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, 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.
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(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)
c/o Societe Financiere du Seujet, 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 May 31, 1997 was
7,642,684.
<PAGE>
Item 1. Financial Statements. Attached.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Results of Operations.
The Company's net loss during the six months ending June 30, 1996
("Stub 1996"), $22,240 was considerably less than for the six months ending June
30, 1995 ("Stub 1995"), $2,324,344. This was principally due to the one-time
write-off in Stub 1995 of the Company's interest in its Italian subsidiary,
Borgonuovo SIM, in the amount of $1,925,995. However, the Company's loss before
discontinued operations was significantly better in Stub 1996 ($22,240) than in
Stub 1995 ($398,349). This was due to a general decrease in almost all
categories of operating expenses, in particular a reduction of interest on
outstanding loans (the Company made a significant payment of principal and
interest on its investor notes during the second quarter of 1995, as further
described below). Additionally, there was no depreciation in Stub 1996 because
of a write-down of the value of the Company's investment in its Bensenville
property during the fourth quarter of 1995.
Financial Condition, Liquidity and Capital Resources.
There was significant change in the Company's financial condition as
of June 30, 1996 as opposed to December 31, 1995. Current liabilities decreased
from $2,735,840 to $1,401,710 while current assets decreased from $722,619 to
$554,248. The decrease in current assets was principally due to the paying down
of accounts payable. However, cash flows during Stub 1996 were significantly
better than in Stub 1995 principally due to sales of stock by the Company and
the conversion of certain of the company's preferred shares into common shares
which was accompanied by an infusion of cash.
In February 1997 the Company sold its property in Bensenville,
Illinois from which it received net cash proceeds of approximately $1,515,000.
Of that sum, approximately $430,000 was escrowed to secure certain minimum rent
guarantees made to the purchaser of the property. These proceeds have
significantly improved the Company's liquidity. Management believes that these
proceeds, together with operating revenues, should be sufficient to fund the
Company's operations through the end of 1997.
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. The
Company did not pay the interest on such note nor the remaining principal
balance thereof until June 1996, at which time all accrued interest (but no
principal) was paid. Payments had not been made to the noteholders due to
disputes between the Company and the primary guarantor of the notes. The
aggregate amount of principal and interest
<PAGE>
owed on the notes as of the date of this filing is approximately $600,000. The
Company intends to pay the noteholders in full during 1997 and has made
arrangements for such payment.
Current Plans of Registrant.
On August 2, 1995, the Company acquired 100% of the stock of 3H
Human Health High-Tech Public Limited Company, an Irish corporation which has
certain world-wide rights (exclusive of France) to certain products of Inoteb,
S.A., a French corporation ("Inoteb"). These products relate to the use of
coral-based or originated products in human bone regeneration. In addition, in
the third quarter of 1996, the Company acquired a controlling interest in the
capital stock of Inoteb.
As a result of these acquisitions, the Company's focus shifted from
real estate to involvement in the research, development and marketing of
Inoteb's products. This fundamental shift in focus makes discussion of the
Company's near, medium and long-term operations extremely difficult. Inoteb has
been selling its products, principally within the European Community, for
several years, but does not yet have approval for the sale of its products in
the United States, a significant market. Management believes that the U.S.
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
U.S. which is selling in the U.S. its own coral-based products for use in human
bone regeneration; 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 certain of 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 its
operations, entering in to joint ventures with key strategic partners for
distribution of its products, research, development and the like. No assurance
can be had that any such arrangements will be reached or that they will be
profitable.
The Company will again consider its eligibility to have its shares
listed on the NASDAQ Small Cap Market after its audit for the year ended
December 31, 1996 is completed. Even if the Company's stock is so listed, there
can be no assurance that a market broader that the one which now exists will
develop. The Company does believe that such a listing would add to the liquidity
of the Company's shares.
PART II
Item 1. Legal Proceedings. There are no reportable events relating to this Item.
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 May 23, 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: June 2, 1996 /s/ Riccardo Mortara
-----------------------------------
Riccardo Mortara, Chairman
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
INDEX TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995 F-2
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX AND THREE MONTHS ENDED JUNE 30, 1996 AND 1995 F-3
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1996 F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995 F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-6/16
* * *
F-1
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
June December
ASSETS 30, 1996 31, 1995
------ ------------ -----------
(Unaudited) (Note 1)
<S> <C> <C>
Current assets:
Cash $ 326,184 $ 633,305
Prepaid expenses and other current assets 228,064 89,314
------------ -----------
Total current assets 554,248 722,619
Property and equipment, at estimated net
realizable value, net of accumulated depreciation
of $323,632 6,601,379 6,601,379
License fees, net of accumulated amortization
of $111,431 and $61,906 1,374,319 1,423,845
Investment in limited partnership, at equity 174,363 174,363
Investment in nonmarketable securities 600,000 600,000
Deferred charges, net of accumulated amortization of
$110,536 and $90,618 152,882 172,800
Other assets 1,542 1,542
------------ -----------
Totals $ 9,458,733 $ 9,696,548
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of mortgage payable $ 112,447 $ 107,700
Notes payable 517,500 517,500
Accounts payable and accrued liabilities 719,928 2,025,149
Payables to related party 51,835 85,491
------------ -----------
Total current liabilities 1,401,710 2,735,840
Tenant security deposits 56,644 50,654
Mortgage payable, net of current portion 4,709,417 4,766,852
------------ -----------
Total liabilities 6,167,771 7,553,346
------------ -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value; 1,000,000
shares authorized; 450 and 1,000 shares
issued and outstanding, -- 1
Common stock, $.001 par value; 20,000,000
shares authorized; 5,202,206 and 5,913,316
shares issued and outstanding 5,202 5,913
Additional paid-in capital 10,564,732 9,394,020
Accumulated deficit (7,278,972) (7,256,732)
------------ -----------
Total stockholders' equity 3,290,962 2,143,202
------------ -----------
Totals $ 9,458,733 $ 9,696,548
============ ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX AND THREE MONTHS ENDED JUNE 30, 1996 AND 1995
(Unaudited)
<TABLE>
<CAPTION>
Six Months Three Months
Ended June 30, Ended June 30,
------------------------- ------------------------
1996 1995 1996 1995
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Revenues:
Rental revenue $ 509,344 $ 538,379 $ 263,094 $ 251,998
Other income 66,095 9,084 25,178 7,790
----------- ----------- ---------- -----------
Totals 575,439 547,463 288,272 259,788
----------- ----------- ---------- -----------
Operating expenses:
Interest (including
amortization of loan
fees) 257,850 408,821 124,663 165,793
Depreciation of property
and equipment 74,755 28,736
Professional fees 129,659 186,733 57,354 89,178
Property taxes 71,028 74,208 35,514 37,983
Other operating expenses 139,142 201,295 34,793 92,379
----------- ----------- ---------- -----------
Totals 597,679 945,812 252,324 414,069
----------- ----------- ---------- -----------
Income (loss) before
discontinued operations (22,240) (398,349) 35,948 (154,281)
Discontinued brokerage
operations - loss
on disposal (1,925,995)
----------- ----------- ---------- -----------
Net income (loss) $ (22,240) $(2,324,344) $ 35,948 $ (154,281)
=========== =========== ========== ===========
Income (loss) per common share:
Income (loss) from continuing
operations $ -- $ (.18) $ .01 $ (.07)
Loss from discontinued
operations (.89)
----------- ----------- ---------- -----------
Net income (loss)
per common share $ -- $ (1.07) $ .01 $ (.07)
=========== =========== ========== ===========
Weighted average
common shares outstanding 4,725,649 2,171,230 4,635,553 2,268,862
=========== =========== ========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 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 (550) (1) 733,333 733 549,268 550,000
Cancellation of
common stock in
connection with
terminated acquisition (1,711,110) (1,711) 1,711
Net loss (22,240) (22,240)
---------- -------- --------- -------- ----------- ----------- ----------
Balance, June 30,
1996 450 $ -- 5,202,206 $ 5,202 $10,564,732 $(7,278,972) $3,290,962
========== ======== ========= ======== =========== =========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(Unaudited)
1996 1995
----------- -----------
Operating activities:
Net loss $ (22,240) $(2,324,344)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation of property and equipment 74,755
Amortization of other assets 69,444 31,817
Deferred professional fees 52,045
Loss from discontinued operations 1,925,995
Changes in operating assets and liabilities:
Prepaid expenses and other current
assets (138,750) (25,749)
Other assets (8,700)
Accounts payable and accrued expenses (1,305,221) 87,336
Tenant security deposits 5,990
----------- -----------
Net cash used in operating activities (1,390,777) (186,845)
Investing activities:
Distribution from limited partnership 89,239
Advances from related party (33,656) (59,690)
----------- -----------
Net cash provided by (used in)
investing activities (33,656) 29,549
----------- -----------
Financing activities:
Proceeds from sales of common stock 1,170,000 1,532,000
Principal payments on short-term obligations (1,213,165)
Principal payments on mortgage obligations (52,688) (56,592)
----------- -----------
Net cash provided by financing activities 1,117,312 262,243
Net increase (decrease) in cash (307,121) 104,947
Cash, beginning of period 633,305 99,529
----------- -----------
Cash, end of period $ 326,184 $ 204,476
=========== ===========
Supplemental disclosure of cash flow data:
Interest paid $ 222,407 $ 229,606
=========== ===========
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 holds an
investment in nonmarketable securities of a related Canadian
financial advisory services company (see Notes 2 and 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 Notes 5 and 13). 3H has 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):
BioCoral and its subsidiaries are referred to collectively herein
as the "Company."
Riccardo Mortara is the chairman of the Board of Directors and
chief executive officer of the Company. As of June 30, 1996, Mr.
Mortara controlled 100% of the outstanding shares of preferred
stock of the Company which comprised 60% of its voting shares
(see Note 12).
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.
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).
F-7
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Business and summary of accounting policies (continued):
Capitalization (concluded):
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 six months ended June 30, 1996 (the Company recorded the
issuance of all 266,667 shares during the six months ended June
30, 1996).
During May 1996, the Company received $550,000 in connection with
the issuance 733,333 shares of common stock to the Company's
principal stockholder and the cancellation of 550 shares of
preferred stock (see Note 12).
Basis of presentation:
The Company incurred significant losses from continuing and
discontinued operations in the six months ended June 30, 1996 and
the years ended December 31, 1995 and 1994. As a result, the
Company had a working capital deficiency of $847,462 and an
accumulated deficit of $7,278,972 at June 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.
Subsequent to June 30, 1996, the Company received $150,000 in
connection with the issuance of an additional 200,000 shares of
common stock to the Company's principal stockholder and the
cancellation of an additional 150 shares of preferred stock (see
Notes 12 and 14). 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 June
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 June 30, 1996,
and its results of operations for the six and three months ended
June 30, 1996 and 1995 and cash flows for the six months ended
June 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 subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
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, 1996 and December 31, 1995, substantially all of the
Company's cash was held in foreign banks.
Property and equipment:
Property and equipment, substantially all of which is 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
14).
License fees:
License fees were recorded at cost and are being amortized using
the straight-line method over 15 years.
F-9
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Business and summary of accounting policies (concluded):
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 accounts for its investment in a limited partnership
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 six and
three months ended June 30, 1996 and 1995.
Advertising:
The Company expenses the cost of advertising and promotions as
incurred. Advertising costs charged to operations were not
material in the six and three months ended June 30, 1996 and
1995.
Income taxes:
The Company accounts for income tax 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 loss per common share:
Net 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. No stock
options or other common stock equivalents were outstanding during
the six and three months ended June 30, 1996 and 1995.
Reclassifications:
Certain accounts in the 1995 consolidated financial statements
have been reclassified to conform to 1996 presentations.
F-10
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
the controlling 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 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 15).
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 13).
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 SA for the purchase of a license that
would give 3H the exclusive right to distribute BioCoral outside
of France. 3H exercised the option in 1995 (see Note 5). Since
neither the shares issued by the Company nor the rights acquired
by 3H had an objectively determinable value at the date of the
exchange, the Company valued the shares issued and the rights
initially acquired on the basis of the par value of the shares
issued of $1,422.
F-11
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Income taxes:
As of June 30, 1996, the Company had net operating loss
carryforwards of approximately $1,454,000 available to reduce
future Federal taxable income which, if not used, will expire at
various dates through June 30, 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 consists of the following at
June 30, 1996 and December 31, 1995:
June December
30, 1996 31, 1995
---------- ----------
Federal $1,276,798 $1,237,759
State 349,241 338,563
---------- ----------
Totals 1,626,039 1,576,322
Less valuation allowance 1,626,039 1,576,322
---------- ----------
Totals $ -- $ --
========== ==========
The Company has offset the deferred tax asset of $1,626,039
attributable to the potential benefits from such net operating
loss carryforwards as of June 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, substantially all of which is used in the
Company's real estate operations, consisted of the following at
both June 30, 1996 and December 31, 1995:
Land $1,373,253
Buildings and improvements 7,175,701
Office equipment 2,243
----------
8,551,197
Less accumulated depreciation 323,632
----------
8,227,565
Less effect of write-down of
property and equipment to
estimated net realizable value 1,626,186
----------
Total $6,601,379
F-12
<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.
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 SA, a French corporation. The
agreement requires 3H to pay aggregate licensing fees of
$1,485,751. As of June 30, 1996, the Company had paid $1,173,156
to Inoteb SA. The remaining installments of $312,595 were
included in accounts payable as of and paid subsequent to June
30, 1996.
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.
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.
Future minimum rents under those leases in each of the years
subsequent to June 30, 1996 are as follows:
Year Ending
March 31, Amount
----------- ----------
1997 $ 535,154
1998 438,600
1999 374,543
2000 123,466
----------
Total $1,471,763
==========
F-13
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Commitments and contingencies:
The Company had an agreement with Trammell Crow to manage the two
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 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 borrowings:
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 June 30, 1996, the outstanding principal balance of the
Regulation D notes was $517,500. The due date for substantially
all of the Regulation D notes has subsequently been extended to
December 31, 1996. Management intends to continue to negotiate
for a further extension; however, as of April 30, 1997, the
Company had not received an extension and management cannot
assure that such negotiations will be successful.
Note 10 - Long-term debt:
Long-term debt consists of a mortgage note with a principal
balance of $4,821,864 at June 30, 1996, bearing interest at
8.66%, which is payable in monthly installments of $43,802
through April 1999. The mortgage note is secured by buildings
with a net carrying value of approximately $6,600,000 at June 30,
1996.
The mortgage was assumed on February 18, 1997 by the purchaser of
the buildings (see Note 14).
F-14
<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 125,000 shares of
common stock excercisable at $7.75 per share from the date of
issuance until they expire in June 1997. There were no other
outstanding options at June 30, 1996, and no shares were issued
under the Plan through June 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
Dremer Holding, Ltd., a company controlled by Mr. Mortara. During
May 1996, a total of 550 shares of preferred stock outstanding
were canceled and 733,333 shares of common stock were sold to the
holder for $550,000 (see Note 14).
Holders of the Series A preferred stock have the right to elect
60% of the members of the Company's Board of Directors. In all
other respects, the holders of the shares of the Series A
preferred stock have the same rights and preferences as holders
of the common stock.
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 June 30, 1996. The remaining shares issued
will be canceled as soon as administratively feasible.
Note 14 - Subsequent events:
Subsequent to June 30, 1996, a total of 150 shares of Series A
preferred stock (see Note 12) were canceled and 200,000 shares of
common stock were sold to the holder for $150,000. In addition,
the holder has agreed to purchase an additional 400,000 shares of
common stock for $300,000.
In connection with the acquisition of the rights to market
certain biomedical materials in 1995 (see Note 5), the Company
also obtained an option to acquire a controlling interest in the
licensor, Inoteb SA, which is a French medical products
manufacturer and developer. In July 1996, the Company acquired
51.5% of the common stock of Inoteb SA, and bonds that are
convertible into another 4.5% of its common stock, in exchange
for 1,840,516 shares of common stock of the Company. The Company
has requested the conversion of the bonds. The Company also
agreed to reinvest after tax profits, if any, up to a specified
maximum amount, in and use its best efforts to raise additional
capital for the operations of Inoteb SA.
F-15
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 - Subsequent events (concluded):
In October 1996, the Company entered into an agreement to sell
the 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).
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-16
<PAGE>
4-29-97 9PM KK INSERTS TO 6-30-96 NOTES 12 AND 14
REVISED NOTE 12
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
Dremer Holding, Ltd., a company controlled by Mr. Mortara. During
May 1996, a total of 550 shares of preferred stock outstanding
were canceled and 733,333 shares of common stock were sold to the
holder for $550,000 (see Note 14).
Holders of the Series A preferred stock have the right to elect
60% of the members of the Company's Board of Directors. In all
other respects, the holders of the shares of the Series A
preferred stock have the same rights and preferences as holders
of the common stock.
INSERT #14-1
Note 14 - Subsequent events:
Subsequent to June 30, 1996, a total of 150 shares of Series A
preferred stock (see Note 12) were canceled and 200,000 shares of
common stock were sold to the holder for $150,000. In addition,
the holder has agreed to purchase an additional 400,000 shares of
common stock for $300,000.
F-17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
6-MOS is qualified in it's entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 326,184
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 554,248
<PP&E> 6,925,011
<DEPRECIATION> 323,632
<TOTAL-ASSETS> 9,458,733
<CURRENT-LIABILITIES> 1,401,710
<BONDS> 517,500
0
0
<COMMON> 5,202
<OTHER-SE> 3,285,760
<TOTAL-LIABILITY-AND-EQUITY> 9,458,733
<SALES> 0
<TOTAL-REVENUES> 575,439
<CGS> 0
<TOTAL-COSTS> 597,679
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (22,240)
<INCOME-TAX> 0
<INCOME-CONTINUING> (22,240)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,240)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
