitments and Contingencies (continued)
assumed returns from investment of their funded pension plans and their social
security payments. The deferred compensation plan is unfunded. As of December
31, 1998, the Company had no liability under the plan as actuarially determined.
Upon completion of their employment, the officer-stockholders also agreed to
serve as consultants to the Company on a minimum part-time, plus as-needed
basis, at a specified daily rate.
Other
On September 27, 1996, the Company signed an exclusive worldwide licensing
agreement with MD Foods Ingredients (MDFI) amba of Denmark for the use,
manufacture and sale of Biospherics' nonfattening sugar, D-tagatose, as a
sweetener in foods. The Company received a non-refundable $750,000 initial
partial payment on signing. This $750,000 was classified as licensing revenue in
the 1996 financial statements. The Company received an additional payment of
$1,750,000 on January 6, 1997, subsequent to the successful completion of MDFI's
due diligence. The $750,000 of the $1,750,000 received on January 6, 1997,
completes the initial non-refundable payment, and was classified as licensing
revenue in the first quarter of 1997. The remaining $1 million of the $1,750,000
received was classified as deferred revenue as this represents a non-refundable
advance against future royalties, recoverable and to be recognized as revenue,
at the rate of 50% of such annual royalties. The term of the MDFI Agreement is
five years after the expiration of the last to expire present or future U.S.
patent covering the licensed product and/or the licensed process for
manufacturing D-tagatose. The Company has two U.S. patents covering the
proprietary method for the manufacture of D-tagatose, which expire on July 19,
2009, and March 25, 2111, respectively. Additional patents are likely to result
from ongoing research. Full running royalties will be paid to the Company on
sales, which the Company believes will begin when the first full-scale
production plant for D-tagatose becomes operational. Under the terms of the
agreement, MDFI has full responsibility for all development costs, including any
regulatory requirements to sell in the U.S. and European Countries and the costs
of production and sales.
In November 1995, the Company received a notice of potential liability
(the "Notice") from the U.S. EPA regarding a small quantity of hazardous
materials shipped in 1988 and 1989 to a site owned and operated by a fully
licensed company that was in the business of disposing of such materials. That
company has since gone out of business. The EPA is conducting an investigation
of the source, extent, and the nature of release or threatened release of
hazardous substances at this site. The EPA has spent over $4.5 million in its
investigation and restoration activities and the Company has a potential
proportionate liability under the Comprehensive Environmental Response,
Compensation and Liability Act, as amended, for such costs. Based upon
information in the Notice, the amount of hazardous material shipped to the site
by the Company is less than .2% of all such materials found at the site. If the
EPA allocates its costs based upon the amount of materials shipped by each
company to the site in proportion to the total materials shipped to the site,
the Company's share of the costs should be immaterial.
The Company is also a party to other legal actions arising in the ordinary
course of business. Management of the Company, after reviewing developments to
date with legal counsel, is of the opinion that the outcome of such matters will
not have a materially adverse effect on the financial position or results of
operations of the Company.
7. Stock Option Plan
The Company has an Employees' Stock Option Plan (the "Plan") which permits
issuance of both Incentive Stock Options (ISO) and Non-Qualified Stock Options,
whereby options may be granted to officers and other key employees to purchase
up to 400,000 shares of common stock in amounts determined by the Board of
Directors through December 31, 2007. The Company also has an Employees'
Nonqualified Stock Option Plan, whereby options were granted to officers and
other key employees, through May 14, 1997, to purchase up to 4,400,000 shares of
common stock in amounts determined by the Board of Directors. Options may be
granted at a price not less than 50% of the fair market value of the stock on
the date the options are granted and for a term not to exceed ten years from the
award date. The Board of Directors determines the vesting period of options
granted, which is generally five years. To date, all options granted, except for
those part of an anti-hostile takeover plan explained below, have been at the
then-publicly quoted
-23-
<PAGE>
Biospherics Incorporated
Notes to Financial Statements
----------
7. Stock Option Plan (continued)
price of the stock. During 1998, 89,000 options were granted. Activity for the
two years ended December 31, 1998, is shown below:
<TABLE>
<CAPTION>
1998 1997
Weighted Weighted
Average Average
1998 Exercise 1997 Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding at beginning of year 2,820,750 $ 2.48 2,896,872 $ 2.25
Granted 89,000 $ 5.87 100,000 $ 6.34
Exercised (12,000) $ 3.40 (146,122) $ 3.74
Expired or forfeited (96,900) $ 5.48 (30,000) $ 4.49
--------- ------ ---------- -------
Outstanding at end of year 2,800,850 $ 2.43 2,820,750 $ 2.48
Exercisable at end of year 664,475 591,125
Available for grant at end of year 246,000 300,000
Price range of options
Outstanding $1.43 to $7.25 $1.43 to $7.25
Exercised $2.88 to $3.50 $2.88 to $5.25
Expired or forfeited $2.88 to $7.25 $2.88 to $7.13
Weighted average fair value of
options granted during the year $3.34 $3.82
</TABLE>
The following table summarizes information with respect to stock options
outstanding at December 31, 1998:
Number of Weighted
Options Average Weighted
Range of Outstanding Remaining Average
Exercise Price at 12/31/98 Contractual Life Exercise Price
-------------- ----------- ---------------- --------------
$1.43 2,000,000(1) 0.96 $1.43
$2.88 - 4.06 176,500 1.14 $3.06
$4.68 - 7.00 542,850 2.49 $5.19
$7.12 - 7.25 81,500 2.79 $7.21
-------------- ----------- ---------------- --------------
$1.43 - 7.25 2,800,850 1.32 $2.43
============ =========== ================ ==============
(1) On November 18, 1994, two officer-shareholders were each granted options to
purchase 1,000,000 shares of common stock of the Company at $1.4375 per share
subject to two conditions. The options will be exercised in the event that both
(i) a third party acquires 5% or more of the issued and outstanding common stock
of the Company and (ii) the exercise is approved by the Board of Directors of
the Company. The options expire on December 15, 1999. This plan was put in place
not for compensatory purposes but as a means of protecting shareholder value
against unsolicited offers deemed inadequate by the Board of Directors and to
help ensure fair and equal treatment of all shareholders.
-24-
<PAGE>
Biospherics Incorporated
Notes to Financial Statements
----------
7. Stock Option Plan (continued)
The following table summarized information with respect to stock options
exercisable at December 31, 1998
Weighted
Year of Option Number of Average
Expiration Options Exercise Price Price Range
- -------------- ------------ -------------- -----------
1999 111,500 $2.88 $2.88
2000 381,850 $4.76 $3.31 - 6.19
2001 73,250 $7.22 $7.13 - 7.25
2002 63,875 $6.70 $6.19 - 7.00
2003 34,000 $6.26 $5.78 - 6.36
---------- ------- -------------- -----------
All Years 664,475 $4.98 $2.88 - 7.25
========== ======= ============== ============
The Company applies APB Opinion No. 25 and related interpretations in
accounting for the Plan. Accordingly, because the exercise price of options
granted has been at market price, no compensation cost has been recognized. The
Company elected the "disclosure only" presentation of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation in 1996
and, consequently, makes no charge against income in the financial statements
with respect to options granted at fair market value. To measure stock-based
compensation in accordance with SFAS 123, the fair value of each option grant
was estimated on the date of grant using the Black-Scholes option-pricing model.
The following tables summarizes the assumptions used and the pro-forma net loss
and net loss per share resulting from applying SFAS 123.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net loss As reported $(1,980,594) $(141,852)
Pro forma $(2,408,248) $(516,187)
Net loss per share - basic As reported $(0.23) $(0.02)
Pro forma $(0.27) $(0.06)
Net loss per share - diluted As reported $(0.23) $(0.02)
Pro forma $(0.27) $(0.06)
Expected life (years) 4 4
Risk-free interest rate 4.70% 6.48%
Volatililty 75% 75%
Dividend yield 0.0% 0.0%
Weighted average remaining contractual life (years) 1.32 2.28
Weighted average fair value at date of grant $3.34 $3.82
</TABLE>
8. Employee Benefit Plans
Effective January 1, 1990, the Company established the Biospherics
Incorporated 401(k) Retirement Plan. The Plan is a discretionary defined
contribution plan and covers substantially all employees who have attained the
age of 21, have completed 1 year of service, and have worked a minimum of 1,000
hours in the past Plan or anniversary year.
Under provisions of the Plan, the Company, for any plan year, has
contributed an amount equal to 50% of the participant's contribution or 2 1/2%
of the participant's eligible compensation, whichever is less. The Company may,
at its own discretion, make additional matching contributions to participants.
Company contributions, net of forfeitures, amounted to $69,331 in 1998 and
$66,761 in 1997.
-25-
<PAGE>
Biospherics Incorporated
Notes to Financial Statements
----------
9. Information by Business Segment
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker, or decision making group, in deciding how to allocate
resources and in assessing performance. The Company is managed along two
business segments, Information Services Division and the BioTech Programs Unit.
Financial information by business segment for the years ended December
31, 1998, and 1997 are summarized below.
<TABLE>
<CAPTION>
Year Ended December 31,
(Dollars in thousands)
1998 1997
--------- --------
<S> <C> <C> <C>
Revenues Information Services Division $ 15,766 $ 12,677
BioTech Programs Unit 248 962
-------- --------
Total revenues $ 16,014 $ 13,639
======== ========
Operating Profit (Loss) Information Services Division $ (1,724) $ (712)
and Income (Loss) BioTech Programs Unit (240) 452
-------- --------
Before Income Taxes Total operating profit (1,964) (260)
Interest income (expense) (137) 36
======== ========
Income (loss) from operations before
income taxes $ (2,101) $ (224)
-------- --------
Identifiable Assets Information Services Division $ 7,379 $ 4,307
BioTech Programs Unit 171 229
General corporate assets 4,084 6,723
-------- --------
Total assets $ 11,634 $ 11,259
======== ========
Capital Information Services Division $ 3,373 $ 1,716
Expenditures BioTech Programs Unit 14 --
General corporate assets 277 53
-------- --------
Total assets $ 3,664 $ 1,769
======== ========
Depreciation Information Services Division $ 1,017 $ 480
and Amortization BioTech Programs Unit 20 23
General corporate assets 274 131
-------- --------
Total depreciation and amortization $ 1,311 $ 634
======== ========
</TABLE>
During 1998, ISD recognized revenue from four of its customers
representing 18%, 17%, 16%, and 11% of the total Company revenues. During 1997,
the Company recognized revenue from four of its customers representing 19%, 13%,
12%, and 11% of the total Company revenues. Government contracts accounted for
70% and 69% of the ISD revenue in 1998 and 1997, respectively.
The BioTech Programs Unit has invented and patented for the Company the
use of D-tagatose as a low-calorie sweetener and has invented and patented
safe-for-humans pesticides. The Company also has filed for patents on other
inventions. In 1996, the Company signed an exclusive worldwide licensing
agreement with MD Foods Ingredients amba of Denmark for the use, manufacture and
sale of Biospherics' nonfattening sugar, D-tagatose, as a sweetener (see Note 6
"Commitments and Contingencies").
Operating profit (loss) consists of revenue less operating expenses. In
computing operating profit, interest expense and income taxes were not
considered.
-26-
<PAGE>
Biospherics Incorporated
Notes to Financial Statements
----------
9. Information by Business Segment (continued)
Identifiable assets by business segment are those assets used in the
Company's operations in each segment, such as accounts receivable, inventories,
fixed assets, and patent costs. Corporate assets are principally cash and
certain other assets not related to a particular segment's operations.
-27-
<PAGE>
Report of Independent Accountants
To the Stockholders and Board of Directors
Biospherics Incorporated
In our opinion, the accompanying balance sheet and related statements of
operations, changes in stockholders' equity and cash flows present fairly, in
all material respects, the financial position of Biospherics Incorporated at
December 31, 1998 and the results of its operations and its cash flows for the
years ended December 31, 1998 and 1997, in conformity with generally accepted
accounting principles. 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 of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers L.L.P.
- ----------------------------------
Baltimore, Maryland
March 24, 1999
-28-
<PAGE>
Biospherics Incorporated
----------
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Items 9 through 12.
Information required by Part III (Items 9 through 12) of this Form 10-KSB
is incorporated by reference to the Company's definitive Proxy Statement for the
Annual Meeting of Stockholders for the fiscal year ended December 31, 1998,
which will be filed with the Securities and Exchange Commission not later than
120 days after the end of the fiscal year to which this report relates.
PART IV
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(3) Articles of Incorporation and Bylaws of the Company
(incorporated by reference to the Company's Annual Proxy
Statement of May 15, 1992, as filed with the Commission)
(3.1) Articles of Amendment of the Company (incorporated by
reference to the company's proxy statement for its May
1992 annual meeting, as filed with the Commission).
(10.1) Supplemental Executive Retirement Plan Agreement dated
as of February 17, 1993, by and between Gilbert V. Levin
and the Company (incorporated by reference to Form
10-KSB filed March 31, 1993)
(10.2) Supplemental Executive Retirement Plan Agreement dated
as of February 17, 1993, by and between M. Karen Levin
and the Company (incorporated by reference to Form
10-KSB filed March 31, 1993)
(10.3) Consulting Agreement dated as of February 17, 1993, by
and between Gilbert V. Levin and the Company
(incorporated by reference to Form 10-KSB filed March
31, 1993)
(10.4) Consulting Agreement dated as of February 17, 1993, by
and between M. Karen Levin and the Company (incorporated
by reference to Form 10-KSB filed March 31, 1993)
(10.5) Employment Agreement dated as of November 17, 1995, by
and between Gilbert V. Levin and the Company
(incorporated by reference to Form 10-KSB filed March
31, 1996)
(10.5.1) Amendment to Employment Agreement dated as of November
17, 1995, by and between Gilbert V. Levin and the
Company (incorporated by reference to Form 10-KSB filed
March 23, 1998)
(10.6) Restated Stock Redemption Agreement dated as of January
15, 1996, by and between Gilbert V. Levin, M. Karen
Levin, and the Company (incorporated by reference to
Form 10-KSB filed March 31, 1996)
(10.7) Asset Purchase Agreement dated February 27, 1996, by and
between the Company and ManTech International
Corporation (incorporated by reference to Form 10-KSB
filed March 31, 1996)
(10.8) Agreement and License between the Company and MD Foods
Ingredients Amba.
(10.9) Securities Purchase Agreement dated as of December 12,
1997, by and between the Company and RGC International
Investors, LDC, c/o Rose Glen Capital Management, L.P.
(incorporated by reference to Form 8-K filed December
18, 1997).
(10.10) Lease Agreement dated as of November 11, 1997 by and
between the Company and Liberty Property Trust.
(10.11) 1997 Stock Option Plan (incorporated by reference from
the company's proxy statement for its May 1998 annual
meeting, as filed with the Commission).
(23) Consent of PricewaterhouseCoopers L.L.P.
(27) Financial Data Schedule (included only with electronic
filing)
-29-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Biospherics Incorporated
(Registrant)
Date: February 25, 1999 By: /s/ Gilbert V. Levin
------------------------- ---------------------
Gilbert V. Levin
Chair, CEO, President & Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Chair, CEO, President, and
/s/ Gilbert V. Levin Treasurer February 25, 1999
- -------------------------
Gilbert V. Levin
Director, Vice President for
/s/ M. Karen Levin Communications, Secretary February 22, 1999
- -------------------------
M. Karen Levin
/s/ Lionel V. Baldwin Director February 22, 1999
- -------------------------
Lionel V. Baldwin
/s/ David A. Blake Director February 22, 1999
- -------------------------
David A. Blake
/s/ A. Bruce Cleveland Director February 22, 1999
- -------------------------
A. Bruce Cleveland
/s/ George S. Jenkins Director February 22, 1999
- -------------------------
George S. Jenkins
/s/ Anne S. MacLeod Director February 22, 1999
- -------------------------
Anne S. MacLeod
-30-
Biospherics Incorporated Exhibit 23
----------
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Biospherics Incorporated on Form S-8 (File No. 333-66053) and on Form S-3 (File
No. 333-44973), of our report dated March 24, 1999, on our audits of the
financial statements of Biospherics Incorporated as of December 31, 1998, and
for each of the two years ended December 31, 1998 and 1997, which report is
included in this Annual Report on Form 10-KSB.
/s/ PricewaterhouseCoopers L.L.P.
- ---------------------------------
Baltimore, Maryland
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,288,834
<SECURITIES> 0
<RECEIVABLES> 1,787,820
<ALLOWANCES> 145,000
<INVENTORY> 0
<CURRENT-ASSETS> 4,814,944
<PP&E> 9,192,053
<DEPRECIATION> 2,756,472
<TOTAL-ASSETS> 11,634,238
<CURRENT-LIABILITIES> 4,536,480
<BONDS> 0
0
0
<COMMON> 28,801
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 11,634,238
<SALES> 16,013,897
<TOTAL-REVENUES> 16,013,897
<CGS> 12,457,277
<TOTAL-COSTS> 17,978,103
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 137,233
<INCOME-PRETAX> (2,101,439)
<INCOME-TAX> (120,845)
<INCOME-CONTINUING> (1,980,594)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,980,594)
<EPS-PRIMARY> (0.23)
<EPS-DILUTED> (0.23)
</TABLE>
