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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 2000
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-5576
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BIOSPHERICS(R) INCORPORATED
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(Exact name of Registrant as specified in its Charter)
DELAWARE 52-0849320
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
12051 INDIAN CREEK COURT, BELTSVILLE, MARYLAND 20705
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(Address of principal executive offices)
Registrant's telephone number, including area code: 301-419-3900
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
NONE
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK ($.005 PAR VALUE PER SHARE)
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(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of February 13, 2001, the aggregate market value of the voting stock
was $65,250,684, of which $47,671,707 was held by non-affiliates of the
Registrant, based on the closing price of the such stock, as quoted by NASDAQ on
such date.
There were 10,735,331 shares of the Registrant's Common Stock
outstanding as of February 13, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Biospherics Incorporated definitive Proxy Statement, to
be filed with the Securities and Exchange Commission pursuant to Regulation 14A
of the Securities Exchange Act of 1934 not later than 120 days after the end of
the fiscal year to which this report relates, are incorporated by reference into
Part III of this Form 10-K.
Page 1 of 37
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PART I
Certain statements contained in this Form 10-K, including without
limitation, statements containing the words "believes," "estimates," "expects"
and words of similar import, constitute "forward looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Such words and expressions are intended to
identify such forward looking statements, but are not intended to constitute the
exclusive means of identifying such statements. Such forward looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievements of the Company, or industry
results, to be materially different from any future results, performance or
achievements expressed or implied by such forward looking statements. Given
these uncertainties, prospective investors are cautioned not to place undue
reliance on such forward looking statements. The Company disclaims any
obligation to update any such factors or to publicly announce the results of any
revisions to any of the forward looking statements contained herein to reflect
any events or developments. See the Company's Form 8-K filing dated March 26,
1999, for a more detailed statement concerning forward looking statements.
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Biospherics Incorporated (the "Company" or "Registrant"), a Delaware
corporation, was founded in 1967. The Company began trading as "Spherix" in
January 2001 and anticipates formally changing the corporate name after
obtaining shareholder approval in May 2001. The Company consists of a
Biotechnology Division ("BioSpherix"), a Commercial Information Services
Division ("CISD"), a Government Information Services Division ("GISD"), and an
Information Technology Division ("ITD"). CISD, GISD and ITD are collectively
referred to as "InfoSpherix." The Company is managed along two (2) business
segments, BioSpherix and InfoSpherix.
The principal executive offices of the Company are located at 12051
Indian Creek Court, Beltsville, Maryland 20705, and its telephone number is
(301) 419-3900. The Company's internet website addresses are
HTTP://WWW.BIOSPHERICS.COM and HTTP://WWW.SPHERIXINC.COM. The Company's Common
Stock trades on the NASDAQ National Market System under the symbol BINC. The
Company anticipates formally changing its symbol to SPEX after obtaining
shareholder approval of its name change in May 2001.
BIOSPHERIX DIVISION
The BioSpherix Division is the Company's biotechnology research and
development arm, dedicated to developing proprietary products and services with
a view toward economic commercial applications. The Company has accumulated a
number of patents on its products.
TAGATOSE AS A LOW-CALORIE BULK SWEETENER. BioSpherix has patented the
use of a naturally occurring sugar, tagatose, as a full-bulk, low-calorie
sweetener. It is a true sugar that looks, feels, and tastes like table sugar.
Tagatose is present in small amounts in a number of foods, including dairy
products. The Company has been developing the product since receiving a patent
for its use as a low-calorie sweetener in foods and beverages in 1988, and two
patents for its production process (1991 and 1992).
In January 1997, the Company completed a license agreement with MD
Foods Ingredients amba ("MDFI") of Denmark for the exclusive worldwide rights to
manufacture, market, and distribute tagatose as a food ingredient in return for
a non-refundable up-front payment and a royalty schedule based upon net sales of
the sugar. In return for the exclusive license, MDFI assumed responsibility for
all future marketing, development and regulatory expenses, including the cost of
constructing and operating production plants. MDFI has subsequently merged with
Swedish dairy and food products company, Arla, to form Arla Foods ("Arla"). Arla
manufactures a wide variety of dairy products, foods and food ingredients. The
company ranks as one of the largest dairy products manufacturers in the world.
Arla operates cheese plants producing large amounts of whey as a by-product.
Whey is raw material for making tagatose. Arla has stated that their resources
for tagatose have been increased by the merger.
Total non-refundable payments of $2.5 million received from Arla
included a $1 million advance against future royalties. The Company will receive
running royalties once commercial sales of tagatose begin. To strengthen their
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cooperative efforts, the two companies established a Tagatose Advisory Committee
to plan and review progress in bringing tagatose to its various world market
sectors. The Committee consists of three Arla representatives and one Company
representative. The Committee proposes strategies and actions for Arla
management's consideration, but has no authority to enforce such
recommendations. Arla has contracted with the Company for technological support
in excess of $800,000 since the signing of the license agreement.
Arla plans to enter tagatose into the U.S. sweetener market first. A
panel of experts is retained by Arla to determine whether tagatose qualifies as
Generally Recognized As Safe (GRAS) which, under FDA regulation, would permit
its sale in the U.S. Arla has designed a commercial plant to manufacture
tagatose. Construction will commence after GRAS is affirmed. The GRAS Expert
Panel has been reviewing the extensive safety data submitted to it and Arla
advises that it expects a favorable conclusion early in 2001. Arla reports that
it has begun the approval process for tagatose in Europe and other countries.
Arla also reported to the Company that the US FDA has permitted labeling of
tagatose as containing 1.5 kilocalories per gram. This value, requested by Arla,
will permit products containing tagatose to be termed "reduced calorie." Arla
has reserved the right to request a smaller reduced calorie rating in the
future.
The Company believes that tagatose will fill a market not currently
accessible to other sweetener products. That market may initially include health
drinks, chocolate candy, confections, ice cream, frozen desserts, diet sodas,
cereals, and frosting. Later, market applications may broaden to include baked
goods, heat-processed foods, and other dairy products, and other products in
which the full bulk of sugar is required. Tagatose may also be used in
pre-biotics, pro-biotics, healthy foods, and dietary supplements. The Company
believes that chocolate candies and health drinks are excellent introductory
uses for its nonfattening sugar because each constitutes a large market and each
uses sugar as a major ingredient. Manufacturers have long sought a low-calorie,
full-bulk substitute for table sugar in chocolate candy; however, none has been
as successful in emulating the flavor of table sugar as has tagatose. Unlike
table sugar, tagatose has been shown to cause no tooth decay.
TAGATOSE FOR ANEMIA AND HEMOPHILIA TREATMENT. Tagatose has been shown
to improve blood factors indicating that tagatose may be useful as a drug or
drug adjuvant in the treatment of anemia and hemophilia. The Company has
received a patent for the use of tagatose against anemia and hemophilia (1999).
TAGATOSE AS A TREATMENT FOR TYPE 2 DIABETES. The Company has patented
the use of tagatose as a treatment against Type 2 diabetes (1995). Two small
clinical trials at the University of Maryland School of Medicine have found
tagatose effective as an adjuvant treatment of Type 2 diabetes. All subjects
lost weight at physician-approved rates. Other than for initial laxation at high
doses, accommodated in about two weeks, no untoward effects were found in any of
the research. In addition, the studies found that doses of tagatose, in the
range of 10 to 75 grams per day, produced no rise in blood glucose or insulin
levels in diabetic or normal subjects. Tagatose taken before the consumption of
glucose produced a blunting effect on the normally expected rise in blood
glucose.
TAGATOSE AS AN ANTI-HYPERGLYCEMIC AGENT. The Company has patented the
use of tagatose as an anti-hyperglycemic agent to prevent the formation of
advanced glycosylation end-products, which is one of the major causes of aging
(1994).
TAGATOSE AS A SYNERGISER AND FLAVOUR ENHANCER. The Company's licensee
of the use of tagatose in foods has filed for patent on the use of tagatose as a
flavour enhancer. The use would include combining small amounts of tagatose with
high-intensity sweeteners to improve the flavor of diet soft drinks. It would
open the soft drink market to tagatose, not previously thought economical. The
Company would be paid royalties on tagatose sold for such uses.
TAGATOSE AS A PRE-BIOTIC FOOD COMPONENT. This patent application, filed
by the Company's licensee, would protect the use of tagatose as a pre-biotic, a
substance that improves the digestion of food and is beneficial to health.
Pre-biotics are widely sold in Europe and Asia and are increasingly appearing in
the U.S. The Company would be paid royalties on tagatose sold for such uses.
TAGATOSE AS AN INCREASED FERTILITY AND IMPROVED FETAL DEVELOPMENT DRUG.
The Company has received a Notice of Allowance from the U.S. Patent Office that
it will receive a patent on the use of tagatose to increase the fertility of
humans and other animals, to effect higher percentages of live fetuses, and to
cause those fetuses to be heavier, still within normal bounds, than those of
humans or other animals not having taken tagatose.
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JAPANESE PATENT FOR THE MANUFACTURE OF TAGATOSE. The Company obtained a
Japanese patent (2000) on the method for the manufacture of tagatose it had
patented in the U.S. The Company believes this protection of its method to be
significant because of the large potential market for tagatose in Japan. The
rights were conveyed to the Company's licensee of tagatose for food use, and,
under the terms of the agreement, this protects the royalty rate for tagatose
sold in Japan.
GRAS OBTAINED FOR USE OF TAGATOSE AS SWEETENER IN DRUGS. In the year
2000, the Company achieved GRAS status for the use of tagatose as a sweetener
(excipient) in drugs for non-chronic use by adults and children. The Company
maintains all rights to such uses.
GRAS OBTAINED FOR USE OF TAGATOSE IN TOOTHPASTE, MOUTHWASH AND OTHER
COSMETICS. In the year 2000, the Company achieved GRAS status for the uses of
tagatose in toothpaste, mouthwash, lipstick and other cosmetic products. The
Company retains all rights to such uses.
METHOD FOR EXTENDING LIFETIMES OF BIODEGRADABLE PRODUCTS. The Company
has filed for patents on a method TO prevent or delay microbial degradation of a
wide variety of products such as lotions, sun blocks and the like.
The Company is discussing the possibility of licensing the non-food
uses of tagatose to appropriate product companies.
SAFE-FOR-HUMANS PESTICIDES. Sale of "FlyCracker" for use in barns,
pens, food processing plants, and other enclosed spaces began in March of 2000.
The active ingredient for this patented safe-for-humans pesticide is "food
grade". It was developed for use against house flies, on which testing has been
concentrated, but additional susceptible insects may include other types of
flies, ants, mites, and related insects. Safe pesticides were invented by the
Company in response to the EPA's initiative urging the development of
alternatives to the "hard chemical" pesticides commonly used in agriculture and
animal husbandry. These chemicals are reported to be carcinogenic or otherwise
toxic to humans, and pose a risk to consumers of food products containing
traces. The increasing concern over pesticide hazards in foods and the general
environment indicates a market for an economical and effective product that
poses no human or environmental threat. In July of 2000, the Company submitted
an application to the Organic Materials Review Institute (OMRI) to list
FlyCracker as "allowed" for use in organic livestock production farms. On
January 12, 2001, OMRI accepted our application, clearing the way for the
Company to sell FlyCracker under the "organic" label.
In addition to plans for expanded research in the food and
pharmaceutical uses of tagatose and safe pesticides, the Company plans to
increase research in its patent-pending method for prolonging the lifetimes of
fragrances, sun block, lotions and other cosmetic products.
While the products under development show promise, continued progress
is dependent upon many factors, including, but not limited to, the Company's
having sufficient funds and resources to pursue them. The $5 million raised from
the February 2000 private placement is principally dedicated to increase market
penetration and sales of FlyCracker, and further the development of the products
mentioned.
INFOSPHERIX BUSINESS LINE
Commercial Information Services Division
CISD's professional staff serves the needs of commercial clients, with
a focus on health, pharmaceutical, medical data, and clinical trials management
services ranging from inbound and outbound telesupport for information gathering
and dissemination, to health-professional operated decision support systems
servicing health organizations, and advanced data warehouse and data mart
services. CISD specializes in health issues and provides information services on
a wide range of diseases and disabilities, disease prevention, and education.
Areas of expertise include pharmaceutical drug and product lifecycle support
(including product launch and recalls) and clinical research support. Programs
are staffed by health professionals and other information specialists who are
given extensive training and strict quality control guidelines. The Company's
clients have included many of the major U.S. pharmaceutical companies, managed
care organizations, clinical research organizations, and their advertising
agencies. Contracts with non-governmental parties are typically obtained
following private negotiations. Projects range from months to years in duration.
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Government Information Services Division
GISD's information professionals design and operate information centers
providing information management and materials to the public on various socially
beneficial subjects, as well as other information services, such as reservation
and tourism. GISD focuses on those clients who are looking to leverage
technology in the ever advancing world of information management. GISD
researches, collects, organizes and disseminates information by providing
customized information center services combining advanced data collection
systems, expert decision support systems, and tele-support utilizing live
operators, audio libraries, and advanced telecommunication technologies like
Interactive Voice Response (IVR). GISD answers millions of calls annually from
professionals and the public nationwide. It operates two Maryland-based
information centers (Beltsville and Cumberland, MD) that efficiently manage and
track high volumes of data. Coupling GISD's expert staff with its advanced
technologies results in an efficient and effective system to collect and
disseminate large amounts of information.
The Company was awarded a contract from the Michigan Department of
Natural Resources to operate its Central Reservation System, which commenced on
August 1, 2000. The Company's Federal Information Center ("FIC") contract,
through the General Services Administration, concluded on October 13, 2000. In
2000, the FIC contract accounted for approximately $2.7 million in revenue or
16% of total revenue for the period. Contracts with governmental parties are
obtained after a competitive bidding process and are most often for terms
ranging from two to three years, with additional option years.
CISD and GISD accounted for 40% and 59% of the Company's total revenues
in 2000, respectively. While contracts are numerous, most of CISD and GISD's
revenues traditionally have been generated by a few large commercial and
government contracts. See Note 1, "Concentrations," of the Notes to the
Financial Statements included herein pursuant to Part II of this Form 10-K.
Information Technology Division
ITD provides internal and external technical services including
software engineering, telecommunications, network infrastructure, Internet
provision, and all other services of a computer or information systems
technology nature. ITD has engineered the Computer Telephony Integration ("CTI")
System, ReserveSuite, HealthSuite, and InfoSuite that have been used to deliver
services via CISD and GISD. Historically and strategically, services and
products of ITD are utilized and/or delivered via the other operating Divisions.
ITD focuses on commercial and government business of an information technology
nature, providing consulting, integration, and support services, as well as
product development, both internally and commissioned. ITD has provided industry
award winning E-Business solutions, a core competency exploited on the majority
of its endeavors.
GOVERNMENT CONTRACTS
Government contract awards are from time to time subject to protest
proceedings by competitive bidders. As of December 31, 2000, none of the
Company's awards were under protest or in default. Government contracts
typically have terms and conditions which, while providing annual or multi-year
terms, subject them to termination upon convenience or default.
INDUSTRY SEGMENTS
See Note 12, "Information by Business Segment," of the Notes to the
Financial Statements included herein pursuant to Part II of this Form 10-K for
industry segment information of the Company, which information is incorporated
herein by reference.
MARKET CONCENTRATION
During 2000, 1999, and 1998, InfoSpherix contributed 99%, 99%, and 98%
of total Company revenue. The Company's business operations are usually
dependent upon substantial revenue from a select group of customers. In 2000,
1999, and 1998, revenue from the following customers accounted for more than 10%
of total Company revenues:
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2000 1999 1998
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U.S. Government U.S. Government U.S. Government
Pfizer Parke-Davis Parke-Davis
McKesson HBOC-PPG
It is currently expected that revenue from each of the U.S. Government, the
State of Michigan, and the State of Maryland will each account for more than 10%
of total Company revenues in 2001.
PATENTS AND TRADEMARKS
The Company has established a strong worldwide patent position for
tagatose and an economical process for its manufacture. The Company's 1988 U.S.
patent for the use of tagatose as a low-calorie sweetener/bulking agent has
subsequently been obtained or filed in many countries. The Company developed a
proprietary method for manufacture of tagatose that is protected by two U.S.
patents, issued in 1991 and 1992, also filed in many countries. In October 1994,
the Company received a patent for the discovery that tagatose is effective in
reducing hyperglycemia, one of the principal causes of physical and mental
aging. In September 1995, it received a patent for the use of tagatose in
treating diabetes.
In November 1992, a U.S. patent was awarded to the Company for its
safe-for-humans pesticide. In December 1997, the Company received a U.S. patent
on another safe-for-humans pesticide. The Company has also applied for foreign
patents for these products.
In 2000, the Company received a Notice of Allowance for the use of
tagatose in improving fertility and fetal development. In 2000, a patent
application was filed for a method to increase useful lifetimes of products
subject to microbial degradation.
In 1999, patent coverage was received for use of tagatose in treating
anemia and hemophilia. Other patents for health uses of tagatose are pending.
In December 2000, a Japanese patent was awarded to the Company for its
process to manufacture tagatose.
With respect to all of its inventions, the Company has received
approximately 120 patents, including foreign issues. It has several patents
pending and many additional invention disclosures. In addition to its strong
patent position, the Company relies on the common law protection of such
information as trade secrets and on confidentiality agreements to protect the
value of these assets.
The amount of royalties payable to the Company from Arla under the
above-described license agreement is dependent upon the existence of
relevant patents, plus five years at a lesser rate.
SEASONALITY
Revenues from reservation and tourism services are greatest in the
spring and summer when vacation planning is the heaviest. Revenues from other
sources tend to be more evenly spread throughout the year, although the fourth
quarter is historically the low period of the year.
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SALES BACKLOG
Sales backlog at December 31, 2000 and 1999, were as follows ($000s):
DECEMBER 31, 2000 DECEMBER 31, 1999
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CURRENT NON-CURRENT TOTAL CURRENT NON-CURRENT TOTAL
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GISD $ 10,428 $ 8,732 $ 19,160 $ 4,921 $ 6,743 $ 11,664
CISD
558 191 749 2,473 495 2,968
BioSpherix
- 1,000 1,000 - 1,000 1,000
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$ 10,986 $ 9,923 $ 20,909 $ 7,394 $ 8,238 $ 15,632
============= ================ ============== ============= =============== =============
It is anticipated that substantially all of the current GISD and CISD 2000
year-end backlog will be completed in 2001. New backlog is expected through
constantly on-going sales efforts.
COMPETITION
The information systems industry is subject to rapid and significant
technological change. The Company is in competition with other information
services companies across the Nation. Many of these competitors have
substantially greater financial and technical resources than the Company. While
acknowledging strong competition from other information services firms, the
Company has developed a specialized niche by concentrating on high quality,
personalized service combined with computerization for efficiency and
cost-effectiveness. The Company has established a reputation for rapidly
starting up information projects to meet its clients' critical needs, while not
compromising high quality and reasonable pricing. Over the past three years, the
Company has invested over $2 million in state-of-the-art CTI systems and over $2
million in the development of specialized computer software products to improve
its competitive position.
Competitors of BioSpherix are numerous and include, among others, major
pharmaceutical, chemical, consumer, and biotechnology companies, specialized
firms, universities and other research institutions. There can be no assurance
that the Company's competitors will not succeed in developing technologies and
products that are more effective than any that are being developed by the
Company or that would render the Company's technology and potential products
obsolete and noncompetitive. Many of these competitors have substantially
greater financial and technical resources and production and marketing
capabilities than the Company.
Over the past several years, various sugar alcohols have been used in
food products as bulk sweeteners. However, none has the taste of table sugar and
most are more caloric than tagatose. Bulk sweeteners are used in products where
the bulk of sugar is essential, such as baked goods, chocolates, and ice cream.
High intensity sweeteners, such as aspartame, saccharin, and sucralose do not
provide the bulk needed for these products.
RESEARCH AND DEVELOPMENT
BioSpherix expenditures for research and development were approximately
$281,000, $344,000 and $411,000 in 2000, 1999 and 1998, respectively. These
expenditures were incurred primarily in the ongoing efforts to commercialize
tagatose, including its development for drug uses, and to develop the Company's
safe-for-humans pesticides. The efforts to support Arla were reimbursed by Arla
in 1999 and 1998. Spending emphasis shifted to development and marketing of
FlyCracker in 1999 and 2000.
GOVERNMENTAL REGULATION
The business activities of the Company are subject to a variety of
Federal and state compliance, licensing, and certification requirements.
Management believes that the Company is, and has been at all times, in full
compliance with Federal and state environmental protection and worker safety
laws. The Company has not incurred significant expense in complying with such
laws and does not anticipate material expense, except for the FDA approval for
commercialization of tagatose (which is to be borne by Arla). Commercialization
of tagatose in the United States for use as food additives will require
successful completion of the GRAS certification being pursued by Arla.
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ENVIRONMENT
Compliance with current federal, state and local provisions regulating
the discharge of materials into the environment, or otherwise relating to the
protection of the environment, has not had, and in the opinion of management
will not have, a material effect on the Company's financial position, net
income, capital expenditures or competitive position.
EMPLOYEES
In 2000, the Company employed an average of 323 persons on a full or
part time basis. Of this total, approximately 228 were full-time employees. The
Company's employees are not currently unionized, and management believes that
its relations with the Company's employees are harmonious.
GEOGRAPHIC AREAS
InfoSpherix's business is and has been based in the United States.
Accordingly, InfoSpherix revenues are entirely from U.S.-based operations.
BioSpherix's licensee for tagatose's food use, Arla, is located in
Europe. Sales of FlyCracker have occurred in the U.S., but international sales
are being pursued.
ITEM 2. DESCRIPTION OF PROPERTY
In November 1997, the Company signed a new lease agreement effective
May 1, 1998, for 51,625 square feet of office/call center/research
labs/warehouse space in the same Beltsville, Maryland, facility previously
occupied, under the terms of a lease that expires on February 28, 2009. This
facility contains corporate administration, human resources, accounting, sales
and marketing, technical services, research labs, warehousing, and call center
operations for both InfoSpherix and BioSpherix segments.
The Company currently leases approximately 16,000 square feet of space
for its GISD telesupport services in Cumberland, Maryland.
Throughout 2000, the Company operated at approximately 40% and 70% of
productive capacity at the Beltsville and Cumberland facilities, respectively.
ITEM 3. LEGAL PROCEEDINGS
Information required by this Item 3 is included in Note 9 "Commitments
and Contingencies" of the Notes to Financial Statements included herein pursuant
to Part II of this Form 10-K.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted by the Company during the fourth
quarter of 2000 to a vote of security holders through solicitation of proxies or
otherwise.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded in the over-the-counter market and
is quoted in the NASDAQ National Market System under the symbol BINC. No cash
dividends have been paid. The Company's loan agreement with its bank does not
expressly restrict the payment of dividends; however, no such payments are
anticipated in the near future.
As of February 13, 2001, the number of shareholders of record of the
Company's common stock was approximately 5,500. The following table states the
high and low sales prices of the Company's common stock for each quarter during
the two year period ended December 31, 2000, as reported on the NASDAQ National
Market System:
HIGH LOW
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1st Quarter 2000 $15 $5 1/4
2nd Quarter 2000 $10 11/16 $4 3/4
3rd Quarter 2000 $7 31/32 $4 7/32
4th Quarter 2000 $7 3/32 $4 3/8
1st Quarter 1999 $8 $4 13/16
2nd Quarter 1999 $7 15/16 $6
3rd Quarter 1999 $6 7/8 $4
4th Quarter 1999 $7 19/32 $4 1/16
In late February 2000, the Company completed a $5 million private
offering of 723,982 units to a single institutional investor (the "Investor").
Such offering was exempt from registration requirements under the Securities Act
of 1933 pursuant to the private offering exemption. Each unit consisted of one
share of Common Stock and one and one-half (1 1/2) warrants with an exercise
price of $6.91 per share (the "Warrant"). The Warrant is exercisable throughout
a four year period. The Company has registered the shares sold and the shares
covered by the Warrant on Form S-3 (Registration No. 333-32504). Private
offerings with the same Investor were also conducted in 1997 and 1999.
During 2000, warrants for the purchase of 50,100 and 50,000 shares, at
$4.00 and $6.40, respectively, of the Company's Common Stock were exercised,
resulting in proceeds of $520,425. Additional warrants issued in connection with
the 1997, 1999 and 2000 offerings for the purchase of 325,000, 1,085,973 and
250,000 shares at $6.40, $6.91, and $8.00, respectively, are outstanding at
December 31, 2000.
In connection with the above-described private placements, the Investor
has agreed that it will not exercise any of the warrants to the extent that it
would acquire shares of Common Stock exceeding 9.9% of the outstanding Common
Stock nor to sell shares to anyone to the extent that their holdings in the
Company would exceed 4.9% of the outstanding Common Stock.
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ITEM 6. SELECTED FINANCIAL DATA
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Revenue $17,034,694 $12,698,412 $16,013,897 $13,639,319 $13,800,385
Income (loss) from
continuing operations $ 591,070 $(5,205,097) $(1,980,594) $ (141,852) $ 126,566
Loss from discontinued
operations $ - $ - $ - $ - $ (57,576)
Net income (loss) $ 591,070 $(5,205,097) $(1,980,594) $ (141,852) $ 68,990
Net income (loss)
per share, diluted $ 0.06 $ (0.55) $ (0.23) $ (0.02) $ 0.01
Total assets $13,451,258 $ 8,555,609 $11,634,238 $11,259,075 $ 5,600,910
Long-term debt obligations $ 358,411 $ 1,490,765 $ 2,229,664 $ 1,517,954 $ 214,546
Cash dividends declared
per common share $ - $ - $ - $ - $ -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS--2000 COMPARED WITH 1999
The Company reported net income of $591,000 ($0.06 per diluted share)
on sales of $17,035,000 for the year ended December 31, 2000, compared with a
net loss of $5,205,000 ($0.55 per share) on sales of $12,698,000 for the year
ended December 31, 1999.
The Company operates via two (2) principal segments, InfoSpherix and
BioSpherix.
InfoSpherix revenue for 2000 was $16,885,000, compared to $12,568,000
in 1999. The $4,317,000 (34%) increase was primarily a result of the creation of
the Company's business development group which generated new commercial and
government business. The following schedule summarizes the break-down of
InfoSpherix revenue between government and commercial contracts (in $000s):
FOR THE YEAR ENDED DECEMBER 31
2000 1999
----------------- -----------------
Government $10,009 $8,974
Commercial 6,876 3,594
----------------- -----------------
$16,885 $12,568
================= =================
The Company's business development group is targeting the commercial
pharmaceutical segment, the government information center and technology
segments, and the ReserveSuite product and services segment, for continued
growth. Currently the Company is negotiating on several contracts along these
business segments, although no assurance can be given that these efforts will
result in new business for the Company.
-10-
The Company's Federal Information Center ("FIC") contract, through the
General Services Administration, concluded on October 13, 2000. In 2000, the FIC
contract accounted for approximately $2.7 million in revenue or 16% of total
revenue for the period. The Company expects the revenue loss from the FIC
contract to be offset beginning near the end of the first quarter of 2001 by its
recent award of a contract from the Michigan Department of Natural Resources to
operate its Central Reservation System. The base amount of the award is $9.5
million over three years, excluding additional options for two one-year
extensions.
Certain of the Company's commercial contracts provide pharmaceutical
and medical information for a specific drug or product. The success of a
particular drug or product will often determine whether the Company's contract
is extended or renewed. Sales and marketing efforts have been intensified to
re-establish and increase the Company's share of commercial business in response
to the high level of public interest in health information. Focus has been
placed on the pharmaceutical companies' drug development and launch support, as
opposed to the single drug approach of previous years.
The ITD was awarded three IDIQ technical services contracts in 2000.
The Company will begin marketing on these contracts in 2001.
Commercial contracts are typically for shorter terms than government
contracts and that can result in substantial variations in commercial revenues.
For example, in the first quarter of 2000, the Company obtained and
substantially performed a pharmaceutical contract which accounted for
approximately 15% of the Company's revenue in 2000.
BioSpherix revenue for 2000 was $150,000, compared to revenue of
$130,000 in 1999. The $20,000 (15%) increase in revenue was as a result of the
sale of a specialty carbohydrate manufactured by the Division net of the effect
of reduced R&D funding from Arla as a result of the completion of the technical
support services provided to Arla.
Selling, general and administrative expenses ("S,G&A") for 2000 was
$3,940,000, compared to $3,674,000 in 1999. The increase of $266,000 (7%) was
the result of increased marketing expenditures.
Depreciation and amortization expense for 2000 was $1,315,000, compared
to $1,741,000 in 1999. The decrease of $426,000 (24%) was the result of $2
million in assets that the Company wrote-down in 1999.
Interest, net in 2000 amounted to $180,000 of income, compared to a net
expense of $211,000 in 1999. The $391,000 increase was the result of increased
interest revenue earned on funds received in connection with the private
placement and decreased borrowing on the bank line of credit and the related
decrease in the rate of interest charged by the bank.
The Company recognized no income tax expense in connection with its
2000 profits due to its tax loss carryforwards.
The Company's sales backlog as of December 31, 2000, was $20,909,000
compared to $15,632,000 as of December 31, 1999. The increase in backlog between
years is a result of the addition of new Government contracts.
RESULTS OF OPERATIONS--1999 COMPARED WITH 1998
The Company reported a net loss of $5,205,000 ($0.55 per share) on
sales of $12,698,000 for the year ended December 31, 1999, compared with a net
loss of $1,981,000 ($0.23 per share) on sales of $16,014,000 for the year ended
December 31, 1998. Results for 1999 include a $4.3 million operating loss from
InfoSpherix and $369,000 in unrecovered costs associated with BioSpherix.
Included in InfoSpherix's loss for 1999 is a $2 million write-down of impaired
assets taken in the fourth quarter of 1999.
InfoSpherix revenue for 1999 was $12,568,000, compared to $15,766,000
in 1998. The $3,198,000 (20%) decrease between years was primarily the result of
completion of several long-term government contracts. The prior year also
included larger than normal revenue from the initial launch of two commercial
contracts. The following schedule summarizes the break-down of InfoSpherix
revenue between government and commercial contracts (in $000s):
-11-
FOR THE YEAR ENDED DECEMBER 31
1999 1998
----------------- -----------------
Government $8,974 $11,094
Commercial 3,594 4,672
----------------- -----------------
$12,568 $15,766
================= =================
Starting in the first quarter of 1999, the Company initiated
significant re-engineering efforts across its business lines, through the
reduction of labor and renegotiation of contracts, in combination with a
marketing strategy designed to take advantage of the Company's technology
investment. The Company targeted growth in the business line in which the
Company is the most competitive, the health and pharmaceutical business, to make
this line the Company's profit leader. The government business also has seen
significant results in increased performance on all contracts. Management has
taken steps to restructure the Company's business development plan.
BioSpherix revenue for 1999 was $130,000, compared to $248,000 in 1998.
The $118,000 (48%) decrease was the result of the completion of the technical
support services provided to Arla.
Selling, general and administrative expenses ("S,G&A") for 1999 was
$3,674,000, compared to $3,799,000 in 1998. The $125,000 (3%) decrease was the
result of staff reductions.
Depreciation and amortization expense for 1999 was $1,741,000, compared
to $1,311,000 in 1998. The $430,000 (33%) increase was the result of the
Company's investments in information systems and software development.
During the fourth quarter of 1999, the Company wrote-down approximately
$2 million of capitalized software and computer technology. The write-down
included $648,000 for InfoSuite, $633,000 for HealthSuite, and $731,000 for
ReserveSuite/CTI. The write-downs were a result of changes made to the Company's
marketing plan in the fourth quarter of 1999, and approved by the Board of
Directors in February 2000. Despite efforts to market these products throughout
1999, management acknowledges the lack of sufficient historical and forecasted
sales. The absence of dependable sales leads related to these assets and the
progressive shifting of the Company's marketing efforts towards the
pharmaceutical business and BioSpherix products, cause uncertainty that
sufficient future cashflows will be obtained to justify the value of these
assets on the books. These assets have therefore been revalued in the fourth
quarter under the guidelines of FAS 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Based on the
Company's expectation of future discounted net cash flows from these assets,
these assets have been written-down to their expected realizable value of $1.6
million.
Interest (net) for 1999 was a net loss of $211,000, compared to a net
loss of $137,000 in 1998. The $74,000 (54%) increase was the result of increased
interest expense connected with increased borrowing on the bank line of credit
and the related increase in the rate of interest charged by the bank.
Based on the Company's losses and its accumulated deficit, the Company
provided a full valuation allowance against the net deferred tax asset. During
the second quarter of 1999, the Company increased the allowance in the amount of
$300,000 to fully value the remaining net deferred tax asset recorded at
December 31, 1998, resulting in an income tax expense for the year of $300,000.
The Company's sales backlog as of December 31, 1999, was $15,632,000
compared to $25,828,000 as of December 31, 1998. The decrease in backlog between
years was the result of the expiration of contracts and the decrease in sales.
LIQUIDITY AND CAPITAL RESOURCES
The Company renewed its Loan Agreement (the "Agreement") with Bank of
America (the "Bank") on June 30, 2000, which provides for borrowing up to $1.5
million, subject to advance rates as defined in the Agreement. Outstanding
borrowings under the Agreement aggregated $386,274 at December 31, 2000, and are
collateralized by the Company's eligible accounts receivable and $500,000 from
the Company's money market account. The interest rate under the new agreement is
the Bank's prime rate plus 0.25% per annum. The total amount available to the
Company
-12-
was $1,113,726 under the Agreement at December 31, 2000. The Agreement contains
covenants that require the Company to meet certain tangible net worth and cash
flow coverage ratios. The Company was in compliance with the bank covenants as
of December 31, 2000. The line expires on June 30, 2001, but the Company
anticipates that the line will be renewed in 2001. However, if the Company is
unable to extend the line of credit, the Company believes that it has adequate
funds to meet all of its current obligations for the balance of 2001.
Cash flow for the year ended December 31, 2000, reflects a net cash
inflow of $4.1 million consisting of $1.7 million provided by operating
activities, $1.9 million used in investing activities, and $4.3 million provided
by financing activities. Cash flow from operating activities in 2000 increased
$2.8 million from those of the prior year as a result of increased revenues from
InfoSpherix programs. Investment in property and equipment increased by $0.5
million, as $1.3 million was used in 2000 to buy out the Company's telephone
equipment leases. These investments were financed through the proceeds from
operations and the issuance of common stock via the private placement.
Working capital as of December 31, 2000, was $6,358,000, which
represents a $6,297,000 increase from working capital of $61,000 at December 31,
1999. The increase in working capital is principally due to the 2000 private
placement and the profitable operations conducted by the Company in 2000.
The Company considers the upgrading of its information and
telecommunications systems complete and adequate for the near term. Future
capital needs to start new contracts and maintain existing programs, while
upgrading its information and telecommunication systems, will be proportionately
less. The Company is anticipating sufficient cash flow from operating activities
during 2001 to cover its continuing capital needs. No dividends were paid in
2000 and none are anticipated in 2001.
IMPACT OF THE YEAR 2000
To date, the Company has not encountered any significant effects of the
Year 2000 issue either internally or with third parties. The Company cannot
guarantee that problems will not occur in the future or have not yet been
detected.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company manages its debt and its available cash considering
available investment opportunities and risks, tax consequences and overall
financing strategies.
At year-end 2000, the Company had approximately $233,000 of fixed-rate
indebtedness and approximately $386,000 of variable-rate indebtedness. The
Company has not entered into any interest rate swaps or other derivatives with
respect to its indebtedness.
Cash available for investment is typically invested in short term
funds, which generally mature in 30 days or money-market funds. In general, such
funds are not subject to market risk because the interest paid on such funds
fluctuates with the prevailing interest rate. The carrying amounts approximate
market value. It is the Company's practice to hold these investments to
maturity.
Assuming year-end 2000 variable rate debt and cash available for
investment, a one percent change in interest rates would impact net interest
income by less than $55,000.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101). SAB 101 provides guidance on the recognition, presentation, and disclosure
of revenues in financial statements. The Company adopted SAB 101 as of January
1, 2000. The adoption did not have a material effect on the financial results,
as the Company's revenue recognition policies were already consistent with SAB
101.
-13-
ITEM 8. FINANCIAL STATEMENTS
Financial statements and supplementary data required by this Item 8
follow.
INDEX TO FINANCIAL STATEMENTS PAGE
Reports of Independent Accountants.................................................................................15
Statements of Operations for the years ended December 31, 2000, 1999 and 1998......................................17
Balance Sheets as of December 31, 2000 and 1999....................................................................18
Statements of Changes in Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998.................19
Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998......................................20
Notes to Financial Statements......................................................................................21
-14-
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS
BIOSPHERICS INCORPORATED
We have audited the accompanying balance sheet of Biospherics Incorporated
(the "Company") as of December 31, 2000, and the related statements of
operations, changes in stockholders' equity and cash flows for the year
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 audit.
We conducted our audit in accordance with auditing standards generally
accepted 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, financial statements referred to above present fairly, in all
material respects, the financial position of Biospherics Incorporated at
December 31, 2000, and the results of its operations and its cash flows for
the year ended, in conformity with accounting principles generally accepted
in the United States.
/s/ Grant Thornton LLP
Vienna, Virginia
February 13, 2001
-15-
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS
BIOSPHERICS INCORPORATED
In our opinion, the accompanying balance sheet and related statements of
operations, changes in stockholders' equity and cash flows present fairly, in
all material respects, the financial position of Biospherics Incorporated at
December 31, 1999 and the results of its operations and its cash flows for the
years ended December 31, 1999 and 1998, in conformity with accounting principles
generally accepted in the United States of America. 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
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Baltimore, Maryland
February 29, 2000
-16-
BIOSPHERICS INCORPORATED
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
2000 1999 1998
------------------ ------------------ ------------------
REVENUE $ 17,034,694 $ 12,698,412 $ 16,013,897
OPERATING EXPENSE
Direct contract and operating costs 11,087,899 9,621,882 12,457,277
Selling, general and administrative expense 3,939,702 3,673,635 3,799,150
Research and development expense 281,084 343,880 410,827
Depreciation and amortization expense 1,314,962 1,740,511 1,310,849
Write-down of impaired assets - 2,012,225 -
------------------ ------------------ ------------------
Total operating expense 16,623,647 17,392,133 17,978,103
------------------ ------------------ ------------------
INCOME (LOSS) FROM OPERATIONS 411,047 (4,693,721) (1,964,206)
Interest, net 180,023 (211,376) (137,233)
------------------ ------------------ ------------------
Income (loss) before taxes 591,070 (4,905,097) (2,101,439)
Income tax expense (benefit) - 300,000 (120,845)
------------------ ------------------ ------------------
NET INCOME (LOSS) $ 591,070 $ (5,205,097) $ (1,980,594)
------------------ ------------------ ------------------
Net income (loss) per share, basic $ 0.06 $ (0.55) $ (0.23)
------------------ ------------------ ------------------
Net income (loss) per share, diluted $ 0.06 $ (0.55) $ (0.23)
------------------ ------------------ ------------------
Weighted average shares outstanding, basic 10,499,628 9,433,295 8,790,050
------------------ ------------------ ------------------
Weighted average shares outstanding, diluted 10,559,794 9,433,295 8,790,050
------------------ ------------------ ------------------
See accompanying notes to financial statements.
-17-
BIOSPHERICS INCORPORATED
BALANCE SHEETS
AS OF DECEMBER 31, 2000 AND 1999
2000 1999
--------------- ---------------
ASSETS
Current assets
Cash and cash equivalents $ 5,549,866 $ 1,437,280
Restricted cash 500,000 500,000
Trade accounts receivable, net of allowance for
doubtful accounts of $75,000 and $200,000 2,121,747 1,616,012
Other receivables 220,855 149,149
Prepaid expenses and other assets 450,982 476,866
--------------- ---------------
Total current assets 8,843,450 4,179,307
Property and equipment, net of accumulated depreciation
of $3,647,404 and $3,555,415 4,457,841 4,239,776
Patents, net of accumulated amortization of $115,643 and $100,085 149,967 136,526
--------------- ---------------
Total assets $13,451,258 $ 8,555,609
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank line of credit $ 386,274 $ 1,277,853
Accounts payable and accrued expenses 742,830 1,095,199
Accrued salaries and benefits 974,844 682,034
Notes payable 200,177 634,716
Capital lease obligations 70,570 317,445
Deferred revenue 111,161 111,161
--------------- ---------------
Total current liabilities 2,485,856 4,118,408
Notes payable 33,082 206,000
Capital lease obligations 54,582 332,604
Deferred rent 161,483 116,154
Deferred compensation 136,308 -
Deferred revenue 1,000,000 1,000,000
--------------- ---------------
Total liabilities 3,871,311 5,773,166
--------------- ---------------
Commitments and contingencies
Redeemable common stock, 3,076,307 and 3,054,273 shares
at December 31, 2000 and 1999, respectively 679,208 547,337
--------------- ---------------
Stockholders' equity
Preferred stock, $0.01 par value, 2,000,000 shares authorized;
none issued and outstanding - -
Common stock, $0.005 par value, 50,000,000 and 18,000,000
shares authorized; 10,784,045 and 9,781,488 issued,
10,735,331 and 9,747,656 outstanding, of which
3,076,307 and 3,054,273 shares are classified as
redeemable common stock at December 31, 2000 and
1999, respectively 38,539 33,636
Paid-in capital in excess of par value 14,147,749 7,963,339
Treasury stock, 48,714 and 33,838 shares, at cost at
December 31, 2000 and 1999, respectively (327,976) (219,054)
Accumulated deficit (4,957,573) (5,542,815)
--------------- ---------------
Total stockholders' equity 8,900,739 2,235,106
--------------- ---------------
Total liabilities and stockholders' equity $13,451,258 $ 8,555,609
=============== ===============
See accompanying notes to financial statements.
-18-
BIOSPHERICS INCORPORATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
RETAINED
COMMON STOCK PAID-IN TREASURY STOCK EARNINGS
---------------------- CAPITAL IN ----------------- (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT EXCESS OF PAR SHARES AMOUNT DEFICIT) EQUITY
---------- ----------- ------------- ------- --------- ----------- ------------
Balance, December 31, 1997 8,829,190 $28,078 $4,403,204 40,606 $(267,369) $1,649,166 $5,813,079
Issuance of common stock
Exercise of employee stock options 12,000 60 40,690 - - - 40,750
Exercise of stock warrants 132,501 663 529,341 - - - 530,004
Cost of stock issuance - - (60,491) - - - (60,491)
Net loss - - - - - (1,980,594) (1,980,594)
----------- ----------- ------------ ------- ----------- ------------ ------------
Balance, December 31, 1998 8,973,691 28,801 4,912,744 40,606 (267,369) (331,428) 4,342,748
Issuance of common stock
Exercise of employee stock options 130,298 652 396,677 - - - 397,329
Exercise of stock warrants 677,499 3,387 2,894,109 - - - 2,897,496
Cost of stock issuance - - (17,768) - - - (17,768)
Issuance of treasury stock in payment
of expenses - - - (6,768) 48,315 (6,290) 42,025
Net reclassification for redeemable
common stock - 796 (222,423) - - - (221,627)
Net loss - - - - - (5,205,097) (5,205,097)
----------- ----------- ------------ ------- ----------- ------------ ------------
Balance, December 31, 1999 9,781,488 33,636 7,963,339 33,838 (219,054) (5,542,815) 2,235,106
Issuance of common stock
Sale of common stock in private
placement 723,982 3,620 4,996,380 - - - 5,000,000
Exercise of employee stock options 178,475 892 844,033 - - - 844,925
Exercise of stock warrants 100,100 501 519,925 - - - 520,426
Cost of stock issuance - - (44,167) - - - (44,167)
Acquisition of treasury stock in
connection with option exercises - - - 17,966 (132,499) - (132,499)
Issuance of treasury stock in payment
of expense - - - (3,090) 23,577 (5,828) 17,749
Net reclassification for redeemable
common stock - (110) (131,761) - - - (131,871)
Net income - - - - - 591,070 591,070
----------- ----------- ------------ ------- ----------- ------------ ------------
Balance, December 31, 2000 10,784,045 $38,539 $14,147,749 48,714 $(327,976) $(4,957,573) $8,900,739
----------- ----------- ------------ ------- ----------- ------------ ------------
See accompanying notes to financial statements.
-19-
BIOSPHERICS INCORPORATED
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
2000 1999 1998
--------------- -------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 591,070 $ (5,205,097) $(1,980,594)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,314,961 1,740,511 1,310,849
Provision for uncollectible accounts receivable (125,000) 55,000 60,000
Loss on disposal or write-down of assets 25,484 2,037,341 99,209
Treasury stock issued in payment of expenses 17,749 42,025 -
Changes in assets and liabilities:
Trade accounts receivable (380,735) (28,192) (266,473)
Other receivables (71,706) 61,039 (99,875)
Prepaid expenses and other assets 11,249 81,204 (131,541)
Deferred income taxes - 300,000 175,526
Accounts payable and accrued expenses 132,535 (165,997) (34,549)
Income taxes payable - - (215,226)
Deferred rent 45,329 9,231 (10,336)
Deferred compensation 136,308 - (18,869)
Deferred revenue - (33,643) (30,471)
--------------- -------------- ---------------
Net cash provided by (used in) operating activities 1,697,244 (1,106,578) (1,142,350)
--------------- -------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (1,887,828) (1,432,487) (3,867,313)
Restricted cash, security deposit - - 27,408
Deposit - - (70,000)
Additions to patent costs (28,999) (22,360) (4,810)
--------------- -------------- ---------------
Net cash used in investing activities (1,916,827) (1,454,847) (3,914,715)
--------------- -------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change on bank line of credit (891,579) 129,848 1,138,006
Restricted cash under bank line of credit - (500,000) -
Net change in book overdraft (144,177) (458,134) 552,407
Proceeds from notes payable - 198,491 678,922
Payments on notes payable (607,457) (543,849) (475,168)
Payments on capital lease obligations (213,303) (393,541) (287,304)
Proceeds from issuance of common stock 6,232,852 3,286,675 570,754
Cost of issuance of common stock (44,167) (9,619) (60,491)
--------------- -------------- ---------------
Net cash provided by financing activities 4,332,169 1,709,871 2,117,126
--------------- -------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,112,586 (851,554) (2,939,939)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,437,280 2,288,834 5,228,773
--------------- -------------- ---------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 5,549,866 $ 1,437,280 $ 2,288,834
=============== ============== ===============
SUPPLEMENTAL CASH FLOW INFORMATION
Income taxes refunded $ 151,312 $ 16,943 $ 62,674
Interest paid $ 143,903 $ 290,284 $ 336,345
Property and equipment financed by capital leases $ - $ - $ 795,260
Property and equipment financed by accounts payable $ 72,245 $ 120,162 $ 55,181
See accompanying notes to financial statements.
-20-
BIOSPHERICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
--------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Biospherics Incorporated was founded in 1967, is incorporated in
Delaware, and maintains two facilities in Maryland. The Company consists of a
Biotechnology Division ("BioSpherix"), a Commercial Information Services
Division ("CISD"), a Government Information Services Division ("GISD"), and an
Information Technology Division ("ITD"). CISD, GISD and ITD are collectively
referred to as "InfoSpherix." BioSpherix is dedicated to research, development,
and productization of proprietary products. CISD and GISD operate information
center services providing consulting, information management, and materials
management to the public as well as reservation and tourism solutions. ITD
provides software engineering, telecommunications, network infrastructure,
internet provision, and other computer system services via CISD and GISD.
CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. At December 31, 2000,
the Company had approximately $6,115,392 in deposits with a maturity of three
months or less in one bank, which exceeds FDIC insured limits. The Company has
not experienced any losses on its investments.
CONCENTRATIONS
At December 31, 2000, three major contracts constitute 44% of the trade
accounts receivable, the components of which are 17%, 15%, and 12%. No other
single contract was greater than 10% of total trade accounts receivable.
Receivables from Federal and state agencies represented 40% of the total trade
accounts receivable. The Company's Federal Information Center ("FIC") contract,
through the General Services Administration, concluded on October 13, 2000. The
FIC contract in 2000, accounted for approximately $2.7 million in revenue or 16%
of total revenue for the period.
USE OF ESTIMATES AND ASSUMPTIONS
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles. This requires management to make
estimates and assumptions that affect certain reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the period. Accordingly, actual results could differ from those estimates and
assumptions.
PROPERTY AND EQUIPMENT AND DEPRECIATION
Property and equipment are stated at cost and consist of office
furniture and equipment, computer hardware and software, leasehold improvements,
and capital leases. Computer hardware and software include the cost of
internally developed software programs which have long-term benefits. It is the
Company's policy to capitalize software developed for internal use. The Company
computes depreciation and amortization under the straight line method over the
following estimated useful lives of the related assets.
Office furniture and equipment 3 to 10 years
Computer hardware and software 3 to 5 years
Leasehold improvements are depreciated or amortized over the lesser of
the term of the related lease or the estimated useful lives of the assets
(generally 5 to 10 years). Major additions, improvements and renewals are
capitalized and ordinary repairs, maintenance, and renewals are expensed in the
year incurred. Gains or losses from the sale or retirement of property and
equipment result from the difference between sales proceeds (if any), and the
assets' net book value, and are recorded in the Statement of Operations.
-21-
BIOSPHERICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
--------------
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to operations as incurred.
PATENT COSTS
Legal costs incurred in connection with patent applications and costs
of acquiring patents are capitalized when incurred. When patents are granted,
costs are amortized over a term representing the lesser of the life of the
patent or the projected sales period of the product or process.
LONG-LIVED ASSETS
The Company assesses the potential impairment of long-lived assets,
when events or circumstances indicate that the carrying amount of an asset may
not be recoverable. In 2000, the Company recorded a loss in connection with the
disposal of obsolete assets of $25,485. The Company recorded an impairment loss
on software technologies of $2,012,225 in 1999 and a loss in connection with the
disposal of obsolete assets of $25,116 in association with computer hardware and
software technologies (see Note 4). The Company uses an estimate of its future
undiscounted cash flows to evaluate whether the long-lived assets are
recoverable. The amount of impairment, if any, is measured based on projected
discounted cash flows.
REVENUE RECOGNITION
Revenue is recognized using the following methods depending upon the
terms of the contracts: time and materials, fixed price, or cost-plus-fixed-fee.
Revenue under time and materials contracts is recognized at contractually agreed
upon rates based upon direct labor hours expended and other direct costs
incurred. Revenue for fixed-price contracts is recognized using the
percentage-of-completion and unit-of-delivery methods. Revenue for
cost-plus-fixed-fee contracts is recognized based on the allowable total costs
incurred plus a pro rata share of the fee. Losses, if any, on contracts are
recorded during the period when first determined.
LICENSE FEES AND ADVANCE ROYALTIES
License fees and royalties are recognized as revenue over the fixed
term of the contract. Non-refundable fees are recognized when they are earned in
accordance with the applicable contractual terms. Payments received that are
related to future performance are deferred and recorded as revenue as they are
earned over contractually specified future performance periods. See Note 9.
Pursuant to the contractual terms, the advance will be recovered and therefore
recognized as revenue at the rate of 50% of such future royalties. As
commercialization of the products subject to the royalties is not expected until
the year 2002, the deferred revenue has been classified as noncurrent.
INCOME TAXES
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year end, based on enacted tax laws and
statutory tax rates applicable to the periods in which the 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.
Income tax expense is the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
FAIR VALUE INFORMATION
The estimated fair value of the Company's financial instruments, which
include cash, receivables, accounts payable, long-term notes payable, and
short-term notes payable reported in the balance sheet, approximate their
carrying value.
-22-
BIOSPHERICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
--------------
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company applies APB Opinion No. 25 and related interpretations in
accounting for stock-based compensation. Accordingly, because the exercise price
of options granted has been at market price, no compensation cost has been
recognized. The Company elected the "disclosure only" presentation of Statement
of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION in 1996 and, consequently, makes no charge against income in the
financial statements with respect to options granted with exercise prices at or
above fair market value.
NET INCOME PER SHARE
Basic net income (loss) per common share has been computed by dividing
net income (loss) by the weighted-average number of common shares outstanding
during the year. Diluted net income per common share has been computed by
dividing net income by the weighted-average number of common shares outstanding
with an assumed increase in common shares outstanding for common stock
equivalents, which includes outstanding options and warrants. Diluted net loss
per common share has been computed by dividing net loss by the weighted-average
number of common shares outstanding without an assumed increase in common shares
outstanding for common stock equivalents, as common stock equivalents are
antidilutive.
2000 1999 1998
--------------- --------------- ----------------
Weighted average shares outstanding, basic 10,499,628 9,433,295 8,790,050
Weighted average dilutive common stock equivalents 60,166 - -
--------------- --------------- ----------------
Weighted average shares outstanding, diluted 10,559,794 9,433,295 8,790,050
=============== =============== ================
2. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Balance, December 31, 1997 $85,000
Valuation adjustment 60,000
----------------
Balance, December 31, 1998 145,000
Write-off of uncollectible accounts (151,000)
Valuation adjustment 206,000
----------------
Balance, December 31, 1999 200,000
Write-off of uncollectible accounts (156,000)
Valuation adjustment 31,000
----------------
Balance, December 31, 2000 $75,000
================
3. PROPERTY AND EQUIPMENT
The components of property and equipment as of December 31, 2000, at
cost are:
2000 1999
--------------- ----------------
Computer software $2,363,919 $2,434,762
Computer hardware 4,555,263 3,067,993
Office furniture and equipment 388,532 624,991
Leasehold improvements 302,313 339,892
Capital leases 495,218 1,327,553
--------------- ----------------
Total cost $8,105,245 $7,795,191
Accumulated depreciation and amortization (3,647,404) (3,555,415)
--------------- ----------------
Property and equipment, net $4,457,841 $4,239,776
=============== ================
-23-
BIOSPHERICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
--------------
4. WRITE-DOWN OF IMPAIRED ASSETS
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," the Company uses an estimate of the future discounted
net cash flows of the related asset or asset grouping over the estimated
remaining life in measuring whether the assets are recoverable. During the
fourth quarter of 1999, the Company wrote-down approximately $2 million of
capitalized software and computer technology. The write-down included $648,000
for InfoSuite, $633,000 for HealthSuite, and $731,000 for ReserveSuite/CTI.
InfoSuite is a database and search-engine product, client-server based in Oracle
and Web-enabled, used to handle large volumes of data, categorize and
cross-reference data, perform expert searches, present results of data searches,
and other various related functions. HealthSuite is an advanced database
management product for clinical management, clinical demographics, demand
management, disease management, algorithmic expert system functions, and other
related capabilities. ReserveSuite is a comprehensive system for reserving
elements of an inventory, reporting and full management capability, client
server based in Oracle as well as Web-enabled. Computer Telephony Integration
("CTI") is a technology that enables the integration of telephone systems and
complex computer systems. The write-downs were a result of changes made to the
Company's marketing plan in the fourth quarter of 1999, and approved by the
Board of Directors in February 2000. Despite efforts to market these products
throughout 1999, management acknowledged the lack of sufficient historical and
forecasted sales. The absence of dependable sales leads related to these assets
and the progressive shifting of the Company's marketing efforts towards the
pharmaceutical business and BioSpherix products in 1999, caused uncertainty that
sufficient future cashflows would be obtained to justify the value of these
assets on the books. These assets were therefore revalued in the fourth quarter
of 1999 under the guidelines of FAS 121. Based on the Company's expectation of
future discounted net cash flows from these assets, these assets were
written-down to their expected realizable value of $1.6 million. There were no
additional write-downs in 2000.
5. DEBT
LINE OF CREDIT
The Company renewed its Loan Agreement (the "Agreement") with Bank of
America (the "Bank") on June 30, 2000, which provides for borrowing up to $1.5
million, subject to advance rates as defined in the Agreement. Outstanding
borrowings under the Agreement aggregated $386,274 and $1,277,853 at December
31, 2000 and 1999, respectively, and are collateralized by the Company's
eligible accounts receivable and $500,000 from the Company's money market
account. The interest rate under the new agreement is the Bank's prime rate plus
0.25% per annum. The total amount available to the Company was $1,113,726 and
$171,881 under the Agreement at December 31, 2000 and 1999, respectively. The
Agreement contains covenants that require the Company to meet certain tangible
net worth and cash flow coverage ratios. The Company was in compliance with the
bank covenants as of December 31, 2000. The line expires on June 30, 2001, but
the Company anticipates that the line will be renewed in 2001. However, if the
Company is unable to extend the line of credit, the Company believes that it has
adequate funds to meet all of its current obligations for the balance of 2001.
NOTES PAYABLE TO BANK
On May 31, 1997, the Company entered into an Equipment Line of Credit
Agreement ("Equipment Line") with the Bank to assist in financing equipment
purchases related to new contracts. The Equipment Line consists of a series of
loans for the acquisition of computer hardware and telecommunication equipment
not to exceed a maximum aggregate amount of $1 million. Additional terms include
repayment of each loan in thirty-six (36) equal monthly installments at a fixed
interest rate equal to the Treasury Index plus 275 basis points at the time of
loan origination. The facility is collateralized by the equipment purchased with
the loan proceeds. As part of this Equipment Line, the Company has entered into
the following notes payable with the Bank:
-24-
BIOSPHERICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
--------------
BALANCE PRINCIPAL PAYMENTS
ORIGINAL INTEREST RATE AS OF -------------------------
DATE OF NOTE AMOUNT PER ANNUM 12/31/00 2001 2002
- --------------------- ------------ --------------- --------------- ------------ ------------
December 3, 1997 $ 302,415 8.59% 8,400 8,400 -
March 11, 1998 $ 120,240 8.33% 13,360 13,360 -
April 29, 1998 $ 460,572 8.44% 76,762 76,762 -
October 20, 1998 $ 98,110 6.66% 29,978 29,978 -
July 1, 1999 $ 198,491 8.75% 104,759 71,677 33,082
--------------- ------------ ------------
$ 233,259 $ 200,177 $ 33,082
=============== ============ ============
OTHER
Included in accounts payable is $248,623 and $392,799 related to a book
overdraft at December 31, 2000 and 1999, respectively.
6. PRIVATE PLACEMENTS
In late February 2000, the Company completed a $5 million private
offering of 723,982 units to a single institutional investor (the "Investor").
Each unit consisted of one share of Common Stock and one and one-half (1 1/2)
warrants with an exercise price of $6.91 per share (the "Warrant"). The Warrant
is exercisable throughout a four year period. The Company has registered the
shares sold and the shares covered by the Warrant on Form S-3 (Registration No.
333-32504). Private offerings with the same Investor were also conducted in 1997
and 1999.
During 2000, warrants for the purchase of 50,100 and 50,000 shares, at
$4.00 and $6.40, respectively, of the Company's Common Stock were exercised,
resulting in proceeds of $520,425. Warrants for the purchase of 325,000,
1,085,973 and 250,000 shares at $6.40, $6.91, and $8.00, respectively, are
outstanding at December 31, 2000.
In connection with the above-described private placements, the Investor
has agreed that it will not exercise any of the warrants to the extent that it
would acquire shares of Common Stock exceeding 9.9% of the outstanding Common
Stock nor to sell shares to anyone to the extent that their holding in the
Company would exceed 4.9% of the outstanding Common Stock.
7. TREASURY STOCK TRANSACTION
During 2000, the Company issued 3,090 shares of Common Stock previously
held in the treasury in payment of expenses. The excess of the purchase price of
the treasury stock over the value of the stock on the date of issuance has been
charged to retained earnings in the amount of $5,828. During 2000, the Company
also accepted 17,966 shares of Common Stock as part of a stock option exercise.
These shares were recorded as an addition to treasury stock.
During 1999, the Company issued 6,768 shares of Common Stock previously
held in the treasury in payment of expenses. The excess of the purchase price of
the treasury stock over the value of the stock on the date of issuance has been
charged to retained earnings in the amount of $6,290.
8. INCOME TAXES
The benefit for income taxes in 2000, 1999 and 1998 consists of:
-25-
BIOSPHERICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
--------------
YEAR ENDED DECEMBER 31,
2000 1999 1998
---------- ------------ -------------
Current
Federal $ - $ - $ (53,297)
State - - (11,598)
---------- ------------ -------------
Total current benefit - - (64,895)
---------- ------------ -------------
Deferred
Federal - 245,624 (45,809)
State - 54,376 (10,141)
---------- ------------ -------------
Total deferred provision (benefit) - 300,000 (55,950)
---------- ------------ -------------
Total income tax provision (benefit) $ - $ 300,000 $ (120,845)
---------- ------------ -------------
The tax effect of significant temporary differences representing
deferred tax assets as of December 31, 2000 and 1999, is as follows:
2000 1999
----------------------------- -----------------------------
CURRENT NON-CURRENT CURRENT NON-CURRENT
---------- ------------- --------- -------------
Property and equipment $ - $ (536,042) $ - $ (58,673)
Deferred rent 35,331 - 14,260 -
Accrued vacation 29,940 - 45,278 -
Allowance for doubtful accounts 28,965 - 77,240 -
Deferred revenue - 386,200 - 386,200
Net operating loss carryforward - 2,870,162 - 2,478,885
Accrued bonus 144,645 - - -
Other 47,604 - (1,005) -
---------- ------------- --------- -------------
286,485 2,720,320 135,773 2,806,412
Valuation allowance (286,485) (2,720,320) (135,773) (2,806,412)
---------- ------------- --------- -------------
Deferred tax asset $ - $ - $ - $ -
---------- ------------- --------- -------------
Approximately $700,000 in U.S. net operating loss were utilized during
2000 to offset taxable income. The Company has $7.4 million in net operating
loss carryforwards which will be available to offset regular taxable U.S. income
during the carryforward period, which will begin to expire in 2018. Based on the
Company's losses in recent years and its accumulated deficit, the Company has
provided a full valuation allowance against the net deferred tax asset. During
fiscal year 2000, the Company increased the allowance in the amount of $64,200
to fully value the net deferred tax asset at December 31, 2000. At December 31,
2000, approximately $340,000 of the valuation allowance, related to benefits
from stock compensation, will be credited to paid in capital when recognized in
future periods.
Reconciliation between actual tax expense and tax computed at the
statutory Federal rate of 34 percent for 2000, 1999, and 1998 are as follows:
-26-
BIOSPHERICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
--------------
2000 1999 1998
---------------- ---------------- ----------------
U.S. Federal income tax rate at 34% $ 200,964 $ (1,667,747) $ (714,489)
State taxes, net of federal tax benefit 27,307 (225,862) (192,691)
Increase in valuation allowance 64,620 2,188,049 758,120
Expenses not deductible for tax purposes 6,353 5,560 5,431
Valuation allowance related to stock compensation (299,244) - -
Adjustment for prior year taxes - - 22,784
---------------- ---------------- ----------------
Income tax provision (benefit) $ - $ 300,000 $ (120,845)
================ ================ ================
9. COMMITMENTS AND CONTINGENCIES
GOVERNMENT CONTRACTS
The principal portion of the Company's revenue has been generated
traditionally by InfoSpherix. Several of the Company's contracts that provide
these revenues (principally contracts with the U.S. Government) are from time to
time subject to protest proceedings. These contracts are awarded pursuant to a
competitive bidding process. As of December 31, 2000, none of the Company's
contracts were under protest.
LEASES
The Company has various commitments under capital and operating leases
through 2009 relating to computer hardware and software, office equipment, its
call center facility in Cumberland, Maryland, and its call center and
administrative offices in Beltsville, Maryland.
Future minimum rentals as of December 31, 2000, under noncancellable
leases are as follows:
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
- --------------------------------------- ------------- --------------
2001 $ 95,554 $ 525,255
2002 54,950 517,695
2003 16,898 530,638
2004 1,102 546,124
2005 - 562,507
Thereafter - 1,893,758
------------ ---------------
168,504 $ 4,575,977
===============
Less: executory costs 30,053
Less: amount representing interest 13,299
------------
Capital lease obligations 125,152
Less current portion 70,570
------------
Long-term obligations $ 54,582
============
These future minimum rentals do not include consumer price index (CPI)
adjustments to which some of the leases are subject. The Company incurred rental
expenses of $707,000 in 2000, $887,000 in 1999 and $1,253,000 in 1998 under
operating leases.
-27-
BIOSPHERICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
--------------
The Company recorded rental income of $155,000 in 1998, under sublease
agreements, which is offset against rent expense in the accompanying financial
statements. No rental income was recorded in 2000 or 1999.
RELATED PARTY TRANSACTIONS
Stock Redemption Agreements
In August 1978, the Company, with stockholders' approval, entered into
agreements, which were restated on January 15, 1996, with two
officer-stockholders (the "Principal Stockholders") who beneficially own over
29% of the outstanding common stock at December 31, 2000. Under the agreement,
upon their deaths, the Company may be required to redeem from their estates the
number of shares of the Company's stock necessary to pay estate taxes and
administrative expenses of the estate, if any, up to $5,000,000. Shares would be
redeemed at the then-current market price. Redeemable common stock, as of
December 31, 2000 and 1999, consisted of 3,076,307 and 3,054,273 shares with a
par value of $0.005 per share, respectively. The Company is the beneficiary of
an insurance policy on the lives of these individuals, which the Company
maintains to provide benefits of $5,000,000 for this agreement.
EMPLOYEE CONTRACT
The Company has entered into an employment agreement with its Founder,
Chair, CEO, and Treasurer, who is a Principal Stockholder, that provides for
certain benefits should he be terminated within the terms of the agreement for
other than specific reasons. Benefits to be provided under this agreement
include continued life, disability, accident and health insurance and severance
payments equal to his annual base compensation through the term of the
agreement. The agreement expires on November 17, 2001.
DEFERRED RENT
The Company entered into a lease for its headquarters and research
facilities in 1998. The excess of the rent expense over the cash payments for
rent is recorded as deferred rent and is being amortized over the life of the
lease.
DEFERRED COMPENSATION AND CONSULTING AGREEMENTS
The Company has entered into agreements with the Principal
Stockholders, whereby these individuals agreed to serve as full-time employees
of the Company until their respective retirements. Under the agreements, upon
retirement, these individuals will receive deferred compensation equal to 70% of
their average annual total compensation less the assumed returns from investment
of their funded pension plans and their social security payments. The deferred
compensation plan is unfunded. At December 31, 2000, the Company's liability was
$11,000 under the plan as actuarially determined. The Company has also agreed to
fund long-term, continuous lifetime healthcare policies for the Principal
Stockholders. At December 31, 2000, the Company's liability was estimated to be
$125,000. Upon completion of their employment, the officer-stockholders also
agreed to serve as consultants to the Company on a minimum part-time, plus
as-needed basis, at a specified daily rate.
DEFERRED REVENUE
On September 27, 1996, the Company signed an exclusive worldwide
licensing agreement with MD Foods Ingredients amba (MDFI) of Denmark for the
use, manufacture and sale of Biospherics' nonfattening sugar, tagatose, as a
sweetener in foods. The Company received a non-refundable $750,000 initial
partial payment on signing. This $750,000 was classified as licensing revenue in
the 1996 financial statements. The Company received an additional payment of
$1,750,000 on January 6, 1997, subsequent to the successful completion of MDFI's
due diligence. The $750,000 of the $1,750,000 received on January 6, 1997,
completes the initial non-refundable payment, and was classified as licensing
revenue in the first quarter of 1997. The remaining $1 million of the $1,750,000
was classified as deferred revenue as this represents a non-refundable advance
against future royalties, recoverable and to be recognized as revenue, at the
rate of 50% of such annual royalties. The term of the Agreement is five years
after the expiration of the last to expire present or future U.S. patent
covering the licensed product and/or the licensed process for manufacturing
tagatose. The Company has two U.S. patents covering the proprietary method for
the manufacture of tagatose, which expire on July 19, 2009, and March 25, 2111,
respectively. Additional patents have been procured and
-28-
BIOSPHERICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
--------------
others are likely to result from ongoing research. The Company believes the new
patents will extend the term of the royalties. Full running royalties will be
paid to the Company on sales, which the Company believes will begin when the
first full-scale production plant for tagatose becomes operational. Under the
terms of the agreement, MDFI has full responsibility for all development costs,
including any regulatory requirements to sell in the U.S. and European Countries
and the costs of production and sales. In 2000, MDFI was merged into Arla Foods.
OTHER
The Company is also a party to legal actions arising in the ordinary
course of business. Management of the Company, after reviewing developments to
date with legal counsel, is of the opinion that the outcome of such matters will
not have a materially adverse effect on the financial position or results of
operations of the Company.
10. STOCK OPTION PLAN
The Company has an Employees' Stock Option Plan (the "Plan") which
permits issuance of both Incentive Stock Options (ISO) and Non-Qualified Stock
Options, whereby options may be granted to officers and other key employees to
purchase up to 400,000 shares of common stock in amounts determined by the
Compensation Committee of the Board of Directors through December 31, 2007. The
Company also has some options still outstanding under an expired option plan. To
date, all options granted have been at the then-publicly quoted price of the
stock. During 2000, 1999, and 1998, 44,400, 18,050, and 84,000 options were
granted, respectively. At December 31, 2000, 213,225 options were available for
grant under the Plan. An additional 5,000, 4,000, and 5,000 options were granted
outside the Plan in 2000, 1999, and 1998, respectively. Activity for the three
years ended December 31, 2000, for all option grants is shown below:
2000 1999 1998
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
2000 EXERCISE 1999 EXERCISE 1998 EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------------- ------------ ------------- ------------ -------------- ------------
Outstanding at beginning of year 634,100 $ 5.47 2,800,850 $ 2.43 2,820,750 $ 2.48
Granted 49,400 $ 6.53 22,050 $ 6.08 89,000 $ 5.87
Exercised (178,475) $ 4.73 (129,500) $ 3.07 (12,000) $ 3.40
Expired or forfeited (214,525) $ 4.97 (2,059,300) $ 1.35 (96,900) $ 5.48
------------- ------------ ------------- ------------ -------------- ------------
Outstanding at end of year 290,500 $ 6.55 634,100 $ 5.47 2,800,850 $ 2.43
Exercisable at end of year 203,138 557,600 664,475
Price range of options
Outstanding $4.06-$7.25 $3.31-$7.25 $1.43-$7.25
Exercised $3.31-$7.25 $2.88-$6.19 $2.88-$3.50
Expired or forfeited $4.68-$7.12 $1.44-$7.25 $2.88-$7.25
The following table summarizes information with respect to stock
options outstanding at December 31, 2000:
NUMBER OF OPTIONS WEIGHTED AVERAGE
RANGE OF OUTSTANDING AT REMAINING WEIGHTED AVERAGE
EXERCISE PRICE 12/31/00 CONTRACTUAL LIFE EXERCISE PRICE
- ---------------- --------------- ------------------ ------------------
$3.31 - 4.06 2,500 2.19 $ 4.06
$4.68 - 7.00 212,625 2.8 $ 6.34
$7.08 - 7.25 75,375 1.18 $ 7.21
- ---------------- --------------- ------------------ ------------------
$3.31 - 7.25 290,500 2.35 $ 6.55
================ =============== ================== ==================
-29-
BIOSPHERICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
--------------
The following table summarizes information with respect to stock
options exercisable at December 31, 2000:
YEAR OF OPTION NUMBER OF WEIGHTED AVERAGE
EXPIRATION OPTIONS EXERCISE PRICE PRICE RANGE
- -------------------- ------------------ ------------------ ------------------
2001 68,375 $7.23 $7.13-$7.25
2002 79,875 $6.59 $6.19-$7.00
2003 43,075 $6.16 $5.78-$6.36
2004 6,813 $6.07 $6.00-$6.60
2005 5,000 $6.43 $6.44
- -------------------- ------------------ ------------------ ------------------
All Years 203,138 $6.69 $5.78-$7.25
==================== ================== ================== ==================
To measure stock-based compensation in accordance with SFAS 123, the
fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model. The following tables summarize the
assumptions used and the pro-forma net income (loss) and net income (loss) per
share resulting from applying SFAS 123.
2000 1999 1998
---- ---- ----
Net income (loss) As reported $591,070 $(5,205,097) $(1,980,594)
Pro forma $365,922 $(5,681,165) $(2,408,248)
Net income (loss) per share - basic As reported $0.06 $(0.55) $(0.23)
Pro forma $0.04 $(0.60) $(0.27)
Net income (loss) per share - diluted As reported $0.06 $(0.55) $(0.23)
Pro forma $0.04 $(0.60) $(0.27)
Expected life (years) 4 4 4
Risk-free interest rate 5.75% 5.00% 4.70%
Volatility 73% 75% 75%
Dividend yield 0.0% 0.0% 0.0%
Weighted average remaining contractual life (years) 2.35 1.68 1.32
Weighted average fair value at date of grant $3.76 $3.53 $3.34
11 EMPLOYEE BENEFIT PLANS
Effective January 1, 1990, the Company established the Biospherics
Incorporated 401(k) Retirement Plan. The Plan is a discretionary defined
contribution plan and covers substantially all employees who have attained the
age of 21, have completed 1 year of service, and have worked a minimum of 1,000
hours in the past Plan or anniversary year.
Under provisions of the Plan, the Company, for any plan year, has
contributed an amount equal to 50% of the participant's contribution or 2 1/2%
of the participant's eligible compensation, whichever is less. The Company may,
at its own discretion, make additional matching contributions to participants.
Company contributions, net of forfeitures, amounted to $72,000, $59,000, and
$69,000 in 2000, 1999 and 1998, respectively.
12 INFORMATION BY BUSINESS SEGMENT
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker, or decision making group, in deciding how to allocate
resources and in assessing performance. The Company is managed along two
business segments, InfoSpherix and BioSpherix.
Financial information by business segment for the years ended December
31, 2000, 1999, and 1998 are summarized below:
-30-
BIOSPHERICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
--------------
YEAR ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS)
2000 1999 1998
--------- ------------ ----------
REVENUES InfoSpherix $ 16,885 $ 12,568 $ 15,766
BioSpherix 150 130 248
--------- ------------ ----------
Total revenues $ 17,035 $ 12,698 $ 16,014
========= ============ ==========
OPERATING PROFIT (LOSS) InfoSpherix $ 870 $ (4,325) $ (1,724)
AND INCOME (LOSS) BioSpherix (459) (369) (240)
BEFORE INCOME TAXES --------- ------------ ----------
Total operating income (loss) 411 (4,694) (1,964)
Interest income (expense), net 180 (211) (137)
--------- ------------ ----------
Income (loss) from operations before
income taxes $ 591 $ (4,905) $ (2,101)
========= ============ ==========
IDENTIFIABLE ASSETS InfoSpherix $ 6,557 $ 5,338 $ 7,379
BioSpherix 164 150 171
General corporate assets 6,730 3,068 4,084
--------- ------------ ----------
Total assets $ 13,451 $ 8,556 $ 11,634
========= ============ ==========
CAPITAL InfoSpherix $ 1,882 $ 1,060 $ 3,373
EXPENDITURES BioSpherix - 1 14
General corporate assets 21 506 277
--------- ------------ ----------
Total capital expenditures $ 1,903 $ 1,567 $ 3,664
========= ============ ==========
DEPRECIATION InfoSpherix $ 1,186 $ 1,502 $ 1,017
AND AMORTIZATION BioSpherix 20 24 20
General corporate assets 109 215 274
--------- ------------ ----------
Total depreciation and amortization $ 1,315 $ 1,741 $ 1,311
========= ============ ==========
During 2000, InfoSpherix recognized revenue from four of its
customers, including two government agencies, representing 22%, 16%, 15%, and
12% of the total Company revenues. During 1999, InfoSpherix recognized
revenue from three of its customers representing 28%, 24%, and 17% of the
total Company revenues. During 1998, InfoSpherix recognized revenue from four
of its customers representing 18%, 17%, 16%, and 11% of the total Company
revenues. Government contracts accounted for 59% and 71% of the InfoSpherix
revenue in 2000 and 1999, respectively.
BioSpherix has invented and patented for the Company the use of
tagatose as a low-calorie sweetener and has invented and patented
safe-for-humans pesticides. The Company also has filed for patents on other
inventions. In 1996, the Company signed an exclusive worldwide licensing
agreement with MD Foods Ingredients (MDFI) amba of Denmark for the use,
manufacture and sale of Biospherics' low-calorie sugar, tagatose, as a
sweetener (see Note 9 "Commitments and Contingencies"). In 2000, MDFI was
merged into Arla Foods.
BioSpherix also developed a safe-for-humans (and animals) pesticide
against house and stable flies, FlyCracker, and market tested it in 2000. The
consumer response was very favorable, and the Company will greatly increase its
marketing and sales effort for this unique, environmentally friendly product for
the year 2001. It potentially fills an important need expressed by the EPA for
safe pesticides to replace the harsh chemicals that the EPA cites as toxic.
BioSpherix is also developing other proprietary products.
Operating profit (loss) consists of revenue less operating expenses. In
computing operating profit, interest expense and income taxes were not
considered.
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BIOSPHERICS INCORPORATED
NOTES TO FINANCIAL STATEMENTS
--------------
Identifiable assets by business segment are those assets used in the
Company's operations in each segment, such as accounts receivable, inventories,
fixed assets, and patent costs. Corporate assets are principally cash and
certain other assets not related to a particular segment's operations.
13. SELECTED QUARTERLY INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA),
UNAUDITED
The table below sets forth selected unaudited financial information for
each quarter of the last two years.
QUARTER ENDED
------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
------------ ------------- ---------------- ---------------
1999
Revenue $ 2,966 $ 3,583 $ 3,473 $ 2,676
Gross profit $ 425 $ 950 $ 1,320 $ 381
Net income (loss) $ (994) $ (842) $ 18 $ (3,387)
Net loss
per share, basic $ (0.11) $ (0.09) $ - $ (0.35)
Net loss
per share, diluted $ (0.11) $ (0.09) $ - $ (0.35)
2000
Revenue $ 5,254 $ 4,683 $ 4,419 $ 2,679
Gross profit $ 2,282 $ 1,790 $ 1,710 $ 165
Net income (loss) $ 1,018 $ 387 $ 438 $ (1,252)
Net income (loss)
per share, basic $ 0.10 $ 0.04 $ 0.04 $ (0.12)
Net income (loss)
per share, diluted $ 0.09 $ 0.03 $ 0.04 $ (0.12)
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BIOSPHERICS INCORPORATED
----------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On April 5, 2000, PricewaterhouseCoopers LLP declined to stand for
re-election as the independent accountants for Biospherics Incorporated. The
reports of PricewaterhouseCoopers LLP on the financial statements for the years
end December 31, 1999 and 1998 contained no adverse opinion or disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principle. In connection with its audits for 1999 and 1998 and
through April 5, 2000, there were no disagreements with PricewaterhouseCoopers
LLP on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if not resolved
to the satisfaction of PricewaterhouseCoopers LLP would have caused them to make
reference thereto in their report on the financial statements for such years.
On April 27, 2000, the Company engaged Grant Thornton LLP as its new
independent accountants. The decision to engage Grant Thornton LLP was approved
by the Audit Committee, the Board of Directors of the Company, and Shareholders.
PART III
ITEMS 10 THROUGH 13.
Information required by Part III (Items 10 through 13) of this Form
10-K is incorporated by reference to the Company's definitive Proxy Statement
for the Annual Meeting of Stockholders for the fiscal year ended December 31,
2000, which will be filed with the Securities and Exchange Commission not later
than 120 days after the end of the fiscal year to which this report relates.
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
(3) Articles of Incorporation and Bylaws of the Company (incorporated by reference to the Company's
Annual Proxy Statement of May 15, 1992, as filed with the Commission)
(3.1) Articles of Amendment of the Company (incorporated by reference to the Company's Proxy Statement
for its May 1996 and May 2000 annual meetings, as filed with the Commission).
(10.1) Supplemental Executive Retirement Plan Agreement dated as of February 17, 1993, by and between
Gilbert V. Levin and the Company (incorporated by reference to Form 10-KSB filed March 31, 1993)
(10.2) Supplemental Executive Retirement Plan Agreement dated as of February 17, 1993, by and between
M. Karen Levin and the Company (incorporated by reference to Form 10-KSB filed March 31, 1993)
(10.3) Consulting Agreement dated as of February 17, 1993, by and between Gilbert V. Levin and the
Company (incorporated by reference to Form 10-KSB filed March 31, 1993)
(10.4) Consulting Agreement dated as of February 17, 1993, by and between M. Karen Levin and the
Company (incorporated by reference to Form 10-KSB filed March 31, 1993)
(10.5) Employment Agreement dated as of November 17, 1995, by and between Gilbert V. Levin and the
Company (incorporated by reference to Form 10-KSB filed March 31, 1996)
(10.5.1) Amendment to Employment Agreement dated as of November 17, 1995, by and between Gilbert V. Levin
and the Company (incorporated by reference to Form 10-KSB filed March 15, 1999)
(10.6) Restated Stock Redemption Agreement dated as of January 15, 1996, by and between Gilbert V.
Levin, M. Karen Levin, and the Company (incorporated by reference to Form 10-KSB filed March
31, 1996)
(10.7) Stock Purchase Warrants dated as of February 24, 2000, March 31, 1999 and May 18, 1999
(incorporated by reference to Form 8-K filed March 3, 2000 and May 24, 1999)
(10.8) Agreement and License between the Company and MD Foods Ingredients Amba (incorporated by
reference to Form 8-K filed October 22, 1996)
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BIOSPHERICS INCORPORATED
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(10.9) Securities Purchase Agreement dated as of February 24, 2000, by and between the Company and RGC
International Investors, LDC, c/o Rose Glen Capital Management, L.P. (incorporated by reference
to Form 8-K filed March 3, 2000).
(10.10) Lease Agreement dated as of November 11, 1997 by and between the Company and Liberty Property
Trust.
(10.11) 1997 Stock Option Plan (incorporated by reference from the Company's Proxy Statement for its May
1998 annual meeting, as filed with the Commission).
(10.12) On March 3, 2000, the Company filed a report on Form 8-K dated February 24, 2000, pursuant to
Item 5 thereof, to report the issuance of 723,982 units consisting of one share of Common Stock
and one and one-half warrants with an exercise price of $6.91 per share.
(10.13) On April 12, 2000, the Company filed a report on Form 8-K dated April 5, 2000, pursuant to Item
4 thereof, to report that PricewaterhouseCoopers LLP declined to stand for re-election as the
independent accountants for the Company.
(10.14) On May 2, 2000, the Company filed a report on Form 8-K dated April 27, 2000, pursuant to Item 4
thereof, to report that the Board of Directors approved a resolution authorizing management of
the Company to engage Grant Thornton LLP to act as its independent auditors for the calendar
year 2000.
(10.15) On March 6, 2001, the Company filed a report on Form 8-K dated February 16, 2001, pursuant to
Item 5 thereof, to report that the Board of Directors adopted a Rights Agreement by and between
the Company and American Stock Transfer & Trust Company as Rights Agent.
(23a) Consent of Grant Thornton LLP
(23b) Consent of PricewaterhouseCoopers LLP
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BIOSPHERICS INCORPORATED
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange
Act, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
BIOSPHERICS INCORPORATED
------------------------
(Registrant)
Date: FEBRUARY 16, 2001 By: /s/ GILBERT V. LEVIN
------------------------------- ------------------------------
Gilbert V. Levin
Chair, CEO, & Treasurer
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
Registrant and in the capacities and on the dates indicated.
/s/ GILBERT V. LEVIN Chair, CEO, and Treasurer February 16, 2001
- --------------------------------------
Gilbert V. Levin
/s/ M. KAREN LEVIN Director, Vice President for
- -------------------------------------- Communications February 16, 2001
M. Karen Levin
/s/ LIONEL V. BALDWIN Director February 16, 2001
- --------------------------------------
Lionel V. Baldwin
/s/ THOMAS GANTT Director February 16, 2001
- --------------------------------------
Thomas Gantt
/s/ ANNE S. MACLEOD Director February 16, 2001
- --------------------------------------
Anne S. MacLeod
/s/ THOMAS G. MOORE Director February 16, 2001
- --------------------------------------
Thomas G. Moore
/s/ DEBORAH S. STREB Director February 16, 2001
- --------------------------------------
Deborah S. Streb
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