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 March 31, 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)
14 Quai du Seujet, Geneva, Switzerland
- --------------------------------------------------------------------------------
(Address of principal executive offices)
011-4122-908-1598
- --------------------------------------------------------------------------------
(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 |_| No |X|
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares of common stock outstanding as of March 31, 1997 was
7,642,722.
<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 three month period ended March 31, 1997 ("Stub 1997") is the
first period in which the Company's financial statements reflected almost
exclusively its ownership of its subsidiary Inoteb and the results of Inoteb's
operations. The Company experienced a net loss of $441,110 from continuing
operations during Stub 1997 due to operating losses in Inoteb. Losses from
discontinued operations aggregated $188,058. The net loss for this three month
period was significantly greater than for the three months ended March 31, 1996
("Stub 1996") when the Company experienced a net loss from continuing operations
of $124,533. The net loss figure for Stub 1996 reflected general corporate
operating expenses offset against a relatively insignificant amount of other
income. The increase in operating expenses in Stub 1997 as compared to Stub 1996
was due principally to the consolidation of Inoteb's operations. Total revenues
for Stub 1997 were $141,677, an increase of $103,497 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 $1,042,000 (subject to certain escrows to secure guarantees),is to
receive additional sales proceeds of approximately $473,000 during the remainder
of 1997, and 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 the end of fiscal 1997.
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 $185,641 from December 31, 1996 to March
31, 1997, primarily due to the decrease in the net value of the assets of
certain discontinued operations. Cash increased significantly, from $9,142 to
$512,411 due to the sale of the Bensenville Properties. Total liabilities
increased slightly, primarily due to consolidation of Inoteb's activities.
Stockholders' equity was positive, at $1,760,212.
As mentioned above, the Company's liquidity was greatly improved by
the sale in 1997 of 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 the end of fiscal 1997.
If the sales of either PEMP or SIM are not completed on a timely basis or in
amounts satisfactory to the Company,
<PAGE>
then it will attempt to meet its cash needs by additional sales of its common
stock to non-US investors. No assurance can be had that any such sales will be
made.
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.
Current Plans of Registrant
The Company's focus shift from real estate to involvement in the research,
development and marketing of Inoteb's products makes discussion of the Company's
near and long term operations extremely difficult. Inoteb has been actively
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. 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, entering into
joint ventures with key strategic partners for distribution of its products,
research and development and the like. No assurance can be had that any such
arrangements will be reached or that they will be profitable.
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
<PAGE>
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. The within Quarterly Report is one of
the reports whose filing the Commission sought to compel and, pursuant to the
terms of the Final Judgment and the Company's undertaking with the Commission,
this delinquent report is to be filed by the Company no later than August 15,
1997. All other 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.
(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: August 12, 1997 /s/ Riccardo Mortara
-------------------------------
Riccardo Mortara, Chairman
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
INDEX TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND DECEMBER 31, 1996 F-2
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996 F-3
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1997 F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996 F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-6/19
* * *
F-1
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND DECEMBER 31, 1996
March December
ASSETS 31, 1997 31, 1996
------ ----------- ----------
(Unaudited) (See Note 1)
Current assets:
Cash $ 512,411 $ 9,142
Accounts receivable, net of allowance for
doubtful accounts of $187,400 and $261,300 179,900 153,700
Inventories 148,300 251,100
Net assets of discontinued operations 1,338,026 2,139,007
Other current assets 490,934 202,500
------------ ------------
Total current assets 2,669,571 2,755,449
Property and equipment, net of accumulated
depreciation of $108,000 and $98,100 160,936 226,936
License fees, net of accumulated amortization
of $185,719 and $160,956 1,300,031 1,324,794
Goodwill, net of accumulated amortization of
$24,000 and $16,000 145,984 153,984
Other assets 23,412 24,412
------------ ------------
Totals $ 4,299,934 $ 4,485,575
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 493,775 $ 255,100
Notes payable 517,500 517,500
Accounts payable and accrued liabilities 990,922 893,970
------------ ------------
Total current liabilities 2,002,197 1,666,570
Long-term debt, net of current portion 537,525 786,500
------------ ------------
Total liabilities 2,539,722 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 (9,546,597) (8,917,429)
Unearned compensation (1,080,625) (1,137,500)
------------ ------------
Total stockholders' equity 1,760,212 2,032,505
------------ ------------
Totals $ 4,299,934 $ 4,485,575
============ ============
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(Unaudited)
1997 1996
----------- -----------
Revenues:
Sales $ 137,200
Other income 4,477 $ 38,180
----------- -----------
Totals 141,677 38,180
----------- -----------
Operating expenses:
Cost of sales 122,800
Research and development 40,300
Interest 16,783 19,252
Depreciation of property and equipment 9,900
Professional fees 106,048 67,705
Other operating expenses 286,956 75,756
----------- -----------
Totals 582,787 162,713
----------- -----------
Loss from continuing operations (441,110) (124,533)
----------- -----------
Discontinued real estate operations:
Income from operations 66,345
Loss on disposal (188,058)
----------- -----------
Income (loss) from discontinued operations (188,058) 66,345
----------- -----------
Net loss $ (629,168) $ (58,188)
=========== ===========
Loss per common share:
Loss from continuing operations $ (.06) $ (.02)
Income (loss) from discontinued operations (.02) .01
----------- -----------
Net loss per common share $ (.08) $ (.01)
=========== ===========
Weighted average common shares outstanding 7,544,944 4,815,745
=========== ===========
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 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 56,875 56,875
Net loss (629,168) (629,168)
---- ---- --------- ------ ----------- ----------- ----------- ----------
Balance, March 31,
1997 -- $ -- 7,642,722 $7,643 $12,379,791 $(9,546,597) $(1,080,625) $1,760,212
==== ==== ========= ====== =========== =========== =========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(Unaudited)
1997 1996
---------- ----------
Operating activities:
Net loss $(629,168) $ (58,188)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation of property and equipment 9,900
Loss on disposal of property and equipment 56,100
Amortization of other assets 32,763 24,764
Amortization of unearned compensation 56,875
(Income) loss from discontinued operations 188,058 (66,345)
Changes in operating assets and liabilities:
Accounts receivable (26,200)
Inventories 102,800
Other current assets (288,434)
Other assets 1,000 107
Accounts payable and accrued expenses 96,952 (390,653)
--------- ---------
Net cash used in operating activities (399,354) (490,315)
--------- ---------
Investing activities:
Advances from related party (33,656)
Net proceeds from disposal of real estate
operations 612,923
--------- ---------
Net cash provided by (used in) investing
activities 612,923 (33,656)
--------- ---------
Financing activities:
Proceeds from long-term borrowings 60,300
Principal payments on long-term borrowings (70,600)
Proceeds from sale of common stock 300,000 390,000
--------- ---------
Net cash provided by financing activities 289,700 390,000
--------- ---------
Net increase (decrease) in cash 503,269 (133,971)
Cash, beginning of period 9,142 429,081
--------- ---------
Cash, end of period $ 512,411 $ 295,110
========= =========
Supplemental disclosure of cash flow data:
Interest paid $ 55,547 $ 112,896
========= =========
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 purchased, from a related party,
51% of the outstanding stock of Borgonuovo S.I.M. S.p.A. (the
"SIM") which is headquartered in Milan, Italy and operates a
brokerage business that is equivalent to the business
conducted by brokers and dealers in securities in the United
States. The Company effectively discontinued its brokerage
operations and abandoned its interest in the SIM as of January
1, 1995.
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 Bio-
F-6
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Business and summary of accounting policies (continued):
Business (concluded):
Coral (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 March 31, 1997, 3H had not generated any
significant amounts of revenues or expenses from biomaterials
operations.
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."
Riccardo Mortara is the chairman of the Board of Directors,
chief executive officer and a principal stockholder of the
Company.
Capitalization:
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.
On May 4, 1992, the Company issued 711,111 shares of common
stock for $500. During 1993, the Company sold 43,733 shares of
common stock at $.0056 per share in cash to 28 accredited and
29 nonaccredited persons. These transactions did not involve a
public offering or an underwriter and, accordingly, were
exempt from the registration requirements of the Securities
Act of 1933 (the "Securities Act"). On March 25, 1994, the
Company canceled 533,333 of the 711,111 shares initially
issued.
The Company sold 1,733,866 and 471,514 shares of common stock
outside the United States and received net proceeds of
$7,022,160 and $2,369,600 in 1994 and 1995, respectively,
through an offering that was exempt pursuant to Regulation S
of the Securities Act. 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
F-7
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Business and summary of accounting policies (continued):
Capitalization (concluded):
2,223 shares of common stock. As a result, the Company
received net proceeds of $1,800,000 and $175,000 and issued
112,000 and 12,444 shares of common stock in 1994 and 1995,
respectively.
In November 1995, the Company agreed to sell 266,667 shares of
common stock to an affiliate for total cash consideration of
$1,080,000 (or $4.05 per share).
During 1996, the Company received $700,000 in connection with
the issuance of 933,333 shares of common stock to a company
controlled by Mr. Mortara and the cancellation of 700 shares
of preferred stock, and, during January 1997, the Company
received $300,000 in connection with the issuance of 400,000
shares of common stock to the same holder and the cancellation
of the remaining 300 shares of outstanding preferred stock
(see Note 10).
Basis of presentation:
The Company incurred significant losses from continuing and
discontinued operations in the three months ended March 31,
1997 and the years ended December 31, 1996 and 1995. As a
result, the Company had an accumulated deficit of $9,546,597
at March 31, 1997. Management believes that the Company will
need additional working capital to develop profitable
biomaterials 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 $1,042,000
from the sale of its real estate properties in February 1997
(see Note 2), of which $430,000 was deposited in escrow to
secure certain minimum rent guarantees made to the purchaser,
and it will receive additional sales proceeds of approximately
$473,000 during the remainder of 1997. As a result, management
believes that the Company will be able to continue to operate
through at least March 31, 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-8
<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 March 31,
1997, and its results of operations and cash flows for the
three months ended March 31, 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") 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 March 31, 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-9
<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 is 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 three months ended March 31, 1997 and 1996.
Research and development:
Costs and expenses related to research and product development
are expensed as incurred.
F-10
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Business and summary of accounting policies (continued):
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.
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-11
<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. Mr. Mortara, a principal stockholder of the
Company, is an executive officer and sole director of BIPA,
Inc., the general partner of BIPLP. 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. Approximately $430,000 was deposited in
escrow to secure certain minimum rent guarantees made to the
purchaser. As a result, the Company expects to receive net
proceeds of approximately $1,515,000 from the sale, of which
approximately $1,042,000 was received during the three months
ended March 31, 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 March 31, 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-12
<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 three months ended
March 31, 1996 as though Inoteb had been acquired at the
beginning of 1996:
1996
-----------
Revenues $ 195,180
Loss from continuing operations (408,533)
Loss per common share (.05)
Weighted average common shares
outstanding 6,656,261
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-13
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Income taxes:
As of March 31, 1997, the Company had net operating loss
carryforwards of approximately $3,342,000 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:
March December
31, 1997 31, 1996
---------- ----------
Federal $1,830,000 $1,634,000
State 552,000 493,000
---------- ----------
Totals 2,382,000 2,127,000
Less valuation allowance 2,382,000 2,127,000
---------- ----------
Totals $ -- $ --
========== ==========
The Company offset the deferred tax assets of approximately
$2,382,000 and $2,127,000 attributable to the potential
benefits from such net operating loss carryforwards as of
March 31, 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:
March December
31, 1997 31, 1996
--------- --------
Land $ 10,600 $ 11,400
Buildings and improvements 126,700 150,400
Equipment and furnishings 131,636 163,236
-------- --------
268,936 325,036
Less accumulated depreciation 108,000 98,100
-------- --------
Totals $160,936 $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-14
<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:
As of December 31, 1994, the outstanding principal balance of
the Regulation D notes was $1,800,000. 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. As of March 31, 1997, the
outstanding principal balance of the Regulation D notes was
$517,500. Management anticipates that the Company will also
use a portion of the proceeds from the sale of the commercial
real estate (see Note 2) to repay the balance of these notes
by September 1997.
Note 8 - Long-term debt:
Long-term debt consisted of the following:
March December
31, 1997 31, 1996
---------- ----------
Term loans payable monthly in
varying installments, including
interest at rates ranging from
6.95% to 9.5% through December
2001 (A) $ 479,900 $ 524,600
Noninterest bearing advances
initially scheduled to be paid
in monthly installments through
2000 (B) 551,400 517,000
---------- ----------
1,031,300 1,041,600
Less current portion 493,775 255,100
---------- ----------
Long-term debt $ 537,525 $ 786,500
========== ==========
(A) The loans were secured by equipment with a net carrying
value of approximately $196,000 at March 31, 1997.
F-15
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Long-term debt (concluded):
(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.
Principal payment requirements on long-term debt obligations
in each of the years subsequent to March 31, 1997 are as
follows:
Year Ending
March 31, Amount
----------- ---------
1998 $493,775
1999 196,775
2000 212,675
2001 128,075
Management of the Company believes that the term loans and the
noninterest bearing advances had carrying values that
approximated their fair values as of March 31, 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.
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. 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, March 31, 1997. Accordingly, the weighted
average exercise price of the options outstanding and
exercisable at March 31, 1997 was $4.45 per share. The
weighted average fair value of the options granted in 1996 was
$5.61 per share.
F-16
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - Stock option plan (concluded):
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 a period of five years. The
unamortized portion of unearned compensation is presented
separately in and deducted from stockholders' equity in the
Company's consolidated balance sheets.
Had compensation cost been determined based on the fair value
of the options at the grant date consistent with the
provisions of SFAS 123, the Company's historical loss and loss
per common share from continuing operations and net loss and
net loss per common share for the three months ended March 31,
1997 would have been adjusted to the pro forma amounts set
forth below:
Historical Pro Forma
---------- ---------
Loss from continuing operations $(441,110) $(494,410)
Net loss (629,168) (682,468)
Loss per common share:
Loss from continuing operations (.06) (.07)
Net loss (.08) (.09)
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.
F-17
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 March 31, 1997 and December 31, 1996
consisted of the following:
March December
31, 1997 31, 1996
----------- -----------
Cash $ 160,000 $ 200,000
Cash held in escrow 430,000
Proceeds receivable from
sale of assets 580,000
Investments in real estate
limited partnership 168,000 168,000
Property and equipment, net of
accumulated depreciation 6,654,000
Other assets
Mortgage note payable (4,767,000)
Other liabilities (116,000)
----------- -----------
Net assets $ 1,338,000 $ 2,139,000
=========== ===========
Income from discontinued real estate operations reflects
charges for interest of $38,764 and $113,935 for the three
months ended March 31, 1997 and 1996, respectively.
Depreciation was discontinued when the property and equipment
was written down to net realizable value in 1995. As such,
there was no charge for depreciation expense for the three
months ended March 31, 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.
F-18
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13- Segment and geographic information (concluded):
Information about the Company's operations in different
geographic locations for the three months ended March 31, 1997
and 1996 is shown below:
United
States France Ireland Consolidated
---------- ---------- ---------- ------------
1997
----
Net sales $ -- $ 137,200 $ -- $ 137,200
Loss from
continuing
operations (201,139) (193,000) (46,971) (441,110)
Identifiable
assets 1,957,966 1,036,036 1,305,932 4,299,934
1996
----
Net sales $ -- $ -- $ -- $ --
Income (loss)
from
continuing
operations (137,712) -- 13,179 (124,533)
Identifiable
assets 2,283,315 -- 2,005,842 4,289,157
* * *
F-19
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 512,411
<SECURITIES> 0
<RECEIVABLES> 367,300
<ALLOWANCES> 187,400
<INVENTORY> 148,300
<CURRENT-ASSETS> 2,669,571
<PP&E> 268,936
<DEPRECIATION> 108,000
<TOTAL-ASSETS> 4,299,934
<CURRENT-LIABILITIES> 2,002,197
<BONDS> 1,548,800
0
0
<COMMON> 7,643
<OTHER-SE> 1,752,569
<TOTAL-LIABILITY-AND-EQUITY> 4,299,934
<SALES> 137,200
<TOTAL-REVENUES> 141,677
<CGS> 122,800
<TOTAL-COSTS> 122,800
<OTHER-EXPENSES> 443,204
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,783
<INCOME-PRETAX> (629,168)
<INCOME-TAX> 0
<INCOME-CONTINUING> (441,110)
<DISCONTINUED> (188,058)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (629,168)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
