UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the quarterly period ended September 30, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-23512
BIOCORAL INC.
- --------------------------------------------------------------------------------
(Exact name of Small Business Issuer as specified in its charter)
Delaware 33-0601504
- ------------------------------- -------------------------
(State or other jurisdiction of (IRS Employer I.D. No.)
incorporation or organization)
3 villa de l'Industrie, 93400 Saint-Ouen, France
- --------------------------------------------------------------------------------
(Address of principal executive offices)
011-3314-010-2252
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(Issuer's telephone number, including area code)
Check whether the Issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
|X| No |_|
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares of common stock outstanding as of September 30, 1997 was
7,642,684.
<PAGE>
PART I
Item 1. Financial Statements. Attached.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
The Company experienced a net loss of $1,845,516 from continuing
operations during the nine month period ended September 30, 1997 ("Stub 1997")
primarily due to operating losses in its Inoteb subsidiary and $654,063 of
accelerated amortization. Losses from discontinued operations aggregated
$188,058. The net loss for this nine month period was similar to that for the
nine months ended September 30, 1996 ("Stub 1996") when the Company experienced
a net loss from continuing operations of $1,177,783, although the two figures
are not readily comparable since the Stub 1996 figure included a one-time-only
write down of $600,000 and the Stub 1997 figure reflects an acceleration of
approximately $483,000 of amortization of unearned compensation due to the
resignation of Mr. Mortara. The net loss figure for Stub 1996 reflected general
corporate operating expenses offset against a relatively insignificant amount of
other income, since the 1996 operating income was primarily classified as
discontinued operations in Stub 1997. The significant increase in total
operating expenses in Stub 1997 ($2,226,928) as compared to Stub 1996 ($764,791)
was due principally to the consolidation of Inoteb's operations and the
acceleration of amortization as mentioned above. Total revenues for Stub 1997
were $381,412, an increase of $194,404 over the same period the year before.
This reflected principally the results of Inoteb's sales.
In February 1997 the Company sold its Bensenville properties to a third
party in a transaction in which the Company received net proceeds of
approximately $1,515,000 of which $430,000 was deposited in escrow to secure
certain minimum rent guarantees made to the purchaser and the Company was
relieved of its mortgage indebtedness. Management believes that the proceeds
from such sale, together with other operating revenues, should be sufficient to
fund the Company's operations through at least September 30, 1998. Management
further believes that results of the Company's future operations will improve as
the Company sells its interest in certain written down subsidiaries and
streamlines operations and cuts costs at Inoteb. See "Current Plans of
Registrant" below.
Financial Condition, Liquidity and Capital Resources.
Total assets decreased by $1,507,603 from December 31, 1996 to September
30, 1997, primarily due to funding the Company's loss for Stub 1997 and its
outstanding liabilities. Cash increased significantly, from $9,142 to $444,698
due to the sale of the Bensenville properties. Total liabilities decreased
slightly, primarily due to the paydown of investor notes. Stockholder's equity
continues to be positive, at $952,994.
As mentioned above, the Company's liquidity was greatly improved by the
sale in 1997 of
<PAGE>
the Bensenville property. Management anticipates an additional positive change
in its cash position to one of greater liquidity (i) if it successfully
liquidates its interest in the SIM and in PEMP, two written-down subsidiaries;
and (ii) upon the release of the funds escrowed in connection with the
Bensenville sale (approximately $430,000). Management has no timetable for the
liquidation of its interest in either SIM (a discontinued subsidiary) or PEMP (a
written-down investment). Proceeds of the sale of either of these two entities
will be utilized to fund the Company's operations, although no assurance can be
had that either of these can be sold or on prices and terms favorable to the
Company. Management believes that the Company has sufficient cash flow to
sustain its activities through at least September 30, 1998. Beyond then, the
Company will have need of significant additional capital to continue funding its
operations and those of its subsidiary Inoteb. The Company will attempt to meet
its cash needs by additional sales of securities, either debt or equity, to
non-US investors and by seeking government funding for joint ventures. No
assurance can be had that any such additional capital will be received.
As previously disclosed, the Company borrowed approximately $2,000,000 in
short term notes in an exempt transaction under Regulation D in 1994. 80% of the
principal balance of such notes was paid in April 1995. In May 1997, following
the sale of the Bensenville property, the Company made arrangements for payment
in full of such notes together with all accrued interest. As of September 30,
1997, all but approximately $35,000 in principal had been paid and an additional
$8000 in principal was paid subsequently.
Current Plans of Registrant
The Company's focus shift from real estate to involvement in the research,
development and marketing of Inoteb's products, coupled with its continuing
losses from operations and diminishing capital, makes discussion of the
Company's medium and long term operations extremely difficult. Inoteb has been
selling its products, principally within the European Community, for several
years, but does not yet have approval for the sale of its products in the United
States, a significant market. Moreover, sales of Inoteb's products are not
sufficient to fund the Company's operations.
Management believes that the US market, together with other
as-yet-unserviced markets, presents a significant opportunity for the Company's
growth. Management is aware of a company in the US which is selling in the US
its own coral-based products for use in human bone regeneration which has FDA
approval for its products and is substantially better capitalized than the
Company; however, management believes that the Company's products are superior
to such competitor's products. The Company has made arrangements for the
commencement of clinical trials for its products with a view toward FDA approval
thereof . In the interim, the Company will focus on increasing its European and
other sales of its products, streamlining Inoteb's operations (which the Company
began earlier in Fiscal 1997), entering into joint ventures with key strategic
partners for distribution of its products, funding research and development and
the like. No assurance can be had that any such arrangements will be reached or
that they will be profitable.
<PAGE>
Statements contained herein regarding, among other things, the dates upon
which the Company anticipates commencing clinical trials for certain of its
products constitute forward-looking statements under the Federal securities
laws. Such statements are subject to certain risks and uncertainties that could
cause the actual timing of such clinical trials or other events to differ
materially from those projected. With respect to such dates, the Company's
management has made certain assumptions regarding, among other things, the
successful and timely completion of pre-clinical tests, obtaining certain
approvals of the clinical trials from the FDA, the availability of adequate
clinical supplies, the absence of delays in patient enrollment and the
availability of adequate capital resources necessary to complete the clinical
trials. The Company's ability to commence clinical trials on the dates
anticipated is subject to certain risks. Undue reliance should not be placed on
the dates on which the Company anticipates commencing clinical trials. These
estimates are based upon the current expectations of Company's management, which
may change in the future due to a large number of potential events, including
unanticipated future developments.
PART II
Item 1. Legal Proceedings. On July 25, 1997, the United States Securities and
Exchange Commission ("Commission") filed a complaint in the United States
District Court for the District of Columbia against the Company alleging that
the Company had failed to file its Annual Report on Form 10-KSB for the year
ended December 31, 1996, two Quarterly Reports on Form 10- QSB for the fiscal
quarters ended September 30, 1996 and March 31, 1997, and five Notifications of
Late Filing with respect to its delinquent reports. The Commission sought to
compel the Company to file its delinquent periodic reports and to enjoin the
Company from any further violations of Section 13(a) of the Exchange Act and
Rules 12b-25, 13a-1 and 13a-13 thereunder. Simultaneously with the filing of the
Commission's complaint, the Company consented to the entry of a Final Judgment
granting the relief sought by the Commission and admitted that it had not filed
the periodic reports as described above. All delinquent filings have now been
made by the Company.
Item 2. Changes in Securities. There are no reportable events relating to this
item.
Item 3. Defaults Upon Senior Securities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Financial Condition,
Liquidity and Capital Resources".
Item 4. Submission of Matters to a Vote of Security Holders. There are no
reportable events relating to this item.
Item 5. Other Information. There are no reportable events relating to this item.
Item 6. Exhibits and Reports on Form 8-K.
(A) Not applicable.
<PAGE>
(B) None.
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
BIOCORAL, INC.
Date: November 18, 1997 /s/ Nasser Nassiri
------------------------------
Nasser Nassiri, Chairman
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
INDEX TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 F-2
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 F-3
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1997 F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-6/18
* * *
F-1
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
September December
ASSETS 30, 1997 31, 1996
------ ----------- ----------
(Unaudited) (See Note 1)
Current assets:
Cash $ 444,698 $ 9,142
Accounts receivable, net of allowance for
doubtful accounts of $179,600 and $261,300 106,400 153,700
Inventories 75,200 251,100
Net assets of discontinued operations 657,887 2,139,007
Other current assets 182,691 202,500
----------- -----------
Total current assets 1,466,876 2,755,449
Property and equipment, net of accumulated
depreciation of $132,300 and $98,100 109,195 226,936
License fees, net of accumulated amortization
of $235,245 and $160,956 1,250,505 1,324,794
Goodwill, net of accumulated amortization of
$40,000 and $16,000 129,984 153,984
Other assets 21,412 24,412
----------- -----------
Totals $ 2,977,972 $ 4,485,575
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 429,875 $ 255,100
Notes payable:
Related party 260,000
Other 35,000 517,500
Accounts payable and accrued liabilities 908,678 893,970
----------- -----------
Total current liabilities 1,633,553 1,666,570
Long-term debt, net of current portion 391,425 786,500
----------- -----------
Total liabilities 2,024,978 2,453,070
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value; 1,000,000
shares authorized; 300 shares issued and
outstanding in 1996
Common stock, $.001 par value; 20,000,000
shares authorized; 7,642,722 and 7,242,722
shares issued and outstanding 7,643 7,243
Additional paid-in capital 12,379,791 12,080,191
Accumulated deficit (10,951,003) (8,917,429)
Unearned compensation (483,437) (1,137,500)
----------- -----------
Total stockholders' equity 952,994 2,032,505
----------- -----------
Totals $ 2,977,972 $ 4,485,575
=========== ===========
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
Nine Months Three Months
Ended September 30, Ended September 30,
------------------------ -----------------------
1997 1996 1997 1996
----------- ---------- ---------- ----------
Revenues:
Sales $ 352,300 $ 126,300 $ 90,500 $ 126,300
Other income 29,112 60,708 21,644
----------- ---------- ---------- ----------
Totals 381,412 187,008 112,144 126,300
----------- ---------- ---------- ----------
Operating expenses:
Cost of sales 300,500 97,300 67,500 97,300
Research and
development, net of
subsidies 73,400 126,800 (57,500) 126,800
Interest 52,922 54,713 17,774 21,349
Depreciation of
property and
equipment 34,200 6,100 10,300 6,100
Amortization 752,352 82,289 573,076 32,763
Professional fees 368,170 163,030 18,815 39,095
Consulting fees 142,348 142,348
Other operating
expenses 503,036 234,559 262,659 207,664
----------- ---------- ---------- ----------
Totals 2,226,928 764,791 1,034,972 531,071
----------- ---------- ---------- ----------
Loss before other expense (1,845,516) (577,783) (922,828) (404,771)
Other expense - loss on
disposal of investment
in nonmarketable
securities (600,000) (600,000)
----------- ---------- ---------- ----------
Loss before minority
interest (1,845,516) (1,177,783) (922,828) (1,004,771)
Minority interest in loss
of subsidiary (117,225) (117,225)
----------- ---------- ---------- ----------
Loss before discontinued
operations (1,845,516) (1,060,558) (922,828) (887,546)
Discontinued real estate
operations:
Income from operations 184,269 33,497
Loss on disposal (188,058)
----------- ---------- ---------- ----------
Net loss $(2,033,574) $ (876,289) $ (922,828) $ (854,049)
=========== ========== ========== ==========
Loss per common share:
Loss from continuing
operations $(.24) $(.21) $(.12) $(.15)
Income (loss) from
discontinued
operations (.03) .04 .01
----------- ---------- ---------- ----------
Net loss per
common share $(.27) $(.17) $(.12) $(.14)
===== ===== ===== =====
Weighted average common
shares outstanding 7,610,488 5,154,016 7,642,722 6,001,438
=========== ========== ========== ==========
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------- -----------------
Number Number Additional Total
of of Paid-In Accumulated Unearned Stockholders'
Shares Amount Shares Amount Capital Deficit Compensation Equity
------ ------ --------- ------ ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1997 300 $ -- 7,242,722 $7,243 $12,080,191 $ (8,917,429) $(1,137,500) $ 2,032,505
Cancellation of
preferred stock in
connection with sale
of common stock (300) -- 400,000 400 299,600 300,000
Amortization of
unearned compensation 654,063 654,063
Net loss (2,033,574) (2,033,574)
---- ---- --------- ------ ----------- ------------ ----------- -----------
Balance, September 30,
1997 -- $ -- 7,642,722 $7,643 $12,379,791 $(10,951,003) $ (483,437) $ 952,994
==== ==== ========= ====== =========== ============ =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
1997 1996
----------- ----------
Operating activities:
Net loss $(2,033,574) $ (876,289)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation of property and equipment 34,200 6,100
Loss on disposal of property and equipment 83,541
Effect of governmental subsidies on research
and development expenses (118,000)
Write-off of nonmarketable securities 600,000
Amortization of other assets 98,289 82,289
Amortization of unearned compensation 654,063
Minority interest in loss of subsidiary (117,225)
(Income) loss from discontinued operations 188,058 (184,269)
Changes in operating assets and liabilities:
Accounts receivable 47,300 84,400
Inventories 175,900 43,000
Other current assets 19,809 (32,359)
Other assets 3,000 24,108
Accounts payable and accrued expenses 14,708 (1,388,443)
----------- ----------
Net cash used in operating activities (832,706) (1,758,688)
----------- ----------
Investing activities:
Net cash acquired in purchase of Inoteb SA 259,000
Capital expenditures (10,123)
Advances from related party (85,491)
Net proceeds from disposal of real estate
operations 1,085,000
----------- ----------
Net cash provided by investing
activities 1,085,000 163,386
----------- ----------
Financing activities:
Principal payments on short-term obligations (274,438)
Proceeds from long-term obligations 60,300 13,000
Principal payments on long-term obligations (162,600)
Proceeds from sales of common stock 300,000 1,320,000
Proceeds from note payable to related party 260,000
----------- ----------
Net cash provided by financing
activities 183,262 1,333,000
----------- ----------
Net increase (decrease) in cash 435,556 (262,302)
Cash, beginning of period 9,142 429,081
----------- ----------
Cash, end of period $ 444,698 $ 166,779
=========== ==========
Supplemental disclosure of cash flow data:
Interest paid $ 59,292 $ 6,100
=========== ==========
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Business and summary of accounting policies:
Business:
BioCoral, Inc. ("BioCoral") was originally incorporated under the
laws of the State of Delaware on May 4, 1992 as Hermeneutics
Corporation (it was also formerly named IMMO-Finance Corporation).
BioCoral was originally organized to be a "blind pool" or "blank
check company" for the purpose of either merging with or acquiring
an operating company. BioCoral was a "development stage company" for
accounting purposes until March 25, 1994 when it acquired all of the
issued and outstanding stock of Cabestan, Inc. ("Cabestan"), which
concurrently acquired commercial real estate properties from a
commonly controlled related party. As further explained below and in
Notes 2 and 12, the Company entered into an agreement to sell its
real estate properties in October 1996 and consummated the sale in
February 1997. Accordingly, the results of the real estate
operations have been shown separately as discontinued operations in
the accompanying consolidated statements of operations. The net
assets of the discontinued real estate operations have also been
reclassified and shown separately in the accompanying consolidated
balance sheets.
During 1994, BioCoral also formed IMMO-Finance Distribution Limited
("IMMO Limited"), an Irish corporation, which held an investment in
nonmarketable securities of a related Canadian financial advisory
services company (see Note 6).
During 1994, BioCoral filed a registration statement under the
Securities Exchange Act of 1934 (the "Exchange Act") and, as a
result, it became a "public company" that is required to file
periodic reports with the United States Securities and Exchange
Commission.
During 1995, BioCoral acquired 3H Human Health Hightech Public
Limited Company ("3H"), another Irish corporation, which intends to
develop biomaterials operations, whereby it will market bone
substitute materials made from coral and other orthopedic, oral and
maxillofacial products (see Note 2). Such products will be marketed
outside the United States. During 1995, 3H acquired the worldwide
licensing rights, exclusive of the rights in France, for the
marketing of certain bone substitute products under the name
BioCoral (see Note 5). BioCoral also obtained an option to acquire a
controlling interest in the licensor, Inoteb SA ("Inoteb"), a French
medical products manufacturer and developer. As of September 30,
1997, 3H had not generated any significant amounts of revenues or
expenses from bio-materials operations.
F-6
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Business and summary of accounting policies (continued):
Business (concluded):
In July 1996, BioCoral exercised its option and issued 1,840,516
shares of its common stock to acquire 51.5% of the common stock of
Inoteb and bonds that were converted prior to December 31, 1996 into
an additional 4.5% of its common stock (see Note 2). The acquisition
was accounted for as a purchase and the results of Inoteb's
operations have been consolidated from July 1, 1996, the effective
date of the acquisition.
BioCoral and its subsidiaries are referred to collectively herein as
the "Company."
Basis of presentation:
The Company incurred significant losses from continuing and
discontinued operations in the nine months ended September 30, 1997
and the years ended December 31, 1996 and 1995. As a result, the
Company had a working capital deficiency of $166,677 and an
accumulated deficit of $10,951,003 at September 30, 1997. Management
believes that the Company will need additional working capital to
develop profitable bio-materials operations. In the absence of
mitigating circumstances, these matters would raise substantial
doubts about the Company's ability to continue as a going concern.
The Company received net proceeds of approximately $1,515,000 from
the sale of its real estate properties during the nine months ended
September 30, 1997 (see Note 2), of which $430,000 was deposited in
escrow to secure certain minimum rent guarantees made to the
purchaser. As a result, management believes that the Company will be
able to continue to operate through at least September 30, 1998;
however, management believes that the Company probably will need to
raise additional funds for working capital and other purposes
through additional debt or equity financing to sustain and expand
its operations thereafter. Management cannot assure that such
financing will be available.
F-7
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Business and summary of accounting policies (continued):
Basis of presentation (concluded):
In the opinion of management, the accompanying unaudited
consolidated financial statements reflect all adjustments,
consisting of normal recurring accruals, necessary to present fairly
the financial position of the Company as of September 30, 1997, and
its results of operations for the nine months and three months ended
September 30, 1997 and 1996 and cash flows for the nine months ended
September 30, 1997 and 1996. Information included in the
consolidated balance sheet as of December 31, 1996 has been derived
from the audited balance sheet in the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1996 (the "10-KSB")
previously filed with the Securities and Exchange Commission. These
unaudited consolidated financial statements should be read in
conjunction with the financial statements, notes to financial
statements and the other information in the 10-KSB.
Principles of consolidation:
The consolidated financial statements include the accounts of
BioCoral and its majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
The Company initially recorded $117,225 as minority interest in
connection with the purchase of Inoteb in July 1996. The minority
interest in Inoteb's net loss during the period from July 1, 1996,
the effective date of acquisition, through December 31, 1996
exceeded the minority interest initially recorded and, accordingly,
the Company's net loss for 1996 includes the net loss of Inoteb in
excess of $117,225. As a result, subsequent income earned by Inoteb,
if any, will be allocated entirely to the Company until such time as
the Company recovers the excess losses that were not charged to the
minority interest.
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those
estimates.
Cash:
At September 30, 1997 and December 31, 1996, substantially all of
the Company's cash was held in foreign banks.
Inventories:
Inventories are stated at the lower of cost, determined on the
first-in, first-out ("FIFO") method, or market.
F-8
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Business and summary of accounting policies (continued):
Impairment of long-lived assets:
Effective as of January 1, 1995, the Company adopted the provisions
of Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of" ("SFAS 121"). Under SFAS 121, impairment losses on
long-lived assets are recognized when events or changes in
circumstances indicate that the undiscounted cash flows estimated to
be generated by such assets are less than their carrying value and,
accordingly, all or a portion of such carrying value may not be
recoverable. Impairment losses are then measured by comparing the
fair value of assets to their carrying amounts. The adoption of SFAS
121 had no material effect on the accompanying consolidated
financial statements.
Property and equipment:
Property and equipment used in the Company's medical products
manufacturing operations are recorded at cost. Depreciation is
computed using the straight-line method over the estimated useful
lives of the assets (15 years for properties and three to ten years
for equipment).
License fees:
License fees were recorded at cost and are being amortized using the
straight-line method over 15 years.
Goodwill:
Goodwill, which represents the excess of the costs of acquiring the
medical products manufacturing business over the fair value of the
net assets at the date of acquisition, is being amortized using the
straight-line method over an estimated useful life of five years.
Advertising:
The Company expenses the cost of advertising and promotions as
incurred. Advertising costs charged to operations were not material
in the nine months and three months ended September 30, 1997 and
1996.
Research and development:
Costs and expenses related to research and product development are
expensed as incurred.
F-9
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Business and summary of accounting policies (concluded):
Income taxes:
The Company accounts for income taxes pursuant to the asset and
liability method which requires deferred income tax assets and
liabilities to be computed annually for temporary differences
between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the
future based on enacted tax laws and rates applicable to the periods
in which the temporary 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.
The income tax provision or credit is the tax payable or refundable
for the period plus or minus the change during the period in
deferred tax assets and liabilities.
Stock splits:
In December 1995 and November 1996, the Board of Directors of the
Company declared four for three stock splits on the Company's common
stock effected in the form of stock dividends which were paid on
December 18, 1995 and December 16, 1996, respectively. All common
share and per share amounts have been retroactively restated to
reflect the effects of the four for three stock splits.
Net income (loss) per common share:
Net income (loss) per common share is computed based on the net
income or loss applicable to common stock divided by the weighted
average number of common shares outstanding during each period. The
effects of the assumed exercise of outstanding options have not been
included in the computations because such effects were
anti-dilutive.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per
Share," ("SFAS 128") which replaces the presentation of primary
earnings per share required under previously promulgated accounting
standards with a presentation of basic earnings per share. It also
requires dual presentation of basic and diluted earnings per share
on the face of the statement of operations for all entities with
complex capital structures and provides guidance on other
computational changes. SFAS 128 is effective for financial
statements for both interim and annual periods ending after December
15, 1997. Earlier application is not permitted. The Company does not
expect the adoption of SFAS 128 to have a material impact on its
results of operations or computations of net income or loss per
share.
Reclassifications:
Certain accounts in the 1996 consolidated financial statements have
been reclassified to conform with 1997 presentations.
F-10
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Acquisitions and dispositions:
Cabestan was formed in February 1994 for the purpose of owning and
operating commercial real estate. On March 25, 1994, Cabestan
purchased land, two buildings and a 9.3% interest in a limited
partnership that owns undeveloped land from Bensenville Industrial
Park, L.P ("BIPLP"), a commonly controlled company, for the payment
of $5,544,000 in cash and the assumption of a $4,875,998 mortgage
note on the acquired buildings. Riccardo Mortara is an executive
officer and sole director of BIPA, Inc., the general partner of
BIPLP. Mr. Mortara is a principal stockholder of the Company. He was
the chairman of the Board of Directors and chief executive officer
of the Company until he resigned effective August 18, 1997. The
acquisition was accounted for as a purchase. The purchase price of
$9,858,237 exceeded BIPLP's historical cost of the properties by
$1,562,275 which was, effectively, a distribution to a related party
for financial accounting purposes and, therefore, charged directly
to stockholders' equity.
In October 1996, the Company entered into an agreement to sell the
commercial real estate owned by Cabestan for approximately
$6,800,000 before costs directly related to the sale. Such sale was
consummated and a mortgage note on the properties with an
approximate carrying value of $4,748,000 was assumed on February 18,
1997. After $430,000 was deposited in escrow to secure certain
minimum rent guarantees made to the purchaser, the Company received
net proceeds of approximately $1,515,000 from the sale during the
nine months ended September 30, 1997 (see Note 1). The carrying
value of Cabestan's property and equipment had been reduced to
estimated net realizable value, pursuant to SFAS 121, based on the
terms of the 1996 sales agreement through a write-down of $1,626,186
in September 1995, and other assets were written down by $200,000 in
1996. The net assets of the Company's discontinued real estate
operations as of September 30, 1997 and December 31, 1996 are set
forth in Note 12.
On August 2, 1995, the Company issued 1,422,223 shares of common
stock to acquire all of the outstanding common shares of 3H. Prior
to the exchange, 3H's only activity was the acquisition of an option
issued by Inoteb for the purchase of a license that would give 3H
the exclusive right to distribute BioCoral outside of France. 3H
exercised the option in 1995 (see Note 5). Since neither the shares
issued by the Company nor the rights acquired by 3H had an
objectively determinable value at the date of the exchange, the
Company valued the shares issued and the rights initially acquired
on the basis of the par value of the shares issued of $1,422.
F-11
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Acquisitions and dispositions (concluded):
During July 1996, the Company issued 1,840,516 shares of common
stock to acquire effectively 56% of Inoteb's common stock. The
acquisition was accounted for as a purchase, and accordingly, the
results of operations of Inoteb have been included in the
consolidated totals from July 1, 1996, the effective date of the
acquisition.
The Company valued the shares issued to acquire Inoteb at $230,000
or $.125 per share. Total acquisition costs were allocated to the
assets acquired and liabilities assumed based on their estimated
fair values on the date of acquisition, with the excess of the cost
over such fair values allocated to goodwill, as shown below:
Cash $ 259,000
Accounts receivable 314,300
Inventories 317,700
Other current assets 448,142
Property and equipment 225,100
Goodwill 169,984
Other assets 23,500
Account payable and accrued expenses (293,701)
Long-term debt (1,116,800)
Minority interest (117,225)
----------
Cost of acquisition $ 230,000
==========
The following unaudited pro forma information shows the results of
continuing operations for the nine months ended September 30, 1996
as though Inoteb had been acquired at the beginning of 1996:
Revenues $ 569,817
Loss from continuing operations (1,558,583)
Loss per common share (.23)
Weighted average common shares
outstanding 6,736,396
In addition to combining the historical results of operations of the
Company and Inoteb, the pro forma results include adjustments to
reflect depreciation and amortization based on the fair values of
assets acquired and the minority interest in the net loss (subject
to the limitation explained in Note 1).
F-12
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Income taxes:
As of September 30, 1997, the Company had net operating loss
carryforwards of approximately $4,746,000 available to reduce future
Federal taxable income which, if not used, will expire at various
dates through 2012. Due to changes in the ownership of the Company,
the utilization of these loss carryforwards may be subject to
substantial annual limitations. The Company also has net operating
loss carryforwards available for state income tax purposes.
Deferred income tax assets attributable to these carryforwards and
the related valuation allowance consisted of the following:
September December
30, 1997 31, 1996
---------- ----------
Federal $2,277,000 $1,634,000
State 682,000 493,000
---------- ----------
Totals 2,959,000 2,127,000
Less valuation allowance 2,959,000 2,127,000
---------- ----------
Totals $ -- $ --
========== ==========
The Company offset the deferred tax assets of approximately
$2,959,000 and $2,127,000 attributable to the potential benefits
from such net operating loss carryforwards as of September 30, 1997
and December 31, 1996, respectively, by equivalent valuation
allowances due to the uncertainties related to the extent and timing
of its future taxable income. There were no other material temporary
differences as of those dates.
Note 4 - Property and equipment:
Property and equipment used in the Company's medical products
operations consisted of the following:
September December
30, 1997 31, 1996
-------- --------
Land $ 10,200 $ 11,400
Buildings and improvements 113,900 150,400
Equipment and furnishings 117,395 163,236
-------- --------
241,495 325,036
Less accumulated depreciation 132,300 98,100
-------- --------
Totals $109,195 $226,936
======== ========
Note 5 - Licensing fees:
3H entered into a 15 year licensing agreement in 1995 for the
worldwide marketing rights, outside of France, for certain medical
products produced by Inoteb. The agreement required 3H to pay
aggregate licensing fees of $1,485,751.
F-13
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Investment in nonmarketable securities:
In September 1994, IMMO Limited invested $600,000 in PEMP, Inc.
("PEMP"). The investment was in the form of a loan at December 31,
1994. It was converted into nonmarketable preferred shares during
1995 which are entitled to an annual cumulative 10% dividend. PEMP
is a Canadian financial advisory firm and an affiliate of PEMP
Investment Advisors, Inc., a beneficial owner of shares of the
Company's common stock. In August 1996, based on PEMP's inability to
make the dividend payments, management of the Company deemed the
investment in PEMP to be worthless, and it was written off in its
entirety in 1996.
Note 7 - Short-term notes payable:
The $260,000 note payable by the Company at September 30, 1997 to a
related party is due on demand and bears interest at 10%.
The Company sold 36 units and 3.5 units in 1994 and 1995,
respectively, through an offering that was exempt pursuant to
Regulation D of the Securities Act. Each unit consisted of a six
month, 12% note (the "Regulation D note") in the principal amount of
$50,000 and 2,223 shares of common stock. As a result, the Company
received net proceeds of $1,800,000 and $175,000 and issued
Regulation D notes in the principal amount of $1,800,000 and
$175,000 and 112,000 and 12,444 shares of common stock in 1994 and
1995, respectively.
As of April 4, 1995, the Company defaulted with respect to the
payment of Regulation D notes with a principal balance of $1,775,000
and accrued but unpaid interest of $53,250 and, accordingly, such
notes became due and payable. In August 1995, the Company paid 80%
of the principal balance and was able to negotiate an extension of
the due date. During the nine months ended September 30, 1997, the
Company used a portion of the proceeds from the sale of its
commercial real estate (see Note 2) to make principal payments on
the notes totaling $482,500 (including $208,062 which was directly
offset against outstanding notes and, accordingly, not reflected in
the accompanying 1997 consolidated statement of cash flows). As a
result, the outstanding principal balance of the Regulation D notes
was $35,000 at September 30, 1997. Management anticipates that the
Company will also use a portion of the remaining proceeds from the
sale of the commercial real estate to repay the remaining balance of
these notes by December 31, 1997.
F-14
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Long-term debt:
Long-term debt consisted of the following:
September December
30, 1997 31, 1996
--------- ---------
Term loans payable monthly in
varying installments, including
interest at rates ranging from
6.95% to 9.5% through December
2000 (A) $410,700 $ 524,600
Noninterest bearing advances
initially scheduled to be paid
in monthly installments through
2000 (B) 410,600 517,000
-------- ----------
821,300 1,041,600
Less current portion 429,875 255,100
-------- ----------
Long-term debt $391,425 $ 786,500
======== ==========
(A) The loans were secured by equipment with a net carrying value
of approximately $109,195 at September 30, 1997.
(B) The advances were made to Inoteb by an agency of the French
government that finances or subsidizes certain research and
development projects. If the research does not result in a
commercially feasible product and certain other conditions are
met, Inoteb will not have to pay some or all of the advances.
During the nine months ended September 30, 1997, the Company
reduced advances payable and research and development expenses
by $118,000 as a result of subsidies obtained from the
governmental agency.
Principal payment requirements on long-term debt obligations in each
of the years subsequent to September 30, 1997 are as follows:
Year Ending
September 30, Amount
------------- --------
1998 $429,875
1999 138,475
2000 131,975
2001 120,975
Management of the Company believes that the term loans and the
noninterest bearing advances had carrying values that approximated
their fair values as of September 30, 1997 because the interest
rates and other relevant terms of such financial instruments were
the equivalent of those that the Company could have obtained for new
loans as of that date.
F-15
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Stock option plan:
On May 4, 1992, the Company adopted a stock option plan (the "Plan")
pursuant to which options to purchase an aggregate of up to
2,000,000 shares of common stock may be issued. On June 10, 1996,
the Company granted options for the purchase of 333,250 shares of
common stock exercisable at $5.81 per share. On December 31, 1996,
the Company granted options for the purchase of 650,000 shares of
common stock exercisable at $3.75 per share (including options for
the purchase of 325,000 shares granted to Mr. Mortara). These
options are exercisable for a five year period from the date of
issuance. There were no other outstanding options at, and no shares
were issued under the Plan through, September 30, 1997. Accordingly,
the weighted average exercise price of the options outstanding and
exercisable at September 30, 1997 was $4.45 per share. The weighted
average fair value of the options granted in 1996 was $5.61 per
share.
The Company has elected to make pro forma disclosures, as required
by Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"), of net income or loss as
if a fair value based method of accounting for stock options had
been applied if such pro forma amounts differ materially from the
historical amounts. Therefore, the Company will account for stock
options in accordance with the provisions of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
and recognize compensation costs as a result of the issuance of
stock options based on the excess, if any, of the fair value of the
underlying stock at the date of grant (or at an appropriate
subsequent measurement date) over the amount the employee must pay
to acquire the stock.
The fair value of the common stock underlying the 650,000 options
issued on December 31, 1996 exceeded the exercise price. Therefore,
the Company charged $1,137,500 to unearned compensation and
additional paid-in capital upon the issuance of these options on
December 31, 1996 based on the number of shares subject to option
and the difference between the estimated fair value of an underlying
share and the per share exercise price. Unearned compensation is
being amortized on a straight-line basis over periods of up to five
years. The unamortized portion of unearned compensation is presented
separately in and deducted from stockholders' equity in the
Company's consolidated balance sheets. General and administrative
expenses for the nine months and three months ended September 30,
1997 include amortization of approximately $483,000 that was
accelerated as a result of the resignation of Mr. Mortara.
F-16
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Stock option plan (concluded):
The compensation cost, pro forma loss and loss per common share from
continuing operations and net loss and net loss per common share for
the nine months ended September 30, 1997 determined using a fair
value based method of accounting for the stock options granted in
1997, as required by SFAS 123, would not differ materially from the
corresponding historical amounts.
Note 10- Preferred stock:
At January 1, 1996, there were 1,000 shares of nonconvertible,
Series A preferred stock outstanding, all of which were owned by a
company controlled by Mr. Mortara. During 1996, a total of 700
shares of preferred stock outstanding were canceled and 933,333
shares of common stock were sold to the holder for $700,000. During
January 1997, the remaining 300 shares of preferred stock
outstanding were canceled and 400,000 shares of common stock were
sold to the holder for $300,000.
Note 11- Terminated acquisition:
The Company had issued 1,955,556 common shares in 1995 in connection
with a proposed acquisition of a new subsidiary. The acquisition
proposal was terminated and 1,711,110 of the shares were canceled as
of December 31, 1996. The Company has ordered its transfer agent not
to transfer any of the remaining shares.
Note 12- Discontinued operations:
The assets and liabilities of the Company's discontinued real estate
operations as of September 30, 1997 and December 31, 1996 consisted
of the following:
September December
30, 1997 31, 1996
-------- -----------
Cash $ 60,000 $ 200,000
Cash held in escrow 430,000
Investments in real estate
limited partnership 168,000 168,000
Property and equipment, net of
accumulated depreciation 6,654,000
Mortgage note payable (4,767,000)
Other liabilities (116,000)
-------- -----------
Net assets $658,000 $ 2,139,000
======== ===========
F-17
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12- Discontinued operations (concluded):
Income (loss) from discontinued real estate operations reflects
charges for interest of $38,764 and $338,075 for the nine months
ended September 30, 1997 and 1996, respectively. Depreciation was
discontinued when the property and equipment was written down to net
realizable value in 1995. As a result, there was no charge for
depreciation expense for the nine months ended September 30, 1997
and 1996.
Note 13- Segment and geographic information:
The Company operates principally in one industry segment which
includes the development, manufacture and sale of bio-medical
materials used in medical products. The Company conducts operations
outside of the United States, principally in France and Ireland.
Information about the Company's operations in different geographic
locations for the nine months ended September 30, 1997 and 1996 is
shown below:
United
States France Ireland Consolidated
--------- ---------- ---------- ------------
1997
----
Net sales $ 352,300 $ 352,300
Loss from
continuing
operations $ (790,131) (481,700) $ (90,247) (1,362,078)
Identifiable
assets 821,965 900,495 1,255,512 2,977,972
1996
----
Net sales $ 126,300 $ 126,300
Loss from
continuing
operations $ (232,585) (332,000) $ (613,198) (1,177,783)
Identifiable
assets 2,564,701 1,079,823 1,360,408 5,004,932
Note 14- Subsequent events:
On October 21, 1997, the Company granted its new chief executive
officer an option to purchase 350,000 shares of common stock which
is exercisable during the five year period from the date of grant at
$2.375 per share, the fair market value of the shares on the date of
grant.
On October 21, 1997, the Company issued 54,351 shares of common
stock (including 42,105 shares that were issued to its new chief
executive officer) to pay approximately $130,000 of accrued
consulting fees.
F-18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Biocoral,
Inc. and subsidiaries and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 444,698
<SECURITIES> 0
<RECEIVABLES> 286,000
<ALLOWANCES> 179,600
<INVENTORY> 75,200
<CURRENT-ASSETS> 1,466,876
<PP&E> 241,495
<DEPRECIATION> 132,300
<TOTAL-ASSETS> 2,977,972
<CURRENT-LIABILITIES> 1,633,553
<BONDS> 1,116,300
0
0
<COMMON> 7,643
<OTHER-SE> 945,351
<TOTAL-LIABILITY-AND-EQUITY> 2,977,972
<SALES> 352,300
<TOTAL-REVENUES> 381,412
<CGS> 300,500
<TOTAL-COSTS> 300,500
<OTHER-EXPENSES> 1,873,506
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 52,922
<INCOME-PRETAX> (1,845,516)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,845,516)
<DISCONTINUED> (188,058)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,033,574)
<EPS-PRIMARY> (.27)
<EPS-DILUTED> (.27)
</TABLE>
