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, 1996
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 September 30, 1996 was
7,242,722.
<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 September 30, 1996 is the first period
in which the Company's financial statements reflected its ownership of its
subsidiary Inoteb and the results of Inoteb's operations. This Discussion and
Analysis will attempt to explain the effects of such consolidation on the
Company's financial condition and results of operations.
The Company experienced a net loss of $876,289 during the nine month
period ended September 30, 1996 due to operating losses in its Cabestan and
Inoteb subsidiaries and to a write-off (in the amount of $600,000) of the
investment it had made in 1994 in PEMP, a Canadian portfolio management firm.
Management undertook the write down because of the failure of PEMP management to
redeem the Company's investment in PEMP as promised. The Company still believes
the investment in PEMP has value and is actively exploring ways to liquidate
this position and realize on its value. Management believes that it will be able
to reach agreement with management of PEMP for purchase of the Company's
interest in PEMP for approximately $600,000 but no assurance can be made that
any such sale will be consummated or, if consummated, at that price. If such a
sale is consummated, the Company will report the proceeds of such sale in the
quarter in which it is sold. The net loss for this nine month period compares
favorably with the net loss for the nine months ended September 30, 1995, which
was $2,318,843. That net loss figure consisted principally of a write down of
another asset in the amount of $1,925,995. The 1996 loss was lower due to a
decrease in interest expense ($147,573) because of the paydown of the investor
notes and to decreased depreciation ($114,623) due to a write-down of the
Bensenville properties in 1995. Accordingly, the net losses from operations for
the nine months ended 9/30/96 ($276,289) was less than the net losses from
operations for the nine months ended 9/30/95 ($392,848), despite the
consolidation of Inoteb's operations. The Company's net results from operations
(a loss of $254,049) for the three month period ended 9/30/96 were, however,
significantly different from the same period in 1995 (net income of $5,501).
This was due principally to operating losses in the Company's Inoteb subsidiary
during that time period, which it did not own in 1995, and to a slight decrease
in revenues from operations at its Bensenville property, which it sold in 1997.
Total revenues for the three months ended September 30, 1996 were
$336,983, an increase of $58,822 over the same period the year before. This
reflected a moderate decrease in the Company's revenues from its Bensenville
facility and the addition of revenues from its Inoteb subsidiary. Operating
expenses for both the three month period and the nine month period ended
September 30, 1996 increased significantly, primarily due to the addition of
Inoteb's operating expenses.
<PAGE>
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 (subject to certain escrows to secure guarantees) 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 into the first quarter of 1998. Management further
believes that results of the Company's future operations will improve as the
Company sells its interest in SIM, its investment in PEMP and streamlines
operations and cuts costs at Inoteb. See "Current Plans of Registrant" below.
Financial Condition, Liquidity and Capital Resources.
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; and (ii) upon
the release of the funds escrowed in connection with the Bensenville sale
(approximately $430,000). Management anticipates that the sale of the Company's
interest in PEMP will occur prior to the end of 1997 and has no timetable for
the liquidation of its interest in SIM. 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 first quarter of 1998. If the
sales of either PEMP or SIM are not completed on a timely basis or in amounts
satisfactory to the Company, 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
<PAGE>
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
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,
the remaining delinquent reports are to be filed by the Company no later than
August 15, 1997.
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".
<PAGE>
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) Current Report on Form 8-K, dated October 15, 1996.
<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: July 30, 1997 /s/ Riccardo Mortara
----------------------
Riccardo Mortara, Chairman
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
INDEX TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995 F-2
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 F-3
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1996 F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-6/19
* * *
F-1
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
September December
ASSETS 30, 1996 31, 1995
------ ------------ ------------
(Unaudited) (Note 1)
Current assets:
Cash $ 413,981 $ 633,305
Accounts receivable, net of allowance for
doubtful accounts of $150,000 248,817
Inventories 274,700
Other current assets 481,886 89,314
------------ -----------
Total current assets 1,419,384 722,619
Property and equipment, net of accumulated
depreciation of $329,732 and $323,632 6,875,879 6,601,379
License fees, net of accumulated amortization
of $136,195 and $61,906 1,349,556 1,423,845
Investment in real estate limited partnership,
at equity 174,363 174,363
Investment in nonmarketable securities 600,000
Deferred charges, net of accumulated
amortization of $119,707 and $90,618 143,711 172,800
Goodwill, net of accumulated amortization of $8,000 161,984
Other assets 73,820 1,542
------------ -----------
Totals $ 10,198,697 $ 9,696,548
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 425,099 $ 107,700
Notes payable 517,500 517,500
Accounts payable and accrued liabilities 890,647 2,025,149
Payables to related parties 85,491
------------ -----------
Total current liabilities 1,833,246 2,735,840
Tenant security deposits 49,182 50,654
Long-term debt, net of current portion 5,499,356 4,766,852
------------ -----------
Total liabilities 7,381,784 7,553,346
------------ -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value; 1,000,000
shares authorized; 300 and 1,000 shares
issued and outstanding, 1
Common stock, $.001 par value; 20,000,000
shares authorized; 7,242,722 and 5,913,316
shares issued and outstanding 7,243 5,913
Additional paid-in capital 10,942,691 9,394,020
Accumulated deficit (8,133,021) (7,256,732)
------------ -----------
Total stockholders' equity 2,816,913 2,143,202
------------ -----------
Totals $ 10,198,697 $ 9,696,548
============ ===========
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE AND THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
Nine Months Three Months
Ended September 30, Ended September 30,
------------------- -------------------
1996 1995 1996 1995
----------- ----------- ----------- ----------
Revenues:
Rental revenue $ 718,005 $ 795,371 $ 208,661 $ 256,992
Sales 126,300 126,300
Other income 68,117 30,253 2,022 21,169
----------- ----------- ----------- ----------
Totals 912,422 825,624 336,983 278,161
----------- ----------- ----------- ----------
Operating expenses:
Cost of sales 97,300 97,300
Research and development 126,800 126,800
Interest (including
amortization of loan
fees) 392,788 540,361 134,938 131,540
Depreciation of property
and equipment 6,100 120,723 6,100 45,968
Professional fees 170,713 191,433 41,054 4,700
Property taxes 87,447 112,191 16,419 37,983
Other operating
expenses 424,788 253,764 285,646 52,469
----------- ----------- ----------- ----------
Totals 1,305,936 1,218,472 708,257 272,660
----------- ----------- ----------- ----------
Income (loss) before
other expense (393,514) (392,848) (371,274) 5,501
Other expense - loss on
disposal of investment
in nonmarketable
securities 600,000 600,000
----------- ----------- ----------- ----------
Income (loss) before
minority interest (993,514) (392,848) (971,274) 5,501
Minority interest in loss
of subsidiary (117,225) (117,225)
----------- ----------- ----------- ----------
Income (loss) before
discontinued operations (876,289) (392,848) (854,049) 5,501
Loss on disposal of
discontinued brokerage
operations (1,925,995)
----------- ----------- ----------- ----------
Net income (loss) $ (876,289) $(2,318,843) $ (854,049) $ 5,501
=========== =========== =========== ==========
Income (loss) per common
share:
Income (loss) from
continuing operations $(.17) $ (.17) $(.14) $ --
Loss from discontinued
operations (.85)
------ ------ ------ ------
Net income (loss)
per common share $(.17) $(1.02) $(.14) $ --
====== ====== ====== ======
Weighted average common
shares outstanding 5,154,016 2,273,387 6,001,438 2,490,048
=========== =========== =========== ==========
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
---------------- ----------------
Number Number Additional Total
of of Paid-In Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
------ ------ ------ ------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1996 1,000 $1 5,913,316 $5,913 $ 9,394,020 $(7,256,732) $2,143,202
Proceeds from sale
of common stock 266,667 267 619,733 620,000
Cancellation of
preferred stock
in connection
with sale of
common stock (700) (1) 933,333 933 699,068 700,000
Cancellation of
common stock in
connection with
terminated ac-
quisition (1,711,110) (1,711) 1,711
Common stock issued
to acquire 56% of
Inoteb SA 1,840,516 1,841 228,159 230,000
Net loss (876,289) (876,289)
----- -- --------- ------ ----------- ----------- ----------
Balance, September
30, 1996 300 $-- 7,242,722 $7,243 $10,942,691 $(8,133,021) $2,816,913
===== === ========= ====== =========== =========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
1996 1995
------------ -----------
Operating activities:
Net loss $ (876,289) $(2,318,843)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation of property and equipment 6,100 120,723
Amortization of other assets 111,378 31,817
Deferred professional fees 61,997
Write-off of nonmarketable securities 600,000
Minority interest in loss of subsidiary (117,225)
Loss from discontinued operations 1,925,995
Changes in operating assets and
liabilities, net of effects of purchase of
Inoteb SA:
Accounts receivable 65,483
Inventories 43,000
Other current assets 55,570 25,058
Other assets (48,778) (18,707)
Accounts payable and accrued expenses (1,428,203) (312,187)
Tenant security deposits (1,472)
------------ -----------
Net cash used in operating
activities (1,590,436) (484,147)
------------ -----------
Investing activities:
Net cash acquired in purchase of Inoteb SA 259,000
Capital expenditures (55,500)
Distribution from limited partnership 89,239
Advances from related party (85,491) (50,410)
------------ -----------
Net cash provided by investing
activities 118,009 38,829
------------ -----------
Financing activities:
Proceeds from sales of common stock 1,320,000 1,790,807
Principal payments on short-term obligations (1,231,920)
Principal payments on long-term obligations (66,897) (73,291)
------------ -----------
Net cash provided by financing
activities 1,253,103 485,596
------------ -----------
Net increase (decrease) in cash (219,324) 40,278
Cash, beginning of period 633,305 99,529
------------ -----------
Cash, end of period $ 413,981 $ 139,807
============ ===========
Supplemental disclosure of cash flow data:
Interest paid $ 406,410 $ 408,861
============ ===========
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 4 and 14, the Company entered into an agreement to sell
its real estate properties in October 1996 and consummated the
sale in February 1997. The Company wrote down the carrying
values of the properties to their estimated net realizable
values as of December 31, 1995.
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. Accordingly, the
results of brokerage operations have been shown separately as
discontinued operations in the accompanying consolidated
statements of operations.
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, 1996, 3H had not generated any
significant amounts of revenues or expenses from biomaterials
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 September 30,
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 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.
F-7
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Business and summary of accounting policies (continued):
Capitalization (concluded):
On March 23, 1994, the Company used a portion of such net
proceeds and the net proceeds from a short-term renewable loan
to purchase common stock from and a 100% interest in Cabestan,
which concurrently used the funds it received from the Company
to purchase commercial real estate properties from a commonly
controlled related party (see Note 2).
On September 12, 1994, the Company used a portion of the net
proceeds from the Regulation S and Regulation D offerings as
part of the consideration for the purchase of its 51% interest
in the brokerage operations.
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), of which $460,000 was paid for
113,580 shares in 1995 and $620,000 was paid for 153,087 shares
in the nine months ended September 30, 1996 (the Company
recorded the issuance of all 266,667 shares during the nine
months ended September 30, 1996).
During the nine months ended September 30, 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 (see Note
12).
Basis of presentation:
The Company incurred significant losses from continuing and
discontinued operations in the nine months ended September 30,
1996 and the years ended December 31, 1995 and 1994. As a
result, the Company had a working capital deficiency of $421,026
and an accumulated deficit of $8,133,021 at September 30, 1996.
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.
During January 1997, the Company received $300,000 in connection
with the issuance of additional shares of common stock to a
company controlled by Mr. Mortara and the cancellation of the
remaining shares of its preferred stock (see Note 12). The
Company also received net proceeds of approximately $1,515,000
from the sale of its real estate properties in February 1997
(see Note 14), 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, 1997;
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 September 30,
1996, and its results of operations for the nine and three
months ended September 30, 1996 and 1995 and cash flows for the
nine months ended September 30, 1996 and 1995. Information
included in the consolidated balance sheet as of December 31,
1995 has been derived from the audited balance sheet in the
Company's Annual Report on Form 10-KSB for the year ended
December 31, 1995 (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
September 30, 1996 exceeded the minority interest initially
recorded and, accordingly, the Company's net loss for the nine
and three months ended September 30, 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, 1996 and December 31, 1995, 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):
Property and equipment:
Property and equipment used in the Company's real estate
operations was initially recorded at cost. Depreciation was
computed using the straight-line method over the estimated
useful lives of the assets (39 years for commercial properties
and three to ten years for equipment). Effective as of December
31, 1995, the carrying value of property and equipment was
reduced to estimated net realizable value, pursuant to Statement
of Financial Accounting Standards No. 121, based on the terms of
a 1996 contract for the sale of the property and equipment, and
depreciation was discontinued (see Notes 4, 7 and 13).
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.
Deferred charges:
Deferred charges consist principally of loan fees which are
amortized to interest expense using the straight-line method
(which does not differ materially from the interest method) over
the terms of the related loans.
Investment in limited partnership:
The Company's investment in a real estate limited partnership
that owns undeveloped land is accounted for using the equity
method and, accordingly, the investment is carried at cost
adjusted for the Company's proportionate share of the
partnership's undistributed earnings or losses. Such
proportionate earnings or losses were not material in the nine
and three months ended September 30, 1996 and 1995.
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 and three months ended September 30, 1996
and 1995.
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 (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.
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.
Note 2 - Acquisitions and newly formed entities:
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.
F-11
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Acquisitions and newly formed entities (continued):
The acquisition was accounted for as a purchase and, accordingly,
the results of operations of Cabestan have been included in the
consolidated totals from the date of acquisition. 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.
On September 12, 1994, the Company completed the acquisition of
51% of the SIM in a business combination accounted for as a
purchase (see Note 1). The purchase price was $2,043,026 which
exceeded the fair value of the net assets acquired by $1,281,018.
The assets acquired included a cash balance of $1,107,799. The
Company discontinued its brokerage operations, abandoned the
related assets and recognized a loss on such disposal of
$1,925,995 effective as of January 1, 1995 (see Note 16).
During 1996, the Company entered into a contract to sell the land
and buildings that Cabestan had acquired from a related party in
1994. The Company recorded a loss of $1,626,186 in 1995 in
connection with the sale (see Notes 4 and 14).
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.
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.
F-12
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Acquisitions and newly formed entities (concluded):
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 and three months ended
September 30, 1996 and 1995 as though Inoteb had been acquired at
the beginning of 1995:
Nine Months Ended Three Months Ended
September 30, September 30,
----------------------- ---------------------
1996 1995 1996 1995
---------- ---------- --------- ---------
Revenues $ 1,287,822 $ 1,535,824 $ 336,983 $ 394,988
Income
(loss) (1,374,314) (420,523) (971,274) 46,101
Income
(loss) per
common
share (.20) (.10) (.16) .01
Weighted
average
common
shares
outstanding 6,736,396 4,113,903 6,001,438 4,330,564
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).
The issuance of common shares in connection with the acquisition
was a noncash transaction that is not reflected in the
accompanying 1996 consolidated statement of cash flows.
F-13
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Income taxes:
As of September 30, 1996, the Company had net operating loss
carryforwards of approximately $2,127,000 available to reduce
future Federal taxable income which, if not used, will expire at
various dates through 2011. 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 consist of the following at
September 30, 1996 and December 31, 1995:
September December
30, 1996 31, 1995
---------- ----------
Federal $1,536,000 $1,238,000
State 420,000 338,000
---------- ----------
Totals 1,956,000 1,576,000
Less valuation allowance 1,956,000 1,576,000
---------- ----------
Totals $ - $ -
========== ==========
The Company has offset the deferred tax asset of approximately
$1,956,000 attributable to the potential benefits from such net
operating loss carryforwards as of September 30, 1996 by an
equivalent valuation allowance due to the uncertainties related to
the extent and timing of its future taxable income. There were no
other material temporary differences as of that date.
Note 4 - Property and equipment:
Property and equipment used in the Company's real estate
operations consisted of the following at September 30, 1996 and
December 31, 1995:
September December
30, 1996 31, 1995
---------- ----------
Land $1,373,253 $1,373,253
Buildings and improvements 7,222,463 7,175,701
Equipment and furnishings 2,243 2,243
---------- ----------
8,597,959 8,551,197
Less accumulated depreciation 323,632 323,632
---------- ----------
8,274,327 8,227,565
Less effect of write-down of
property and equipment to
estimated net realizable value 1,626,186 1,626,186
---------- ----------
Totals $6,648,141 $6,601,379
========== ==========
F-14
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Property and equipment (concluded):
During 1996, the Company entered into a contract to sell the
buildings, equipment and land owned by Cabestan (see Note 14). In
connection with the sale, the Company determined that the carrying
value of such assets exceeded their estimated net realizable
value. Accordingly, a loss of $1,626,186, which represents the
excess of the net carrying value of $8,227,565 over the estimated
net realizable value of $6,601,379, was charged to results of
operations in 1995 and depreciation was discontinued.
Property and equipment used in the Company's medical products
operations consisted of the following at September 30, 1996:
Land $ 11,800
Buildings and improvements 102,750
Equipment and furnishings 119,088
--------
233,638
Less accumulated depreciation 6,100
--------
Total $227,538
========
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.
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 during the
three months ended September 30, 1996.
Note 7 - Leases:
The Company was leasing the commercial space in the real estate
properties that were subject to the sales contract (see Notes 1, 4
and 14) under operating leases with terms of up to six years. Most
of the leases contain clauses for reimbursement of real estate
taxes, maintenance, insurance and certain other operating expenses
of the properties. Income from leases is recognized on a
straight-line basis regardless of when payment is due.
F-15
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Leases (concluded):
Future minimum rents under those leases in each of the years
subsequent to September 30, 1996 are as follows:
Year Ending
September 30, Amount
------------- ----------
1997 $ 654,448
1998 590,065
1999 544,684
2000 205,153
2001 145,239
----------
Total $2,139,589
==========
Note 8 - Commitments and contingencies:
The Company had an agreement with Trammell Crow to manage the two
commercial buildings owned by Cabestan (see Note 4). The agreement
provided for Trammell Crow to manage, maintain and provide all
operational matters with regard to Cabestan's commercial
properties. In return, Trammell Crow was compensated with a
commission of 2.6% of the gross rental receipts as a management
fee. The Company also had to pay a leasing commission to Trammell
Crow for all existing lease tenants in the amount of 2% of gross
receipts per year, and 7% in the first year for any new leases
acquired. The Company was required to reimburse Trammell Crow for
the ordinary expenditures it incurs in managing the properties.
Note 9 - 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 September 30, 1996, the outstanding principal balance of the
Regulation D notes was $517,500 (see Note 14).
F-16
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 - Long-term debt:
Long-term debt consists of the following:
September December
30, 1996 31, 1995
---------- ----------
Mortgage note payable in monthly
installments of $43,802
including interest at 8.66%
through March 1999 and a final
principal payment of $4,487,703
in April 1999 (A) $4,794,655 $4,874,552
Term loans payable monthly in
varying installments, including
interest at rates ranging from
6.95% to 9.5% through December
2001 (B) 598,100
Noninterest bearing advances
initially scheduled to be paid in
monthly installments through
2000 (C) 531,700
---------- ----------
5,924,455 4,874,552
Less current portion 425,099 107,700
---------- ----------
Long-term debt $5,499,356 $4,766,852
========== ==========
(A) The mortgage is secured by buildings with a net carrying
value of approximately $6,600,000 at September 30, 1996.
The mortgage was assumed on February 18, 1997 by the
purchaser of the buildings (see Note 14).
(B) The loans are secured by equipment with a net carrying
value of approximately $196,000 at September 30, 1996.
(C) 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 five years subsequent to September 30, 1996 are as
follows:
Year Ending
September 30, Amount
------------- ----------
1997 $ 425,099
1998 525,754
1999 4,806,202
2000 96,000
2001 21,400
F-17
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - 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. In June 1996,
the Company granted options for the purchase of 333,250 shares of
common stock exercisable at $5.81 per share from the date of
issuance until they expire in June 2001. There were no other
outstanding options at September 30, 1996, and no shares were
issued under the Plan through September 30, 1996.
The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"). Accordingly, no earned
or unearned compensation cost was recognized in the accompanying
consolidated financial statements for stock options granted in
1996. 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 pro forma loss and loss per
common share from continuing operations and net loss and net loss
per common share would not have differed materially from the
historical amounts for the nine and three months ended September
30, 1996.
Note 12 - Preferred stock:
At December 31, 1995, 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 the nine months ended
September 30, 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
(see Note 14).
Note 13 - 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 September 30, 1996. The Company has ordered
its transfer agent not to transfer any of the remaining shares.
F-18
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 - Subsequent events:
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 the mortgage note on the property was repaid
on February 18, 1997 (see Notes 1, 4, 7 and 10). Management
anticipates that the Company will also use a portion of the
proceeds from the sale to repay the balance of the Company's
Regulation D notes by September 1997 (see Note 9).
In December 1996, the Company granted options to employees for the
purchase of a total of 650,000 shares of common stock exercisable
at $3.75 per share from the date of issuance until they expire in
June 2001 (see Note 11).
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 15 - Discontinued brokerage operations:
The assets and liabilities of the brokerage operations that were
discontinued effective as of January 1, 1995 consisted of the
following:
Cash $ 7,088
Marketable securities 2,495,026
Accounts receivable and prepaid expenses 365,091
Loans receivable 722,744
Income tax refund receivable 332,266
Related party receivable 879,607
Property and equipment 371,487
Goodwill 1,271,366
Other assets 27,361
Accounts payable and accrued liabilities (3,049,374)
Other liabilities (316,139)
Loans payable (476,141)
Minority interest (704,387)
----------
Total $1,925,995
===========
* * *
F-19
