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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
For the fiscal year ended DECEMBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-5576
BIOSPHERICS(R) INCORPORATED
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(Exact name of small business issuer as specified in its Charter)
DELAWARE 52-0849320
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12051 INDIAN CREEK COURT, BELTSVILLE, MARYLAND 20705
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(Address of principal executive offices)
Issuer's telephone number, including area code: 301-419-3900
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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 Issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the Issuer
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 Issuer'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 Issuer's revenues for its most recent fiscal year: $12,698,412.
As of February 18, 2000, the aggregate market value of the voting stock
was $108,146,698, of which $74,284,419 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 9,831,518 shares of the Registrant's Common Stock
outstanding as of February 18, 2000.
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.
Page 1 of 32
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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. See the Company's Form 8-K filing dated March 26,
1999, for a more detailed statement concerning forward looking statements.
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Biospherics Incorporated (the "Company" or "Registrant"), a Delaware
corporation, was founded in 1967. The Company consists of a Biotechnology
Division ("BioTech"), an Information Services Division ("ISD"), and an
Information Technology Division ("ITD"). As part of BioTech, the Company is
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.
BIOTECHNOLOGY DIVISION
BioTech is the Company's biotechnology 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.
TAGATOSE AS A BULK SWEETENER. BioTech has patented the use of a
naturally occurring sugar, tagatose, as a full-bulk, low-calorie sweetener. It
is a true sugar that looks, feels, and tastes like table sugar. 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 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, development and regulatory 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. MDFI operates whey
protein processing plants, the by-product of which is raw material for making
tagatose. MDFI has announced plans to merge with Swedish dairy and food products
company, Arla, on April 17, 2000, pending approval from their respective boards.
MDFI has stated that their resources for tagatose will be increased by the
merger.
Total payments received from MDFI included a $1 million non-refundable
advance against future royalties. Biospherics will receive running royalties
once commercial sales of tagatose begin. To strengthen their cooperative
efforts, the two companies established a tagatose advisory committee to plan and
review progress in bringing 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, but has no
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authority to enforce such recommendations. MDFI has funded Biospherics for
technological support in excess of $800,000 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 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 tagatose and say they will begin
construction once GRAS is affirmed. The GRAS Expert Panel has been reviewing the
extensive safety data submitted to it and is expected to reach a favorable
conclusion this spring according to MDFI's annual report. MDFI reports that they
have begun the approval process for tagatose in Europe and other countries. MDFI
also reported to Biospherics' that the US FDA has approved labeling of tagatose
as containing no more than 1.5 kilocalories per gram. This value, requested by
MDFI, will permit products containing tagatose to be termed "reduced calorie."
The Company believes that tagatose will be declared GRAS for use in
food products, 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 tagatose. Also, unlike table sugar, tagatose has
been shown to cause no tooth decay.
TAGATOSE FOR ANEMIA AND HEMOPHILIA TREATMENT. The Company has received
a patent for the use of tagatose against anemia and hemophilia (1999). Tagatose
has been shown to improve blood factors in the two diseases and indicates that
tagatose may be useful as a drug or drug adjuvant in the treatment of anemia and
hemophilia.
TAGATOSE AS A TREATMENT FOR TYPE 2 DIABETES. The Company has patented
the use of tagatose for use as a treatment against Type 2 diabetes (1995).
Ongoing research continues to support tagatose's effectiveness in combating this
disease. Studies so far have indicated that doses of tagatose in the range of 10
to 75 grams per day produced no rise in blood glucose or insulin levels in
diabetic or normal subjects. In addition, tagatose taken before the consumption
of glucose has been shown to have a blunting effect on the normally expected
rise in blood glucose.
TAGATOSE AS AN ANTI-HYPERGLYCEMIC AGENT. The Company has patented the
use of 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).
These patent rights are retained by Biospherics. Studies on the use of
tagatose on Type 2 diabetic patients are ongoing at the University of Maryland
School of Medicine. The Company is discussing the possibility of licensing the
use of tagatose for drug uses with pharmaceutical and nutritional products
companies. Other uses for tagatose outside the scope of the license to MDFI are
being pursued.
SAFE-FOR-HUMANS PESTICIDES. Sale of "FlyCracker," will begin March of
2000. The active ingredient for this patented safe-for-humans pesticide is made
from compounds that are considered "food grade". It was 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. Safe pesticides were invented by the Company in response to the EPA's
initiative urging the development of alternatives to the "hard chemical"
pesticides 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 increasing concern over
pesticide hazards in foods and the general environment indicates a market for an
economical and effective product that poses no human or environmental threat.
In addition to plans for expanded research in the food and
pharmaceutical uses of tagatose, the Company plans to increase research in its
patent-pending method for prolonging the lifetimes of fragrances, sun block,
lotions and other cosmetic products. While these products show promise, the
continued development is dependent upon many factors, including but not limited
to, the Company's having sufficient funds and resources to pursue them. The $5
million raised from the February 2000 private placement will be used in part to
further the development of these products.
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INFORMATION SERVICES DIVISION
COMMERCIAL BUSINESS
ISD's professional staff serves the needs of commercial clients,
with a focus on 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 and advanced data warehouse and data mart services. 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 pharmaceutical drug and product lifecycle support and
clinical research support. 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, managed car organizations, and clinical
research organizations. Contracts with non-governmental parties are typically
obtained following private negotiations. Projects range from months to years
in duration.
GOVERNMENT BUSINESS
ISD's information professionals design and operate information centers
providing information management and materials to the public on various socially
beneficial subjects, as well as other information services, such as reservation
and tourism services..ISD focuses on those clients who are looking to leverage
technology in the ever advancing world of information management. 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 Collaborative Web Navigation. 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. Coupling ISD's expert
staff with its advanced technologies results in an efficient and effective
system to collect and disseminate large amounts of information.
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.
The Company's Federal Information Center (FIC) contract, through the
General Services Administration, has been extended through March 31, 2000. The
Company is in the final rounds of negotiations for the new FIC contract, which
has a base of seven months and four option years, but does not know at this time
whether it will be awarded the contract. 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. Government
contract awards are from time to time subject to protest proceedings by
competitive bidders. As of December 31, 1999, none of the Company's awards were
under protest.
ISD accounted for 99% of the Company's total revenues in 1999. 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 1999, government business accounted for approximately
71% of ISD's business.
The Company intends to restructure ISD into two separate divisions in
order to provide management and reporting capability in-line with its 2000
strategic plan. The new divisions will be the Commercial Information Services
Division ("CISD") and the Government Information Services Division ("GISD").
INFORMATION TECHNOLOGY DIVISION
ITD provides internal and external technical services including
software engineering, telecommunications, network infrastructure, Internet
provision, and all other services of a computer or information systems
technology nature. ITD has engineered two products that have been used to
deliver services via ISD. Historically and strategically, services and products
of ITD are utilized and/or delivered via the other operating Divisions. ITD
focuses on commercial and government business of an information technology
nature, providing consulting, integration, and
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support services, as well as product development, both internally and
commissioned. ITD has provided industry award winning E-Business solutions, a
core competency exploited on the majority of its endeavors.
INDUSTRY SEGMENTS
See Note 11 "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.
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 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 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 tagatose.
SALES BACKLOG
Sales backlog at December 31, 1999 and 1998, were as follows ($000s):
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
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CURRENT LONG-TERM TOTAL CURRENT LONG-TERM TOTAL
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<S> <C> <C> <C> <C> <C> <C>
Information Services Division $ 7,394 $ 7,238 $14,632 $10,588 $14,040 $24,628
BioTech Programs Unit -- 1,000 1,000 200 1,000 1,200
------- ------- ------- ------- ------- -------
$ 7,394 $ 8,238 $15,632 $10,788 $15,040 $25,828
------- ------- ------- ------- ------- -------
</TABLE>
PATENTS AND TRADEMARKS
The Company has established a strong worldwide patent position for
tagatose and an economical process for its manufacture. The Company's 1988 U.S.
patent for the use of 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 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 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 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.
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In 1999, patent coverage was received for use of tagatose in treating
anemia and hemophilia. Other patents for health uses of tagatose are pending.
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.
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 tagatose (which is to be borne by MDFI). Commercialization
of tagatose in the United States for use as food additives will require FDA
approval or GRAS certification. 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.
RESEARCH AND DEVELOPMENT
BioTech expenditures for research and development were approximately
$343,880 and $411,000 in 1999 and 1998, respectively. These expenditures were
incurred primarily in the ongoing efforts to commercialize tagatose, including
its development for drug uses, with a minor portion to develop the Company's
safe-for-humans pesticides. These efforts to support MDFI were reimbursed by
MDFI.
EMPLOYEES
In 1999, the Company employed an average of 367 persons on a full or
part time basis. Of this total, approximately 206 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 February 28, 2009. 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 8 "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 1999 to a vote of security holders, through solicitation of proxies,
or otherwise.
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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 1999 or 1998. 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 18, 2000, the number of shareholders of record of the
Company's common stock was approximately 5,700. 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, 1999, as reported on the NASDAQ National
Market System.
<TABLE>
<CAPTION>
HIGH LOW
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<S> <C> <C>
1st Quarter 1999 $8 $4 13/16
2nd Quarter 1999 $7 15/16 $6
3rd Quarter 1999 $6 7/8 $4
4th Quarter 1999 $7 19/32 $4 1/16
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
</TABLE>
In December 1997, the Company completed a $3 million private offering
of 375,000 units to a single institutional investor (the "Investor"). Each unit
consisted of two shares of Common Stock and two Warrants, with exercise prices
of $4.00 and $4.50 per share, respectively. Additionally, Warrants to purchase
120,000 shares of Common Stock at $4.00 per share were issued to various
placement agents. The Warrants were exercisable throughout a three year period.
All shares issued in connection with the December 1997 private placement,
including all which may be issued pursuant to exercise of the Warrants, have
been registered by the Company's Registration Statement.
Prior to March 31, 1999, the Investor exercised warrants with an
exercise price of $4.00 per share for 125,000 shares of Common Stock. On March
31, 1999, the Investor agreed to exercise the balance of its $4.00 per share
Warrants (i.e., for 250,000 shares of Common Stock) in consideration for the
Company's grant to the Investor of a new three-year Warrant for 250,000 shares
of Common Stock with an exercise price of $8.00 per share (the "1999 Warrant
I"). As part of the transaction, the Company has registered the shares of Common
Stock underlying the 1999 Warrant I.
On May 21, 1999, the Investor agreed to exercise all of its $4.50 per
share Warrants (i.e., for 375,000 shares of Common Stock) in consideration for
the Company's grant to the Investor of a new three-year Warrant for 375,000
shares of Common Stock with an exercise price of $6.40 per share (the "1999
Warrant II"). As part of the transaction, the Company has registered the shares
of Common Stock underlying the 1999 Warrant II.
The shares underling the 1999 Warrant I and the 1999 Warrant II, have
been registered by the Company's Registration Statement on Form S-3
(Registration No. 333-79593). During 1999, warrants for the purchase of 302,499
and 375,000 shares, at $4.00 and $4.50, respectively, of the Company's Common
Stock were exercised, resulting in proceeds of $2,897,496. Warrants for the
purchase of 60,000, 375,000, and 250,000 shares at $4.00, $6.40, and $8.00,
respectively, are outstanding at December 31, 1999.
In late February 2000, the Company completed another $5 million private
offering of 723,982 units to the Investor. Each unit consisted of one share of
Common Stock and one and one-half (1 1/2) Warrants with an exercise
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price of $6.90625 per share (the "2000 Warrant"). The 2000 Warrant is
exercisable throughout a four year period. The Company has agreed to register
the shares sold and the shares covered by the 2000 Warrant on Form S-3.
In connection with the above-described private placements, the Investor
has agreed that it will not exercise any of the warrants to the extent that it
would acquire shares of Common Stock exceeding 9.9% of the outstanding Common
Stock nor to sell shares to anyone to the extent that their holding in the
Company would exceed 4.9% of the outstanding Common Stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS--1999 COMPARED WITH 1998
The Company reported a net loss of $5,205,097 ($0.56 per share) on
sales of $12,698,412 for the year ended December 31, 1999, compared with a net
loss of $1,980,594 ($0.23 per share) on sales of $16,013,897 for the year ended
December 31, 1998. Results for 1999 include a $4.3 million operating loss from
ISD and $369,000 in unrecovered costs associated with the Biotechnology
Division. Included in ISD's loss for 1999, is a $2 million write-down of
impaired assets taken in the fourth quarter of 1999.
Revenue from ISD decreased to $12,568,000 in 1999 compared to
$15,766,000 in 1998 primarily as a result of completion of several long-term
government contracts. The prior year also included larger than normal revenue
from the initial launch of two commercial contracts. The following schedule
summarizes the break-down of ISD revenue between government and commercial
contracts (in $000s):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
1999 1998
------- -------
<S> <C> <C>
Government $ 8,974 $11,094
Commercial 3,594 4,672
------- -------
$12,568 $15,766
------- -------
------- -------
</TABLE>
Starting in the first quarter of 1999, the Company initiated
significant re-engineering efforts across its business lines, through the
reduction of labor and renegotiation of contracts, in combination with a
marketing strategy designed to take advantage of the Company's technology
investment. The Company targeted growth in the business line in which the
Company is the most competitive, the health and pharmaceutical business, to make
this line the Company's profit leader. The government business also has seen
significant results in increased performance on all contracts. Management has
taken steps to restructure the Company's business development plan. In a recent
restructure of the Company's marketing efforts, a new Business Development Group
was formed. This newly formed group is responsible for business development,
marketing, account management and growth, and client relationship management.
The Business Development Group will strategically focus on the commercial
pharmaceutical business, which now accounts for 28% of the Company's revenue,
and offers the most favorable profit margins. The Company is also considering
plans to market its existing Information Technology Division to target
technology-oriented commercial contracts, as well as government contracts which
are anticipated to provide better margins than the services the Company has
traditionally provided to the government.
Certain of the Company's major government contracts expire in 2000 and
are subject to either rebid or the exercise of extension options at the
discretion of the government. While the Company is confident of its ability to
retain these contracts, the loss thereof could have an adverse effect on the
Company's operations.
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. 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. Focus has been
placed on the pharmaceutical companies' drug development and launch support, as
opposed to the single drug approach of previous years.
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Revenue from BioTech programs decreased $118,000 (48%) from $248,000 in
1998 to $130,000 in the current year as a result of the completion of the
technical support services provided to MDFI.
Selling, general and administrative expenses ("S,G&A") decreased
$125,000 (3%) from $3,799,000 in 1998 to $3,674,000 in 1999 as a result of staff
reductions.
Depreciation and amortization expense increased $430,000 (33%) from
$1,311,000 in 1998 to $1,741,000 in 1999 as a result of the Company's
investments in information systems and software development.
During the fourth quarter of 1999, the Company wrote-down approximately
$2 million of capitalized software and computer technology. The write-down
included $648,000 for InfoSuite, $633,000 for HealthSuite, and $731,000 for
ReserveSuite/CTI. 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. HealthSuite is an
advanced database management product for clinical management, clinical
demographics, demand management, disease management, algorithmic expert system
functions, and other related capabilities. ReserveSuite is a comprehensive
system for reserving elements of an inventory, reporting and full management
capability, client server based in Oracle as well as Web-enabled. Computer
Telephone Integration ("CTI") is a technology that enables the integration of
telephone systems and complex computer systems. The write-downs were a result of
changes made to the Company's marketing plan in the fourth quarter of 1999, and
approved by the Board of Directors in February 2000. Despite efforts to market
these products throughout 1999, management acknowledges the lack of sufficient
historical and forecasted sales. The absence of dependable sales leads related
to these assets and the progressive shifting of the Company's marketing efforts
towards the pharmaceutical business and BioTech products, cause uncertainty that
sufficient future cashflows will be obtained to justify the value of these
assets on the books. These assets have therefore been revalued in the fourth
quarter under the guidelines of FAS 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Based on the
Company's expectation of future discounted net cash flows from these assets,
these assets have been written-down to their expected realizable value of $1.6
million.
Interest (net) increased $74,000 (54%) from a net loss of $137,000 in
1998 to a net loss of $211,000 in 1999. The increase was the result of increased
interest expense connected with increased borrowing on the bank line of credit
and the related increase in the rate of interest charged by the bank.
Based on the Company's losses in recent years and its accumulated
deficit, the Company has provided a full valuation allowance against the net
deferred tax asset. During the second quarter of 1999, the Company increased the
allowance in the amount of $300,000 to fully value the remaining net deferred
tax asset recorded at December 31, 1998, resulting in an income tax expense for
the year of $300,000.
The Company's sales backlog as of December 31, 1999, was $15,632,000
compared to $25,828,000 as of December 31, 1998. The decrease in backlog between
years is a result of the expiration of contracts and the decrease in sales.
LIQUIDITY AND CAPITAL RESOURCES
The Company renewed its Loan Agreement (the "Agreement") with Bank of
America (the "Bank") on January 31, 2000, which provides for borrowing up to
$1.5 million, subject to advance rates as defined in the Agreement. Outstanding
borrowings under the Agreement aggregated $1,277,853 at December 31, 1999, and
are collateralized by the Company's eligible accounts receivable and $500,000
from the Company's money market account. The interest rate under the new
agreement is the Bank's prime rate plus 2.5% per annum. The total amount
available to the Company was $171,881 under the Agreement at December 31, 1999.
In the fall of 1999 and in early 2000, the Bank extended the line of credit but
provided that absent an additional agreement with the Company, all loans would
become due and payable on a date certain. At present, this date is March 31,
2000. The Company is in discussions with the Bank and other institutional
lenders to extend the line of credit and related term loans.
In late February 2000, the Company completed another $5 million private
offering of 723,982 units to the Investor, resulting in net proceeds of
approximately $5 million. Each unit consisted of one share of Common Stock and
one and one-half (1 1/2) Warrants with an exercise price of $6.90625 per share
(the "2000 Warrant"). The 2000 Warrant is exercisable throughout a four year
period. The Company has agreed to register the shares sold and the shares
covered
-9-
<PAGE>
by the 2000 Warrant. Given the increased liquidity of the Company, resulting
from the private placement, the Company believes that it will obtain an
appropriate extension of the line of credit. However, if the Company is unable
to extend the line of credit, the Company believes that it has adequate funds to
meet all of its current obligations for the balance of 2000.
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 $224,791 at December
31, 1999. 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, 1999, reflects a net cash
outflow of $0.9 million consisting of $1.0 million used in operating activities,
$1.5 million used in investing activities, and $1.6 provided by financing
activities. Cash flow from operating activities in 1999 decreased $0.1 million
from those of the prior year as a result of the Company's re-engineering
efforts. Investment in property and equipment decreased by $2.5 million as the
Company completed the upgrading of its information and telecommunications
systems during the first half of 1999. These investments were financed through
the proceeds from the issuance of common stock.
Working capital as of December 31, 1999, was $60,899, which represents
a $217,065 decrease from working capital of $277,964 at December 31, 1998.
The Company considers the upgrading of its information and
telecommunications systems 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 proportionately
less. The Company is anticipating sufficient cash flow from operating activities
during 2000 to cover its continuing capital needs, but will consider using
approximately $1.2 million of the proceeds from the February 24, 2000, private
placement to purchase certain telephone equipment currently under leases. It is
also anticipated that royalties on sales by MDFI could begin in 2001. No
dividends were paid in 1999 and none are anticipated in 2000.
IMPACT OF THE YEAR 2000
To date, the Company has experienced no significant adverse effects
related to the Year 2000 computer issue. The important internal information
technology systems made a seamless transition into the Year 2000 and there were
no notable problems with equipment or systems which may have been effected by
faulty embedded chips or other Year 2000 problems. The Company is not aware of
any significant Year 2000 problems at any of its customers nor has the company
noted any disruption in its supply chain related to Year 2000 issues.
The Company implemented a comprehensive project plan to identify
internal and external information technology and non-information technology
systems which required modification or upgrade to be made Year 2000 compliant.
An inventory and assessment of these systems was completed fourth quarter of
1998. Remediation and testing of non-Year 2000 compliant systems was completed
during the second quarter of 1999. As part of this project, the Company
developed and tested contingency plans which identified workarounds in the event
of a malfunction of a system designated as a priority system at the inventory
stage. In addition, the Company identified suppliers of key goods and services
to all business areas, requested information about their Year 2000 readiness,
and audited certain key suppliers for Year 2000 readiness.
The Company has spent approximately $200,000 principally for capital
expenditures as of December 31, 1999 to become Year 2000 compliant. These
expenditures are for external costs and do not include costs of Company
employees who implemented the comprehensive project plan described above. The
Company believes that any additional resources needed to address Year 2000
issues will not be material. However, there can be no assurance that currently
unidentified Year 2000 issues, if any, will not arise, especially in areas
outside the Company; that these issues will not have a material adverse effect
on the Company; or, that additional resources needed to address these issues
will not be material.
-10-
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued SFAS NO. 137,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF
THE EFFECTIVE DATE OF FASB STATEMENT NO. 133. This statement amends SFAS No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, to be
effective for all fiscal quarters of all fiscal years beginning after June
15, 2000. 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 believes that the effect of adoption of SFAS No. 133 will not have a
material effect on the Company's financial statements.
-11-
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
Financial statements and supplementary data required by this Item 7
follow.
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS PAGE
<S> <C>
Report of Independent Accountants................................................................13
Statements of Operations for the years ended December 31, 1999 and 1998..........................14
Balance Sheet as of December 31, 1999............................................................15
Statements of Changes in Stockholders' Equity for the years ended December 31, 1999 and 1998.....16
Statements of Cash Flows for the years ended December 31, 1999 and 1998..........................17
Notes to Financial Statements....................................................................18
</TABLE>
-12-
<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, 1999 and the results of its operations and its cash flows for the
years ended December 31, 1999 and 1998, in conformity with accounting principles
generally accepted in the United States. 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 auditing standards generally
accepted in the United States, 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 LLP
Baltimore, Maryland
February 29, 2000
-13-
<PAGE>
BIOSPHERICS INCORPORATED
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
REVENUE $ 12,698,412 $ 16,013,897
OPERATING EXPENSE
Direct contract and operating costs 9,621,882 12,457,277
Selling, general and administrative expense 3,673,635 3,799,150
Research and development expense 343,880 410,827
Depreciation and amortization expense 1,740,511 1,310,849
Write-down of impaired assets 2,012,225 --
------------ ------------
Total operating expense 17,392,133 17,978,103
------------ ------------
LOSS FROM OPERATIONS (4,693,721) (1,964,206)
Interest, net (211,376) (137,233)
------------ ------------
Loss before taxes (4,905,097) (2,101,439)
Income tax expense (benefit) 300,000 (120,845)
------------ ------------
NET LOSS $ (5,205,097) $ (1,980,594)
------------ ------------
------------ ------------
Net loss per share, basic and diluted $ (0.55) $ (0.23)
------------ ------------
------------ ------------
Weighted average shares outstanding, basic and diluted 9,433,295 8,790,050
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to financial statements
-14-
<PAGE>
BIOSPHERICS INCORPORATED
BALANCE SHEET
AS OF DECEMBER 31, 1999
<TABLE>
<S> <C>
ASSETS
Current assets
Cash and cash equivalents $ 1,437,280
Restricted cash 500,000
Trade accounts receivable, net of allowance for
doubtful accounts of $200,000 1,616,012
Other receivables 149,149
Prepaid expenses and other assets 476,866
-----------
Total current assets 4,179,307
Property and equipment, net of accumulated depreciation
of $3,555,415 4,239,776
Patents, net of accumulated amortization of $100,085 136,526
-----------
Total assets $ 8,555,609
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank line of credit $ 1,277,853
Accounts payable and accrued expenses 1,095,199
Accrued salaries and benefits 682,034
Notes payable 634,716
Capital lease obligations 317,445
Deferred revenue 111,161
-----------
Total current liabilities 4,118,408
Notes payable 206,000
Capital lease obligations 332,604
Deferred rent 116,154
Deferred revenue 1,000,000
-----------
Total liabilities 5,773,166
-----------
Commitments and contingencies
Redeemable common stock, 3,054,273 shares 547,337
-----------
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;
9,781,488 issued, 9,747,650 outstanding, of which
3,054,273 shares are classified as redeemable common stock 33,636
Paid-in capital in excess of par value 7,963,339
Treasury stock, 33,838 shares, at cost (219,054)
Accumulated deficit (5,542,815)
-----------
Total stockholders' equity 2,235,106
-----------
Total liabilities and stockholders' equity $ 8,555,609
-----------
-----------
</TABLE>
See accompanying notes to financial statements
-15-
<PAGE>
BIOSPHERICS INCORPORATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Retained
Common Stock Paid-in Treasury Stock Earnings
-------------------- Capital in ------------------ (Accumulated Stockholders'
Shares Amount Excess of Par Shares Amount Deficit) Equity
--------- -------- ------------- ------ --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 8,829,190 $ 28,078 $4,403,204 40,606 $(267,369) $ 1,649,166 $ 5,813,079
Issuance of common stock
Exercise of employee stock options 12,000 60 40,690 -- -- -- 40,750
Exercise of stock warrants 132,501 663 529,341 -- -- -- 530,004
Cost of stock issuance -- -- (60,491) -- -- -- (60,491)
Net loss -- -- -- -- -- (1,980,594) (1,980,594)
--------- -------- ---------- ------ --------- ----------- -----------
Balance, December 31, 1998 8,973,691 28,801 4,912,744 40,606 (267,369) (331,428) 4,342,748
Issuance of common stock
Exercise of employee stock options 130,298 652 396,677 -- -- -- 397,329
Exercise of stock warrants 677,499 3,387 2,894,109 -- -- -- 2,897,496
Cost of stock issuance -- -- (17,768) -- -- -- (17,768)
Issuance of treasury stock in payment
of expenses -- -- -- (6,768) 48,315 (6,290) 42,025
Net reclassification for redeemable
common stock -- 796 (222,423) -- -- -- (221,627)
Net loss -- -- -- -- -- (5,205,097) (5,205,097)
--------- -------- ---------- ------ --------- ----------- -----------
Balance, December 31, 1999 9,781,488 $ 33,636 $7,963,339 33,838 $(219,054) $(5,542,815) $ 2,235,106
--------- -------- ---------- ------ --------- ----------- -----------
--------- -------- ---------- ------ --------- ----------- -----------
</TABLE>
See accompanying notes to financial statements.
-16-
<PAGE>
BIOSPHERICS INCORPORATED
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net loss $(5,205,097) $(1,980,594)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,740,511 1,310,849
Loss on sale or write-down of assets 2,037,341 99,209
Treasury stock issued in payment of expenses 42,025 --
Changes in assets and liabilities:
Trade accounts receivable (28,192) (266,473)
Provision for uncollectible accounts receivable 55,000 60,000
Other receivables 61,039 (99,875)
Prepaid expenses and other assets 81,204 (131,541)
Deferred income taxes 300,000 175,526
Accounts payable and accrued expenses (165,997) (34,549)
Income taxes payable -- (215,226)
Deferred rent 9,231 (10,336)
Deferred compensation -- (18,869)
Deferred revenue (33,643) (30,471)
----------- -----------
Net cash used in operating activities (1,106,578) (1,142,350)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (1,432,487) (3,867,313)
Restricted cash, security deposit -- 27,408
Deposit -- (70,000)
Additions to patent costs (22,360) (4,810)
----------- -----------
Net cash used in investing activities (1,454,847) (3,914,715)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change on bank line of credit 129,848 1,138,006
Restricted cash under bank line of credit (500,000) --
Net change in book overdraft (458,134) 552,407
Proceeds from notes payable 198,491 678,922
Payments on notes payable (543,849) (475,168)
Payments on capital lease obligations (393,541) (287,304)
Proceeds from issuance of common stock 3,286,675 570,754
Cost of issuance of common stock (9,619) (60,491)
----------- -----------
Net cash provided by financing activities 1,709,871 2,117,126
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (851,554) (2,939,939)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,288,834 5,228,773
----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,437,280 $ 2,288,834
----------- -----------
SUPPLEMENTAL CASH FLOW INFORMATION
Income taxes refunded $ 16,943 $ 62,674
Interest paid $ 290,284 $ 336,345
Property and equipment financed by capital leases $ -- $ 795,260
Property and equipment financed by accounts payable $ 120,162 $ 55,181
</TABLE>
See accompanying notes to financial statements.
-17-
<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 a
Biotechnology Division ("BioTech"), an Information Services Division ("ISD"),
and an Information Technology Division ("ITD"). BioTech is dedicated to
research, development, and productization of proprietary products. ISD operates
information center services providing consulting, information management, and
materials management to the public as well as reservation and tourism solutions.
ITD provides software engineering, telecommunications, network infrastructure,
internet provision, and other computer system services via ISD.
CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. At December 31, 1999,
the Company had approximately $1,933,424 in investments with a maturity of three
months or less in one bank, which exceeds FDIC insured limits by $1,833,424. The
Company has not experienced any losses on its investments.
RECEIVABLES
Three major contracts constitute 61% of the trade accounts receivable,
the components of which are 35%, 16%, and 10%. No other single contract was
greater than 10% of total trade accounts receivable. Receivables from Federal
and state agencies represented 69% of the total trade accounts receivable.
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.
<TABLE>
<S> <C>
Office furniture and equipment 3 to 10 years
Computer hardware and software 5 years
</TABLE>
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.
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.
-18-
<PAGE>
BIOSPHERICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
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 an impairment loss on software
technologies of $2,012,225 in 1999 and a loss in connection with the disposal of
obsolete assets of $25,116 in 1999 and $99,209 in 1998 associated with computer
hardware and software technologies (see Note 3). 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 effective 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 8.
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 2001, 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.
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 loss per common share has 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, as common stock
equivalents are antidilutive.
-19-
<PAGE>
BIOSPHERICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
-------------
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued SFAS NO. 137,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE
EFFECTIVE DATE OF FASB STATEMENT NO. 133. This statement amends SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities to be effective for
all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS NO.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, 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 change sin
the derivative's fair value be recognized in earnings unless specific hedge
accounting criteria are met. The Company believes that the effect of adoption of
SFAS No. 133 will not have a material effect on the Company's financial
statements.
2. PROPERTY AND EQUIPMENT
The components of property and equipment as of December 31, 1999, at
cost are:
<TABLE>
<CAPTION>
ACCUMULATED
DEPRECIATION
AND NET BOOK
COST AMORTIZATION VALUE
----------- ------------ ----------
<S> <C> <C> <C>
Computer software $2,434,762 $1,068,885 $1,365,877
Computer hardware 3,067,993 1,460,443 1,607,550
Office furniture and equipment 624,991 304,499 320,492
Leasehold improvements 339,892 109,643 230,249
Capital leases 1,327,553 611,945 715,608
----------- ------------ ----------
$7,795,191 $3,555,415 $4,239,776
----------- ------------ ----------
----------- ------------ ----------
</TABLE>
3. WRITE-DOWN OF IMPAIRED ASSETS
In accordance with Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," the Company uses an estimate of the
future discounted net cash flows of the related asset or asset grouping over
the estimated remaining life in measuring whether the assets are recoverable.
During the fourth quarter of 1999, the Company wrote-down approximately $2
million of capitalized software and computer technology. The write-down
included $648,000 for InfoSuite, $633,000 for HealthSuite, and $731,000 for
ReserveSuite/CTI. 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.
HealthSuite is an advanced database management product for clinical
management, clinical demographics, demand management, disease management,
algorithmic expert system functions, and other related capabilities.
ReserveSuite is a comprehensive system for reserving elements of an
inventory, reporting and full management capability, client server based in
Oracle as well as Web-enabled. Computer Telephone Integration ("CTI") is a
technology that enables the integration of telephone systems and complex
computer systems. The write-downs were a result of changes made to the
Company's marketing plan in the fourth quarter of 1999, and approved by the
Board of Directors in February 2000. Despite efforts to market these products
throughout 1999, management acknowledges the lack of sufficient historical
and forecasted sales. The absence of dependable sales leads related to these
assets and the progressive shifting of the Company's marketing efforts
towards the pharmaceutical business and BioTech products, cause uncertainty
that sufficient future cashflows will be obtained to justify the value of
these assets on the books. These assets have therefore been revalued in the
fourth quarter under the guidelines of FAS 121. Based on the Company's
expectation of future discounted net cash flows from these assets, these
assets have been written-down to their expected realizable value of $1.6
million.
-20-
<PAGE>
BIOSPHERICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
-------------
4. DEBT
LINE OF CREDIT
The Company renewed its Loan Agreement (the "Agreement") with Bank of
America (the "Bank") on January 31, 2000, which provides for borrowing up to
$1.5 million, subject to advance rates as defined in the Agreement. Outstanding
borrowings under the Agreement aggregated $1,277,853 at December 31, 1999, and
are collateralized by the Company's eligible accounts receivable and $500,000 in
the Company's money market account. The interest rate under the new agreement is
the Bank's prime rate plus 2.5% per annum (2% at 12/31/99). The total amount
available to the Company was $171,881 under the Agreement at December 31, 1999.
In the fall of 1999 and in early 2000, the Bank extended the line of credit but
provided that absent an additional agreement with the Company, all loans would
become due and payable on a date certain. At present, this date is March 31,
2000. The Company is in discussions with the Bank and other institutional
lenders to extend the line of credit and related term loans. Given the increased
liquidity of the Company, resulting from the recently concluded private
offering, the Company believes that it will obtain an appropriate extension.
However, if the Company is unable to extend the line of credit, the Company
believes that it has adequate funds to meet all of its current obligations for
the balance of 2000.
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 12/31/99 2000 2001 2002
- ----------------- -------- ------------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
August 31, 1997 $112,724 8.78% 25,050 25,050 -- --
December 3, 1997 $302,415 8.59% 92,402 92,402 -- --
March 11, 1998 $120,240 8.33% 50,100 40,080 10,020 --
April 29, 1998 $460,572 8.44% 217,493 153,524 63,969 --
October 20, 1998 $ 98,110 6.66% 59,956 32,703 27,253 --
July 1, 1999 $198,491 8.75% 170,923 66,164 66,164 38,595
-------- -------- -------- -------
$615,924 $409,923 $167,406 $38,595
-------- -------- -------- -------
</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 consists 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 $224,791 at December 31,
1999, which 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
Included in accounts payable is $392,799 related to a book overdraft at
December 31, 1999.
-21-
<PAGE>
BIOSPHERICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
-------------
5. PRIVATE PLACEMENTS
In December 1997, the Company completed a $3 million private offering
of 375,000 units to a single institutional investor (the "Investor"). Each unit
consisted of two shares of Common Stock and two warrants, with exercise prices
of $4.00 and $4.50 per share, respectively. Additionally, warrants to purchase
120,000 shares of Common Stock at $4.00 per share were issued to various
placement agents. The warrants were exercisable throughout a three year period.
All shares issued in connection with the December 1997 private placement,
including all which may be issued pursuant to exercise of the warrants, have
been registered by the Company.
Prior to March 31, 1999, the Investor exercised warrants with an
exercise price of $4.00 per share for 125,000 shares of Common Stock. On March
31, 1999, the Investor agreed to exercise the balance of its $4.00 per share
warrants (i.e., for 250,000 shares of Common Stock) in consideration for the
Company's grant to the Investor of a new three-year warrant for 250,000 shares
of Common Stock with an exercise price of $8.00 per share (the "1999 Warrant
I"). As part of the transaction, the Company has registered the shares of Common
Stock underlying the 1999 Warrant I.
On May 21, 1999, the Investor agreed to exercise all of its $4.50 per
share warrants (i.e., for 375,000 shares of Common Stock) in consideration for
the Company's grant to the Investor of a new three-year warrant for 375,000
shares of Common Stock with an exercise price of $6.40 per share (the "1999
Warrant II"). As part of the transaction, the Company has registered the shares
of Common Stock underlying the 1999 Warrant II.
The shares underlying the 1999 Warrant I and the 1999 Warrant II, have
been registered by the Company. During 1999, warrants for the purchase of
302,499 and 375,000 shares, at $4.00 and $4.50, respectively, of the Company's
Common Stock were exercised, resulting in proceeds of $2,897,496. Warrants for
the purchase of 60,000, 375,000, and 250,000 shares at $4.00, $6.40, and $8.00,
respectively, are outstanding at December 31, 1999.
In late February 2000, the Company completed another $5 million private
offering of 723,982 units to the Investor. Each unit consisted of one share of
Common Stock and one and one-half (1 1/2) warrants with an exercise price of
$6.90625 per share (the "2000 Warrant"). The 2000 Warrant is exercisable
throughout a four year period. The Company has agreed to register the shares
sold and the shares covered by the 2000 Warrant.
In connection with the above-described private placements, the Investor
has agreed that it will not exercise any of the warrants to the extent that it
would acquire shares of Common Stock exceeding 9.9% of the outstanding Common
Stock nor to sell shares to anyone to the extent that their holding in the
Company would exceed 4.9% of the outstanding Common Stock.
6. TREASURY STOCK TRANSACTION
During April 1999, the Company issued 6,768 shares of Common Stock
previously held in the treasury in payment of expenses. The excess of the
purchase price of the treasury stock over the value of the stock on the date of
issuance has been charged to retained earnings in the amount of $6,290.
7. INCOME TAXES
The benefit for income taxes in 1999 and 1998 consists of:
-22-
<PAGE>
BIOSPHERICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
-------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
Current
Federal $ -- $ (53,297)
State -- (11,598)
--------- ---------
Total current benefit -- (64,895)
--------- ---------
Deferred
Federal 245,624 (45,809)
State 54,376 (10,141)
--------- ---------
Total deferred provision (benefit) 300,000 (55,950)
--------- ---------
Total income tax provision (benefit) 300,000 (120,845)
--------- ---------
</TABLE>
The tax effect of significant temporary differences representing
deferred tax assets as of December 31, 1999, is as follows:
<TABLE>
<CAPTION>
CURRENT NON-CURRENT
----------- -----------
<S> <C> <C>
Property and equipment $ -- $ (58,673)
Deferred rent 14,260 --
Accrued vacation 45,278 --
Allowance for doubtful accounts 77,240 --
Deferred revenue -- 386,200
Net operating loss carryforward -- 2,478,885
Other (1,005) --
----------- -----------
135,773 2,806,412
Valuation allowance (135,773) (2,806,412)
----------- -----------
Deferred tax asset $ -- $ --
----------- -----------
----------- -----------
</TABLE>
The Company has $6.4 million of U.S. net operating loss carryforwards
which will be available to offset regular taxable U.S. income during the
carryforward period, which will begin to expire in 2018. Based on the Company's
losses in recent years and its accumulated deficit, the Company has provided a
full valuation allowance against the net deferred tax asset. During the second
quarter of 1999, the Company increased the allowance in the amount of $300,000
to fully value the remaining net deferred tax asset recorded at December 31,
1998.
Reconciliation between actual tax expense and tax computed at the
statutory Federal rate of 34 percent for 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
U.S. Federal income tax rate at 34% $(1,667,747) $ (714,489)
State taxes, net of federal tax benefit (225,862) (192,691)
Increase in valuation allowance 2,188,049 758,120
Expenses not deductible for tax purposes 5,560 5,431
Adjustment for prior year taxes -- 22,784
----------- -----------
Income tax provision (benefit) $ 300,000 $ (120,845)
----------- -----------
----------- -----------
</TABLE>
-23-
<PAGE>
BIOSPHERICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
-------------
8. 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 years.
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, 1999, 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, 1999, under noncancellable
leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
- ------------------------ -------- ----------
<S> <C> <C>
2000 $401,627 $ 796,550
2001 235,463 653,085
2002 155,149 560,905
2003 16,898 543,460
2004 1,102 559,763
Thereafter -- 1,987,966
-------- ----------
810,239 $5,101,729
----------
----------
Less: executory costs 70,383
Less: amount representing interest 89,807
--------
Capital lease obligations 650,049
Less current portion 317,445
--------
Long-term obligations $332,604
--------
</TABLE>
These future minimum rentals do not include consumer price index (CPI)
adjustments to which some of the leases are subject. The Company incurred rental
expenses of $887,131 in 1999 and $1,253,373 in 1998 under operating leases.
The Company recorded rental income of $154,703 in 1998, under sublease
agreements, which is offset against rent expense in the accompanying financial
statements. No rental income was recorded in 1999.
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
31% of the outstanding common stock at December 31, 1999. 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
-24-
<PAGE>
BIOSPHERICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
-------------
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, 1999, consisted of 3,054,273 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, 2000. The maximum contingent
liability under this agreement as of December 31, 1999, aggregates approximately
$286,144.
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 assumed returns from investment
of their funded pension plans and their social security payments. The deferred
compensation plan is unfunded. As of December 31, 1999, 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 May 28, 1999, the U.S. Department of Labor Administrative Review
Board (the "ARB") issued a decision that concluded a lengthy administrative
proceeding concerning the Company's liability for wages and fringe benefits
under two contracts that the Company was awarded by the General Services
Administration, a Federal Government agency. The ARB's decision found that the
Company had failed to pay wages and benefits for certain labor categories in
accordance with the Service Contract Act, and held that the Company is required
to pay these wages and benefits retroactively. The amount of this liability
could be substantial. While there are contractual procedures that will allow the
Company to request reimbursement of certain payments from the General Services
Administration, it is unlikely that the Company will be able to recover the full
amount of the liability. There are also administrative procedures that allow the
Department of Labor ("DOL") to waive the retroactivity of the ARB's decision,
and the Company has forwarded a request to the DOL requesting that the
retroactivity of the decision be limited to May 28, 1999. If the DOL grants the
Company's request, the Company's liability would be limited to $139,330 in
back wages and $13,058 in back fringe benefits. However, the DOL has not yet
responded to this request, and the decision whether to limit the retroactivity
of the ARB's decision is completely within the DOL's discretion.
On September 27, 1996, the Company signed an exclusive worldwide
licensing agreement with MD Foods Ingredients amba (MDFI) of Denmark for the
use, manufacture and sale of Biospherics' nonfattening sugar, 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
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
tagatose. The Company has two U.S. patents covering the proprietary method for
the manufacture of 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 tagatose
becomes operational. Under the terms of the agreement, MDFI
-25-
<PAGE>
BIOSPHERICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
-------------
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. During 1999, the EPA
requested a payment of approximately $6,000 in satisfaction of this potential
liability, to date, no final agreement has been resolved.
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.
9. 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 some options still
outstanding under an expired option plan. To date, all options granted have been
at the then-publicly quoted price of the stock. During 1999, 22,050 options were
granted. Activity for the two years ended December 31, 1999, is shown below:
<TABLE>
<CAPTION>
1999 1998
Weighted Weighted
Average Average
1999 Exercise 1998 Exercise
Shares Price Shares Price
----------- ------ -------------- ------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 2,800,850 $ 2.43 2,820,750 $ 2.48
Granted 22,050 $ 6.08 89,000 $ 5.87
Exercised (129,500) $ 3.07 (12,000) $ 3.40
Expired or forfeited (2,059,300) $ 1.35 (96,900) $ 5.48
----------- ------ -------------- ------
Outstanding at end of year 634,100 $ 5.47 2,800,850 $ 2.43
Exercisable at end of year 557,600 664,475
Available for grant at end of year 246,100 246,000
Price range of options
Outstanding $3.31-$7.25 $1.43 to $7.25
Exercised $2.88-$6.19 $2.88 to $3.50
Expired or forfeited $1.44-$7.25 $2.88 to $7.25
</TABLE>
-26-
<PAGE>
BIOSPHERICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
The following table summarizes information with respect to stock
options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Number of Weighted
Options Average Weighted
Range of Outstanding Remaining Average
Exercise Price at 12/31/99 Contractual Life Exercise Price
- -------------- ----------- ---------------- --------------
<S> <C> <C> <C>
$3.31 - 4.06 43,000 0.56 $ 3.36
$4.68 - 7.00 520,600 1.76 $ 5.41
$7.12 - 7.25 70,500 1.77 $ 7.22
- -------------- ----------- ---------------- --------------
$3.31 - 7.25 634,100 1.68 $ 5.47
- -------------- ----------- ---------------- --------------
- -------------- ----------- ---------------- --------------
</TABLE>
The following table summarizes information with respect to stock
options exercisable at December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED
YEAR OF OPTION NUMBER OF AVERAGE
EXPIRATION OPTIONS EXERCISE PRICE PRICE RANGE
- --------------- --------- -------------- -----------
<S> <C> <C> <C>
2000 372,950 $4.75 $3.31-$6.19
2001 68,375 $7.22 $7.13-$7.25
2002 70,250 $6.64 $6.19-$7.00
2003 42,025 $6.17 $5.78-$6.36
2004 4,000 $6.00 $6.00
- --------------- --------- -------------- -----------
All Years 557,600 $5.41 $3.31-$7.25
- --------------- --------- -------------- -----------
- --------------- --------- -------------- -----------
</TABLE>
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 summarize the assumptions used and the pro-forma net loss
and net loss per share resulting from applying SFAS 123.
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C> <C>
Net loss As reported $(5,205,097) $(1,980,594)
Pro forma $(5,681,165) $(2,408,248)
Net loss per share - basic As reported $(0.55) $(0.23)
Pro forma $(0.60) $(0.27)
Net loss per share - diluted As reported $(0.55) $(0.23)
Pro forma $(0.60) $(0.27)
Expected life (years) 4 4
Risk-free interest rate 5.00% 4.70%
Volatililty 75% 75%
Dividend yield 0.0% 0.0%
Weighted average remaining contractual life (years) 1.68 1.32
Weighted average fair value at date of grant $3.53 $3.34
</TABLE>
-27-
<PAGE>
BIOSPHERICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
10. 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 $59,270 in 1999 and
$69,331 in 1998.
11. 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 Biotechnology Division.
Financial information by business segment for the years ended December
31, 1999, and 1998 are summarized below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS)
1999 1998
-------- --------
<S> <C> <C> <C>
REVENUES Information Services Division $ 12,568 $ 15,766
Biotechnology Division 130 248
-------- --------
Total revenues $ 12,698 $ 16,014
-------- --------
-------- --------
OPERATING PROFIT (LOSS) Information Services Division $ (4,325) $ (1,724)
AND INCOME (LOSS) Biotechnology Division (369) (240)
BEFORE INCOME TAXES -------- --------
Total operating loss (4,694) (1,964)
Interest income (expense), net (211) (137)
-------- --------
Income (loss) from operations before
income taxes $ (4,905) $ (2,101)
-------- --------
-------- --------
IDENTIFIABLE ASSETS Information Services Division $ 5,338 $ 7,379
Biotechnology Division 150 171
General corporate assets 3,068 4,084
-------- --------
Total assets $ 8,556 $ 11,634
-------- --------
-------- --------
CAPITAL Information Services Division $ 1,060 $ 3,373
EXPENDITURES Biotechnology Division 1 14
General corporate assets 506 277
-------- --------
Total assets $ 1,567 $ 3,664
-------- --------
-------- --------
DEPRECIATION Information Services Division $ 1,502 $ 1,017
AND AMORTIZATION Biotechnology Division 24 20
General corporate assets 215 274
-------- --------
Total depreciation and amortization $ 1,741 $ 1,311
-------- --------
-------- --------
</TABLE>
-28-
<PAGE>
BIOSPHERICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
During 1999, ISD recognized revenue from three of its customers
representing 28%, 24%, and 17% of the total Company revenues. During 1998, the
Company recognized revenue from four of its customers representing 18%, 17%,
16%, and 11% of the total Company revenues. Government contracts accounted for
71% and 70% of the ISD revenue in 1999 and 1998, respectively.
The BioTech Programs Unit has invented and patented for the Company the
use of 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, tagatose, as a sweetener (see Note 8
"Commitments and Contingencies").
Operating profit (loss) consists of revenue less operating expenses. In
computing operating profit, interest expense and income taxes were not
considered.
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.
-29-
<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,
1999, 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
1996 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) Stock Purchase Warrants dated as of March 31, 1999 and
May 18, 1999 (incorporated by reference to Form 8-K
filed May 24, 1999)
(10.8) Agreement and License between the Company and MD Foods
Ingredients Amba (incorporated by reference to Form 8-K
filed October 22, 1996)
(10.9) Securities Purchase Agreement dated as of February 24,
2000, 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 March 3,
2000).
(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 LLP
(27) Financial Data Schedule (included only with electronic
filing)
-30-
<PAGE>
BIOSPHERICS INCORPORATED
----------
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 23, 2000 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.
/s/ Gilbert V. Levin Chair, CEO, President, and February 23, 2000
- ----------------------- Treasurer
Gilbert V. Levin
/s/ M. Karen Levin Director, Vice President for February 23, 2000
- ----------------------- Communications, Secretary
M. Karen Levin
/s/ Lionel V. Baldwin Director February 23, 2000
- ----------------------
Lionel V. Baldwin
/s/ David A. Blake Director February 23, 2000
- ----------------------
David A. Blake
/s/ Thomas Gantt Director February 23, 2000
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Thomas Gantt
/s/ George S. Jenkins Director February 23, 2000
- ----------------------
George S. Jenkins
/s/ Anne S. Macleod Director February 23, 2000
- ----------------------
Anne S. MacLeod
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<PAGE>
EXHIBIT 23
BIOSPHERICS INCORPORATED
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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 Forms S-3 (File
No. 333-44973 and 333-79593), of our report dated February 29, 2000, on our
audits of the financial statements of Biospherics Incorporated as of December
31, 1999, and for each of the two years ended December 31, 1999 and 1998, which
report is included in this Annual Report on Form 10-KSB.
/s/ PricewaterhouseCoopers LLP
Baltimore, Maryland
March 14, 2000
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