UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996 Commission file number 0-23512
BIOCORAL, INC.
(Name of small business issuer as specified in its charter)
Delaware 33-0601504
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
14 Quai du Seujet, Geneva
SWITZERLAND N/A
(Address of Principal Executive Offices) (Zip Code)
011-4122-908-1598
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock. $.001 Par Value
Indicate by check mark 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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and no disclosure will be
contained, to the best of issuer's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.
Issuer's revenues from continuing operations for its most recent fiscal
year were $325,071.
The aggregate market value of the voting stock held by non-affiliates of
the Issuer, as of December 31, 1996, was $ 32,465,959.
The Issuer had 7,242,722 shares of common stock outstanding as of December
31, 1996.
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Documents Incorporated by Reference - See Exhibit Index
PART I
Item 1. Description of Business
Background
BioCoral, Inc., a Delaware corporation (the "Company") is an international
biomaterials company that, through its subsidiaries, develops, manufactures and
markets bone graft and growth material for orthopedic, oral and maxillofacial
applications to a number of countries outside the United States. The Company's
chief product, BioCoral, is derived from natural coral using proprietary
manufacturing processes. BioCoral has certain characteristics (chemical
composition, porosity, etc.) similar to human bone that facilitates its
replacement of bone and concomitant bone strengthening. Prior to 1995, the
Company derived substantially all its revenue from other unrelated businesses.
The Company has written off its investment in one such area, and has sold
certain real property owned by it which had been a prior focus of its business.
Through the end of 1996, the Company had not yet realized significant revenues
from the sale of its BioCoral products. Its products are not approved for sale
in the United States and there can be no assurance such approval will be
obtained. The failure to do so could have a material adverse effect upon the
Company's ultimate profitability.
The Company, formerly known as IMMO-Finance Corporation, was incorporated
on May 4, 1992 under the name Hermeneutics Corporation. The Company was
originally formed for the purpose of either merging with or acquiring an
operating company with operating history and assets. The Securities and Exchange
Commission has defined and designated these types of companies as "blind pools"
and "blank check" companies. From May 1992 through March 1994 the Company was a
blank check company with the primary purpose of seeking merger or acquisition
candidates. The Company ceased to be a blank check company on March 25, 1994
when it acquired all of the issued and outstanding shares of the capital stock
of Cabestan, Inc., a Pennsylvania corporation ("Cabestan"). Cabestan had owned
two commercial properties located in the Bensenville Industrial Park in the
Chicago area. Cabestan's commercial properties consisted of one building which
serves as a bulk warehouse/distribution center and a second building which
serves as office space and as a service center. The properties were sold to a
non-affiliated third party in 1997. See Item 2. - "Description of Properties".
The Company entered the biomaterials field on August 2, 1995, when it
acquired virtually all the outstanding shares of 3H Human Health Hightech Public
Company Limited, an Irish corporation ("3H") The principal asset of 3H consists
of an exclusive worldwide (except France) license to distribute a bone
substitute material manufactured from coral and marketed under the name
BioCoral. The license was granted by the owner of the patent rights to BioCoral,
Inoteb, S.A., a French corporation ("Inoteb") in which a 51.5% (now 56%)
interest was subsequently acquired by the Company. The license granted by Inoteb
is for a period of 15 years plus two
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additional two year periods, and includes the right to distribute certain other
products developed by Inoteb. Potential products include a biological glue
utilizing the patient's own blood as an ingredient to insure biocompatibility,
and an osteoporosis treatment. None of Inoteb's products are presently available
in the United States and no FDA approvals thereof have been obtained. The FDA
approval process is long and expensive and no assurance can be had of the
ultimate granting thereof, or of the Company's ultimate profitability.
The Company acquired the shares of 3H from Cornington International Inc.
and Halford Finance S.A., each a British Virgin Islands corporation and each a
client of Societe Financiere du Seujet, a financial services company owned by
Riccardo Mortara, the Company's Chairman and a director. 500,000 ordinary shares
(out of 500,800 shares outstanding) and all 100,000 outstanding preference
shares, of 3H Human Health Hightech Public Company Limited, an Irish corporation
("3H") were acquired in exchange for (a) 800,000 shares of the Company's common
stock; (b) $1,000,000 in cash, payable in five installments of $200,000 each 60
days, commencing October 2, 1995; and (c) the right to purchase 150,000 shares
of the Company's common stock for each $1,000,000 in net profit after taxes of
3H in excess of $2,000,000, the aforementioned options to be prorated for each
fractional portion of each multiple of $1,000,000 net profit. In connection with
such Agreement the Company was granted an option to acquire Inoteb, which option
has been exercised in part. The Company also agreed, in connection with any
purchase of Inoteb, to invest all net profits after taxes from BioCoral for five
years (up to a maximum of $10,000,000) into Inoteb, and agreed to use its best
efforts to raise $15,000,000 for investment into Inoteb at the rate of
$5,000,000 per year by each of July 31, 1996, 1997 and 1998. The Company did not
raise such amount for Inoteb by July 31, 1997, and there can be no assurance
that it will be able to do so in the future. See Item 12 - "Certain
Relationships and Related Transactions".
The Company took further steps to solidify its position within the
biomaterials field by agreeing to acquire Inoteb. In October 1995, the Company
entered into an agreement (the "Inoteb Agreement") with 10 individuals, all
French nationals, pursuant to which the Company agreed to acquire from such
individuals an aggregate of 30,150 shares and 7497 convertible bonds
(collectively, the "Inoteb Securities") of Inoteb which, among other things,
owns certain patent rights to BioCoral's products. The shares and bonds of
Inoteb acquired represent 51.5% of the capital share of Inoteb and 86.67% of the
convertible bonds thereof. During the third quarter of 1996, the Company asked
for the conversion of all the Inoteb convertible bonds into shares of Inoteb and
the Company now owns 56% of the outstanding shares of Inoteb. The remaining
minority interest in Inoteb is owned by European financial institutions such as
Sofinnova S.A. and FCPR Soffinova Capital, both owned by Credit National of
Paris; SDR Bretagne, the official governmental development company for the
French region of Brittany; Jafco Saint-Honore I and II, owned by Compagnie
Financiere Ed. de Rothschild of Paris; Parquest Venture Partnership and Atlas
Venture Europe Fund B.V.
The consideration for the Inoteb Securities was initially to be an
aggregate of 1,035,292
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shares of the Company's common stock. In addition, the Inoteb Agreement provided
for the Company to confirm that (a) the first $10,000,000 of 3H's net profits
would be utilized to subscribe for additional Inoteb capital for Inoteb to use
for research and development; and (b) it would use its best efforts to raise an
aggregate of $15,000,000 on or before July 31, 1998 to be utilized for
capitalizing Inoteb. 3H has yet to realize any significant revenues and the
Company has not raised any additional funds for Inoteb's capitalization.
The Agreement was closed in escrow with a French notary in late October
1995 owing to the implications of the agreement for the Inoteb shareholders
under French law. The Company completed the acquisition of a 51.5% equity
interest in Inoteb on July 23, 1996 when the shares were released from escrow.
The number of shares given to the Inoteb shareholders was increased to reflect
the share dividend the Company had declared in December 1995.
Previously, on September 12, 1994, the Company had acquired a 51% interest
in the capital stock of Borgonuovo SIM S. A. (the "SIM"), an Italian corporation
with principal offices in Milan engaged in the brokerage and investment advisory
business. During the year ended December 31, 1995, this investment was written
off by the Company in its entirety. The Company also has another subsidiary,
IMMO Finance Distribution Limited, an Irish corporation ("IMMO Distribution"),
formed in April 1994. To date its only activity has been a passive investment in
PEMP, Inc., a Canadian mutual fund. During 1996, this investment was written off
by the Company in its entirety. See "Business - Discontinued Operations."
The US executive offices of the Company are temporarily located in care of
its counsel, Stein Riso Haspel & Jacobs LLP, 805 Third Avenue, New York 10022.
Its European office is located at 14 Quai du Seujet, 1201 Geneva, Switzerland.
The Company is presently seeking appropriate office space in New York City and
anticipates that it will require approximately 1000 square feet for such
offices.
BioCoral
BioCoral is a natural biomaterial produced from natural coral. Certain
chemical, physical and structural characteristics of coral are very similar to
that of human bone tissue. BioCoral is derived from three particular species of
coral which is naturally present in abundance. Like human bone tissue, BioCoral
is primarily (more than 97%) comprised of calcium carbonate. Porous and
resorbable, BioCoral is prepared in microgranules as well as in engineered
shapes according to specific indication. Due to its similarity to bone tissue,
BioCoral is resorbed by the body as new bone growth invades the BioCoral. The
principal current alternative to BioCoral is the utilization of autologous (from
the patient's own body) bone grafts. The use of autologous bone grafts requires
the patient to undergo one or more additional surgeries to harvest the bone
graft material. This is not always feasible due to the condition of the patient
or other contraindications, and must be shaped in a separate procedure to fit
the graft area.
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According to Inoteb, BioCoral has been used in over 130,000 patients,
principally in France and Italy. BioCoral was patented in France in 1979, in the
United States in 1982, and in Japan in 1989. Inoteb acquired the patent rights
to BioCoral from ANVAR/CNRS, the French National Center for Scientific Research,
a French governmental agency. Revenues from these operations have been realized
at the Inoteb level and, accordingly, were not part of the Company's 1995
operating data.
Clinical Applications
BioCoral has been used in various clinical applications. Current uses
include the following: (a) orthopedic surgery uses include spinal surgery,
tibial (shinbone) osteotomies, hip fractures, trephine (skull) hole replacement,
fracture repair and filling of bone cavities; (b) maxillocraniofacial surgery
and plastic surgery uses include reconstructive and cosmetic surgery; (c) oral
surgery uses include filling of bone defects due to loss of teeth or periodontal
disease.
BioCoral's crystalline structure is composed almost entirely of calcium
carbonate, with trace amounts of fluoride, strontium and magnesium. BioCoral is
highly porous, with one gram having a surface area greater than 1 square meter.
It is believed that this porosity and the chemical similarity of BioCoral to
bone tissue is conducive to new bone growth and resorption by the body. Because
BioCoral is resorbed, it can be combined with antimicrobials, anticancer agents
or other pharmaceuticals for slow release into bone tissue, resulting in an
advantage over autologous bone grafts.
Osteoporosis
Osteoporosis is a progressive bone disorder in which bone density
decreases, combined with increased bone brittleness and porosity, which
primarily affects post-menopausal women. Current preventive treatment for
osteoporosis includes estrogen drugs. Phase II clinical trials in Europe have
demonstrated the efficacy of BioCoral for local osteoporosis treatment in
rebuilding bone, particularly in combination with osteodensimatic screening. The
Company intends to raise capital to fund Phase III clinical trials, which will
be a prerequisite to human use in the United States. There can be no assurance
that any such funds will be raised, and the failure to raise such funds could
have a material adverse effect upon the Company.
Surgical Glue
Inoteb has developed an autologous fibrin adhesive glue with autologous
growth factors. This surgical glue is prepared using the patient's own blood, in
a closed system, eliminating immunological problems and the risk of blood-borne
disease transmission such as, for example, HIV. The surgical glue can be used
not only with BioCoral but also for the treatment of hemorrhage during surgery
and for wound healing in soft tissues. Inoteb is beginning clinical trials in
Europe of the surgical glue and expects to have the product ready for marketing
in Europe and elsewhere (but not the US) in 1998. The Company anticipates that
the initial clinical
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applications of the autologous glue will be in connection with facial and
reconstructive plastic surgery. Pursuant to its license agreement with Inoteb,
3H has the exclusive right to distribute the surgical glue outside France. The
world market segment for the surgical glue is estimated by Inoteb to be in
excess of $600 million. No assurance can be made that the Company will ever be
able to commercially exploit the surgical glue or, if commercially exploited,
that it will be successful.
On May 21, 1996, 3H entered into a requirements supply contract with
Intermedics Orthopedics of Denver, a subsidiary of Sulzer S.A. of Switzerland, a
major international medical products manufacturer. Pursuant to the agreement, 3H
agreed to supply all of such company's requirements of BioCoral products in
connection with Intermedics' proprietary bone growth factor. Intermedics' growth
factor, coupled with the Company's products, will be used in connection with
orthopedic surgical applications. Intermedics and BioCoral will move forward
promptly to begin clinical trials to obtain FDA approval of the products. No
assurance can be given as to the dollar value of this agreement, nor can there
be any assurance that it will be successful or lead to significant revenues.
Raw Materials and Manufacturing
The primary raw material used by the Company to manufacture BioCoral is
coral. The coral used in the Company's products is presently sourced from New
Caledonia, but is also found in abundance in wide areas of the Indian and
Pacific Oceans. The Company believes that its existing inventory of coral,
together with coral sources immediately available to it, are sufficient to meet
its present needs. To date, coral prices have been stable but no assurance can
be had that they will not rise. The Company is, however, unaware of any factors
which are likely to have a material adverse effect on the Company's ability to
obtain coral at a competitive price.
Manufacturing of BioCoral is done at Inoteb's facility in Saint Gonnery,
France. This facility, which covers approximately 350 square meters (3150 square
feet), has been ISO 9002 rated since August 1995 and recently passed an ISO
audit conducted by AFAQ, the French national quality assurance agency. On
October 25, 1996, Inoteb was granted, in addition to the ISO 9002 certification,
European Norms 46002 certification for the quality assurance system set up in
the manufacturing process of BioCoral and, on December 30, 1996, Inoteb was
granted the EC certificate allowing sales of BioCoral throughout the European
Community. The Company believes this facility is adequate to service the
Company's present and immediately anticipated needs.
Competition
BioCoral. The Company's BioCoral product competes with (i) natural bone
obtained from autograft procedures and allograft sources and with (ii) two other
synthetic bone products, one marketed in the United States by Interpore, Inc. a
publicly-held company with significantly
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greater resources and distribution capabilities than the Company, and another
that was approved by the FDA in May 1993. Autograft and allograft bone have been
used for graft material for a much longer period of time than BioCoral and
similar materials, and in order to increase its future sales of BioCoral, the
Company will have to demonstrate to the medical community the surgical and
patient advantages, safety, efficacy, cost effectiveness and clinical results of
BioCoral.
The Company believes that BioCoral provides an attractive alternative to
autograft and allograft bone graft materials. In an autograft procedure, bone
material is first harvested from another part of the patient's skeleton and
then, in a second procedure, grafted to the site of the bone deficit. The
harvesting procedure increases operating time and expense, and can lead to
complications such as infection, excessive blood loss, chronic pain and
deformity. When an autograft is not feasible or desirable, allograft bone,
typically obtained from a cadaver, can be used. In order to maintain mechanical
and biological properties, some allograft bone is not sufficiently sterilized to
avoid all risks of disease transmission. Therefore, unlike BioCoral, which is a
sterile and biocompatible material, allograft bone carries the risks of implant
rejection and the transmission of infections agents such as hepatitis and HIV.
The use of BioCoral entails none of these risks and provides clinical results
comparable to those of autograft material.
In May 1993, a second bone graft substitute was approved by the FDA. This
product consists of hydroxyapatite-calcium phosphate and bovine collagen, which
must be mixed with patients' own bone marrow. The Company believes that this
three-part system is more difficult to use due to the mixing process and has
inferior mechanical qualities. It also requires refrigeration, has a shorter
shelf life and raises the risk of adverse reaction in patients allergic to
bovine collagen. This system is marketed by Zimmer, Inc., a subsidiary of
Bristol-Myers-Squibb, a competitor with significantly greater resources and
distribution capabilities than the Company.
The Company is not aware of the degree to which either Zimmer or
Interpore's products have penetrated the European or Asian markets, but their
significant market presence in the United States and their greater resources
pose a significant obstacle to the Company's ability to successfully market its
products in the United States should it ultimately obtain FDA approval of its
products.
Dental Implant Market. The Company competes with many businesses in the
production and distribution of dental implant systems for rehabilitation of
partially and totally edentulous patients. These businesses compete primarily on
the basis of product performance and price, as well as customer loyalty and
service.
Oral and Maxillofacial Market. BioCoral competes with autograft, allograft
and xenograft, as well as non-porous hydroxyapatite products for repair or
reconstruction of oral and maxillofacial bone structures. In addition, this
product competes with silicone implants for maxillofacial applications.
Companies selling competitive products sometimes also sell dental implants, so
bundling these products is often a strategy. All of these businesses compete
primarily on the basis of product performance and price, as well as on customer
loyalty and service. A
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number of the Company's competitors have substantially greater resources, larger
market share and greater research and development capabilities than the Company
and may, therefore, be expected to compete aggressively and successfully in the
markets for the Company's dental implant products.
Management believes that the Company's products are superior to its
competitors' products. The Company has begun to make 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 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.
Governmental Regulation
BioCoral has been approved for marketing in more than 15 countries in
Europe, Korea, South Africa, Canada and Australia. BioCoral has been approved
for reimbursement by the Tarif Interministeriel des Prestations Sanitaires, the
French national health services agency.
The Company's products are subject to significant government regulation in
the United States and other countries. To test clinically, and to produce and
mass market products for human diagnostic and therapeutic use, the Company must
comply with mandatory procedures and safety standards established by the Food
and Drug Administration ("FDA") and comparable state and foreign regulatory
agencies. Typically, such standards require that products be approved by the
government agency as safe and effective for their intended use before being
marketed for human applications. The approval process is expensive and
time-consuming, and no assurance can be given that any agency will grant
approval of the Company's products or that the length of time the approval
process will take will not be extensive. No clinical testing on humans may be
undertaken in the United States without first obtaining an Investigational
Device Exemption ("IDE") from the FDA.
There are two principal methods by which FDA approval may be obtained to
market regulated products in the United States. One method is to seek FDA
approval through a premarket notification filing under Section 510(k) of the
Food, Drug and Cosmetics Act. Applicants under the 510(k) procedure must prove
that the device for which approval is sought is substantially equivalent to
devices on the market before the Medical Device Amendments of 1976 or devices
approved after the 510(k) procedure. The review period for a 510(k) application
is 90 days from the date of filing the application; if not rejected, within such
90 days, applications are deemed approved.
The alternative method is to obtain premarket approval ("PMA") from the
FDA. Under the PMA procedure, the applicant must obtain an IDE before beginning
the substantial clinical testing required to determine the safety, efficacy and
potential hazards of the products. The
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review period under the PMA procedure may last for several years.
The FDA also imposes requirements on manufacturers and sellers of products
under its jurisdiction, such as labelling, manufacturing practices, record
keeping and reporting. There can be no assurance that appropriate approvals from
the FDA will be obtained for sales of any of the Company's products in the
United States. Such failure could have a materially adverse impact upon the
Company.
Discontinued Operations
Cabestan / Bensenville Real Estate Operations. On March 25, 1994 the
Company acquired all of the issued and outstanding capital stock of Cabestan.
The Company acquired the stock of Cabestan for a cash purchase price of
approximately $5,544,000. The Company financed the acquisition through a
combination of obtaining a $1,050,000 short term loan and through capital raised
in a Regulation S offering to non-US investors, which offering had its initial
closing on March 23, 1994 with respect to 630,000 shares of Common Stock with
net proceeds to the Company of $4,536,000. The short term loan bore interest at
the rate of 5% per annum and was repaid in full by the Company prior to its
September 30, 1994 due date out of the proceeds from the Company's Regulation S
Offering. The Company raised an aggregate of $7,022,160 in net proceeds to the
Company in its Regulation S Offering concluded in December 1994.
Concurrently with the Company's acquisition of the stock of Cabestan,
Cabestan acquired the following assets from Bensenville Industrial Park, L.P.
("BIP") for the following considerations: (i) Building #3 in the Bensenville
Industrial Park located adjacent to Chicago's O'Hare Airport ("Building #3") for
a purchase price of $3,631,210 in cash and the assumption of an outstanding
mortgage obligation on this property of $1,876,878; (ii) a 100% beneficial
ownership interest in Building #12 in the Bensenville Industrial Park ("Building
#12") for a purchase price of $1,642,790 in cash and the assumption of an
outstanding mortgage obligation on this property of $2,999,120 and (iii) a 9.3%
limited partnership interest in Bensenville Associates Limited, an Illinois
limited partnership ("BAL") (the "Limited Partnership Interest"), for a purchase
price of $270,000. Riccardo Mortara, a director and the Chief Executive Officer
of the Company, is an affiliate of BIP. See Item 12 - "Certain Relationships and
Related Transactions". Building #3 is used as a bulk warehouse/distribution
center and Building #12 is used for office space and as a service center. BAL,
the former owner of the entire Bensenville Industrial Park consisting of 14
buildings in the Chicago/O'Hare Airport area (the "Bensenville Industrial
Park"), of which Building #3 and Building #12 were a part, is currently the
owner of approximately 12.5 acres of undeveloped land in the Bensenville
Industrial Park. Building #3 and Building #12 are collectively referred to
herein as the "Bensenville Properties." This property was sold in February 1997.
See Item 2 - "Description of Property".
The opportunity to acquire Cabestan was presented to the Company by Dremer
Holding, Ltd. ("Dremer"), through its President, Riccardo Mortara, who is also
the Company's Chief
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Executive Officer and a director. Mr. Mortara is the sole officer, director and
shareholder of Dremer. Also as part of the acquisition of Cabestan, Dremer
received 1,000 shares of the Series A Preferred Stock of the Company. The Series
A Preferred Stock entitled Dremer to elect 60% of the members of the Board of
Directors of the Company and effectively afforded Mr. Mortara, after the
acquisition of Cabestan, with effective control of the Company. By January 1997,
all such Series A Preferred Stock was converted, together with a cash infusion
into the Company of $1,000,000 , into 1,000,000 shares of the Company's common
stock.
The SIM. On May 31, 1994 the Company entered into a non-binding letter of
intent (the "Letter of Intent") to acquire a 51% ownership interest in
Borgonuovo SIM S.p.A. (the "SIM"), an Italian company with principal offices
located in Milan engaged in the brokerage and asset management business. A SIM
is the Italian equivalent of a U.S. securities brokerage and investment advisory
firm. The purchase price for the 51% interest in the SIM was approximately
$2,000,000 (US). Although the Letter of Intent contemplated the purchase of the
full 51% interest in the SIM at one time at the Closing (as defined below), the
Company acquired an aggregate of 14% of the issued and outstanding capital stock
of the SIM, in increments, between the execution of the Letter of Intent and the
execution of a definitive purchase agreement, for a pro-rata portion of the
approximately $2,000,000 (US) purchase price for the full 51% interest. On
September 12, 1994, there was a simultaneous execution and closing (the
"Closing") of a Stock Purchase Agreement, by and among the Company, Kialu
S.r.l., an Italian company (the "SIM Stockholder") and Alessandro Bassetti
("Bassetti") , an individual residing in Milan (the "Stock Purchase Agreement")
with respect to the acquisition by the Company of the additional 37% interest in
the SIM for the balance of the $2,000,000 U.S. purchase price, so that on
September 12, 1994 the Company became the owner of a 51% interest in the SIM.
The Stock Purchase Agreement granted to the SIM Stockholder the right to put the
remaining 49% interest in the SIM (which includes the shares owned by Mr.
Bassetti's uncle) to the Company from and after the three year anniversary date
of the Closing. The put option entitles the SIM Stockholder to put the 49% of
the stock of the SIM to the Company at a purchase price of 49% of the net book
value of the SIM at the time of the exercise of the put option.
Owing to disagreements with management of the SIM and the SIM's poor
performance, this investment was written off in its entirety during 1995. The
Company is presently evaluating its options with respect to proceeding against
the SIM Shareholder.
Investment in PEMP - In September 1994 the Company, through IMMO
Distribution, made a passive investment of approximately $600,000 in PEMP
Investment Advisers, Inc. ("PEMP"), a company with offices in Montreal which
offers financial and tax planning services to private individuals and entities.
For its initial investment in PEMP, IMMO Distribution acquired a PEMP "network"
consisting of a randomly chosen group of PEMP clients, and was entitled to
receive a percentage of the annual financial management and other fees paid to
PEMP by the clients included in IMMO Distribution's "network." The investment in
PEMP's network was converted by IMMO Distribution into a loan in December 1994
with a variable rate of interest. This loan was converted into 800,000 shares of
the preferred stock of PEMP in June 17, 1995,
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which preferred shares are entitled to an annual cumulative fixed dividend at
the rate of 10% per annum. Although Mr. Mortara has had prior business dealings
with PEMP, neither Mr. Mortara, nor any officer or director of the Company, is
an affiliate of PEMP. During 1996, certain parties affiliated with PEMP had
agreed to redeem all such shares for the amount of $600,000, which has not been
accomplished as of the date of this Report. Accordingly, effective August 1,
1996, the Company wrote down this investment in its entirety. Nonetheless, the
Company does anticipate liquidating this investment before December 31, 1997,
although there can be no assurance that any such sale may be made nor that the
Company will receive the full redemption amount originally promised.
Financings
The Regulation S Offering
The Company conducted an offering of its Common Stock outside of the
United States pursuant to Regulation S promulgated under the Securities Act of
1933 from March 1994 through December 1994 (the "Regulation S Offering"). In its
Regulation S Offering, the Company sought to raise up to $40,000,000 through the
sale of up to 5,000,000 shares of its Common Stock at a price of $8.00 per
share. An aggregate of 975,300 shares of Common Stock were sold in the
Regulation S Offering raising aggregate net proceeds for the Company of
$7,022,160.
The shares offered in the Regulation S Offering were offered primarily
through Societe Financiere Privee, S.A., a financial services company located
in, and organized under the laws of, Switzerland. Mr. Mortara, the Company's
Chief Executive Officer and a non-U.S. citizen, requested SFP to offer the
shares in the Regulation S Offering to certain of its customers. In addition,
Mr. Mortara offered the shares in the Regulation S Offering on behalf of the
Company directly to persons and entities which are among his personal and
business acquaintances. The Company paid a commission on all shares sold in the
Regulation S Offering by non-affiliates of the Company of 10% or $0.80 per share
sold in the offering. The shares which were offered through Mr. Mortara or his
affiliates were sold at a price of $7.20 per share and no commissions were paid
to Mr. Mortara or his affiliates with respect to such offers or sales. Most of
the sales in the Regulation S Offering were made to Societe Financiere Privee,
S.A., which purchased such shares as the nominee holder for approximately 166
persons and entities. Mr. Mortara is not an affiliate of Societe Financiere
Privee, S.A., but does have a pre-existing long-term business relationship with
such entity.
The Regulation D Offering
The Company conducted an offering of units of its debt and equity
securities in accordance with Regulation D promulgated under the Securities Act
of 1933 from June 1994 through January 31, 1995 (the "Regulation D Offering")
primarily to raise funds needed by the Company to acquire the SIM. In the
Regulation D Offering, the Company sought to raise up to $2,500,000 by the sale
of up to 50 Units (the "Units") at a price of $50,000 per Unit, each Unit
11
<PAGE>
consisting of one $50,000 six month note bearing interest at a rate of 12% per
annum (the "Reg D Notes") and 1,250 shares of the Common Stock of the Company,
$.001 par value per share (the "Common Stock"). The Company sold an aggregate of
39.5 Units in the Regulation D Offering, with an aggregate of $1,975,000 in
proceeds for the Company raised in such offering in consideration for the
issuance of $1,975,000 in face amount of the Reg D Notes and 49,375 shares of
Common Stock. Baraban Capital Corporation ("BCC"), an investment banking firm
and former affiliate of the Company, guaranteed payment of principal and
interest on the Reg D Notes. Baraban Securities Incorporated, a broker-dealer
and former affiliate of the Company ("BSI") acted as the broker-dealer with
respect to the offering of the Units. In consideration for such activities BSI
received a sales commission of 10% on the Units sold and a nonaccountable
expense allowance equal to 3% on the Units sold. BSI also received 500 shares of
Common Stock of the Company for each Unit sold in the Regulation D Offering, or
an aggregate of 19,750 shares of Common Stock. See Item 12 - "Certain
Relationships and Related Transactions."
An aggregate of $1,775,000 in principal amount and $53,250 of accrued but
unpaid interest became due and payable on the Reg D Notes on April 4, 1995, and
the Company was unable to pay such amounts, and accordingly, defaulted in the
repayment of the Reg D Notes. Societe Financiere du Seujet, an affiliate of
Riccardo Mortara, the Chief Executive Officer and a director of the Company,
agreed to deliver to the holders of the Reg D Notes which have become due and
payable, in exchange for the surrender and cancellation of such Reg D Notes,
one-half of the principal amount due on such Reg D Notes, all of the accrued and
unpaid interest on such Reg D Notes through April 4, 1995 and a new promissory
note for one-half of the original principal amount on such Reg D Notes ("New
Notes"). During the period from April 4, 1995 through June 30, 1996, an
additional 60% of the principal amount and all accrued interest through June 30,
1996 was paid on the New Notes. In May 1997, following the sale of the
Bensenville Properties, the Company arranged with its counsel to pay off the
full principal balance of the New Notes together with all accrued interest
through such date and escrowed with counsel sufficient funds to effectuate such
payment.
Employees
The Company currently has no employees other than its officers and
directors who devote as much time as they believe necessary to carry out the
affairs of the Company. Inoteb currently has 12 employees, all of whom are full
time. Nasser Nassiri, a director of the Company, has been rendering services on
a full-time basis to Inoteb since January 1, 1997, in an effort to help it
streamline operations, cut costs and strengthen management. Mr. Nassiri has not
received compensation for such services.
Item 2. Description of Property.
On October 15, 1996, Cabestan entered into an agreement with Brooklyn
Roads, Ltd., an
12
<PAGE>
Ontario corporation ("Buyer") based in Toronto pursuant to which Buyer agreed to
acquire the fee interest in the Bensenville Properties for an aggregate
consideration of $6,800,000. The consideration for the property was to be
payable in part by the assumption of an existing first mortgage loan
("Mortgage") on the property in the approximate amount of $4,750,000, and the
balance in cash at closing. There was no prior relationship between the Company
and Buyer. The agreement was amended on January 30, 1997 (the "Amendment") to
provide for a reduction in the purchase price to $6,675,000 and to add certain
minimum rent guarantees. In February 1997, Buyer's rights under the agreement,
as amended, were assigned to Carbrook LLC, a Minnesota limited liability
company.
The transaction closed on February 18, 1997. The total consideration for
the sale was $6,675,000. The purchase price was funded partly in cash and partly
by assumption of the Mortgage whose balance at the time was $4,747,982. Of the
cash proceeds of the sale (approximately $1,515,000) an aggregate of $442,423
were escrowed with the title insurance company pending issuance of three letters
of credit, two (in the aggregate amount of $430,000) to secure certain rent
guarantee obligations set forth in the Amendment and one which replaces a letter
of credit previously issued to secure one of the leases on the Bensenville
Properties. Not included in the sale was Cabestan's 9.3% special limited
partnership interest in BAL. BAL, the former owner of the Bensenville Industrial
Park, is now the owner of three parcels of undeveloped land including a 5-acre
tract called Bensenville #16 and two additional parcels of 4.9 and 2.76 acres.
The Bensenville Properties sold to Carbrook comprise an aggregate of
158,791 square feet of office and warehouse space on 10.33 acres, and are part
of the 14 building Bensenville Industrial Park located in Bensenville, Illinois
near Chicago's O'Hare Airport. The industrial park contains an aggregate of
1,967,698 square feet of rentable space on 125 acres and was developed by
Trammel Crow Company. In December 1993, 12 of the 14 buildings in the
Bensenville Industrial Park were sold by BAL to a single purchaser, and the
remaining two buildings, the Bensenville Properties, were distributed to BIP as
a partnership distribution in lieu of cash. BIP ultimately transferred such
buildings to Cabestan.
General Office Space
In addition to the above, the Company maintains executive offices at 14
Quai du Seujet, Geneva, at the offices of SFS. SFS has provided this office
space on a rent-free basis. The Company maintains its US office, on a temporary
basis, in care of its US counsel and is actively seeking alternate office space
in New York City. The Company anticipates needing approximately 1000 square feet
of office space in New York City.
Item 3. Legal Proceedings.
13
<PAGE>
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 Annual 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
report is to be filed by the Company no later than August 15, 1997.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
At December 31, 1996 there were 7,242,722 shares of the Company's Common
Stock issued and outstanding. A significant portion of the outstanding shares of
the Company are subject to resale restrictions and, unless registered under the
Securities Act of 1933 (the "Act"), or exempted under another provision of the
Act, will be ineligible for sale in the public market. Sales of substantial
amounts of the Common Stock of the Company which are presently restricted in the
public market could adversely affect prevailing market prices.
The following table sets forth information regarding the high and low bid
and asked price for the Company's common stock as reported by NASDAQ on the
Electronic Bulletin Board. Such prices no not necessarily reflect actual
transactions and do not include retail mark-up, mark-down or commissions. The
prices set forth below are per share.
- --------------------------------------------------------------------------------
Quarter High Bid Low Bid High Ask Low Ask
- --------------------------------------------------------------------------------
March 31, 1996 9 6.5 10 6.875
- --------------------------------------------------------------------------------
June 30, 1996 8.25 6.75 8.875 7.125
- --------------------------------------------------------------------------------
14
<PAGE>
- --------------------------------------------------------------------------------
September 30, 8.25 6.75 8.375 7
1996
- --------------------------------------------------------------------------------
December 31, 7.25 4.25 7.75 4.75
1996
- --------------------------------------------------------------------------------
Holders
As of December 31, 1996 there were approximately 111 holders of record of
the shares of the Company's common stock.
Dividends
The Company has paid no cash dividends on its equity securities to date
and does not anticipate the payment of cash dividends on its equity securities
in the near future. The Company paid a dividend of one share of its common stock
for each three shares owned on December 18, 1995 and paid, in December 1996,
another stock dividend of one share for each three shares owned as of November
6, 1996.
Item. 6. Management's Discussion and Analysis of Business and Results of
Operations
This Management's Discussion and Analysis of Financial Condition and
Results of Operations, as well as several other parts of this Annual Report on
Form 10-KSB, contain forward-looking statements and information that involve
significant risks and uncertainties. The Company's actual results could differ
materially from those anticipated by such forward-looking statements and
information. Factors that may cause such differences may not be foreseeable by
the company at this time. This Management's Discussion and Analysis of Financial
Condition and Results of Operations should be read in conjunction with the
Company's consolidated financial statements and notes thereto included elsewhere
herein.
Results of Operations
Total revenues from continuing operations for the year ended December 31,
1996 ("FY 1996") were $325,071 as opposed to $22,516 for the year ended December
31, 1995 ("FY 1995"). This increase was due principally to the effect of the
inclusion of Inoteb from July 1, 1996, the effective date of the acquisition.
The net loss for FY 1996 was $1,660,697 as opposed to $4,349,611 in FY 1995.
This was due to the presence in the FY 1995 loss of two discontinued items, the
write down of the Company's entire interest in the SIM ($1,925,995) and its
partial write down ($1,626,186) of its interest in the Cabestan properties.
Excluding these discontinued items and the non-recurring write down during FY
1996 of the Company's investment in PEMP ($600,000), the loss from continuing
operations for FY 1995 would be $953,045 as compared to $1,073,903 for FY 1996.
Operating expenses increased significantly (by $540,000) in FY 1996 due to the
consolidation of
15
<PAGE>
Inoteb's expenses from July 1, 1996, the effective date of the acquisition. The
pro forma loss from continuing operations as though Inoteb had been acquired at
the beginning of FY 1995 would have been $2,172,028 (FY 1996) and $427.269 (FY
1995).
Financial Condition, Liquidity and Capital Resources
The Company's liquidity was diminished somewhat during FY 1996 as opposed
to FY 1995, but rebounded significantly in early 1997. The Company's cash
position dropped from $429,081 at December 31, 1995 to $9,142 at December 31,
1996, primarily as a result of the use of cash to pay down accounts payable
(accounts payable having dropped from $1,835,462 to $893,970 as of such dates).
Despite the consolidation of Inoteb and its payables, the Company reduced total
current liabilities from $2,438,453 at December 31, 1995 to $1,666,570 at
December 31, 1996, a reduction of $771,883. The Company's liquidity was helped
by the infusion of an additional $1,000,000 into the Company (through January
1997) in connection with the conversion of its Series A Preferred Stock and,
more significantly, in February 1997 when the Company sold the Bensenville
Properties and realized net cash proceeds of approximately $1,515,000. Following
such sale, the Company escrowed with its counsel approximately $575,000 in order
to redeem in full its obligations on the Reg D Notes. Management believes that
the proceeds of such sale, net of amounts utilized to pay the Reg D Notes, will
be sufficient to fund the Company's operations through December 31, 1997.
The Company has, however, significant cash needs on an ongoing basis
during the short and medium term, resulting primarily from the Company's
obligations to raise funds for Inoteb's research and development and its
obligation to use 3H's profits to do so. The Company has received indications of
interest from certain European financial institutions for substantial
investments in the Company but has not yet entered into any agreement therefor.
No assurance can be had that these investments will be made. The Company's
working capital at the end of FY 1996 amounted to $1,088,879 as opposed to a
deficit of $2,007,987 for FY 1995.
Current Plans of the Company
The Company intends to focus on the marketing and development of its
BioCoral and related products. To obtain approval for the sale of such products
in the United States will require a significant expenditure of capital over a
long period of time. The Company anticipates realizing some revenues from the
sale of BioCoral products in 1997, and will also enable Inoteb to utilize some
of the Company's resources to help promote sales of the products. It is hoped
that such revenues can also be applied to the costs of obtaining FDA approval
for the products. The Company has entered into arrangements with two entities,
each of which is significantly better capitalized than the Company, to share
certain of such costs; however, there can be no assurance that such approval
will be obtained or that the Company will have sufficient funds to obtain such
approval, third party participations notwithstanding. If such is the case, the
Company will focus on the European market and will explore other markets as
well.
16
<PAGE>
Specifically, the Company intends to continue to explore a variety of
potential applications for its products on a number of different fronts. First,
regarding the autologous glue, the Company intends to clinically test the
product with a number of well-known plastic surgeons utilizing same in their
practices in Europe. The Company anticipates that the initial clinical uses will
be in the facial and reconstructive plastic surgery areas. Testing is expected
to commence later in 1997, with a view towards beginning commercial development
of the product in Europe during 1998. Second, regarding osteoporosis, the
Company intends to continue expanding the osteodensimatic screening and surgical
implants, the results of which have been highly successful. The Company intends,
through the use of a large European-based clinic, to expand the clinical trials
on a wider group of patients. It is anticipated that, if clinically proven, this
unique combination will alter the current methodology of treatment of
osteoporosis. Third, the Company will continue to develop, through its supply
contracts with third parties, the potential for use of its product in
conjunction with growth factor with a view toward ultimate FDA approval of same
for sale in the American market.
Special Note Regarding Forward-Looking Statements
Statements contained in various portions of this Annual Report on Form 10-K
(including, without limitation, this Item 6 and Item 1) regarding, among other
things, the dates upon which the Company anticipates commencing clinical trials
for certain of its products or receiving certain revenues or proceeds 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 revenues, 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, timeliness in payment by
the parties with which it deals, 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 and the Company's
ability to recognize revenue is subject to both ordinary and extraordinary
business risks. Undue reliance should not be placed on the dates on which the
Company anticipates recognizing revenues or 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.
Item 7. Financial Statements.
Attached.
Item 8. Changes In and Disagreement with Accountants on Accounting and
Financial Disclosure :
None.
17
<PAGE>
PART III
Item 9. Directors. Executive Officers, Promoters and Control Persons; Compliance
With Section 16 (a) of the Exchange Act
The following is certain information with respect to directors, executive
officers and key employees of the Company as of June 30, 1997:
Riccardo Mortara, Age 50, Chairman of the Board, Chief Executive
Officer and a Director
Nasser Nassiri, Age 34, Secretary, Treasurer and a Director
Each of such persons was elected or appointed for a one-year term to serve
and hold office until their respective successors are elected or appointed.
Riccardo Mortara is the general manager and director of Societe Financiere
du Seujet, Geneva, Switzerland, a company that provides portfolio management and
financial services to banks, corporations and high-net-worth individuals
primarily in Europe. He is also president of Development Bancorp, Ltd., a US
publicly-traded investment banking concern. From 1989 to 1991, Mr. Mortara
served as the president of a financial services company listed on the Alberta
Stock Exchange. Between the years 1984 and 1991, Mr. Mortara was a director of a
Geneva private portfolio management company of which he is still a co-owner. Mr.
Mortara serves on the boards of five financial services companies. He holds a
Masters of Engineering degree from the Polytechnical University of Turin, Italy.
Nasser Nassiri is and has been for more than the last five years, a
private investor, financial advisor to family investment companies and
pharmaceutical businesses in the Middle East, and a director of various publicly
and privately held companies worldwide. Mr. Nassiri is based in Paris. In
addition, Mr. Nassiri serves as Managing Director of Starratt Resources
(Clarendon) Ltd., a Canadian corporation, and acts as financial consultant to
its parent corporation, Starratt Resources Ltd., a publicly-held Canadian
corporation involved in the production of minerals. From 1994 until 1995, Mr.
Nassiri was also a director of Central Asia Goldfields, a publicly-held Canadian
metals mining company. From 1990 until 1994, Mr. Nassiri was a director of
Contact World Paris, a privately-held international electronics company. From
1983 to 1987, Mr. Nassiri was a director of Prak Management, a privately-held
Middle East - based oil and gas holding company.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than ten
percent of the Company's Common Stock to file with the Securities Exchange
Commission initial reports of stock ownership and reports of changes in stock
ownership. Due to administrative oversight, Mr. Mortara was late in
18
<PAGE>
reporting, during four months, certain changes in beneficial ownership which
occurred in 1996. Also due to administrative oversight, Mr. Nassiri was late in
reporting his initial statement of beneficial ownership, and two statements of
changes in such position during 1996.
Item 10. Executive Compensation
Directors currently do not receive compensation for their duties as
directors.
No compensation has been paid by the Company for the services of its
officers and directors to date. Compensation of the Company's management in the
future will be determined by the Board of Directors. The Board has, however,
agreed to grant each director reimbursement up to $75,000 per annum for expenses
actually incurred by them in connection with their service as such. During 1996,
the Company reimbursed Mr. Mortara an aggregate of $432,061 for expenses
theretofore incurred by him during 1994 and 1995. In addition, there is no
prohibition on advances being made by the Company to its officers and directors
although no such advances have been made to date. Management is not currently
aware of any circumstances under which it would institute a policy of
prohibiting advances from being made to its officers and directors. The
stockholders of the Company will not have the opportunity to vote on or approve
such compensation. There is no maximum dollar amount of compensation that may be
paid to management.
On June 10, 1996, the Company granted to each of Riccardo Mortara and
Nasser Nassiri, options for each of them to purchase up to 125,000 shares of the
Company's common stock at an exercise price of $7.75 per share. The
consideration for the grant of such options was their continued service as
directors of the Company. The options are now exercisable to purchase 166,250
shares (each) at $5.82 per share. The options are exercisable at any time during
the five year period following their grant. The option exercise price was the
market price of the shares of the Company's common stock on the date of grant.
On December 31, 1996, the Company granted to each of Riccardo Mortara and
Nasser Nassiri, options for each of them to purchase up to 325,000 shares of the
Company's common stock at an exercise price of $3.75 per share. The
consideration for the grant of such options was their continued service as
directors of the Company. The options are exercisable at any time during the
five year period following their grant. The option exercise price was below the
market price of the shares of the Company's common stock on the date of grant.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth information, as of January 31, 1997,
relating to the beneficial ownership of the Company's Common Stock by those
persons beneficially holding more than 5% of the Company's Common Stock, by the
Company's directors and executive officers, and by all of the Company's
directors and executive officers as a group. Unless otherwise
19
<PAGE>
indicated, the address for each person listed below is in care of the Company.
- --------------------------------------------------------------------------------
Name and Address Amount and Nature of Percent of Class
Beneficial Ownership
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Riccardo Mortara 1,474,250 (1) 19.9
- --------------------------------------------------------------------------------
Nasser Nassiri 491,250 (2) 6.6
- --------------------------------------------------------------------------------
All Officers/Directors as a 1,965,500 26.5
Group (2 persons)
- --------------------------------------------------------------------------------
(1) Excludes 125,805 shares owned by Societe Financiere du Seujet, an affiliate
of Riccardo Mortara, as nominee. Mr. Mortara disclaims any beneficial ownership
of any such shares. Includes 491,250 immediately exercisable options and 983,000
shares owned by Ofinco, S.A., a Panamanian corporation owned by Mr. Mortara. ***
(2) Includes 491,250 immediately exercisable options.
***As of March 29, 1996, Riccardo Mortara, through Ofinco S.A., the
assignee of Dremer, owned 1000 shares of the Company's Series A Preferred Stock
representing all such outstanding shares. On March 29, 1996 the Board of
Directors of the Company agreed to a proposal by Ofinco to convert all such
preferred shares to 1,000,000 common shares, conditioned upon Ofinco infusing an
additional $1,000,000 into the Company. Such conversion was effectuated in its
entirety by January 1997.
Item 12. Certain Relationships And Related Transactions.
During 1996, the Company reimbursed Riccardo Mortara, its Chairman and a
director, an aggregate of $432,061 for expenses theretofore incurred by him in
connection with the Company's business. In addition, during 1996, the Company
granted stock purchase options to each of Riccardo Mortara and Nasser Nassiri.
See Item 10 - "Executive Compensation".
The Company acquired 3H from two entities which are clients of Societe
Financiere du Seujet, the financial services company of which Riccardo Mortara,
a director of the company and its Chairman, is the owner. Mr. Mortara did not
receive any compensation in connection with such acquisition, and Mr. Mortara
disclaims any beneficial ownership of either of such entities or of any of the
Company's securities owned by such entities. See Item 1 - "Business Background".
20
<PAGE>
A company owned and controlled by Riccardo Mortara received 1,000 shares
of the Series A Preferred Stock of the Company for services rendered by it to
the Company. Services rendered included the negotiation and structuring of the
acquisition of the Bensenville Properties by Cabestan, and the negotiation and
structuring of the acquisition by the Company of Cabestan. At various times
through January 1997, all such shares of Series A Preferred Stock were converted
into shares of common stock. See "Business- Discontinued Operations".
There are no arrangements, agreements or understandings between
non-management shareholders and the Company's management under which
non-management shareholders may directly or indirectly participate in or
influence the management of the Company's affairs. There are no arrangements,
agreements or understandings pursuant to which non-management shareholders have
agreed to exercise their voting rights to continue to elect the current
directors to the Company's Board of Directors.
PART IV
Item 13. Exhibits
(a) See Index to Exhibits. The Exhibits therein listed and attached hereto
and the Exhibits therein incorporated by reference are filed as part of this
report.
(b) Reports on Form 8-K. -- May 23, 1996 and October 15, 1996.
21
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
I N D E X
PAGE
----
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS F-2/3
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995 F-4
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995 F-5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995 F-6/7
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995 F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-9/22
* * *
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders
BioCoral, Inc.
We have audited the accompanying consolidated balance sheets of BIOCORAL, INC.
(a Delaware corporation) AND SUBSIDIARIES as of December 31, 1996 and 1995, and
the related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
1996 financial statements of Inoteb SA, a 56%-owned subsidiary, which statements
reflect total assets of $1,080,000 as of December 31, 1996 and loss from
continuing operations of $772,000 for the period from July 1, 1997 (date of
acquisition) through December 31, 1996. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for Inoteb SA as of December 31, 1996 and for
the period from July 1, 1997 through December 31, 1996, is based solely on the
report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of BioCoral, Inc. and Subsidiaries as
of December 31, 1996 and 1995, and their results of operations and cash flows
for the years then ended, in conformity with generally accounting principles.
J.H. COHN LLP
Englewood Cliffs, New Jersey
June 18, 1997
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders
Inoteb SA
We have audited the consolidated balance sheet of INOTEB SA (a French
corporation) AND SUBSIDIARY as of December 31, 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the period from July 1, 1996 (the effective date of the Company's acquisition by
BioCoral, Inc.) to December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Inoteb SA and
Subsidiary as of December 31, 1996, and their results of operations and cash
flows for the period from July 1, 1996 to December 31, 1996, in conformity with
generally accounting principles in the United States.
CONSULTAUDIT S.A.
Paris, France
May 31, 1997
F-3
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS 1996 1995
------------ ------------
Current assets:
Cash $ 9,142 $ 429,081
Accounts receivable, net of allowance for
doubtful accounts of $261,300 153,700
Inventories 251,100
Other current assets 202,500 1,385
Net assets of discontinued operations 2,139,007
------------ ------------
Total current assets 2,755,449 430,466
Property and equipment, net of accumulated
depreciation of $98,100 226,936
License fees, net of accumulated amortization
of $160,956 and $61,906 1,324,794 1,423,845
Investment in nonmarketable securities 600,000
Net assets of discontinued operations 2,125,802
Goodwill, net of accumulated amortization of
$16,000 153,984
Other assets 24,412 1,542
------------ ------------
Totals $ 4,485,575 $ 4,581,655
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 255,100
Notes payable 517,500 $ 517,500
Accounts payable and accrued liabilities 893,970 1,835,462
Payables to related parties 85,491
------------ ------------
Total current liabilities 1,666,570 2,438,453
Long-term debt, net of current portion 786,500
------------ ------------
Total liabilities 2,453,070 2,438,453
------------ ------------
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 12,080,191 9,394,020
Accumulated deficit (8,917,429) (7,256,732)
Unearned compensation (1,137,500)
------------ ------------
Total stockholders' equity 2,032,505 2,143,202
------------ ------------
Totals $ 4,485,575 $ 4,581,655
============ ============
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
------------ ------------
Revenues:
Sales $ 250,300
Other income 74,771 $ 22,516
------------ ------------
Totals 325,071 22,516
------------ ------------
Operating expenses:
Cost of sales 142,300
Research and development 297,600
Interest 114,101 440,647
Depreciation of property and equipment 98,100
Professional fees 294,708 348,215
Other operating expenses 569,390 186,699
------------ ------------
Totals 1,516,199 975,561
------------ ------------
Loss before other expenses (credits) (1,191,128) (953,045)
Other expenses (credits):
Loss on disposal of investment in
non-marketable securities (600,000)
Minority interest in loss of subsidiary 117,225
------------ ------------
Loss from continuing operations (1,673,903) (953,045)
------------ ------------
Discontinued operations:
Real estate:
Income from operations 213,206 155,615
Loss on disposal (200,000) (1,626,186)
------------ ------------
13,206 (1,470,571)
Brokerage:
Loss on disposal (1,925,995)
------------ ------------
Income (loss) from discontinued operations 13,206 (3,396,566)
------------ ------------
Net loss $ (1,660,697) $ (4,349,611)
============ ============
Loss per common share:
Loss from continuing operations $ (.29) $ (.38)
Loss from discontinued operations (1.35)
------------ ------------
Net loss per common share $ (.29) $ (1.73)
============ ============
Weighted average common shares outstanding 5,679,046 2,517,613
========= =========
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
<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,
1995 1,000 $1 2,067,377 $2,067 $7,027,459 $(2,907,121) $ 4,122,406
Cancellation of
common shares issued
in 1994 (15,798) (16) 16
Issuance of common
stock in connection
with Regulation
D debt offering 12,444 12 (5) 7
Sales of common
stock through
Regulation S
offering, net of
issuance costs 471,514 472 2,369,128 2,369,600
Issuance of common
stock in
acquisition
of subsidiary 1,422,223 1,422 (622) 800
Issuance of common
stock in terminated
acquisition
(cancelled in 1996) 1,955,556 1,956 (1,956)
Net loss (4,349,611) (4,349,611)
----- -- --------- ------ ---------- ----------- -----------
Balance, December
31, 1995 1,000 $1 5,913,316 $5,913 $9,394,020 $(7,256,732) $ 2,143,202
===== == ========= ====== ========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
<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,
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
acquisition (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
Issuance of
compensatory
stock options 1,137,500 $(1,137,500)
Net loss (1,660,697) (1,660,697)
----- -- --------- ------- ----------- ----------- ----------- -----------
Balance, December 31,
1996 300 $- 7,242,722 $ 7,243 $12,080,191 $(8,917,429) $(1,137,500) $ 2,032,505
===== == ========= ======= =========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
------------ ------------
Operating activities:
Net loss $ (1,660,697) $ (4,349,611)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation of property and equipment 98,100
Amortization of other assets 115,051 61,906
Write-off of nonmarketable securities 600,000
Minority interest in loss of subsidiary (117,225)
(Income) loss from discontinued
operations (13,206) 3,396,565
Changes in operating assets and
liabilities:
Accounts receivable 160,600
Inventories 66,600
Other current assets 247,027 35,431
Other assets 630 52,696
Accounts payable and accrued
liabilities (1,235,192) 414,857
------------ ------------
Net cash used in operating
activities (1,738,312) (388,156)
------------ ------------
Investing activities:
Net cash acquired in purchase of Inoteb SA 259,000
Capital expenditures (99,936)
Initial licensing fee payment (396,000)
Advances from related party (85,491) 25,801
------------ ------------
Net cash provided by (used in)
investing activities 73,573 (370,199)
------------ ------------
Financing activities:
Proceeds from sale of common stock 1,320,000 2,370,407
Principal payments on short-term obligations (1,282,500)
Principal payments on long-term obligations (75,200)
------------ ------------
Net cash provided by financing
activities 1,244,800 1,087,907
------------ ------------
Net increase (decrease) in cash (419,939) 329,552
Cash, beginning of year 429,081 99,529
------------ ------------
Cash, end of year $ 9,142 $ 429,081
============ ============
Supplemental disclosure of cash flow data:
Interest paid $ 111,493 $ 119,337
============ ============
See Notes to Consolidated Financial Statements.
F-8
<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 12 and 13, 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 (including the write-down of the carrying
values of the properties to their estimated net realizable
values as of December 31, 1995) 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. 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.
F-9
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Business and summary of accounting policies (continued):
Business (concluded):
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 December 31, 1996, 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.
F-10
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Business and summary of accounting policies (continued):
Capitalization (concluded):
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).
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 1996. (The Company recorded the issuance of all 266,667
shares during 1996).
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 (see Note 10).
Basis of presentation:
The Company incurred significant losses from continuing and
discontinued operations for the years ended December 31, 1996
and 1995. As a result, the Company had an accumulated deficit of
$8,917,429 at December 31, 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.
F-11
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Business and summary of accounting policies (continued):
Basis of presentation (concluded):
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 10). The
Company also received net proceeds of approximately $1,515,000
from the sale of its real estate properties in February 1997
(see Note 12), 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 December 31, 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.
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 December 31, 1996 and 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-12
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Business and summary of accounting policies (continued):
Impairment of long-lived assets:
Effective as of January 1, 1995, the Company adopted the
provisions of Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" ("SFAS 121"). Under SFAS
121, impairment losses on long-lived assets are recognized when
events or changes in circumstances indicate that the
undiscounted cash flows estimated to be generated by such assets
are less than their carrying value and, accordingly, all or a
portion of such carrying value may not be recoverable.
Impairment losses are then measured by comparing the fair value
of assets to their carrying amounts. The adoption of SFAS 121
had no material effect on the accompanying consolidated
financial statements.
Property and equipment:
Property and equipment used in the Company's medical products
manufacturing operations is recorded at cost. Depreciation is
computed using the straight-line method over the estimated
useful lives of the assets (15 years for properties and three to
ten years for equipment).
License fees:
License fees were recorded at cost and are being amortized using
the straight-line method over 15 years.
Goodwill:
Goodwill, which represents the excess of the costs of acquiring
the medical products manufacturing business over the fair value
of the net assets at the date of acquisition, is being amortized
using the straight-line method over an estimated useful life of
five years.
Advertising:
The Company expenses the cost of advertising and promotions as
incurred. Advertising costs charged to operations were not
material in 1996 and 1995.
Research and development:
Costs and expenses related to research and product development
are expensed as incurred.
F-13
<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.
Reclassifications:
Certain accounts in the 1995 consolidated financial statements
have been reclassified to conform with 1996 presentations.
F-14
<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, 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 effectively decided to discontinue
its real estate operations and entered into an agreement to sell
Cabestan's land and buildings which was consummated in February
1997 (see Notes 1 and 12). The carrying value of Cabestan's
property and equipment was 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 (see Note
13).
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 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 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 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-15
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Acquisitions and newly formed entities (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 1996 and 1995 as though Inoteb had been
acquired at the beginning of 1995:
1996 1995
---------- ----------
Revenues $ 700,471 $ 1,029,716
Loss from continuing operations (2,172,028) (427,269)
Loss per common share (.32) (.10)
Weighted average common shares
outstanding 6,863,669 4,358,129
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-16
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Income taxes:
As of December 31, 1996, the Company had net operating loss
carryforwards of approximately $2,712,000 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
December 31, 1996 and 1995:
1996 1995
---------- ----------
Federal $1,634,000 $1,238,000
State 493,000 338,000
---------- ----------
Totals 2,127,000 1,576,000
Less valuation allowance 2,127,000 1,576,000
---------- ----------
Totals $ - $ -
========== ==========
The Company offset the deferred tax assets of approximately
$2,127,000 and $1,576,000 attributable to the potential benefits
from such net operating loss carryforwards as of December 31, 1996
and 1995, 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 at December 31, 1996:
Land $ 11,400
Buildings and improvements 150,400
Equipment and furnishings 163,236
--------
325,036
Less accumulated depreciation 98,100
--------
Total $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-17
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Investment in nonmarketable securities:
In September 1994, IMMO Limited invested $600,000 in PEMP, Inc.
("PEMP"). The investment was in the form of a loan at December 31,
1994. It was converted into nonmarketable preferred shares during
1995 which are entitled to an annual cumulative 10% dividend. PEMP
is a Canadian financial advisory firm and an affiliate of PEMP
Investment Advisors, Inc., a beneficial owner of shares of the
Company's common stock.
In August 1996, based on PEMP's inability to make the dividend
payments, management of the Company deemed the investment in PEMP
to be worthless, and it was written off in its entirety in 1996.
Note 7 - Short-term notes payable:
As of December 31, 1994, the outstanding principal balance of the
Regulation D notes was $1,800,000. As of April 4, 1995, the
Company defaulted with respect to the payment of Regulation D
notes with a principal balance of $1,775,000 and accrued but
unpaid interest of $53,250 and, accordingly, such notes became due
and payable. In August 1995, the Company paid 80% of the principal
balance and was able to negotiate an extension of the due date. As
of December 31, 1996, the outstanding principal balance of the
Regulation D notes was $517,500 (see Note 12).
Note 8 - Long-term debt:
Long-term debt consisted of the following at December 31, 1996:
Term loans payable monthly in varying
installments, including interest at
rates ranging from 6.95% to 9.5%
through December 2001 (A) $ 524,600
Noninterest bearing advances initially
scheduled to be paid in monthly
installments through 2000 (B) 517,000
----------
1,041,600
Less current portion 255,100
----------
Long-term debt $ 786,500
==========
(A) The loans were secured by equipment with a net carrying
value of approximately $134,400 at December 31, 1996.
F-18
<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 five years subsequent to December 31, 1996 are as
follows:
Year Ending
December 31, Amount
------------ --------
1997 $255,100
1998 457,700
1999 229,600
2000 84,100
2001 15,100
Management of the Company believes that the term loans and the
noninterest bearing advances had carrying values that approximated
their fair values as of December 31, 1996 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, December 31, 1996.
Accordingly, the weighted average exercise price of the options
outstanding and exercisable at December 31, 1996 was $4.45 per
share. The weighted average fair value of the options granted in
1996 was $5.61 per share.
F-19
<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 will be amortized commencing in 1997 on a
straight-line basis over a period of five years. The unamortized
portion of unearned compensation will be 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 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 1996 historical
amounts.
Note 10 - 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 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 12).
F-20
<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 - 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 a mortgage note on the properties was assumed
on February 18, 1997 (see Notes 1, 2 and 13). Approximately
$430,000 was deposited in escrow to secure certain minimum rent
guarantees made to the purchaser. 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 7).
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 13 - Discontinued operations:
The assets and liabilities of the Company's discontinued real
estate operations as of December 31, 1996 and 1995 consisted of
the following:
December 31,
--------------------------
1996 1995
----------- -----------
Cash $ 200,000 $ 204,000
Investments in real estate
limited partnership 168,000 174,000
Property and equipment, net of
accumulated depreciation 6,654,000 6,600,000
Other assets 23,000
Mortgage note payable (4,767,000) (4,875,000)
Other liabilities (116,000)
----------- -----------
Net assets $ 2,139,000 $ 2,126,000
=========== ===========
The loss on disposal of real estate operations in the accompanying
consolidated statements of operations reflects a charge of
$200,000 for the write-off of certain prepaid expenses and other
assets in 1996 and a write-down of property and equipment by
$1,626,186 to estimated net realizable value based on the sales
agreement in September 1995. Income from discontinued real estate
operations reflects charges for interest of $452,000 and $461,000
in 1996 and 1995, respectively, and charges for depreciation
expense of $184,000 in 1995 (depreciation was discontinued when
the property and equipment was written down to net realizable
value).
F-21
<PAGE>
BIOCORAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13 - Discontinued operations (concluded):
The assets and liabilities of the Company's brokerage operations
as of January 1, 1995, the date on which they were effectively
discontinued and written off, consisted of the following:
Cash $ 7,000
Marketable securities 2,495,000
Accounts receivable and prepaid expenses 365,000
Loans receivable 723,000
Income tax refund receivable 332,000
Related party receivable 880,000
Property and equipment 371,000
Goodwill 1,271,000
Other assets 27,000
Accounts payable and accrued liabilities (3,049,000)
Other liabilities (316,000)
Loans payable (476,000)
Minority interest (704,000)
-----------
Net assets $ 1,926,000
===========
Note 14 - 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.
Information about the Company's operations in different geographic
locations is shown below:
United
States France Ireland Consolidated
--------- --------- --------- ------------
1996
----
Net sales $ - $ 250,300 $ - $ 250,300
Loss from
continuing
operations (255,321) (771,700) (646,882) (1,673,903)
Identifiable
assets 2,067,341 1,079,984 1,338,250 4,485,575
1995
----
Net sales $ - $ - $ - $ -
Loss from
continuing
operations (854,107) - (98,938) (953,045)
Identifiable
assets 2,551,677 - 2,029,978 4,581,655
* * *
F-22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Company has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
BIOCORAL, INC.
Date: 7/30/97 By: /s/ Riccardo Mortara
-------------------------
Riccardo Mortara, Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Riccardo Mortara
- ----------------------
Riccardo Mortara Chairman of the Board 7/30/97
and a director
/s/ Nasser Nassiri
- ----------------------
Nasser Nassiri Treasurer, Secretary and 7/30/97
a director
<PAGE>
EXHIBIT INDEX
The following exhibits required by Item 601 of Regulation S-K are filed
herewith:
Document Description
Certificate of Incorporation and Bylaws
3.1 Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to
Company's Form 10-SB Registration Statement filed with the Commission on
February 25, 1994, as amended ("Registration Statement").
3.2 By-laws (incorporated by reference to Exhibit 3.2 to the Registration
Statement)
3.3 Amendment to Certificate of Incorporation (incorporated by reference to
Amendment No.1 to the Registration Statement filed with the Commission on April
18, 1994 ("Amendment No.1").
3.4 Amendment to Certificate of Incorporation, (incorporated by reference to
Exhibit 10.21 to the Company's Annual Report on Form 10-KSB filed December 27,
1996 ("1996 10-KSB").
Material Contracts
10.1 1992 Stock Option Plan, (incorporated by reference to Exhibit 10.1 to the
Registration Statement).
10.2 Stock Option Agreement with Jehu Hand (incorporated by reference to Exhibit
10.2 to the Registration Statement).
10.3 Stock Option Agreement with Eric Anderson (incorporated by reference to
Exhibit 10.3 to the Registration Statement).
10.4 Stock Purchase Agreement, dated March 21, 1994, by and among Registrant,
Cabestan, Inc., Jehu Hand and Eric Anderson (incorporated by reference to
Exhibit 10.4 to Amendment No. 1).
10.5 Assignment and Assumption of Transfer Agreement, dated March 25, 1994,
(incorporated by reference to Exhibit 10.5 to Amendment No.1).
10.6 Transfer Agreement, dated December 1993 (incorporated by reference to
Exhibit 10.6 to Amendment No.1).
<PAGE>
10.7 Assignment and Assumption of Limited Partnership Interest, dated March 25,
1994 (incorporated by reference to Exhibit 10.7 to Amendment No.1).
10.8 Agreement of Sale and Purchase, dated March 25, 1994 (incorporated by
reference to Exhibit 10.8 to Amendment No.1).
10.9 Extension Agreement, dated March 1994, by and among Bensenville Associates
Limited, L.P. and Cabestan, Inc. (incorporated by reference to Exhibit 10.9 to
Amendment No.1).
10.10 Agreement dated December 30, 1993 between Bensenville Industrial Park,
L.P. and Bensenville Associates Limited, L.P. (incorporated by reference to
Exhibit 10.10 to Amendment No.1).
10.11 Credit Agreement between Societe Financiere Privee SA and the Company,
dated March 22, 1994 (incorporated by reference to Exhibit 10.11 to Amendment
No.1).
10.12 Letter of Intent, dated May 31, 1994 between the Company and Borgonuovo
SIM, S.p.A. (incorporated by reference to Exhibit 10.12 to Amendment No.2 to the
Company's Registration Statement filed with the Commission on July 15, 1994.
("Amendment No.2")).
10.13 Mortgage Loan Commitment between the Principal Financial Group and
Cabestan, Inc., dated June 20, 1994, (incorporated by reference to Exhibit 10.13
to Amendment No.3).
10.14 Stock Purchase Agreement, dated September 12, 1994, by and between
IMMO-Finance Corporation, Kialu S.r.L. and Alessandro Bassetti, (incorporated by
reference to Exhibit 10.14 to Amendment No.3 to the Company's Registration
statement, as filed with the Commission on September 2, 1994. ("Amendment
No.3")).
10.15 Shareholders' Agreement, dated September 12, 1994, by and among Kialu
S.r.L., IMMO-Finance Corporation and Alessandro Bassetti (incorporated by
reference to Exhibit 10.15 to Amendment No.3).
10.16 Property Management and Leasing Agreement, dated as of October 6, 1994
between Trammell Crow M.W., Inc. and Cabestan, Inc., (incorporated by reference
to Exhibit 10.16 to Company's 10-KSB Annual Report filed April 18, 1995).
10.17 Acquisition Agreement between IMMO-Finance Corporation and Halford Finance
S.A. and Cornington International, Inc., dated August 2, 1995, (incorporated by
reference to Exhibit 10.17 to Company's 1996-10-KSB).
10.18 Distribution Agreement between Inoteb and 3H Human Health Company, Ltd.,
dated May 13, 1995 (English and French versions) (incorporated by reference to
Exhibit 10.18 to Company's 1996-10-KSB).
<PAGE>
10.19 Contrat de Fournitures between Inoteb and 3H Human Health Hightech PLC,
dated October 11, 1995, (incorporated by reference to Exhibit 10.19 to Company's
1996-10-KSB).
10.20 Convention between IMMO-Finance Corporation and various French
shareholders and noteholders, dated October 6 and 18, 1995, (incorporated by
reference to Exhibit 10.20 to Company's 1996-10-KSB).
10.21 INTENTIONALLY OMITTED
10.22 Supply Agreement between Inoteb, S.A., 3H Human Health Hightech PLC and
Intermedics Orthopedics/Denver, Inc., dated May 23, 1996, (incorporated by
reference to Exhibit 10.22 to Company's 1996-10-KSB).
10.23 Stock Option Agreement between Biocoral and Riccardo Mortara, dated June
10, 1996. (incorporated by reference to Exhibit 10.23 to Company's 1996-10-KSB).
10.24 Stock Option Agreement between Biocoral, Halford Finance, S.A. and
Cornington International, Inc., dated September 13, 1996, (incorporated by
reference to Exhibit 10.24 to Company's 1996-10-KSB).
10.25 Purchase Agreement between Cabestan, Inc. and Brooklyn Roads Limited,
dated October 9, 1996, (incorporated by reference to Exhibit 10.25 to Company's
1996-10-KSB).
10.26 Letter Agreement between Biocoral and UI USA, Inc., dated November 26,
1996, (incorporated by reference to Exhibit 10.26 to Company's 1996-10-KSB).
10.27 Stock Option Agreement between Biocoral and each of Nasser Nassiri and
Riccardo Mortara, dated December 31, 1996.
11 List of Biocoral subsidiaries
27 Financial Data Schedule.
STOCK OPTION AGREEMENT
AGREEMENT, dated as of December 31, 1996, between BioCoral, Inc., a
Delaware corporation with its principal place of business c/o Stein Riso Haspel
& Jacobs LLP, 805 Third Avenue, New York, NY 10022 (the "Company"); Nasser
Nassiri, residing at 161 Rue Jules Guesde, 92300 Levallois Perret, France;
Riccardo Mortara, c/o Societe Financiere du Seujet S.A., 14 Quai du Seujet, 1201
Geneva, Switzerland (the "Optionees").
W I T N E S S E T H:
WHEREAS, the Corporation's Chairman, Riccardo Mortara, and the
Corporation's Secretary-Treasurer, Nasser Nassiri ("Optionees"), have been
substantially involved in the day-to-day administration of the Corporation's
affairs since their succession to such offices, and have rendered such services
without compensation; and
WHEREAS, in order to compensate the Optionees without having to
affect the Corporation's cash resources, the Board has resolved to issue to the
Optionees, as of the date hereof, a non-qualified stock purchase option
("Option(s)") as set forth herein; and
WHEREAS, owing to the fact that each Option is non-qualified, the
Board has resolved to set the exercise price of the Option at a discount to the
market price thereof on the date of the grant; and
WHEREAS, the Board has resolved to grant the "Options" the Optionees
for the purchase of up to 325,000 shares of the Company's common stock each, par
value $.001 per share (the "Common Stock") at an exercise price of $3.75 (US)
per share on the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, the parties hereto agree as follows:
1. Grant of Option. Subject to all the terms and conditions hereof, the
Company hereby
<PAGE>
grants to each Optionee the right to purchase all or any part of an aggregate of
325,000 shares each of Common Stock of the Company (the "Option Shares") at an
exercise price of $3.75 per share, on the terms and conditions set forth in this
Agreement.
2. Exercisability of Options. The Option Shares subject to the Options
shall become purchasable, in whole or in part and by either Optionee without
affecting the other, at any time and from time to time beginning on the date
hereof and for a period of 60 months thereafter, and after the expiration date
(the "Expiration Date"), this option and all rights hereunder shall expire and
any Option Shares not purchased on or before the Expiration Date may not
thereafter be purchased hereunder. In the event Optionees fail to exercise the
option on or prior to the Expiration Date, then the Options as to all Option
Shares not exercised shall expire and Optionee shall have no rights with respect
to such remainder of the Options or the Option Shares.
3. Consideration for Grant of Option. The consideration for grant of the
Options is $10, the receipt of which is hereby acknowledged, and Optionees'
services rendered as officers of the Company.
4. Method of Exercise of Option; Payment of Option Purchase Price. These
Options shall be exercisable at any time and from time to time, prior to the
Expiration Date, by written notice (the "Notice") to the Company at its
principal office, presently located c/o Stein Riso Haspel & Jacobs LLP, 805
Third Avenue, New York, NY 10022. The Notice shall state the identity of the
Optionee, the Optionees' election to exercise these Options and the number of
Option Shares in respect of which it is being exercised, and shall be
accompanied by a check in the amount of the Exercise Price. Upon payment of the
full purchase price of the Option Shares by either Optionee, the Company shall
deliver a certificate or certificates representing those shares. A certificate
or certificates for the shares as to which these Options shall have been so
exercised shall be registered
2
<PAGE>
in the name of the exercising Optionee and shall be delivered to such Optionee
at the address of such Optionee specified in the Notice or at such other address
as Optionee shall set forth in its Notice.
5. Non-Assignability of Option. These Options may be exercised only by the
Optionees and shall not be sold, transferred, assigned, pledged, hypothecated or
otherwise disposed of in any way (whether by operation of law or otherwise)
without the Company's prior written consent except that an Optionee may, solely
in connection with a transfer of all or substantially all of his assets to an
entity or entities controlled by such Optionee ("Affiliate"), sell, transfer or
assign all his interest in this Agreement to such Affiliate but only after
giving the Company at least thirty days notice in writing of the proposed sale,
transfer or assignment. Any buyer, transferee, or assignee of this Option shall
be bound by and subject to each and every provision of this Agreement and shall
not sell, transfer, assign, pledge, hypothecate or otherwise dispose of the
Option in any way (whether by operation of law or otherwise).
6. Adjustments to Preserve Option Benefits.
If the outstanding shares of the Company's Common Stock are exchanged
for a different number or kind of shares or securities of the Company through
stock splits, reverse stock spits, stock dividends, recapitalization or other
changes in the stock of the Company, an appropriate and proportionate adjustment
shall be made in the number and kind of shares issued upon any subsequent
exercise of this Option without any change in the aggregate purchase price to be
paid for such shares. For any and all such purposes, but only for such purposes,
Optionee shall be considered to be a shareholder of record of the Company as of
the date of this Option Agreement. Nothing in this Agreement shall preclude the
Corporation from issuing additional shares of Common Stock to any third party.
7. Limitation of Optionee's Rights. Except as otherwise provided in
Section 6 above,
3
<PAGE>
neither Optionee shall have any of the rights or privileges of a shareholder of
the Company in respect of any Option Shares issuable upon exercise of this
Option unless and until those shares have been paid for in full and upon such
payment in full such Optionee shall be deemed to be the record holder.
8. Purchase for Investment. The Optionees jointly and severally represent
and agree that if either Optionee exercises his Option in whole or in part then
those Option Shares so acquired will be acquired for the purpose of investment
and not with a view to their resale or distribution and upon each exercise of
the Option, each Optionee will furnish to the Company a written statement to
that effect, satisfactory in form and substance to the Company and its counsel.
Optionees understand and acknowledge that the shares to be acquired pursuant to
the Options will be restricted securities as such term is defined under the
Securities Act of 1933, as amended, (the "Act") and accordingly will bear a
legend indicating such restrictions.
9. Representations and Warranties of Optionee. As a condition to receipt
of the Options and for other good and valuable consideration, receipt of which
is hereby acknowledge, the Optionees jointly and severally represent and warrant
to the Company as follows:
(i) Optionees acknowledge that the Company is a development stage
company with no significant operating history and that there are significant
risks associated with the Company's business. Accordingly, the value of the
Options and the Option Shares will be based upon the Company's development of
its business which is subject to significant risks; and
(ii) Optionees understands that the Options and the Option Shares
(upon exercise of the option) are being offered and sold under an exemption
from registration provided by Section 4(2) of the Act and the regulations
promulgated thereunder, as well as applicable State law exemptions, and warrant
and represent that the Options and the Option Shares are being or will be (in
the case of the Option Shares) acquired by the undersigned solely for the
undersigneds'
4
<PAGE>
own account, for investment purposes only, and are not being purchased with the
intent or view to resell the Options or the Option Shares or for the resale,
distribution, subdivision or fractionalization thereof. Consequently, the
undersigned must bear the economic risk of the investment for an indefinite
period of time because the Options and the Option Shares cannot be resold or
otherwise transferred unless subsequently registered under the Act and qualified
under applicable State law or an opinion of qualified counsel that indicates an
exemption from registration and/or qualification is available.
10. Notices. Any notice to be given under the terms of these Options shall
be in writing and addressed to the Company at the Company's then-present address
or to Optionees at the addresses provided herein, or at such other address as
any party may hereafter designate in writing to the other. Any notice or other
communication given hereunder shall have been deemed duly given when enclosed in
a properly sealed envelope addressed as aforesaid, registered or certified, and
deposited postage prepaid in a post office or branch post office or, in person,
when so delivered, or by Federal Express or similar courier providing evidence
of receipt.
11. Representations of Company. The Company represents: (I) the
execution, delivery and performance of this Agreement has been duly authorized
by the Board of Directors of the Company; (ii) the consummation of the
transaction contemplated by this Agreement will not violate any provision of the
Company's Certificate of Incorporation or Bylaws; and (iii) no consent of any
third party including, without limitation, federal or state regulatory agencies
is required for execution and performance of this Agreement by the Company.
12. Governing Law. This Agreement shall be deemed to be made under and
shall be construed in accordance with the laws of the State of Delaware and
applicable Federal law without regard to conflict of law principles.
5
<PAGE>
13. Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their legal successors and assigns.
14. Entire Understanding. This Agreement constitutes the entire
understanding of the parties and shall not be amended except by written
agreement between the parties.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the day and year first above written.
BIOCORAL, INC.
By: /s/ Riccardo Mortara
------------------------------
Riccardo Mortara, Chairman
/s/ Nasser Nassiri
------------------------------
Nasser Nassiri, Individually
/s/ Riccardo Mortara
------------------------------
Riccardo Mortara, Individually
6
Ex - 21
LIST OF SUBSIDIARIES
1. Inoteb S.A.
2. 3H Human Health Hightech, Plc
3. Cabestan, Inc.
4. IMMO-Distribution Ltd.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
BIOCORAL INC. and is qualified in its' entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 9,142
<SECURITIES> 0
<RECEIVABLES> 415,000
<ALLOWANCES> 261,300
<INVENTORY> 251,100
<CURRENT-ASSETS> 2,755,449
<PP&E> 325,036
<DEPRECIATION> 98,100
<TOTAL-ASSETS> 4,485,575
<CURRENT-LIABILITIES> 1,666,570
<BONDS> 0
0
0
<COMMON> 7,243
<OTHER-SE> 2,025,262
<TOTAL-LIABILITY-AND-EQUITY> 4,485,575
<SALES> 250,300
<TOTAL-REVENUES> 325,071
<CGS> 142,300
<TOTAL-COSTS> 142,300
<OTHER-EXPENSES> 1,259,798
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 114,101
<INCOME-PRETAX> (1,673,903)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,673,903)
<DISCONTINUED> 13,206
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,660,697)
<EPS-PRIMARY> (.29)
<EPS-DILUTED> (.29)
</TABLE>
