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 June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-23512
BIOCORAL INC.
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(Exact name of Small Business Issuer as specified in its charter)
Delaware 33-0601504
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(State or other jurisdiction of (IRS Employer I.D. No.)
incorporation or organization)
14 Quai du Seujet, Geneva, Switzerland
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(Address of principal executive offices)
011-4122-908-1598
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(Issuer's telephone number, including area code)
Check whether the Issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [_]
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares of common stock outstanding as of June 30, 1997 was
7,642,684.
<PAGE>
PART I
Item 1. Financial Statements. Attached.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
The Company experienced a net loss of $922,688 from continuing operations
during the six month period ended June 30, 1997 ("Stub 1997") primarily due to
operating losses in its Inoteb subsidiary. Losses from discontinued operations
aggregated $188,058. The net loss for this six month period was significantly
greater than for the six months ended June 30, 1996 ("Stub 1996") when the
Company experienced a net loss from continuing operations of $173,012. The net
loss figure for Stub 1996 reflected general corporate operating expenses offset
against a relatively insignificant amount of other income, since the 1996
operating income was primarily classified as discontinued operations in Stub
1997. The significant increase in operating expenses in Stub 1997 ($1,191,956)
as compared to Stub 1996 ($234,028) was due principally to the consolidation of
Inoteb's operations. Total revenues for Stub 1997 were $269,268, an increase of
$208,252 over the same period the year before. This reflected principally the
results of Inoteb's sales.
In February 1997 the Company sold its Bensenville properties to a third
party in a transaction in which the Company received net proceeds of
approximately $1,515,000 of which $430,000 was deposited in escrow to secure
certain minimum rent guarantees made to the purchaser and 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 $882,336 from December 31, 1996 to June 30,
1997, primarily due to funding the Company's loss for Stub 1997 and its
outstanding liabilities. Cash increased significantly, from $9,142 to $472,476
due to the sale of the Bensenville properties. Total liabilities decreased
slightly, primarily due to the paydown of investor notes. Stockholder's equity
continues to be positive, at $1,335,509.
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
<PAGE>
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, 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 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
<PAGE>
in the future due to a large number of potential events, including unanticipated
future developments.
PART II
Item 1. Legal Proceedings. On July 25, 1997, the United States Securities and
Exchange Commission ("Commission") filed a complaint in the United States
District Court for the District of Columbia against the Company alleging that
the Company had failed to file its Annual Report on Form 10-KSB for the year
ended December 31, 1996, two Quarterly Reports on Form 10-QSB for the fiscal
quarters ended September 30, 1996 and March 31, 1997, and five Notifications of
Late Filing with respect to its delinquent reports. The Commission sought to
compel the Company to file its delinquent periodic reports and to enjoin the
Company from any further violations of Section 13(a) of the Exchange Act and
Rules 12b-25, 13a-1 and 13a-13 thereunder. Simultaneously with the filing of the
Commission's complaint, the Company consented to the entry of a Final Judgment
granting the relief sought by the Commission and admitted that it had not filed
the periodic reports as described above. All delinquent filings have now been
made by the Company.
Item 2. Changes in Securities. There are no reportable events relating to this
item.
Item 3. Defaults Upon Senior Securities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Financial Condition,
Liquidity and Capital Resources".
Item 4. Submission of Matters to a Vote of Security Holders. There are no
reportable events relating to this item.
Item 5. Other Information. There are no reportable events relating to this item.
Item 6. Exhibits and Reports on Form 8-K.
(A) Not applicable.
(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 15, 1997 s/ Riccardo Mortara
--------------------------
Riccardo Mortara, Chairman
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
INDEX TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND DECEMBER 31, 1996 F-2
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX AND THREE MONTHS ENDED JUNE 30, 1997 AND 1996 F-3
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1997 F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996 F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-6/19
* * *
F-1
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND DECEMBER 31, 1996
June December
ASSETS 30, 1997 31, 1996
------------ ------------
(Unaudited) (See Note 1)
Current assets:
Cash $ 472,476 $ 9,142
Accounts receivable, net of allowance for
doubtful accounts of $179,600 and $261,300 163,500 153,700
Inventories 182,100 251,100
Net assets of discontinued operations 845,613 2,139,007
Other current assets 378,691 202,500
------------ ------------
Total current assets 2,042,380 2,755,449
Property and equipment, net of accumulated
depreciation of $122,000 and $98,100 119,395 226,936
License fees, net of accumulated amortization
of $210,482 and $160,956 1,275,268 1,324,794
Goodwill, net of accumulated amortization of
$32,000 and $16,000 137,984 153,984
Other assets 28,212 24,412
------------ ------------
Totals $ 3,603,239 $ 4,485,575
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 471,025 $ 255,100
Notes payable 267,500 517,500
Accounts payable and accrued liabilities 1,016,430 893,970
------------ ------------
Total current liabilities 1,754,955 1,666,570
Long-term debt, net of current portion 512,775 786,500
------------ ------------
Total liabilities 2,267,730 2,453,070
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value; 1,000,000
shares authorized; 300 shares issued and
outstanding in 1996
Common stock, $.001 par value; 20,000,000
shares authorized; 7,642,722 and 7,242,722
shares issued and outstanding 7,643 7,243
Additional paid-in capital 12,379,791 12,080,191
Accumulated deficit (10,028,175) (8,917,429)
Unearned compensation (1,023,750) (1,137,500)
------------ ------------
Total stockholders' equity 1,335,509 2,032,505
------------ ------------
Totals $ 3,603,239 $ 4,485,575
============ ============
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX AND THREE MONTHS ENDED JUNE 30, 1997 AND 1996
(Unaudited)
<TABLE>
<CAPTION>
Six Months Three Months
Ended June 30, Ended June 30,
------------------------- -------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Sales $ 261,800 $ 124,600
Other income 7,468 $ 61,016 2,991 $ 22,836
----------- ----------- ----------- -----------
Totals 269,268 61,016 127,591 22,836
----------- ----------- ----------- -----------
Operating expenses:
Cost of sales 233,000 110,200
Research and develop-
ment 130,900 90,600
Interest 35,148 33,364 18,365 14,112
Depreciation of prop-
erty and equipment 23,900 14,000
Professional fees 349,355 123,935 243,307 56,230
Other operating ex-
penses 419,653 76,729 132,697 973
----------- ----------- ----------- -----------
Totals 1,191,956 234,028 609,169 71,315
----------- ----------- ----------- -----------
Loss from continuing
operations (922,688) (173,012) (481,578) (48,479)
----------- ----------- ----------- -----------
Discontinued real estate operations:
Income from operations 150,772 84,427
Loss on disposal (188,058)
----------- ----------- -----------
Income (loss) from dis-
continued operations (188,058) 150,772 84,427
----------- ----------- ----------- -----------
Net income (loss) $(1,110,746) $ (22,240) $ (481,578) $ 35,948
=========== =========== =========== ===========
Income (loss) per common share:
Loss from continuing
operations $ (.12) $ (.03) $ (.06) $ (.01)
Income (loss) from
discontinued
operations (.02) .03 .02
----------- ----------- ----------- -----------
Net income (loss)
per common share $ (.14) $ -- $ (.06) $ .01
=========== =========== =========== ===========
Weighted average common
shares outstanding 7,594,103 4,725,649 7,642,722 4,635,553
=========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------- ----------------
Number Number Additional Total
of of Paid-In Accumulated Unearned Stockholders'
Shares Amount Shares Amount Capital Deficit Compensation Equity
------ ------ ------ ------ ------- ------- ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1997 300 $ - 7,242,722 $7,243 $12,080,191 $ (8,917,429) $(1,137,500) $2,032,505
Cancellation of pre-
ferred stock in con-
nection with sale of
common stock (300) - 400,000 400 299,600 300,000
Amortization of un-
earned compensation 113,750 113,750
Net loss (1,110,746) (1,110,746)
---- ---- --------- ------ ----------- ------------ ----------- ----------
Balance, June 20, 1997 - $ - 7,642,722 $7,643 $12,379,791 $(10,028,175) $(1,023,750) $1,335,509
==== ==== ========= ====== =========== ============ =========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(Unaudited)
1997 1996
----------- -----------
Operating activities:
Net loss $(1,110,746) $ (22,240)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation of property and equipment 23,900
Loss on disposal of property and equipment 83,641
Amortization of other assets 65,526 49,526
Amortization of unearned compensation 113,750
(Income) loss from discontinued operations 188,058 (150,772)
Changes in operating assets and liabilities:
Accounts receivable (9,800)
Inventories 69,000
Other current assets (176,191)
Other assets (3,800)
Accounts payable and accrued expenses 142,796 (1,379,345)
----------- -----------
Net cash used in operating activities (613,866) (1,502,831)
----------- -----------
Investing activities:
Advances from related party (33,656)
Net proceeds from disposal of real estate
operations 1,085,000
----------- -----------
Net cash provided by (used in) in-
vesting activities 1,085,000 (33,656)
----------- -----------
Financing activities:
Principal payments on short-term obligations (250,000)
Proceeds from long-term obligations 60,300
Principal payments on long-term obligations (118,100)
Proceeds from sales of common stock 300,000 1,170,000
----------- -----------
Net cash provided by (used in) financ-
ing activities (7,800) 1,170,000
----------- -----------
Net increase (decrease) in cash 463,334 (366,487)
Cash, beginning of period 9,142 429,081
----------- -----------
Cash, end of period $ 472,476 $ 62,594
=========== ===========
Supplemental disclosure of cash flow data:
Interest paid $ 35,148 $ 222,407
=========== ===========
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 June
30, 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 six months ended June 30, 1997
and the years ended December 31, 1996 and 1995. As a result, the
Company had an accumulated deficit of $10,028,175 at June 30,
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 $1,515,000
from the sale of its real estate properties during the six
months ended June 30, 1997 (see Note 2), of which $430,000 was
deposited in escrow to secure certain minimum rent guarantees
made to the purchaser. As a result, management believes that the
Company will be able to continue to operate through at least
June 30, 1998; however, management believes that the Company
probably will need to raise additional funds for working capital
and other purposes through additional debt or equity financing
to sustain and expand its operations thereafter. Management
cannot assure that such financing will be available.
F-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 June 30,
1997, and its results of operations for the six months and three
months ended June 30, 1997 and 1996 and cash flows for the six
months ended June 30, 1997 and 1996. Information included in the
consolidated balance sheet as of December 31, 1996 has been
derived from the audited balance sheet in the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1996 (the
"10-KSB") 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 June 30, 1997 and December 31, 1996, substantially all of the
Company's cash was held in foreign banks.
Inventories:
Inventories are stated at the lower of cost, determined on the
first-in, first-out ("FIFO") method, or market.
F-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 are recorded at cost. Depreciation is
computed using the straight-line method over the estimated
useful lives of the assets (15 years for properties and three to
ten years for equipment).
License fees:
License fees were recorded at cost and are being amortized using
the straight-line method over 15 years.
Goodwill:
Goodwill, which represents the excess of the costs of acquiring
the medical products manufacturing business over the fair value
of the net assets at the date of acquisition, is being amortized
using the straight-line method over an estimated useful life of
five years.
Advertising:
The Company expenses the cost of advertising and promotions as
incurred. Advertising costs charged to operations were not
material in the six months and three months ended June 30, 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. After $430,000 was deposited in escrow to secure certain
minimum rent guarantees made to the purchaser, the Company
received net proceeds of approximately $1,515,000 from the sale
during the six months ended June 30, 1997 (see Note 1). The
carrying value of Cabestan's property and equipment had been
reduced to estimated net realizable value, pursuant to SFAS 121,
based on the terms of the 1996 sales agreement through a
write-down of $1,626,186 in September 1995, and other assets were
written down by $200,000 in 1996. The net assets of the Company's
discontinued real estate operations as of June 30, 1997 and
December 31, 1996 are set forth in Note 12.
On August 2, 1995, the Company issued 1,422,223 shares of common
stock to acquire all of the outstanding common shares of 3H. Prior
to the exchange, 3H's only activity was the acquisition of an
option issued by Inoteb for the purchase of a license that would
give 3H the exclusive right to distribute BioCoral outside of
France. 3H exercised the option in 1995 (see Note 5). Since
neither the shares issued by the Company nor the rights acquired
by 3H had an objectively determinable value at the date of the
exchange, the Company valued the shares issued and the rights
initially acquired on the basis of the par value of the shares
issued of $1,422.
F-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 six months ended June 30, 1996 as
though Inoteb had been acquired at the beginning of 1996:
Revenues $ 436,416
Loss from continuing operations (551,012)
Loss per common share (.08)
Weighted average common shares
outstanding 6,566,165
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 June 30, 1997, the Company had net operating loss
carryforwards of approximately $3,822,000 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:
June December
30, 1997 31, 1996
---------- ----------
Federal $1,977,000 $1,634,000
State 596,000 493,000
Totals 2,573,000 2,127,000
Less valuation allowance 2,573,000 2,127,000
---------- ----------
Totals $ -- $ --
========== ==========
The Company offset the deferred tax assets of approximately
$2,573,000 and $2,127,000 attributable to the potential benefits
from such net operating loss carryforwards as of June 30, 1997 and
December 31, 1996, respectively, by equivalent valuation
allowances due to the uncertainties related to the extent and
timing of its future taxable income. There were no other material
temporary differences as of those dates.
Note 4 - Property and equipment:
Property and equipment used in the Company's medical products
operations consisted of the following:
June December
30, 1997 31, 1996
---------- ----------
Land $ 10,200 $ 11,400
Buildings and improvements 113,800 150,400
Equipment and furnishings 117,395 163,236
-------- --------
241,395 325,036
Less accumulated depreciation 122,000 98,100
-------- --------
Totals $119,395 $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. In
June 1997, the Company used a portion of the proceeds from the
sale of the commercial real estate (see Note 2) to make principal
payments on the notes totaling $250,000. As a result, the
outstanding principal balance of the Regulation D notes was
$267,500 at June 30, 1997. Management anticipates that the Company
will also use a portion of the remaining proceeds from the sale of
the commercial real estate to repay the remaining balance of these
notes by September 1997.
Note 8 - Long-term debt:
Long-term debt consisted of the following:
June December
30, 1997 31, 1996
---------- ----------
Term loans payable monthly in varying
installments, including interest at
rates ranging from 6.95% to 9.5%
through December 2001 (A) $ 455,100 $ 524,600
Noninterest bearing advances in-
itially scheduled to be paid
in monthly installments through
2000 (B) 528,700 517,000
---------- ----------
983,800 1,041,600
Less current portion 471,025 255,100
---------- ----------
Long-term debt $ 512,775 $ 786,500
========== ==========
(A) The loans were secured by equipment with a net carrying
value of approximately $196,000 at June 30, 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 June 30, 1997 are as follows:
Year Ending
June 30, Amount
----------- ------
1998 $471,025
1999 187,825
2000 201,525
2001 123,425
Management of the Company believes that the term loans and the
noninterest bearing advances had carrying values that approximated
their fair values as of June 30, 1997 because the interest rates
and other relevant terms of such financial instruments were the
equivalent of those that the Company could have obtained for new
loans as of that date.
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, June 30, 1997.
Accordingly, the weighted average exercise price of the options
outstanding and exercisable at June 30, 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 six months ended June 30, 1997 would have been
adjusted to the pro forma amounts set forth below:
Historical Pro Forma
---------- ---------
Loss from continuing operations $ (922,688) $(1,029,288)
Net loss (1,110,746) (1,217,346)
Loss per common share:
Loss from continuing operations (.12) (.14)
Net loss (.14) (.16)
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 June 30, 1997 and December 31, 1996
consisted of the following:
June December
30, 1997 31, 1996
-------- -----------
Cash $248,000 $ 200,000
Cash held in escrow 430,000
Investments in real estate
limited partnership 168,000 168,000
Property and equipment, net of
accumulated depreciation 6,654,000
Mortgage note payable (4,767,000)
Other liabilities (116,000)
-------- -----------
Net assets $846,000 $ 2,139,000
======== ===========
Income (loss) from discontinued real estate operations reflects
charges for interest of $38,764 and $239,485 for the six months
ended June 30, 1997 and 1996, respectively. Depreciation was
discontinued when the property and equipment was written down to
net realizable value in 1995. As a result, there was no charge for
depreciation expense for the six months ended June 30, 1997 and
1996.
Note 13- Segment and geographic information:
The Company operates principally in one industry segment which
includes the development, manufacture and sale of biomedical
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 six months ended June 30, 1997 and 1996 is shown
below:
United
States France Ireland Consolidated
----------- ----------- ----------- -----------
1997
Net sales $ -- $ 261,800 $ -- $ 261,800
Loss from
continuing
operations (540,246) (328,300) (54,142) (922,688)
Identifiable
assets 1,427,969 1,280,275 894,995 3,603,239
1996
Net sales $ -- $ -- $ -- $ --
Income (loss)
from con-
tinuing
operations (184,411) -- 11,399 (173,012)
Identifiable
assets 2,131,157 -- 1,985,256 4,116,413
* * *
F-19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from BioCoral,
Inc. and Subsidaries and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 472,476
<SECURITIES> 0
<RECEIVABLES> 343,100
<ALLOWANCES> 179,600
<INVENTORY> 182,100
<CURRENT-ASSETS> 2,042,380
<PP&E> 241,395
<DEPRECIATION> 122,000
<TOTAL-ASSETS> 3,603,239
<CURRENT-LIABILITIES> 1,754,955
<BONDS> 1,251,300
0
0
<COMMON> 7,643
<OTHER-SE> 1,327,866
<TOTAL-LIABILITY-AND-EQUITY> 3,603,239
<SALES> 261,800
<TOTAL-REVENUES> 269,268
<CGS> 233,000
<TOTAL-COSTS> 233,000
<OTHER-EXPENSES> 923,808
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 35,148
<INCOME-PRETAX> (922,688)
<INCOME-TAX> 0
<INCOME-CONTINUING> (922,688)
<DISCONTINUED> (188,058)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,110,746)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
</TABLE>
