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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark one)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [Fee Required]
For the fiscal year ended December 31, 1997
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[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from to
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Commission file number 0-5576
BIOSPHERICS(R) INCORPORATED
---------------------------
(Exact name of registrant as specified in its Charter)
Delaware 52-0849320
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(State or other jurisdiction of (I.R.S. Employer
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
Securities registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None
Securities registered under Section 12(g) of the Act:
Common Stock ($.005 par value per share)
----------------------------------------
(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 [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. [X]
The Registrant's revenues for its most recent fiscal year: $13,639,319.
As of February 27, 1998, the aggregate market value of the voting stock was
$42,295,061, of which $27,162,126 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 8,788,584 shares of the Registrant's Common Stock outstanding as
of February 27, 1998.
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 herein by reference
into Part III of this Form 10-KSB.
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [X]
Page 1 of 33
Biospherics Incorporated
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PART I
Certain statements contained in Form 10-KSB, 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.
Item 1. DESCRIPTION OF BUSINESS
General
Biospherics Incorporated (the "Company" or "Registrant"), a Delaware
corporation, was founded in 1967. The Company consists of an Information
Services Division ("ISD") and a BioTech Programs Unit ("BioTech"). As part of
BioTech, the Company is also developing its own proprietary products. In
February 1996, the Company sold its Environmental and Laboratory Services
Division ("ELSD") to permit a better focus on the major businesses of the
Company, ISD and BioTech.
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 website address is http://www.biospherics.com. The
Company's Common Stock trades on the NASDAQ National Market System under the
symbol BINC.
Information Services Division
ISD's information professionals operate call centers providing information
to the public on health and other socially beneficial subjects. They provide
computerized health, pharmaceutical and medical data collection and clinical
trial management, report and publication writing and editing, development of
programmatic concepts in public health information and education, database
management, computer-assisted health resource information, and computerized
reservation and tourism services to Federal, State and local government
agencies. ISD collects and disseminates information by providing customized
telesupport and database management systems that combine the live operators with
advanced communication technology. ISD answers millions of calls annually from
professionals and the public nationwide. It operates three Maryland-based call
centers (Beltsville, Cumberland and Columbia, MD) that efficiently manage and
track high volumes of calls. The technology is combined with computerized
database management systems to provide computer telephony integration (CTI),
which results in an efficient and effective system to collect and disseminate
large amounts of information at reduced cost.
ISD specializes in health issues and provides information services on a
wide range of diseases and disabilities, disease prevention, and education.
Areas of expertise include Alzheimer's disease, AIDS, cancer, diabetes, heart
disease, and stroke, in addition to the broad areas of smoking, aging, and
environmental hazards such as mishandling of pesticides. Programs are staffed by
health professionals and other information specialists who are given extensive
training and strict quality control guidelines. ISD's clients have included many
of the major U.S. pharmaceutical companies, as well as government departments
that deal with health or education, such as several of the National Institutes
of Health, other agencies in the Department of Health and Human Services, the
Department of the Navy, and the General Services Administration. Contracts with
non-governmental parties are typically obtained following private negotiations
and are most often for a term of one year, although many such contracts have
continued to renew for several years. Contracts with governmental parties are
obtained after competitive bidding processes and are most often for terms
ranging from two to three years, with additional option years. Many have been
re-won numerous times.
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BIOSPHERICS INCORPORATED
ISD accounted for over 90% of the Company's total revenues in 1996 and
1997. Most of ISD's revenue has traditionally been generated by a few, large
government and commercial contracts. See Note 1, "Receivables" of the Notes to
the Financial Statements included herein pursuant to Part II of this Form
10-KSB. During 1996, government business accounted for approximately 57% of
ISD's business, increasing to 68% in 1997. In December 1997, the Company was
advised by Pharmacia & Upjohn, one of the Company's significant commercial
customers, that its contract would not be renewed after completion on March 31,
1998. Also in December 1997, the Company was awarded a contract for the National
Park Service's National Park Reservation Service which is a two-year
firm-fixed-price contract aggregating $5 million with provision for three option
years. In conjunction with the performance of this contract, the Company
anticipates capital expenditures for computer software and hardware totaling $1
million during 1998. With the full implementation of this new reservation
system, it is anticipated that call times will be reduced, alternative sales
channels (remote field site and internet access) will be available whereby fewer
live operators will be required and reporting capabilities will be enhanced, all
of which should lead to improved margins.
As mentioned above, the principal portion of the Company's revenues has
been generated traditionally by the ISD unit. Several of the Company's contracts
that provide these revenues (principally contracts with the U.S. Government),
are subject to protest proceedings. These contracts are awarded pursuant to a
competitive bidding process. In two cases, the Company is the apparent
successful bidder for such a contract but one or more unsuccessful parties have
filed protests challenging the final award of these contracts to the Company.
The Company did not win its re-compete for its contract with the U.S. Department
of Agriculture - Forest Service and will complete that contract on September 30,
1998.
The Company has announced plans to expand its traditional information
systems business to include providing demand management information services to
HMOs, other group health organizations, insurers and employees in company health
plans (the "Healthcare Opportunity"). The Company intends to pursue the
Healthcare Opportunity by forming a new subsidiary and transferring portions of
its traditional ISD business and assets to such subsidiary to provide it an
initial base of business. The Company has preliminarily agreed to issue an
equity interest in such subsidiary to a physician group in exchange for certain
proprietary assets which will significantly aid in its pursuit of the Healthcare
Opportunity. The completion of the formation of the subsidiary, the final
negotiation with the physician group, the completion of permanent financing for
the subsidiary and the start-up and commencement of operations of the Healthcare
Opportunity all will require substantial effort, the recruitment of management
with experience in the demand management information services industry, and the
expenditure of substantial funds. There can be no assurance that such efforts
will come to fruition or that, if completed, they will result in a successful
operation.
BioTech Programs Unit
BioTech is the Company's research and development arm, dedicated to
developing proprietary products and services with a view toward economic
commercial applications. Over the last several years, the Company has invested
more than $3 million in these developments, primarily in its nonfattening sugar,
D-tagatose. The Company has accumulated a number of patents on its products.
D-Tagatose as a Bulk Sweetener. BioTech has patented the use of a naturally
occurring sugar, D-tagatose, as a full bulk, low-calorie sweetener. It is a true
sugar that looks, feels, performs, and tastes like table sugar. D-Tagatose is
present in small amounts in many dairy products. Biospherics has been developing
the substance since receiving a patent for its use as a food additive in 1988
and two patents for its production process (1991 and 1992).
In September 1996, the Company signed a license agreement with MD Foods
Ingredients amba of Denmark (MD Foods) for the exclusive worldwide rights to
manufacture, market, and distribute D-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, MD Foods will take
responsibility for all future marketing and development expenses, including the
cost of constructing and operating production plants. MD Foods manufactures a
wide variety of dairy products, foods and food ingredients. The Danish dairy
company ranks as the eighth largest dairy products company in the world. It has
the largest whey protein processing plant, the by-product of which is raw
material for making D-tagatose. MD Foods is widely regarded as a manufacturer of
high quality products and has the capability for worldwide distribution.
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BIOSPHERICS INCORPORATED
The up-front payment has been made by MD Foods, part in September 1996 and
part in January 1997. Total payments received were $2.5 million, $1 million of
which is a non-refundable advance against future royalties. Biospherics will
receive running royalties once commercial sales of D-tagatose begin. To
strengthen their cooperative efforts, the two companies established an advisory
committee to plan and review progress in bringing D-tagatose to its various
world market sectors. The committee consists of three MD Foods representatives
and one Biospherics representative. The committee proposes strategies and
actions for MD Foods management's consideration. MD Foods also funds Biospherics
for technological support at the rate of approximately $200,000 for each of the
two years following the signing of the license agreement.
MD Foods expects to compete for a share of the U.S. market for sweeteners.
A panel of experts has advised that D-tagatose may qualify for early entry into
the U.S. market as a food ingredient that is Generally Recognized as Safe
(GRAS). MD Foods has begun design of a commercial plant to manufacture
D-tagatose. MD Foods has advised that the plant construction will commence upon
successful GRAS affirmation in the U.S., currently anticipated in 1998. In this
case, the target date for plant start-up is now projected for the year 2000.
The Company believes that D-tagatose will fill a market not currently
accessible to other sweetener products. That market initially includes chocolate
confections, chewing gum, ice cream, soft drinks, and candies such as toffees
and caramels. Later on, market applications may broaden to include baked goods,
heat-processed foods, frozen desserts, other dairy products, cereals, and other
products in which the full bulk of sugar is required. Biospherics believes that
chocolate candies and chewing gum 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 substitute
for table sugar in chocolate candy; however, partly because of its high sugar
content, none has succeeded in emulating the flavor of table sugar. Also, unlike
table sugar, D-tagatose has been shown to cause virtually no tooth decay.
D-Tagatose as an Anti-hyperglycemic Agent. The Company has received
additional key patents for the use of D-tagatose as an anti-hyperglycemic agent
to prevent the formation of advanced glycosylation end-products, which is one of
the changes associated with aging (1994) and also as a treatment for diabetes
(1995). Studies are ongoing with respect to these potential uses of D-tagatose
at the University of Maryland School of Medicine. The Company is discussing the
possibility of licensing the use of D-tagatose as an anti-hyperglycemic agent
with a number of pharmaceutical and nutritional products companies.
Safe-for-Humans Pesticides. The increasing concern over pesticide hazards
in foods and the general environment indicates a market for an economic and
effective product that poses no human threat. The Company has received two U.S.
patents for its safe-for-humans pesticides and insecticides. More development
work is required in order to develop commercial applications for these products.
For now, Biospherics' research efforts and investment are largely devoted
to continuing to assist MD Foods in the development of D-tagatose because of the
near-term favorable prospects for this product, to continuing studies of the
effectiveness of D-tagatose against diabetes, and to further development of the
pesticides. While other BioTech proprietary products show promise, the continued
development thereof is dependent upon many factors, including but not limited to
the Company's having sufficient funds and resources to devote to such efforts.
Environmental and Laboratory Services Division
On January 5, 1996, the Board of Directors of the Company approved a formal
plan to sell the net assets of the Environmental and Laboratory Services
Division ("ELSD") because of a general decline in the environmental business and
continuing lack of profitability. On February 29, 1996, the Company entered into
an agreement to sell substantially all assets of ELSD except for certain
receivables retained by the Company relating to completed contracts. The
purchase price equaled the book value of substantially all ELSD Beltsville
branch assets, less certain liabilities, plus $113,000 of goodwill. The
aggregate net proceeds received for the sale and liquidation of remaining assets
was $433,000.
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BIOSPHERICS INCORPORATED
Industry Segments
See Note 10 "Information by Business Segment" of the Notes to the Financial
Statements included herein pursuant to Part II of this Form 10-KSB for industry
segment information of the Company, which information is incorporated herein by
reference.
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,
Biospherics has developed a specialized niche by concentrating on high quality,
personalized service combined with computerization for efficiency and
cost-effectiveness. ISD has established a reputation for rapidly starting up
projects to meet its clients' critical needs, while not compromising high
quality and reasonable pricing. During 1997, the Company has invested over $1
million in state-of-the-art computer telephony integration (CTI) systems and
continues to develop computer software products to improve its competitive
position.
Competitors of BioTech 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 which 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, all are caloric, and none has the taste of
table sugar. 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 and saccharin, to not provide the bulk needed for
these products. Recently, another high-intensity sweetener, Erythritol, has
become poised to enter the U.S. market as a self-affirmed Generally Recognized
as Safe (GRAS) product. It is deemed low-calorie, but has a cooling taste unlike
table sugar or D-tagatose. The Company believes that the calorie content of
D-tagatose is lower than that of Erythritol.
Sales Backlog
Sales backlog at December 31, 1997, and 1996, were as follows ($000s):
December 31, 1997 December 31, 1996
------------------------------ -----------------------------
Current Long-Term Total Current Long-Term Total
-------- --------- ------- ------- --------- -------
Information Services $11,070 $10,539 $21,609 $12,429 $16,504 $28,933
BioTech Programs Unit 200 1,000 1,200 1,105 1,232 2,337
-------- --------- ------- ------- --------- -------
$11,270 $11,539 $22,809 $13,534 $17,736 $31,270
-------- --------- ------- ------- --------- -------
Many of the Company's government contracts are awarded pursuant to a
competitive bidding process. In some cases, the Company is the apparent
successful bidder for such a contract but one or more unsuccessful parties have
filed protests challenging the final award of these contracts to the Company.
For purposes of calculating sales backlog as of December 31, 1997, contracts
under protest have been excluded from these totals. If the contracts under
protest where the Company was the apparent successful bidder were included, the
sales backlog at December 31, 1997, would increase from $22.8 million to $37
million. The current portion of sales backlog would increase from $11.3 million
to $13.9 million.
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BIOSPHERICS INCORPORATED
Patents and Trademarks
The Company has established a strong worldwide patent position for
D-tagatose and an economical process for its manufacture. The Company's 1988
U.S. patent for the use of D-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 D-tagatose that is protected by two U.S.
patents, issued in 1991 and 1992. In October 1994, the Company received a patent
for the discovery that D-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 D-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 pesticides were invented by the
Company in response to the EPA's initiative urging the development of
alternatives to the "hard chemicals" commonly used in agriculture and animal
husbandry. These chemicals are known to be carcinogenic or otherwise toxic to
humans, and pose a risk to consumers of food products containing traces. The new
pesticide is made from compounds that are safe, even when directly ingested by
humans or other animals. They were 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. The Company has
also applied for foreign patents for these products.
With respect to all of its inventions, the Company has received a total of
approximately 100 patents, including foreign issues. It has several patents
pending and many additional invention disclosures. In addition to its strong
patent position, the Company also relies on the common law protection of such
information as trade secrets and on confidentiality agreements to protect the
value of these assets.
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 D-tagatose (which is to be borne by MD Foods). Commercialization of
D-tagatose in the United States for use as food additives will require FDA
approval. As of this date, Biospherics believes the results of its test program
warrant continuing the development efforts to provide a broad family of
low-calorie sweeteners. To the Company's knowledge, there is no current
government regulation of the services to be provided via the Healthcare
Opportunity. However, there can be no assurances that such regulations will not
be initiated, which could adversely affect the Company's pursuit of the
Healthcare Opportunity.
Research and Development
BioTech expenditures were $557,000 and $611,000 in 1997 and 1996,
respectively. These expenditures were incurred primarily in the ongoing efforts
to commercialize D-tagatose with a minor portion to develop the Company's
safe-for-humans pesticides.
Employees
In 1997, the Company employed an average of 290 persons on a full or part
time basis. Of this total, approximately 170 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.
-6-
BIOSPHERICS INCORPORATED
Item 2. DESCRIPTION OF PROPERTY
The Company leases a 96,200 square foot facility in Beltsville, Maryland,
under the terms of a lease that expires on April 30, 1998. The Company currently
occupies 43,500 square feet of this facility and has subleased the remaining
space for the duration of the lease. This facility contains corporate
administration, human resources, accounting, sales and marketing, technical
services, warehousing, and call center operations. Current annual rent is
approximately $1,086,231. The annual rent is offset by $511,866 from the sublet
space.
In November 1997, the Company signed a new lease agreement effective May
1, 1998, for 51,325 square feet of office/call center/warehouse space in the
same Beltsville, Maryland, facility previously occupied, under the terms of a
lease that expires on April 30, 2008. Current annual rent will be approximately
$600,000 and is subject to scheduled base rent increases not to exceed 2.5% in
the first five years of the lease and 3.0% in the second five years of the
lease.
The Company currently leases space for its ISD telesupport services in a
14,200 square foot facility in Cumberland, Maryland. The lease is scheduled to
expire on December 31, 1998. In September 1996, the Company entered into a lease
addendum to increase the total square footage from 12,900 square feet to 14,200
square feet. The current annual rent is approximately $63,675. The Company is
currently negotiating a second lease addendum to increase the total square
footage from 14,200 square feet to 15,230 square feet. This addendum is
necessary to accommodate growth in the Company's business. The annual rent for
this facility would increase by approximately $7,000.
Item 3. LEGAL PROCEEDINGS
Information required by this Item 3 is included in Note 7 "Commitments
and Contingencies" of the Notes to Financial Statements included herein pursuant
to Part II of this Form 10-KSB.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted by the Company during the fourth quarter
of 1997 to a vote of security holders, through solicitation of proxies, or
otherwise.
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BIOSPHERICS INCORPORATED
PART II
Item 5. MARKET FOR 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 were paid in 1997 or 1996. 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 27, 1998, the number of shareholders of record of the
Company's common stock was approximately 4,700. The following table sets the
high and low sales prices of the Company's common stock for each quarter during
the two year period ended December 31, 1997, as reported on the NASDAQ National
Market System.
High Low
------------ ------------
1st Quarter 1997 $7 7/8 $5 7/8
2nd Quarter 1997 $6 5/8 $4 3/4
3rd Quarter 1997 $12 1/2 $3 7/16
4th Quarter 1997 $8 1/16 $4 5/16
1st Quarter 1996 $6 $4 1/4
2nd Quarter 1996 $10 $5
3rd Quarter 1996 $9 $5 5/8
4th Quarter 1996 $9 $6 1/8
In December 1997, the Company completed a $3 million private offering of
375,000 units to a single institutional investor. Each unit consisted of two (2)
shares of Common Stock and two (2) warrants, with exercise prices of $4.00 and
$4.50 per share, respectively. The warrants are exercisable for a three (3) year
period.
The transaction was effected in compliance with the exemption from
securities registration afforded by the provisions of Regulation D as
established by the United States Securities and Exchange Commission and the
Securities Act of 1933. In connection with this private placement, the Company
issued warrants to various placement agents which could result in up to an
additional 120,000 shares of Common Stock being issued. The Company has agreed
to file a Registration Statement on Form S-3 for the resale of the registrable
securities covered by this transaction.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations--1997 Compared with 1996
The Company reported a net loss of $141,852 ($0.02 per share) on sales of
$13,639,319 for the year ended December 31, 1997, compared with net income of
$68,990 ($0.01 per share) on sales of $13,800,385 in 1996. Results for 1997 and
1996 both include a $750,000 payment from MD Foods Ingredients amba of Denmark
(MD Foods) under the terms of the September 27, 1996, Licensing Agreement for
the exclusive, worldwide use, manufacture and sale of the Company's nonfattening
sugar, D-tagatose, as a sweetener. Results for the year ended December 31, 1996,
also included a net after-tax loss of $57,576 ($0.01 per share) related to the
discontinued operations of the Company's Environmental and Laboratory Services
Division (ELSD) in the first quarter of 1996. The primary reasons for the
decline in revenue and profitability in the current year can be attributed to a
change in sales mix from higher margin
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BIOSPHERICS INCORPORATED
commercial contracts to lower margin government contracts, higher legal costs
associated with defending or initiating contract protests, start-up costs
associated with expansion of the Company's healthcare information services
business, higher bad debt expense and termination costs associated with several
commercial contracts which ended in 1997 (including write-down of
contract-specific assets).
Revenue from ISD decreased $303,000 (2%) from $12,980,000 in 1996 to
$12,677,000 in 1997 primarily as a result of the expiration of two commercial
contracts. This decrease was partially offset by increased revenue generated
from several government programs. The following schedule summarizes the
break-down of ISD revenue between commercial and government contracts (in
000's):
For the Year Ended December 31,
Information Services Division 1997 1996
- ----------------------------- -------- ------
Commercial $4,079 $6,417
Government 8,598 6,563
------- -------
$12,677 $12,980
------- -------
------- -------
The decline in commercial revenues was due to several factors. 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. In other cases, the Company was unsuccessful in securing contract
renewals in competitive rebids of its commercial contracts. 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.
While government contracts helped to partially offset the decline in
commercial sales, they had an adverse effect on operating income as these
contracts typically carry a lower operating margin. Revenue from government
contracts have generated margins (prior to general and administrative expenses)
of 20% in 1997 and 1996. Revenue from commercial contracts have historically
generated margins (prior to general and administrative expenses) of 25%. The
Company anticipates increased levels of government contracts in 1998 although
the Company continues its efforts to increase its share of commercial business.
In addition to increased sales and marketing efforts, the Company has invested
over $1 million in state-of-the-art computer telephony integration (CTI) systems
in 1997 and plans to invest over $2 million to upgrade systems and develop
computer software products to improve its competitive position in both
commercial and government markets. Many of these new systems and applications,
once implemented, should reduce call time and open up new information channels
whereby fewer live operators will be required. These enhancements should lead to
improved margins and better service to both government and commercial customers.
Also see Note 7 of the Notes to Financial Statements.
Revenue from BioTech Programs increased $142,000 (17%) from $820,000 in
1996 to $962,000 in the current year. Both periods included a $750,000 payment,
the first payment received in the third quarter of 1996 and the second payment
received in the first quarter of 1997, under the licensing agreement with MD
Foods. In addition, the Company is providing technical support to MD Foods to
effect the commercialization of D-tagatose. The Company will receive
approximately $200,000 per year for these technical support services, of which
$212,000 and $70,000 was recognized in contract revenue in 1997 and 1996,
respectively. The Company also received an additional payment aggregating
$1,000,000 in the first quarter of 1997 under the MD Foods License Agreement
representing a non-refundable advance against future royalties. This payment is
classified as deferred revenue in the balance sheet.
General and administrative expenses ("G&A") increased $363,303 (15%) from
$2,465,762 in 1996 to $2,829,065 in 1997. This increase was due to the following
factors: higher bad debt expense and contract termination costs ($100,000)
related to commercial programs, legal costs ($50,000) to defend or initiate
protests under three government contracts during the fourth quarter of 1997, and
start-up costs ($70,000) associated with the expansion of the healthcare
information services business. Research and development expenses decreased
$53,875 (9%) from $611,139 in 1996 to $557,264 in 1997 due in large part to
lower levels of development costs and expenditures associated with D-tagatose.
-9-
BIOSPHERICS INCORPORATED
All costs associated with the FDA approval for commercialization of D-tagatose
will be borne by MD Foods. As noted above, the Company continues to provide
technical support to MD Foods under the terms of the 1996 License Agreement.
Depreciation and amortization expense decreased $107,195 from $738,646 in
1996 to $631,451 in 1997. Included in depreciation and amortization expense for
the year ended December 31, 1996, was $181,495 related to the amortization of
internally developed software for a major commercial contract. In the first
quarter of 1997, the Company wrote-off the balance of unamortized software
development costs related to this contract totaling $126,224 after the customer
notified the Company of its decision not to renew this program. Excluding this
one-time charge, depreciation expense increased $74,300 (13%) from $557,151 in
1996 to $631,451 in 1997. This increase is attributable to higher levels of
capital expenditures for computer software and hardware during the current year.
These investments are necessary to maintain a competitive position in the
Company's information services business.
Other income, net of other expenses, increased $268,429 for the year ended
December 31, 1997, when compared with the same period last year. This increase
was the result of interest income generated from the $2.5 million of license
payments received from MD Foods in late 1996 and early 1997, coupled with the
absence of expenses associated with fixed asset retirements in 1996.
The Company's sales backlog as of December 31, 1997, was $22,809,000, down
from the $31,270,000 as of December 31, 1996. Sales backlog for 1997 excludes
revenue from contracts currently under protest. See Note 7 of the Notes to the
Financial Statements.
Liquidity and Capital Resources
In May 1997, the Company renewed its Loan Agreement with NationsBank N.A.
(the "Bank"). The Agreement, which expires on May 31, 1998, provides for
borrowings of up to $2 million, subject to an advance rate as defined in the
Agreement. Amounts outstanding under the Agreement accrue interest at the Bank's
prime rate plus .75% per annum and are collateralized by the Company's accounts
receivable. The Loan Agreement contains covenants that require the Company to
meet certain tangible net worth and cash flow coverage ratios. The Company was
in violation of the cash flow debt covenant as of December 31, 1997. The
violation was waived by the Bank. The amounts of $1,159,486 and $1,765,000 were
available under the Agreement at December 31, 1997, and 1996, respectively. The
Company anticipates that this line will be renewed in 1998.
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. Outstanding borrowings under this facility aggregated $501,264
at December 31, 1997, at a weighted average interest rate of 8.65%. The facility
is collateralized by the equipment purchased with the loan proceeds.
In October 1997, the Company signed a $500,000 Promissory Note (the "Note")
with ORIX USA Corporation to finance the acquisition of telecommunication
software to be used in the Company's call center operations. Repayment of the
Note will consist of thirty-five (35) equal monthly principal and interest
payments of $14,012 with a final payment of $114,012 due on October 15, 2000.
Outstanding borrowings under this Note aggregated $481,056 at December 31, 1997.
The Note is collateralized by certain telemanagement software licensed to the
Company by Genesys Telecommunications Laboratories, Inc. and has an interest
rate of 11% per annum.
On May 15, 1997, at the Company's Annual Meeting, the Shareholders approved
a plan to convert the Information Services Division into a subsidiary. The new
subsidiary would focus on the expansion of its healthcare business into nurse
triage/demand management. In December 1997, the Company announced plans to
expand its traditional information services business to include providing demand
management information services to HMOs, other group health organization,
insurers, and employees in company health plans (the "Healthcare Opportunity").
The Company has signed a letter of intent with Clinical Solutions, Incorporated
(CSI) of Menlo Park, California, which will
-10-
BIOSPHERICS INCORPORATED
combine the Company's healthcare oriented call center operations with CSI's
staff of medical and marketing personnel and their proprietary algorithm
software, which will be used by call center nurses to give accurate and fast
information to callers with health problems. CSI will receive an equity interest
in the subsidiary prior to permanent financing. The Company has agreed to
contribute certain commercial (healthcare-related) contracts to the subsidiary
along with $1.5 million to finance start-up costs for this venture. It is
anticipated that the subsidiary will obtain its own permanent financing and that
the subsidiary will be self-supporting thereafter. It is possible, however, that
the Company may be required to assist the subsidiary in its financing efforts,
especially in the subsidiary's formative stages. Commencement of operations is
dependent on the execution of a definitive agreement between the parties and is
also dependent upon the new organization's obtaining permanent financing. Such
financing is currently anticipated during the second quarter of 1998.
Cash flow improved significantly as reflected in the accompanying
Statements of Cash Flows. The Company's cash balance at the end of 1997 was $5.2
million, a $4.4 million increase over the comparable period last year. This
increase resulted primarily from improved cash flow from operations coupled with
net proceeds of $2.7 million from the December 1997 sale of 375,000 units (each
unit consisting of two shares of the Company's common stock and two warrants
with exercise prices of $4.00 and $4.50, respectively) in a private offering to
a single institutional investor. Cash flow from operations totaled $2.7 million
for the year ended December 31, 1997, an increase of $2 million when compared
with the prior year. A $1,750,000 cash payment under the 1996 Licensing
Agreement with MD Foods received in January 1997 explains most of this increase.
Stronger collection efforts of trade receivables coupled with the liquidation of
a disputed receivable from Tetra Technologies, Inc. (see Note 7 to the Notes to
the Financial Statements) resulted in lower outstanding receivables at year-end
and improved cash flow. Investments in new capital equipment (including computer
hardware and software) aggregated $1.5 million, which was financed in part
through the Company's equipment line of credit with the Bank discussed above,
capital leases, and the issuance of common stock (through exercise of employees'
stock options and the private placement transaction).
Working capital as of December 31, 1997, was $4.2 million, which represents
a $2.8 million increase from the working capital of $1.4 million at December 31,
1996. This increase was the result of a $1,750,000 payment received in
connection with the MD Foods Licensing Agreement for the Company's proprietary
nonfattening sugar, D-tagatose and the net proceeds of $2.7 million received in
connection with the private placement transaction. Offsetting this increase in
working capital were decreases in accounts receivable due to stronger collection
efforts and the seasonal nature of certain of the Company's reservation and
tourism contracts during the last quarter of the year and increases in accounts
payable, notes payable and capital lease obligations to finance new business
development activities and capital expenditures.
In November 1995, the Company received a notice of potential liability (the
"Notice") from the U.S. EPA regarding a small quantity of hazardous materials
shipped in 1988 and 1989 to a site owned and operated by a fully licensed
company that was in the business of disposing of such materials. The EPA is
conducting an investigation of the source, extent, and the nature of release or
threatened release of hazardous substances at this site. The Company's share of
the costs should be immaterial. Also see Note 7 of the Notes to the Financial
Statements.
The Company will have continuing capital needs over the next several years
to fund its traditional ISD business. In order to effectively compete for new
ISD contracts and maintain and expand existing programs, the Company must
continuously upgrade its information and telecommunication systems. The
equipment will not only expand capacity and capabilities to better service the
customer, but it will also increase efficiency in the Company's call center
operations. The Company anticipates capital expenditures of over $2 million in
1998 to upgrade systems and develop computer software products to improve its
competitive position in both commercial and government markets. The Company will
finance these expenditures by utilizing cash proceeds from license fees received
from MD Foods in 1996 and 1997 and from the private equity offering discussed
above. The Company will continue to seek additional intermediate and long-term
financing alternatives to underwrite the capital expenditures needed to keep
pace with its long-range business plan. There can be no assurances that the
Company will obtain any or all such necessary funding. No dividends were paid in
1997 and none are anticipated in 1998.
-11-
BIOSPHERICS INCORPORATED
For now, the Company's research and development and other activities
necessary to commercialize its BioTech products will largely be devoted to
continuing to assist MD Foods in the development of D-tagatose because of the
near-term favorable prospects for this product. Under the 1996 License
Agreement, MD Foods has the responsibility for all future marketing and
development expenses, including reimbursement to the Company for on-going
development and technical support as well as the cost of constructing and
operating production plants. Continuing studies of the effectiveness of
D-tagatose against diabetes and further development of the Company's
safe-for-humans pesticides will be dependent upon many factors, including but
not limited to the Company's having sufficient funds and resources to devote to
such efforts. The Company is discussing the possibility of licensing the use of
D-tagatose as an anti-hyperglycemic agent with a number of pharmaceutical and
nutritional products. A similar licensing strategy is planned for the continued
development and commercialization of the Company's pesticide products.
As mentioned above, the Company has agreed to contribute $1.5 million to
finance start-up costs for the Healthcare Opportunity. In order for the
subsidiary to commence operations and become a self-supporting entity, it will
attempt to secure private placement financing aggregating $10 million over the
next two years. Initial permanent financing (which is likely to include an
equity component) is expected during the second quarter of 1998. Such financing
is expected to finance the subsidiary's working capital needs and anticipated
operating losses during its first year of operation. Thereafter, the subsidiary
will require an additional capital infusion of $5 million, including a working
capital line of credit facility. No assurances can be given that the subsidiary
will be successful in raising initial permanent financing in 1998 or subsequent
follow-on financing.
Year 2000 Compliance
The Company is in the process of reviewing its core operating and financial
systems as well as other internal and external systems that may require
modification or upgrade to be made Year 2000 compliant. The Company is in the
process of working with its customers and suppliers to identify, modify or
upgrade its existing systems which may not be Year 2000 compliant. The Company
believes that the cost, if any, of completing the modifications necessary to
become Year 2000 compliant will not be material. There can be no assurance,
however, that the Company will be able to identify all aspects of its business
that are subject to Year 2000 problems, or identify Year 2000 problems of
customers or suppliers that affect the Company's business. There also can be no
assurance that the Company's software vendors are correct in their assertions
that the software is Year 2000 compliant or that the Company's estimate of the
cost of systems preparation for Year 2000 compliance will prove ultimately to be
accurate.
Item 7. FINANCIAL STATEMENTS
Financial statements and supplementary data required by this Item 7 follow.
Index to Financial Statements
Statements of Operations for the years ended December 31, 1997, and 1996.................................13
Balance Sheet as of December 31, 1997....................................................................14
Statements of Changes in Stockholders' Equity for the years ended December 31, 1997, and 1996 ...........15
Statements of Cash Flows for the years ended December 31, 1997, and 1996.................................16
Notes to Financial Statements............................................................................17
Report of Independent Accountants........................................................................29
-12-
BIOSPHERICS INCORPORATED
Biospherics Incorporated
Statements of Operations
Years Ended December 31,
----------------------------
1997 1996
------------- ------------
Revenue
Contract revenue.......................... $12,889,319 $13,050,385
Licensing revenue......................... 750,000 750,000
------------- ------------
Total revenue............................. 13,639,319 13,800,385
------------- ------------
Operating expense
Direct contract and operating costs........ 9,881,542 9,605,805
General and administrative expense......... 2,829,065 2,465,762
Research and development expense........... 557,264 611,139
Depreciation and amortization expense...... 631,451 738,646
------------- ------------
Total operating expense.................... 13,899,322 13,421,352
------------- ------------
(Loss) income from operations................ (260,003) 379,033
------------- ------------
Other income (expense), net
Interest income (expense).................. 36,088 (87,256)
Other income (expense)..................... 200 (77,159)
------------- ------------
36,288 (164,415)
------------- ------------
(Loss) income from continuing operations
before income taxes........................ (223,715) 214,618
Income tax (benefit) expense................. (81,863) 88,052
------------- ------------
(Loss) income from continuing operations..... (141,852) 126,566
Loss from discontinued operations, net of
applicable income tax benefit of $47,659... -- (75,457)
Gain on disposal of discontinued operations,
net of applicable income tax expense
of $11,432................................. -- 17,881
------------- ------------
Net (loss) income............................ $ (141,852) $ 68,990
------------- ------------
Net (loss) income per share - basic
(Loss) income from continuing
operations.............................. $ (0.02) $ 0.01
Loss from discontinued operations......... -- --
------------- ------------
Net (loss) income......................... $ (0.02) $ 0.01
------------- ------------
------------- ------------
Net (loss) income per share - diluted
(Loss) income from continuing
operations.............................. $ (0.02) $ 0.01
Loss from discontinued operations......... -- --
------------- ------------
Net (loss) income......................... $ (0.02) $ 0.01
------------- ------------
------------- ------------
Weighted average shares outstanding
Basic..................................... 8,031,785 7,883,060
------------- ------------
------------- ------------
Diluted................................... 8,031,785 9,760,823
------------- ------------
------------- ------------
See accompanying notes to financial statements.
-13-
Biospherics Incorporated
Balance Sheet
December 31, 1997
ASSETS
Current assets
Cash and cash equivalents........................................... $ 5,228,773
Trade accounts receivable, net of allowance for doubtful accounts
of $85,000........................................................ 1,425,597
Costs and estimated earnings in excess of billings on contracts..... 10,750
Other receivables................................................... 110,313
Deferred income taxes............................................... 107,996
Prepaid expenses and other assets................................... 426,529
-----------
Total current assets............................................ 7,309,958
Property and equipment, net of accumulated depreciation
of $1,668,189..................................................... 3,417,173
Deferred income taxes............................................... 367,530
Patents, net of accumulated amortization of $72,435................. 137,006
Restricted cash-security deposit.................................... 27,408
-----------
Total assets.................................................... $11,259,075
-----------
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank line of credit................................................. $ 10,000
Accounts payable and accrued expenses............................... 1,486,035
Accrued salaries and benefits....................................... 579,668
Notes payable....................................................... 353,442
Capital lease obligations........................................... 131,743
Income taxes payable................................................ 215,226
Deferred rent....................................................... 117,259
Deferred revenue.................................................... 175,275
-----------
Total current liabilities....................................... 3,068,648
Notes payable......................................................... 628,878
Capital lease obligations............................................. 403,891
Deferred compensation................................................. 18,869
Deferred income taxes................................................. --
Deferred rent......................................................... --
Deferred revenue...................................................... 1,000,000
-----------
Total liabilities............................................... 5,120,286
-----------
Commitments and contingencies
Redeemable common stock............................................... 325,710
-----------
Stockholders' equity
Preferred stock, $0.01 par value, 2,000,000 shares authorized;
none issued and outstanding....................................... --
Common Stock, $0.005 par value, 18,000,000 shares authorized;
8,829,190 issued, 8,788,584 outstanding, of which
3,213,506 shares are classified as redeemable common stock........ 28,078
Paid-in capital in excess of par value.............................. 4,403,204
Treasury stock, 40,606 shares, at cost.............................. (267,369)
Retained earnings................................................... 1,649,166
-----------
Total stockholders' equity...................................... 5,813,079
-----------
Total liabilities and stockholders' equity...................... $11,259,075
-----------
See accompanying notes to financial statements.
-14-
Biospherics Incorporated
Statements of Changes in Stockholders' Equity
Common Stock Paid-in Treasury Stock
------------------- Capital in ---------------------- Retained Stockholders'
Shares Amount Excess of Par Shares Amount Earnings Equity
--------- ------- ------------- -------- ---------- ---------- -------------
Balance, December 31, 1995.......... 7,869,894 $22,926 $ 773,050 28,902 $(156,268) $1,722,028 $2,361,736
Exercise of employee
Stock Options..................... 87,574 439 333,670 -- -- -- 334,109
Acquisition of treasury
stock in connection with
option exercises.................. -- -- -- 15,704 (114,166) -- (114,166)
Issuance of treasury stock in
payment of expense................ -- -- -- (1,600) 8,831 -- 8,831
Net reclassification of redeemable
common stock...................... -- 325 1,950 -- -- -- 2,275
Tax benefit of stock options....... -- -- 201,129 -- -- -- 201,129
Net income......................... -- -- -- -- -- 68,990 68,990
--------- ------- ------------- -------- ---------- ---------- -------------
Balance, December 31, 1996.......... 7,957,468 23,690 1,309,799 43,006 (261,603) 1,791,018 2,862,904
Issuance of common stock
Exercise of employee
stock options.................... 146,122 730 545,382 -- -- -- 546,112
Sale of common stock, net of
offering costs of $312,298, in
private placement................ 750,000 3,750 2,683,952 -- -- -- 2,687,702
Acquisition of treasury stock in
connection with option exercises.. -- -- -- 26,000 (159,250) -- (159,250)
Issuance of treasury stock in
payment of expense................ -- -- 10,265 (4,000) 13,735 -- 24,000
Cancellation of treasury stock..... (24,400) (122) (139,627) (24,400) 139,749 -- --
Net reclassification for
redeemable common stock........... -- 30 (158,420) -- -- -- (158,390)
Tax benefit of stock options....... -- -- 151,853 -- -- -- 151,853
Net loss........................... -- -- -- -- -- (141,852) (141,852)
--------- ------- ------------- -------- ---------- ---------- -------------
Balance, December 31, 1997.......... 8,829,190 $28,078 $4,403,204 40,606 $(267,369) $1,649,166 $5,813,079
--------- ------- ------------- -------- ---------- ---------- -------------
--------- ------- ------------- -------- ---------- ---------- -------------
See accompanying notes to financial statements.
-15-
Biospherics Incorporated
Statements of Cash Flows
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996
--------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES: $ (141,852) $ 68,990
------------- -------------
Net (loss) income
Adjustments to reconcile net (loss)
income to net cash provided by
operating activities:
Depreciation and amortization.......... 634,230 738,646
Gain from sale of discontinued
operations........................... -- (29,313)
Loss on sale or writedown of assets.... 132,128 237,639
Treasury stock issued in payment
of expense........................... 24,000 8,831
Bad debt expense....................... 126,978 13,930
Deferred income taxes.................. (393,218) (193,615)
Changes in assets and liabilities:
Trade accounts receivable............ 463,549 (148,870)
Costs and estimated earnings in
excess of billings on contracts.... 108,173 (69,893)
Other receivables.................... 83,977 368,416
Prepaid expenses and other assets.... (21,391) (208,654)
Accounts payable and accrued
expenses........................... 375,900 (154,332)
Accrued salaries and benefits........ 34,007 41,521
Income taxes payable................. 112,448 36,768
Deferred rent........................ (84,747) 75,431
Deferred revenue..................... 1,032,386 (48,572)
Deferred compensation................ (28,975) (62,782)
------------- -------------
Net cash provided by operating activities.. 2,457,593 674,141
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment...... (1,511,156) (820,692)
Additions to patent costs................ (1,466) (65,204)
Proceeds from sale of ELSD, net of cash
expenses............................... -- 433,216
Proceeds from sale of property and
equipment.............................. -- 1,131
------------- ------------
Net cash used for investing activities (1,512,602) (451,549)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change on bank line of credit........ (225,000) (86,000)
Net change in book overdraft............. (226,883) 183,852
Proceeds from notes payable.............. 915,139 118,878
Payments on notes payable................ (147,365) (94,142)
Payments on capital lease obligations.... (54,639) --
Proceeds from issuance of common stock... 3,074,564 219,943
Tax benefit of stock options exercised... 151,853 201,129
------------- ------------
Net cash provided by financing activities 3,487,669 543,660
------------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,432,660 766,252
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD................................. 796,113 29,861
------------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $5,228,773 $ 796,113
------------- ------------
------------- ------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes (refunded) paid........... $ 46,115 $ (12,220)
Interest paid.......................... $ 108,930 $ 195,158
Common stock accepted as payment under
stock option exercises............... $ 159,250 $ 114,166
Property and equipment financed by
capital leases....................... $ 590,273 $ --
Property and equipment financed by
accounts payable..................... $ 257,995 $ --
See accompanying notes to financial statements.
16
Biospherics Incorporated
Notes to Financial Statements
---------
1. Summary of Significant Accounting Policies
Significant accounting policies are summarized below.
Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. At December 31, 1997,
the Company had approximately $5,120,000 in investments with a maturity of three
months or less in one bank, which exceeds FDIC insured limits by $5,020,000.
Receivables
Four major contracts constitute 64% of the trade accounts receivable, the
components of which are 17%, 17%, 17%, and 13%. No other single contract was
greater than 10% of total trade accounts receivable.
Costs and estimated earnings in excess of billings on contracts represent
revenues recognized that are not billable as of December 31, 1997, under the
terms of the contracts. There are no significant contract retainages as of
December 31, 1997.
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 ............. 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.
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.
-17-
Biospherics Incorporated
Notes to Financial Statements
---------
Deferred Costs
The Company defers pre-contract costs attributable to certain contracts.
These costs have been predominantly composed of direct internal and external
costs incurred to develop software used to operate the Company's call centers.
The costs are charged to the contract over the related term of the contract.
Long Lived Assets
The Company assesses the potential impairment of long-lived assets, when
events or circumstances indicate the carrying amount of an asset may not be
recoverable. The Company recorded a loss in connection with the write-down of
impaired assets of $132,128 in 1997 and $237,639 in 1996 associated with
computer hardware and software technologies. 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.
Deferred Rent
The Company entered into a lease for its headquarters and research
facilities in 1987. 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.
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 recognized under time and materials contracts is based upon direct labor
hours 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. Included in
deferred revenue at December 31, 1997, is the amount of $1,000,000 attributable
to a non-refundable advance against future royalties from a licensing agreement.
See Note 7. 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 2000, 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.
-18-
Biospherics Incorporated
Notes to Financial Statements
---------
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.
Net Income (Loss) Per Share
In 1997, the Company adopted SFAS No. 128, Earnings Per Share. Basic
earnings (loss) per common share have been computed by dividing net income
(loss) by the weighted-average number of common shares outstanding during the
year. Diluted earnings (loss) per common share have been computed by dividing
net income (loss) by the weighted-average number of common shares outstanding
plus an assumed increase in common shares outstanding for dilutive securities.
Common stock equivalents are omitted from the calculation when their inclusion
would have an anti-dilutive effect. Net income (loss) as reported is available
to common stockholders. Dilutive securities consist of options and warrants to
acquire common stock for a specified price and their dilutive effect is measured
using the treasury method. Earnings per share for all other periods presented
have been restated to conform to SFAS No. 128.
The following table reconciles the weighted average number of common shares
outstanding during each period for basic earnings (loss) per share with the
comparable amount for diluted earnings (loss) per share.
1997 1996
--------- ---------
Weighted average shares outstanding for basic earnings (loss) per share 8,031,785 7,883,060
Weighted average dilutive common stock equivalents .................... -- 1,877,763
--------- ---------
Weighted average shares and common stock equivalents
outstanding for dilutive earnings (loss) per share ................. 8,031,785 9,760,823
--------- ---------
--------- ---------
New Accounting Standards
The Financial Accounting Standards Board has issued two new standards which
become effective for reporting periods beginning after December 15, 1997. SFAS
No. 130, Reporting Comprehensive Income, requires additional disclosures with
respect to certain changes in assets and liabilities that previously were not
required to be reported as results of operations for the period. The Company
will begin making the additional disclosures required by SFAS No. 130 in the
first quarter of 1998. SFAS No. 131, Disclosures about Segments of an Enterprise
and Related Information, requires financial and descriptive information with
respect to operating segments of an entity based on the way management
disaggregates the entity for making internal operating decisions. The Company
will begin making the disclosures required by SFAS No. 131 with financial
statements for the period ending December 31, 1998.
2. Discontinued Operations
On January 5, 1996, the Board of Directors of the Company approved a formal
plan to sell the net assets of the Environmental and Laboratory Services
Division ("ELSD") because of a continuing lack of profitability and diminishing
opportunity for profitable new sales. On February 27, 1996, the Company entered
into an agreement to sell the net assets of ELSD, except for certain receivables
retained by the Company relating to completed contracts. The sale closed on
February 29, 1996. The purchase price equaled the book value of substantially
all ELSD Beltsville branch assets, less certain liabilities, plus $113,000 of
goodwill. The aggregate net proceeds received for the sale and liquidation of
remaining assets were $433,000. Revenue attributable to ELSD was $246,007 for
the year ended December 31, 1996.
-19-
Biospherics Incorporated
Notes to Financial Statements
---------
3. Property and Equipment
The components of property and equipment as of December 31, 1997, at cost
are:
Office furniture and equipment $403,933
Computer hardware and software 3,782,955
Leasehold improvements 308,201
Capital leases 590,273
---------------
5,085,362
Accumulated depreciation (1,668,189)
---------------
Property and equipment, net $3,417,173
---------------
Included in computer software is $120,000 paid to Clinical Solutions, Inc.
See Note 7.
4. Debt
Line of Credit
In May 1997, the Company renewed its Loan Agreement with NationsBank N.A.
(the "Bank"). The Loan Agreement, which expires on May 31, 1998, provides for
borrowings of up to $2 million, subject to an advance rate as defined in the
Agreement. Amounts outstanding under the Agreement aggregated $10,000 as of
December 31, 1997, and $235,000 as of December 31, 1996, accrue interest at the
Bank's prime rate plus .75% per annum (9.25% at December 31, 1997, and 9.0% at
December 31, 1996) and are collateralized by the Company's eligible accounts
receivable. The Loan Agreement contains covenants that require the Company to
meet certain tangible net worth and cash flow coverage ratios. The Company was
in violation of the cash flow debt covenant as of December 31, 1997. The
violation was waived by the Bank. In addition, the Bank revised the cash flow
coverage covenant to be calculated annually rather than quarterly. The amount of
$1,159,486 and $1,765,000 was available under this Agreement at December 31,
1997, and 1996, respectively.
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:
Principal Payments
Original Interest Rate Balance ------------------------------
Date of Note Amount Per Annum As of 12/31/97 1998 1999 2000
- ------------------ --------- ------------- -------------- -------- -------- --------
October 12, 1995 $200,000 8.55% $ 54,216 $ 54,216 $ -- $ --
April 15, 1996 $118,878 8.81% 52,834 39,626 13,208 --
August 31, 1997 $112,724 8.78% 100,200 37,575 37,575 25,050
December 3, 1997 $302,415 8.59% 294,014 100,805 100,805 92,404
-------------- -------- -------- --------
$501,264 $232,222 $151,588 $117,454
-------------- -------- -------- --------
-20-
Biospherics Incorporated
Notes to Financial Statements
---------
Notes Payable to ORIX
In October 1997, the Company signed a $500,000 Promissory Note (the "Note")
with ORIX USA Corporation ("ORIX") to finance the acquisition of
telecommunication software to be used in the Company's call center operations.
Repayment of the Note will consist of thirty-five (35) equal monthly principal
and interest payments of $14,012 with a final payment of $114,012 due on October
15, 2000. Outstanding borrowings under this Note aggregated $481,056 at December
31, 1997, of which $121,220 matures in 1998, $135,248 matures in 1999 and
$224,588 matures in 2000. The Note is collateralized by certain telemanagement
software licensed to the Company by Genesys Telecommunications Laboratories,
Inc. and has an interest rate of 11% per annum.
Other
On January 14, 1998, the Company issued a $500,000 irrevocable letter of
credit payable in favor of the U.S. Department of Interior (National Park
Service) as a contract performance requirement under the contract awarded in
December 1997.
Included in accounts payable are the amounts of $298,523 and $404,396
related to book overdrafts at December 31, 1997, and 1996, respectively.
5. Private Placement
On December 12, 1997, the Company sold 375,000 units for $3 million (each
unit consisting of two shares of common stock and two warrants with exercise
prices of $4.00 and $4.50, respectively) in a private offering to a single
institutional investor. Net of offering costs of $312,298, the placement
resulted in proceeds to the Company of $2,687,702. The transaction was effected
in reliance upon the exemption from securities registration afforded by the
provisions of Regulation D, as established by the U.S. Securities and Exchange
Commission ("SEC") and the Securities Act of 1933. The warrants are exercisable
for a three-year period after the date of closing. The Company is obligated to
file, and has filed, a Registration Statement on Form S-3 with the SEC for the
resale of all registrable securities covered by this transaction.
6. Income Taxes
The provision (benefit) for income taxes in 1997 and 1996 consists of:
Year Ended December 31,
-------------------------
1997 1996
----------- -----------
Current
Federal $254,152 $209,370
State 56,264 46,349
----------- -----------
Total current provision 310,416 255,719
----------- -----------
Deferred
Federal (321,177) (137,278)
State (71,102) (30,389)
----------- -----------
Total deferred benefit (392,279) (167,667)
----------- -----------
Total income tax expense $ (81,863) $ 88,052
----------- -----------
-21-
Biospherics Incorporated
Notes to Financial Statements
---------
The tax effect of significant temporary differences representing deferred
tax assets as of December 31, 1997, is as follows:
Current Non-Current
--------- -----------
Depreciation and amortization $ -- $ 45,704
Deferred compensation (7,287) --
Deferred rent (45,285) --
Accrued vacation (32,082) --
Allowance for doubtful accounts (32,827) --
Deferred revenue -- (386,200)
Organization costs -- (27,034)
Other 9,485 --
--------- -----------
Deferred tax (asset) liability $(107,996) $(367,530)
--------- -----------
Differences between the effective income tax rates and the U.S. Federal
statutory rates for 1997 and 1996 are as follows:
1997 1996
--------- -----------
U.S. Federal income tax rate at 34% $(76,063) $72,971
State taxes, net of federal tax benefit (9,793) 10,533
Expenses not deductible for tax purposes 3,993 4,548
--------- -----------
Income tax (benefit) expense $(81,863) $88,052
--------- -----------
7. Commitments and Contingencies
Government Contracts
The financial statements include revenues under U.S. Government contracts
that are subject to post award audits and potential price redeterminations. The
Defense Contracts Audit Agency ("DCAA") has completed its audits for all years
through 1996. The Company believes that no material adjustments to the financial
statements will arise from the unaudited years.
The principal portion of the Company's revenue has been generated
traditionally by the Information Services Division. Several of the Company's
contracts that provide these revenues (principally contracts with the U.S.
Government) are subject to protest proceedings. These contracts are awarded
pursuant to a competitive bidding process. In some cases, the Company is the
apparent successful bidder for such a contract but one or more unsuccessful
parties have filed protests challenging the final award of these contracts to
the Company. In other cases, another party is the apparent successful bidder for
such a contract and the Company has filed a protest challenging the final award
of a contract. In all cases, the Company is the incumbent prime or subcontractor
on each of these contracts.
Leases
The Company has various commitments under capital and operating leases
through 2008 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.
-22-
Biospherics Incorporated
Notes to Financial Statements
---------
Future minimum rentals as of December 31, 1997, under noncancellable leases
are as follows:
Capital Operating
Year Ending December 31, Leases Leases
- ------------------------ ---------- -----------
1998 $207,566 $1,091,446
1999 206,364 810,187
2000 149,803 719,607
2001 108,582 623,914
2002 69,655 560,905
Thereafter -- 3,091,189
---------- -----------
741,970 $6,897,248
-----------
-----------
Less: executing costs 64,762
Less: amount representing interest 141,574
----------
Capital lease obligations 535,634
Less current portion 131,743
----------
Long-term obligations $403,891
----------
----------
These future minimum rentals do not include CPI adjustments to which some
of the leases are subject. The Company incurred rental expenses of $1,478,179 in
1997 and $1,469,197 in 1996 under operating leases.
The Company recorded rental income of $511,866 in 1997 and $518,337 in
1996, under sublease agreements, which is offset against rent expense in the
accompanying financial statements. Future minimum receipts under sublease
agreements in 1998 are $80,296.
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 who beneficially own over 35% of the outstanding common
stock. 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. The
Company is the beneficiary to an insurance policy on the lives of the two
officer-stockholders, 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 Chairman,
President and CEO 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
December 31, 1999. The maximum contingent liability under this agreement as of
December 31, 1997, aggregates approximately $535,000.
Deferred Compensation and Consulting Agreements
The Company has entered into agreements with two officer-stockholders, who
own over 35% of the outstanding common stock as of December 31, 1997, whereby
the officer-stockholders agreed to serve as full-time employees of the Company
until their respective retirements. Under the agreements, upon retirement, the
officer-stockholders will receive deferred compensation equal to 70% of their
average annual total compensation less the assumed returns from
-23-
Biospherics Incorporated
Notes to Financial Statements
---------
investment of their funded pension plans and their social security payments. The
deferred compensation plan is unfunded. During 1997 and 1996, the deferred
compensation liability was reduced by $28,975 and $62,782, respectively, as
determined by actuarial calculation. 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.
Other
In December 1996, the Company instituted suit against Tetra Technologies,
Inc. ("Tetra") in the Court of Common Pleas in Allegheny County, Pennsylvania.
The suit alleged a breach by Tetra of its obligations to make minimum royalty
payments to the Company as required by a 1991 agreement to which the Company
transferred certain technology rights to Tetra ("the 1991 Agreement"). The
complaint demanded damages in the amount of approximately $100,000, which was
the amount recorded as a receivable from Tetra as of December 31, 1996. Tetra
filed a counterclaim alleging various breaches of the 1991 agreement by the
Company. This matter was settled in 1997. All counterclaims filed by Tetra
against the Company were dismissed.
On May 15, 1997, at the Company's Annual Meeting, the Shareholders approved
a plan to convert the Information Services Division into a subsidiary. When
formed, the new subsidiary will focus on the expansion of its healthcare
business into nurse triage/demand management. In December 1997, the Company
announced plans to expand its traditional information services business to
include providing demand management information services to HMO's, other group
health organization, insurers, and employees in company health plans (the
"Healthcare Opportunity"). The Company has signed a letter of intent with
Clinical Solutions, Incorporated (CSI) of Menlo Park, California, which will
combine the Company's healthcare oriented call center operations with CSI's
staff of medical and marketing personnel and their proprietary algorithm
software, which will be used by call center nurses to give accurate and fast
information to callers with health problems. CSI will receive an equity interest
in the subsidiary. The Company has agreed to contribute certain commercial
(healthcare-related) contracts to the subsidiary along with $1.5 million to
finance start-up costs for this venture. Commencement of operations is dependent
on the execution of a definitive agreement between the parties and is also
dependent upon the new organization's obtaining permanent financing. Such
financing is currently anticipated near the end of the first quarter of 1998 or
the beginning of the second quarter of 1998.
On September 27, 1996, the Company signed an exclusive worldwide licensing
agreement with MD Foods Ingredients amba of Denmark for the use, manufacture and
sale of Biospherics' nonfattening sugar, D-tagatose, as a sweetener. The Company
received a non-refundable $750,000 initial partial payment on signing. This
$750,000 is 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 MD Foods' due diligence. The $750,000
of $1,750,000 received on January 6, 1997, completes the initial non-refundable
payment, and has been classified as licensing revenue in the first quarter of
1997. The remaining $1 million of the $1,750,000 received has been classified as
deferred revenue in the accompanying financial statement 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 MD Foods Agreement is five years after the expiration of the last to expire
U.S. patent covering the licensed product and/or the licensed process for
manufacturing D-tagatose. The Company has two U.S. patents covering the
proprietary method for the manufacture of D-tagatose which expire on July 19,
2009, and March 25, 2111, respectively. 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 D-tagatose is scheduled to become operational.
MD Foods has advised the Company that the decision to proceed with plant
construction will be deferred until GRAS affirmation is desired by MD Foods in
the United States, currently anticipated in 1998. Under the terms of the
agreement, MD Foods Ingredients has full responsibility for all development
costs, including any regulatory requirements to sell in the U.S. and European
Countries and costs of production and sales. In addition, MD Foods will support
Biospherics' efforts toward commercializing D-tagatose to the extent of
approximately $200,000 per year for 1996/1997 and 1997/1998.
In November 1995, the Company received a notice of potential liability (the
"Notice") from the U.S. EPA regarding a small quantity of hazardous materials
shipped in 1988 and 1989 to a site owned and operated by a fully
-24-
Biospherics Incorporated
Notes to Financial Statements
---------
licensed company that was in the business of disposing of such materials. That
company has since gone out of business. The EPA is conducting an investigation
of the source, extent, and the nature of release or threatened release of
hazardous substances at this site. The EPA has spent over $4.5 million in its
investigation and restoration activities and the Company has a potential
proportionate liability under the Comprehensive Environmental Response,
Compensation and Liability Act, as amended, for such costs. Based upon
information in the Notice, the amount of hazardous material shipped to the site
by the Company is less than .2% of all such materials found at the site. If the
EPA allocates its costs based upon the amount of materials shipped by each
company to the site in proportion to the total materials shipped to the site,
the Company's share of the costs should be immaterial.
The Company is also a party to other 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 material adverse effect on the financial position or results of
operations of the Company.
8. Stock Option Plan
The Company has an Employees' Nonqualified Stock Option Plan (the "Plan"),
whereby options may be granted to officers, directors, and other key employees
to purchase up to 4,400,000 shares of common stock in amounts determined by the
Board of Directors through May 14, 1997. Options may be granted at a price not
less than 50% of the fair market value of the stock on the date the options are
granted and for a term not to exceed five years and one month from the date of
grant. The Board of Directors determines the vesting period of options granted
which is generally five years. To date, all options granted, except for those
part of an anti-hostile takeover plan explained below, have been at the
then-publicly quoted price of the stock. During 1997, 100,000 options were
conditionally granted subject to shareholder approval of the new Biospherics
Incorporated 1997 Stock Option Plan, which will be voted on at the May 15, 1998,
Annual Meeting of Stockholders. The 1997 Stock Option Plan will provide for the
purchase of up to 400,000 shares of common stock. Activity for the two years
ended December 31, 1997, is shown below:
1997 1996
Weighted Weighted
Average Average
1997 Exercise 1996 Exercise
Shares Price Shares Price
--------------- ----------- --------------- ----------
Outstanding at beginning of year 2,896,872 $2.25 2,927,446 $2.27
Granted 100,000 $6.34 165,000 $6.91
Exercised (146,122) $3.74 (87,574) $3.82
Expired or forefeited (30,000) $4.49 (108,000) $3.88
--------------- ----------- --------------- ----------
Outstanding at end of year 2,820,750 $2.48 2,896,872 $2.43
Exercisable at end of year 591,125 637,372
Available for grant at end of year 300,000 1,342,200
Price range of options
Outstanding $1.43 to $7.25 $1.43 to $7.25
Exercised $2.88 to $5.25 $2.88 to $5.25
Expired or forefeited $2.88 to $7.13 $2.88 to $5.25
Weighted average fair value of
options granted during the year $3.82 $4.15
-25-
Biospherics Incorporated
Notes to Financial Statements
---------
The following table summarizes information with respect to stock options
outstanding at December 31, 1997:
Number of Options Weighted Average
Range of Exercise Outstanding at Remaining Weighted Average
Price 12/31/97 Contractual Life Exercise Price
- ----------------- ------------------- ------------------- -----------------
$1.43 2,000,000(1) 1.96 $1.43
$2.88-4.00 214,900 1.97 $3.08
$4.68-7.00 505,350 3.36 $5.39
$7.12-7.25 100,500 3.81 $7.19
- ----------------- ------------------- ------------------- -----------------
$1.43-7.25 2,820,750 2.28 $2.48
- ----------------- ------------------- ------------------- -----------------
(1) On November 18, 1994, two officer-shareholders were each granted options to
purchase 1,000,000 shares of common stock of the Company at $1.4375 per share
subject to two conditions. The options will be exercised in the event that both
(i) a third party acquires 5% or more of the issued and outstanding common stock
of the Company and (ii) the exercise is approved by the Board of Directors of
the Company. The options expire on December 15, 1999. This plan was put in place
not for compensatory purposes but as a means of protecting shareholder value
against unsolicited offers deemed inadequate by the Board of Directors and to
help ensure fair and equal treatment of all shareholders.
The following table summarized information with respect to stock options
exercisable at December 31, 1997:
Year of Option Weighted Average
Expiration Number of Options Exercise Price Price Range
- -------------- ----------------- ---------------- -----------
1998 16,400 $3.40 $3.25-3.50
1999 104,250 $2.88 $2.88
2000 353,350 $4.83 $3.31-6.19
2001 76,125 $7.22 $7.13-7.25
2002 41,000 $7.00 $7.00
- -------------- ----------------- ---------------- -----------
All Years 591,125 $4.91 $2.88-7.25
- -------------- ----------------- ---------------- -----------
The Company applies APB Opinion No. 25 and related interpretations in
accounting for the Plan. 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 at fair market value. 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 summarizes the assumptions used and the pro-forma net
(loss) income and net (loss) income per share resulting from applying SFAS 123.
1997 1996
------------ -------------
Net (loss) income As reported $(141,852) $68,990
Pro forma $(516,187) $(217,825)
Net (loss) income per share - basic As reported $(0.02) $0.01
Pro forma $(0.06) $(0.02)
Net (loss) income per share - diluted As reported $(0.02) $0.01
Pro forma $(0.06) $(0.02)
Expected life (years) 4 4
Risk-free interest rate 6.48% 6.26%
Volatility 75% 75%
Dividend yield 0.0% 0.0%
Weighted average remaining contractual
life (years) 4.9 4.7
Weighted average fair value at date of grant $3.82 $4.15
Weighted average exercise price $6.34 $6.91
-26-
Biospherics Incorporated
Notes to Financial Statements
---------
9. 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 $66,761 in 1997 and
$51,843 in 1996.
10. Information by Business Segment
Financial information by business segment for the years ended December 31,
1997, and 1996 are summarized below.
Years Ended December 31,
(Dollars in thousands)
------------------------
1997 1996
----------- ----------
Revenues Information Services Division $12,677 $12,980
BioTech Programs Unit 962 820
----------- ----------
Total revenues $13,639 $13,800
----------- ----------
Operating Profit (Loss) Information Services Division $ (724) $ 204
and Income (Loss) BioTech Programs Unit 475 175
----------- ----------
Before Income Taxes Total operating profit (249) 379
Interest income (expense) 36 (77)
Other income (expense) -- (87)
----------- ----------
Income (loss) from continuing operations
before income taxes $ (213) $ 215
----------- ----------
Identifiable Assets Information Services Division $ 4,307 $ 3,291
BioTech Programs Unit 229 1,152
General corporate assets 6,332 1,158
----------- ----------
Total assets $10,868 $ 5,601
----------- ----------
Capital Information Services Division $ 1,716 $ 521
Expenditures BioTech Programs Unit -- 15
General corporate assets 53 285
----------- ----------
Total assets $ 1,769 $ 821
----------- ----------
Depreciation Information Services Division $ 480 $ 554
and Amortization BioTech Programs Unit 23 31
General corporate assets 131 153
----------- ----------
Total depreciation and amortization $ 634 $ 738
----------- ----------
The Information Services Division ("ISD") provides computerized medical
data collection, clinical trial management, reservation services, report and
publication writing and editing, development of programmatic concepts in public
health information and education, database management, and computer-assisted
health resource information. During 1997, government and commercial business
accounted for approximately 68% and 32%, respectively, of ISD's business
compared with 51% and 49%, respectively, in 1996. During 1997, the Company
recognized revenue from four
-27-
Biospherics Incorporated
Notes to Financial Statements
---------
of its customers, Federal Information Center ("FIC"), Pharmacia & Upjohn, U.S.
Department of Agriculture ("Forest Service"), and Corporation for National
Service ("AmeriCorps"), representing 19%, 13%, 12%, and 11%, respectively, of
the total Company revenues. During 1996, the Company recognized 20% and 18% of
its total revenues from Parke-Davis and FIC, respectively.
The BioTech Programs Unit has invented and patented for the Company the use
of D-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 amba of Denmark for the use, manufacture and
sale of Biospherics' nonfattening sugar, D-tagatose, as a sweetener (see Note
7).
Operating profit consists of revenue less operating expenses. In computing
operating profit, interest expense and income taxes were not deducted.
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.
-28-
Report of Independent Accountants
To the Board of Directors and Stockholders
Biospherics Incorporated
We have audited the financial statements of Biospherics Incorporated listed in
Item 7 of this Form 10-KSB. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Biospherics Incorporated as of
December 31, 1997, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
February 20, 1998
-29-
Biospherics Incorporated
----------
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Items 9 through 12.
Information required by Part III (Items 9 through 12) of this Form 10-KSB
is incorporated by reference to the Company's definitive Proxy Statement for the
Annual Meeting of Stockholders for the fiscal year ended December 31, 1997,
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 13. 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)
(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 (filed
herewith)
(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) Asset Purchase Agreement dated February 27, 1996, by and
between the Company and ManTech International Corporation
(incorporated by reference to Form 10-KSB filed March 31,
1996)
(10.8) Agreement and License between the Company and MD Foods
Ingredients Amba.
(10.9) Securities Purchase Agreement dated as of December 12, 1997,
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 December 18, 1997).
(23) Consent of Coopers & Lybrand L.L.P.
(27) Financial Data Schedule (included only with electronic filing)
(b) Reports on Form 8-K
On December 18, 1997, the Company filed a report on Form 8-K dated
December 12, 1997, pursuant to Item 5 thereof, to report the completion
of a $3 million private offering of units consisting of shares of its
common stock and warrants.
-30-
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 19, 1998 By: /s/ Gilbert V. Levin
----------------- -----------------
Gilbert V. Levin
Chairman of the Board, President &
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 Chairman of the February 19, 1998
- -------------------------------------- Board, President, and
Gilbert V. Levin Treasurer
(Principal Executive Officer)
/s/ M. Karen Levin Director, Vice President for February 19, 1998
- -------------------------------------- Communications, Secretary
M. Karen Levin
/s/ Jeffrey W. Church Executive Vice President and February 19, 1998
- -------------------------------------- Chief Financial Officer
Jeffrey W. Church (Principal Financial and
Accounting Officer)
/s/ Lionel V. Baldwin Director February 19, 1998
- --------------------------------------
Lionel V. Baldwin
/s/ David A. Blake Director February 19, 1998
- --------------------------------------
David A. Blake
/s/ A. Bruce Cleveland Director February 19, 1998
- --------------------------------------
A. Bruce Cleveland
/s/ George S. Jenkins Director February 19, 1998
- --------------------------------------
George S. Jenkins
/s/ Anne S. MacLeod Director February 19, 1998
- --------------------------------------
Anne S. MacLeod
/s/ Rita R. Colwell Director February 19, 1998
- --------------------------------------
Rita R. Colwell
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