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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, FD.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended 12/31/96 Commission File Number 0-10822
Biocontrol Technology, Inc.
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1229323
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
300 Indian Springs Road, Indiana, Pennsylvania 15701
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (412) 349-1811
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 par value
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 and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of January 31, 1997:
Common Stock, $.10 par value -- $ 51,542,144
As of December 31, 1996, 49,213,790 shares of common stock, par value $.10 per
share, were outstanding. As of December 31, 1996, no shares of preferred stock,
par value $10 per share, were outstanding.
Exhibit index is located on pages 39 to 43.
1
Item 1. Business
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General Development of Business
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Biocontrol Technology, Inc. was incorporated in the Commonwealth of
Pennsylvania in 1972 as Coratomic , Inc. and is referred to herein as " BICO "
or the "Company". BICO 's operations are located at 300 Indian Springs Road,
Indiana, PA, and its administrative offices are located at 2275 Swallow Hill
Road, Bldg. 2500, Pittsburgh, PA. The Company is developing the Noninvasive
Glucose Sensor with Diasense , Inc., its 52% owed subsidiary. Where
applicable, BICO and Diasense will be referred to herein as the "Companies".
The Company's primary business from 1972 through 1986 was the design,
manufacture and sale of cardiac pacemakers and associated accessories. In
1983, the Company purchased rights to three heart valves which it manufactured
and sold from 1983 through 1987.
Beginning in late 1986 and continuing through the date hereof, the Company has
been developing new medical devices which include models of a noninvasive
glucose sensor (the "Noninvasive Glucose Sensor"), an implantable port for drug
delivery and hemodialysis use, a polyurethane heart valve, procedures relating
to the use of whole-body extracorporeal hyperthermia in the treatment of the
human immunodeficiency virus ("HIV"), bioremediation products, and a paint
product which is designed to prevent the buildup of certain substances on
underwater surfaces. The Company is currently manufacturing and selling
functional electrical stimulators .
Forward-Looking Statements
From time to time, the Company may publish forward-looking statements relating
to such matters as anticipated financial performance, business prospects,
technological developments, new products, research and development activities,
the regulatory approval process, specifically in connection with the FDA
marketing approval process, and similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. In order to comply with the terms of the safe harbor, the Company
notes that a variety of factors could cause the Company's actual results to
differ materially from the anticipated results or other expectations expressed
in the Company's forward-looking statements. The risks and uncertainties that
may affect the operations, performance, research and development and results of
the Company's business include the following: additional delays in the
research, development and FDA marketing approval of the Noninvasive Glucose
Sensor; delays in the manufacture or marketing of the Company's other products
and medical devices; the Company's future capital needs and the uncertainty of
additional funding; BICO 's uncertainty of additional funding; competition and
the risk that the Noninvasive Glucose Sensor or its other products may become
obsolete; the Company's continued operating losses, negative net worth and
uncertainty of future profitability; potential conflicts of interest; the
status and risk to the Company's patents, trademarks and licenses; the
uncertainty of third-party payor reimbursement for the Sensor and other medical
devices and the general uncertainty of the health care industry; the Company's
limited sales, marketing and manufacturing experience; the amount of time or
funds required to complete or continue any of the Company's various products or
projects; the attraction and retention of key employees; the risk of product
liability; the uncertain outcome and consequences of the lawsuits pending
against the Company; and the dilution of the Company's common stock.
Industry Segments
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The Company operates in a single industry segment consisting of the design,
manufacture and sale of biological/biomedical products and devices. Although
some of the Company s subsidiaries are engaged in other activities, such
activities are immaterial at this time for industry segment purposes.
2
Description of Business
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Development of the Noninvasive Glucose Sensor
BICO and Diasense are currently developing a Noninvasive Glucose Sensor, which
management believes will be able to measure the concentration of glucose in
human tissue without requiring the drawing of blood. Currently available
glucose sensors require the drawing of blood by means of a finger prick.
BICO 's initial research and development with insulin pumps led to a theory by
which blood glucose levels could be detected noninvasively by correlating the
spectral description of reflected electromagnetic energy from the skin with
blood glucose levels in the 50 mg per deciliter to 500 mg per deciliter range
in the infrared region of the electromagnetic spectrum. The method was studied
in 1986 and 1987 by BICO and its consultants at Battelle Memorial Institute in
Columbus, Ohio, using laboratory instruments. The results of the studies
provided information regarding the use of infrared light in the noninvasive
measurement of glucose. The information from the studies, along with later
affirmative work, led to a patent application by BICO 's research team in 1990.
A patent covering the method was granted to the research team and assigned to
BICO in December 1991. The rights of this patent have been purchased by
Diasense from BICO , pursuant to a Purchase Agreement (See, " Intercompany
Agreements"). A second patent application was filed by BICO in December 1992,
and was granted in January 1995. This filing contained new claims which
extended the coverage of the patent based on additional discoveries and data
obtained since the original patent was filed. BICO has assigned the rights to
such patent to Diasense . Additional concepts to improve the capability of
the instrument to recognize blood glucose were developed, and, in May 1993,
corresponding patent applications were filed. As of February, 1997, a total of
five patents have been issued, with additional patent applications pending
(See, "Current Status of the Noninvasive Glucose Sensor" and "Patents,
Trademarks and Licenses"). BICO has been granted the right to develop and
manufacture sensors pursuant to agreements with Diasense (See, " Intercompany
Agreements").
In 1991, BICO 's research team began development of a research prototype
utilizing different technology than previously studied or developed. This
device, the Beta 1 research prototype, was initially tested on six human
subjects, and was subsequently tested on 110 human subjects in March 1992,
during which simultaneous spectral, blood and chemical data was recorded for
analysis in order to develop calibration data for the device. The Beta 1
utilized a separate lap-top computer to perform computational functions. The
results of the March 1992 tests were used to develop further refinements which
led to the development of the Beta 2A .
Although functionally equivalent in terms of performance with the Beta 1, the
next prototype, the Beta 2A , was smaller and had fully integrated
computational software and a liquid crystal display which interacted with the
operator. This model was tested by BICO on 40 human subjects in July 1992.
The spectral and blood chemistry data obtained indicated that the Beta 2A did
not have a satisfactory signal-to-noise ratio to allow for the calculation of
algorithms of sufficient accuracy to be acceptable to Diasense . The
signal-to-noise ratio reflects the sensor's ability to optimize the measurement
by accepting the signal desired (the glucose level) and rejecting the random
interference. A higher signal-to-noise ratio results in a more accurate
measurement.
Additional Beta prototypes evolved which addressed this problem. Testing was
performed with each prototype, culminating in clinical trials at two hospitals
with ten diabetic volunteers each in Des Plaines, Illinois in May 1993 and in
Indiana, Pennsylvania in August 1993. These advanced systems embodying
improvements in the optics, electronics and detection subsystems led to the
design of the Beta 2D, Beta 2E , and Beta 2F prototypes, designed and
constructed to simulate production models.
BICO initially obtained the approval of six Institutional Review Boards
("IRBs") to conduct testing at their hospitals. Those hospitals are Children's
Hospital in Pittsburgh, Pennsylvania; Rush North Shore in Skokie, Illinois;
Westmoreland Hospital in Greensburg , Pennsylvania; Lutheran General Hospital
in Park Ridge, Illinois; Holy Family Hospital in Des Plaines, Illinois; and
Indiana Hospital in Indiana, Pennsylvania. The Company conducted initial
testing at the Holy Family Hospital and Indiana Hospital, and may conduct
further studies on future models at some or all of the other hospitals from
which IRB approval has been obtained.
3
On January 6, 1994, BICO submitted its initial 510(k) Notification to the U.S.
Food and Drug Administration (the "FDA") for approval to market the production
model, the Diasensor 1000. The submission was based on data obtained from the
advanced Beta 2 prototypes, since functionally, the production model will be
identical to these prototype models. BICO 's 510(k) Notification claims that
the product has substantial equivalence to home market glucose monitoring
devices presently in the marketplace since its function is similar, although
the device operates on a different technological principle. BICO provided
information in this 510(k) submission which it believes substantiates that the
device does not raise different questions of safety and efficacy and is as safe
and effective as the approved marketed predicated devices. Such information is
required by the FDA before market approval can be granted. In February 1996,
the FDA convened a panel of advisors to make a recommendation regarding BICO 's
510(k) Notification. The majority of the panel members recommended that BICO
conduct additional testing and clinical trials prior to marketing the Diasensor
1000. BICO and Diasense announced that they remained committed to bringing the
Diasensor 1000 to diabetics, and that additional research, development and
testing would continue (See, "Current Status of the Noninvasive Glucose
Sensor").
The Diasensor 1000 is a spectrophotometer capable of illuminating a small area
of skin on a patient's arm with infrared light, and then making measurements
from the infrared light diffusely reflected back into the device, which it then
displays on a liquid crystal display on the face of the instrument for the user
to read. The Diasensor 1000 uses internal algorithms to calculate a glucose
measurement.
Since the Diasensor 1000 will be calibrated individually, each instrument will
be sold by prescription only and will be calibrated in a calibration center.
This feature may limit the marketability of the Diasensor 1000, and, if the
device is unable to qualify for third-party reimbursement, Diasense 's ability
to market the device could be adversely effected.
Current Status of the Noninvasive Glucose Sensor
After the FDA's panel review in February 1996, the Companies conducted
additional clinical tests using the Diasensor 1000. The data obtained was
submitted in a revised 510(k) Notification filed with and accepted by the FDA
in October 1996. In November 1996, the Companies regulatory affairs team met
with the FDA, and agreed to conduct additional studies, including in-home
studies, of the Diasensor 1000. After working with the FDA to determine an
acceptable protocol for the in-home studies, the Company commenced the trials
on February 3, 1997. The trials are being conducted with improved manufacturing
prototypes which have been fabricated by the Companies. Manufacture of these
improved prototypes began in November 1996 and will continue through April
1997. The Companies anticipate that forty to fifty devices will be available
for the additional clinical and in-home tests currently in progress and planned
for the near future. Since the FDA has deemed the 1996 510(k) to be withdrawn
because of the additional studies, the Companies will resubmit a 510(k)
Notification when the additional studies have been completed and the data has
been analyzed. As part of the testing protocol worked out jointly by the
Companies and the FDA, the parties have agreed upon an intended use of the
device for certain patients who could use the device most successfully. As
with all other FDA-related activities, the Companies cannot provide any
assurances as to the date upon which the studies will be completed, the next
510(k) Notification will be submitted, or when the FDA will complete its review
of such Notification.
In February 1997, the Company demonstrated two of its Diasensor 1000s at both a
press conference and at a shareholders meeting. At the press conference, the
machines provided successful readings which were 94% and 99% accurate when
compared to readings from the Yellow Springs Instrument (the YSI), which is
the accepted industry standard for accurate readings. At the shareholders
meeting, one machine provided successful readings which were 99% accurate when
compared to the YSI readings, and the other machine, triggered by internal
safety measures, did not provide a reading. The internal safety measures are
critical because an erroneous reading could be dangerous to diabetics; in
order to avoid such risks, the Diasensor 1000 is programmed to give no reading
if there is any indication of user error or device malfunction. The diabetic
user is then instructed to test using other invasive means, if a reading is
immediately needed, or to wait and retry for a successful reading from the
Diasensor 1000. In 1996, the Companies retained Mr. Jeff Nesbit , a former FDA
Associate Commissioner for Public Affairs, as a consultant to guide them
through the FDA approval process and to assist BICO with its ongoing overall
relationship with the FDA.
4
Although the Company's research and development team continues to meet with and
work closely with the FDA, due to the complex, technical nature of the
information being evaluated by the FDA, it is impossible for the Company to
estimate how much longer the FDA approval process will take.
During 1994, 1995 and 1996, in addition to conducting continued research and
development on the Noninvasive Glucose Sensor, BICO prepared its new
manufacturing facility for the manufacture of the Noninvasive Glucose Sensor.
The facility, comprised of 68,000 square feet, is being reconfigured to BICO 's
specifications, and the machinery and equipment necessary to manufacture have
been ordered.
Manufacturing prototypes, built by BICO in December 1996 and the first quarter
of 1997, are being used in testing currently being conducted in home and
clinical settings. This testing will continue for approximately four months
and the data will be submitted to the FDA in a 510(k) Notification at the
conclusion of the testing. It is anticipated, but cannot be guaranteed, that
pilot production will begin in the spring of 1997 with the manufacture of
instruments which have been fabricated pursuant to production-released
documentation in compliance with FDA Good Manufacturing Practices ( GMPs ).
These devices can be sold when and if FDA marketing approval is given or in
other world markets where such approval is not necessary. Subject to continued
availability of parts, equipment and personnel, production will then continue
at a steady pace throughout 1997.
FDA approval is necessary to market the Diasensor 1000 in the United States.
The Companies are continuing their efforts to develop an instrument which may
provide for a smaller, more portable device at a lower cost. In addition, the
Companies are continuing their efforts to develop software with a more
"universal" algorithm, which can be used by a larger population. These
improvements may be incorporated in the finalized development of the Diasensor
2000 which may contain more complex software, allowing glucose measurements
from many individuals to be performed with one instrument. The Diasensor 2000
may be subject to the same regulatory testing and approval process as is
required for the Diasensor 1000.
Diasense is responsible for the marketing and sales of the Noninvasive Glucose
Sensor. Diasense plans to market the Noninvasive Glucose Sensor directly to
diabetics, through their doctors' orders, and is currently negotiating with
domestic and international distribution organizations to aid in the marketing
and distribution of the Noninvasive Glucose Sensor. Although many factors may
cause a change in management's current estimate, the Company believes that the
sales price of the Diasensor 1000 at this time will range from approximately
$7,950 to approximately $8,500. Such price may be set at a level which would
limit its sales, absent third-party reimbursement. Due to the current
vicissitudes of the health-care insurance industry, the Companies are unable
to make any projections as to the availability of, or procedures required in
connection with, third-party reimbursement. Although the Companies estimate,
based on 1996 American Diabetes Association data, that there are nearly
16,000,000 diabetics in the United States, not all diabetics will be suitable
users of the Noninvasive Glucose Sensor. Those diabetics who require and
benefit from frequent glucose monitoring comprise the potential market for the
Noninvasive Glucose Sensor. The Companies are unable to estimate the size of
that market at this time.
5
Bioremediation
BICO is also involved in the field of biological remedial (" bioremediation ")
development. Bioremediation technology utilizes naturally occurring
micro-organisms or bacteria to convert various types of contamination to carbon
dioxide and water. This occurs through the dual processes of chemical and
microbiological reactions. The product, PRP , which stands for Petroleum
Remediation Product, is designed as an environmental microbial microcapsule
which is utilized for the collection, containment and separation of oil-type
products in or from water. The product's purpose is to convert the contaminant,
with no residual mass (separated or absorbed) in need of disposal. When the
PRP comes in contact with the petroleum substances, the contaminants are bound
to the PRP , and they stay afloat. Because the product contains the necessary
nutrients and micro-organisms, the bioremediation process begins immediately,
which limits secondary contamination of the air or surrounding wildlife.
Eventually, the product will biodegrade both the petroleum and itself.
Part of the Company's initial research and development involved field testing
supervised by the National Environmental Technology Applications Corporation ("
NETAC "), a group endorsed by the Environmental Protection Agency (the "EPA"),
to determine whether the product is effective. As a result of such testing,
NETAC reported positive results regarding the effectiveness of the product.
In connection with this project, BICO created a subsidiary, Petrol Rem, Inc.
("Petrol Rem"). Petrol Rem's officers and directors include Fred E. Cooper,
Anthony J. Feola and David L. Purdy, who are also directors and/or officers of
BICO and its other affiliates.
PRP is now being manufactured and marketed for use in water and on solid
surfaces in the form of Petrol Rem's Oil Buster product.
The product system is listed on the EPA's National Contingency Plan (" NCP ")
product schedule, and is available in free-flowing powder or absorbent socks.
In 1995, the EPA required that all products previously listed on the NCP
be submitted to additional testing. Because PRP successfully passed the Tier
II efficacy test conducted by NETAC , the product was requalified for listing
on the NCP . Management believes that this requalification process will limit
the number of products available for use in clean-up projects.
Petrol Rem is manufacturing PRP and is currently marketing the product for use
for oil spills in water. In addition, PRP combined with absorbants is being
manufactured and marketed for use in small oil cleanups on hard surfaces such
as the floors of manufacturing facilities, garages and machine shops.
In April 1993, Petrol Rem entered into a lease for a facility in the
Pittsburgh, Pennsylvania area which is used to manufacture PRP . The current
lease has a renewable three-year term, with monthly rental payments of $2,888
plus utilities and applicable business privilege taxes. Petrol Rem has also
purchased equipment which has the capability to produce PRP in quantities of
2,500 pounds per day, and Petrol Rem has built an adequate inventory.
During 1995, Petrol Rem completed a BioResponse Action Plan, which has been
submitted to applicable regulatory agencies, including the EPA, the Coast
Guard, and various state agencies. The Plan, which sets forth the available
options and proper responses to clean-up projects, was created in response to a
growing trend by the agencies to set up pre-approved plans to be used in the
event of an oil-spill emergency. These pre-approved plans would direct the
individuals on site as to which products to use, and should help accelerate
approval and response time.
Because two of Petrol Rem's largest target marketing regions are
Texas/Louisiana and Florida, Petrol Rem has begun warehousing PRP in those
areas.
Petrol Rem has also completed development of a new spray applicator for its PRP
product. The new applicator is a light-weight, portable unit which provides a
more continuous flow of product. The lighter weight and smaller size will
allow easier access to remote sites which were impossible to reach with the
previous applicator.
6
In addition to PRP , Petrol Rem has also developed other products. In order to
address water pollution issues at marinas, Petrol Rem has introduced BIO- SOK ,
which is PRP contained in a 10" fabric sock, is designed and used to aid in
the cleaning of boat bilges. Bilges are commonly cleaned out with detergents
and emulsifiers, which cause the oil pumped out of the bilge to sink to the
bottom of the water, where it is harmful to marine life, and becomes difficult
to collect. In addition, it is illegal to dump oil or fuel into the water. The
BIO- SOK , when placed in the bilge, absorbs and biodegrades the oil or fuel on
contact, which significantly reduces or eliminates the pollution; then the
product biodegrades itself. As a result, BIO- SOK helps to keep marina waters
clear as well as helping to eliminate the chore of bilge cleanup, with its
possible fines to marinas and boaters for pumping oil and fuel into the
waterways.
In July 1996, the Company's PRP and BIO- SOK products were selected by the
National Aeronautics and Space Administration ("NASA") to be featured as
spinoff technology under its technology transfer program, which seeks to
recognize unique civilian adaptations of NASA technology. The products will be
a part of NASA displays at major trade shows.
In October 1996, the Company announced that its BIO- SOK Bilge Maintenance
System had won a 1996 Innovation Award at the International Marine Trades
Exhibit and Convention (" IMTEC "), which is held by the National Marine
Manufacturers Association (the " NMMA "). The award was conferred by a panel
of experts which evaluated a field of approximately fifty seven entrants in the
"Accessories and Trailers" category. The NMMA cited the BIO- SOK 's simplicity
of use and commended the product as on the "frontier of technology".
In December 1996, Petrol Rem announced that the BIO- SOK had been chosen by
BOATING, one of the largest pleasure boating magazines in the world, for use in
all of the boats tested for its magazine. BOATING, which tests over 100 boats
each year, called the BIO- SOK one impressive new product. In February 1997,
BIO- SOK was given a 1997 Innovation Award by the well-known trade magazine
Motorboating and Sailing.
BIO- SOK is guaranteed, lasts for an entire boating season, and is available
from quality marine supply stores in the coastal areas of the United States,
Canada, Europe and South East Asia, and is recommended by the Canadian Coast
Guard.
In February 1997, Petrol Rem entered into a five-year distribution agreement
with Bainbridge International in Queensland, Australia, which grants exclusive
distribution rights for Australia and New Guinea.
Petrol Rem has also developed Oil Buster , which is a mixture of PRP and an
absorbent material. Oil Buster is used to clean up and remediate oil spills on
hard surfaces.
Petrol Rem's BIO-BOOM product is used in water clean-up projects. The product
is a 3" x 10' fabric which is filled with PRP , and is used to both contain and
biodegrade contaminants in water. BIO-BOOM is a superior product to most
containment products because, in addition to containing the oil or fuel spill,
or restricting the spread of an anticipated spill, it also biodegrades the
contaminant, then biodegrades itself. These features act to virtually
eliminate secondary contaminants, thereby reducing disposal and clean-up costs.
Initial sales have occurred, and marketing efforts are accelerating.
The Company believes that it has expended the necessary funds to complete the
development of its bioremediation products, and to build up sufficient
inventory pending additional orders. The Company has spent approximately
$7,137,000 on this project through December 31, 1996.
7
Petrol Rem is marketing PRP through trade shows, magazines, direct mail
advertising, and direct contacts with companies and consultants specializing in
petroleum clean-up, as well as marketing directly to municipalities and
corporations with needs for the product. Initial sales of PRP began in July
1993, and increased marketing efforts during 1996 have resulted in additional
sales. Although there can be no assurances that PRP will be successfully
marketed, the Company believes, based on their scientific determinations, the
results of recent NETAC testing, and the favorable response at the retail
level, that PRP will be a viable product in the bioremediation marketplace.
Whole-Body Extracorporeal Hyperthermia
BICO is currently funding a project with HemoCleanse, Inc. (" HemoCleanse "),
an unaffiliated company located in Lafayette, Indiana. In connection with
this project, BICO formed a wholly-owned subsidiary, IDT , Inc. IDT 's
executive officers and directors include David L. Purdy , Fred E. Cooper,
Glenn Keeling, and Anthony J. Feola , who are also officers and/or directors
of BICO and its other affiliates.
IDT and HemoCleanse have entered into an exclusive License Agreement dated as
of July 21, 1993. Pursuant to the terms of the License Agreement, IDT has the
exclusive world-wide right to commercialize the BioLogic -HT technology, which
is described below.
The project involves the delivery of whole-body extracorporeal hyperthermia
("WBH") utilizing HemoCleanse's BioLogic -HT System for treating the blood of
patients with HIV and Acquired Immuno -deficiency Syndrome ("AIDS"), as well as
cancer. Along with HemoCleanse , IDT has conducted research and clinical
trials which explore the use of hyperthermia to treat blood by exposure to
certain temperatures in order to determine whether such exposures will aid in
the treatment of HIV and other viruses. FDA-approved trials for hyperthermia
as a treatment for cancer commenced in early 1997. HemoCleanse has produced the
equipment used in the procedures and assists IDT with its research and clinical
trials; where appropriate, IDT and HemoCleanse are referred to herein as the
"WBH Companies".
Whole-body hyperthermia achieved through extracorporeal blood heating involves
heating the patient's blood outside the body to approximately 47 degrees
centigrade and returning it back to the body, thus raising the body's core
temperature to up to 42 degrees centigrade. A blood pump moves the patient's
blood through the BioLogic -HT's sorbent-based dialysis system, balancing the
blood chemistries and removing toxins from the blood. Historically,
hyperthermia has been successfully used for the treatment of the symptoms of
certain types of cancer.
Although other entities have experimented with the use of WBH , one significant
problem has been the safe delivery of the procedure. IDT and HemoCleanse
believe that the improvements inherent to their delivery system increase the
safety of the procedure. Through the use of the BioLogic -HT and sorbent
chemicals, the patient's blood chemicals are kept in balance and toxins are
removed. The delivery system also combines the use of a tubular heat
exchanger, various probes and catheters, heated anterior and posterior
blankets, and monitors. As a result, IDT and HemoCleanse believe that they
have taken a significant step towards the creation of a safe delivery system.
Although there can be no assurances that the delivery system is safe for all
humans, clinical trials to date have confirmed that the humans tested were able
to safely tolerate one hour of whole-body hyperthermia at a temperature of 40
to 42 degrees centigrade.
IDT has conducted a series of clinical trials to date using the BioLogic -HT.
Preliminary non-human trials were conducted both outside the United States and
inside the United States at a university-affiliated facility. Initial human
trials were conducted outside the United States in November 1993.
In March 1994, IDT , as sponsor, and HemoCleanse received conditional approval
of an investigational device exemption (" IDE ") application from the FDA,
which indicated that the approval was based upon public health concerns and the
urgency of treating patients with AIDS. The IDE permitted the WBH Companies to
conduct a feasibility study for the treatment of six human patients who were
randomized into two treatment groups (the control group was treated at 40
degrees centigrade, and the tested group was treated at 42 degrees centigrade)
for a single treatment of each patient.
8
In July 1994, IDT and HemoCleanse conducted the procedures approved in
connection with its IDE at St. Elizabeth Hospital Medical Center in Lafayette,
Indiana. Each AIDS patient involved in the randomized study was the subject of
a one-hour WBH treatment; three were treated at 40 degrees centigrade (the
control group) and three were treated at 42 degrees centigrade (the treated
group). Although some of the patients were severely immune suppressed and
ranged in age from 27 years to 50 years, all of the patients tolerated the
procedure, which supports the WBH Companies' contention that whole body
extracorporeal hyperthermia can be safely administered using the BioLogic-HT
system.
In August 1994, the WBH Companies received preliminary results from its July
trials, which indicated that the BioLogic-HT System used in the trials was
successful in delivering safe hyperthermia treatments. Once the data was fully
analyzed by HemoCleanse 's scientists, additional conclusions were reached.
Not only did the data indicate that the treatment could be delivered safely,
but also that preliminary data shows an initial favorable effect on HIV status
as well as Kaposi's Sarcoma.
The results of the July 1994 trials encouraged the WBH Companies to request
that the FDA continue and expand the IDE study. In December 1994, the WBH
Companies received FDA approval to conduct expanded clinical trials on thirty
patients. The first group of ten patients was treated at 42 degrees
centigrade for one hour, with an identical treatment four days later. The
second group of ten patients was treated at 40 degrees centigrade for one hour,
with an identical treatment four days later. The third group of ten patients,
the control group, received no WBH treatment.
In February 1995, the WBH Companies began the expanded clinical trials on the
first fifteen patients at St. Elizabeth Hospital Medical Center in Lafayette,
Indiana. The second group of fifteen patients were the subjects of an
identical set of trials conducted in May 1995. The results of the trials
caused the scientists to conclude that two successive high temperature WBH
treatments are generally safe in subjects with advanced HIV disease, and result
in positive changes in surrogate markers and clinical status; however in order
to establish statistical significance, additional trials must be conducted.
During June and July of 1996, with FDA approval, the WBH Companies treated a
non-randomized group of HIV patients who participated in the 1995 Phase II
Study as either control patients or those who received WBH treatments with the
BioLogic-HT System. The follow-up on this six-month study will conclude in
early 1997.
The WBH Companies have also received FDA approval to conduct an expanded Phase
II Study with 60 HIV patients, with 30 control patients and 30 treated
patients. These studies will be conducted at a hospital in Miami, Florida, and
are expected to commence in 1997.
During 1996, the WBH Companies decided to pursue the use of WBH in the
treatment of cancer, which was one of its original uses. After the completion
of trials at the University of Texas Medical Branch, IDT worked with the
University of Texas to develop a protocol to study the impact of WBH on
mestastic non-small cell lung cancer. That protocol has led to the FDA s first
ever approval of a feasibility study on the treatment pursuant to an IDE
application.
In October 1994, IDT received notification that the patent application for its
specialized method for whole-body extracorporeal hyperthermia (which has been
assigned to IDT ) had been issued. In July 1995, a Continuation in Part Patent,
which included the BioLogic -HT System, filed by IDT for the Specialized
Perfusion Protocol for WBH was allowed, and the patent was granted on December
19, 1995.
9
During 1995, the Company added two members to its Medical and Scientific
Advisory Board: Dr. Moon H. Lee, Ph.D., a researcher at Harbor- UCLA Medical
Center who specializes in HIV-related research; and Dr. Peter M. Schick, an
oncologic surgeon and founder of Westside Research Foundation, a
California-based foundation created to find treatments for HIV. Drs. Lee and
Schick join Drs. Steinhart , Yatvin and Ash, the original members of the
Advisory Board. Corklin R. Steinhart , M.D., Ph.D., is the medical director of
special immunology services at Mercy Hospital in Miami, Florida; Milton B.
Yatvin , Ph.D., is a professor in the Radiation & Thermal Biology Division,
Department of Radiation Oncology at Oregon Health Sciences University in
Portland, Oregon, and Stephen R. Ash, M.D., F.A.C.P., is the Chairman of the
Board and Director of Research and Development of HemoCleanse .
IDT is continuing to pursue its marketing efforts for the BioLogic -HT System's
use in Europe in the treatment of both HIV and cancer.
The Company has expensed approximately $7,263,000 on this project through
December 31, 1996, which includes the Company's acquisition of HemoCleanse
common stock, via a purchase of common stock and the conversion of a loan into
common stock.
Functional Electrical Stimulators
In 1990, BICO began manufacturing functional electrical stimulators , also
referred to as implantable receiver stimulators ("IRS Devices") for Case
Western Reserve University in Cleveland, Ohio ("Case Western") pursuant to a
$378,000 contract with the Department of Veterans Affairs. The stimulators ,
which are implanted under the skin, are used to assist individuals disabled as
a result of spinal cord injury, stroke, head injury, multiple sclerosis and
other neurological disorders by using low levels of electrical stimulation to
activate nerves and muscles to function in a specific manner. The IRS Device
manufactured by BICO is an implantable device similar to a pacemaker, which is
surgically implanted in the chest or abdomen, and acts to replace a damaged or
severed nerve and stimulates muscles of the arm or leg to restore hand
grasping, arm movement, walking or standing. The implanted device works in
concert with a control stick and transmitting coil which are worn on the torso,
and an electronic unit which is carried on the wheelchair.
Other contracts which aggregated an additional $904,000 were received beginning
in 1992 and continuing through 1994 from Case Western, the Department of
Veterans Affairs, and implanting hospitals for devices which were being used in
the university's FDA-approved clinical studies.
In late 1994, NeuroControl Corporation in Cleveland, Ohio ("NeuroControl")
acquired the rights to Case Western's IRS Devices. In February 1995,
NeuroControl awarded BICO a $2.2 million contract to build IRS Devices which
would be used during the completion of clinical studies and into the
commercialization phase of the device. The new contract originally called for
the first installment of devices to be delivered over approximately a two-year
period beginning in October 1995, with the remaining devices to be delivered in
accordance with a schedule to be negotiated. Because of component supply
problems, delivery on the initial installment of devices was delayed until
March 1996. The contract also calls for good-faith negotiations to conclude a
long-term (ten-year) supply agreement for IRS Device implants by March 1, 1997.
NeuroControl submitted a Pre-Market Approval ("PMA") application in October
1995 to the FDA to market the IRS Devices. The application was complete except
for the manufacturing section which was submitted in December 1996. In
addition to the contract for the devices, NeuroControl has placed several
purchase orders with BICO for ancillary items and services.
When Case Western transitioned its rights to the IRS Devices, scientists and
engineers there began a new stimulator development program for a device
referred to as an Implantable Stimulator Telemeter ("IST"). The device
stimulates in a manner similar to the IRS Device, but has built into it a wide
range of other capabilities. BICO has been awarded several small contracts for
development of components for this device and is currently fabricating IST
devices for clinical trials being conducted by Case Western.
Other Projects
- --------------
Implantable Technology
10
In April 1996, BICO was granted FDA approval to market its theraPORT Vascular
Access System ("VAS"). The approval was in connection with the Company's
510(k) Notification filed in January 1996. The device is comprised of a
reservoir which is implanted beneath the skin in the chest region with a
catheter inserted in a vein and provides a delivery system for patients who
require continual injections. Because such repeated injections can cause veins
to shut down and collapse, the theraPORT offers an improved delivery system by
eliminating that vascular trauma. If necessary to accommodate multiple drug
therapy with incompatible drugs, dual ports can be implanted. Such devices are
frequently used in cancer drug therapy. BICO anticipates that the device will
bear a cost of approximately $375 per unit, and marketing is planned for the
second quarter of 1997.
Through its subsidiary, Coraflex Inc. (" Coraflex "), BICO is engaged in the
development of a polyurethane heart valve which management believes may not
have the disadvantages of the mechanical and bioprosthetic valves currently
being marketed. The Coraflex valve, which resembles the human heart's aortic
valve, is made by means of a proprietary manufacturing process. The
polyurethane used in the construction of the heart valve is believed by BICO to
exhibit strength and fatigue resistance which compare favorably with that of
other materials used for prosthetic valves. In vitro testing, some of which
has been performed through the Children's Hospital of Pittsburgh, of the
Coraflex valve to date has demonstrated superior fatigue resistance and flow
characteristics relative to the currently available bioprosthetic and
mechanical devices, respectively. Additional development and testing must be
conducted by BICO prior to its making an application to the FDA for approval to
begin clinical testing in humans. BICO will need additional financing to
complete clinical testing of the valve and to begin production. No assurances
can be made that BICO will receive the necessary funding to complete testing,
will receive FDA-marketing approval, will be able to produce and sell the
valve, or that the valve will be commercially viable.
BICO also has developed technology for other implantable devices, such as
hemodialysis ports, implantable insulin dispensers and rate-adaptive
pacemakers. BICO received patents on its hemodialysis port and rate-adaptive
pacemaker in 1990. Because BICO 's management decided to focus most of the
Company's resources on the research and development of the Noninvasive Glucose
Sensor, little progress was made on these projects. Consequently, some of
these devices are in a very preliminary stage of development, and it is
unclear at this time whether their development will be pursued or completed.
Barnacle Ban
In November 1993, BICO acquired the rights to a specialized paint, as well as
the rights to the name Barnacle Ban pursuant to a patent and trademark license
agreement with its inventor. In 1995, the Company applied for trademark
protection for the name HotBottom Paint, a barrier coat primer and antifouling
paint which received approval for registration from the EPA in July 1995.
Barnacle Ban's paint is designed to repel zebra mussels and other related
marine life from the surfaces of ships, pipelines and other objects which
function under water. Because the accumulation of marine life on surfaces such
as pipes and ships have caused significant problems for entities such as water
authorities, utility companies, and naval operations, the Company believes that
there is a potential market for this product. The Company is continuing the
testing and enhancement of the product; manufacturing of the product began in
1994.
Marketing efforts on the Company's paint products have continued, and the
Company is marketing the products from its Pittsburgh, PA and Gaithersburg, MD
offices. In July 1996, the Company announced that it had entered into a
five-year exclusive distribution agreement with Pleasure Cove Marina, which is
located in Maryland, for Maryland, Virginia, Delaware and the District of
Columbia; the agreement contains an agreed-upon minimum purchase requirement.
11
The trademark and license agreement covers the patents, both granted and
pending, to the paint and its application. The agreement sets forth terms which
include the minimum payment, in the form of royalties and fees, of $32,500 for
the first year, $30,000 for the second year, $42,000 for the third year,
$54,000 for the fourth year and $66,000 for the fifth and each successive year.
These payments will be minimum royalty payments on six percent (6%) of net
sales of the product, plus thirty percent (30%) of all payments received from
any sublicensees . The Company has spent approximately $1,738,000 on this
project through December 31, 1996.
The information set forth herein regarding BICO 's projects is of a summary
nature, and the status of each project is subject to constant change. There
can be no assurances as to the completion or success of any project.
Net Sales
- ---------
From 1993-1996 all significant revenues were generated from FES contracts (See,
"BUSINESS - Functional Electrical Stimulators ").
RESEARCH AND DEVELOPMENT
The Company continues to be actively engaged in the research and development of
new products. Its major emphasis has been the development of a Noninvasive
Glucose Sensor. In order to raise funds for the research and development of
new products, the Company and Diasense have conducted sales of stock. (See,
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS").
PRODUCT IMPROVEMENT
The Company continues to develop and improve its products, including its
Noninvasive Glucose Sensor, PRP, and HotBottom Paint.
The Company has phased out its pacemaker product line and does not intend to
expend any additional funds for improvements to any products formerly marketed.
MARKETING AND DISTRIBUTION
Petrol Rem began marketing of its bioremediation product, PRP , in mid-1993,
and is now sold in quality marine supply stores in the coastal areas of the
United States, Canada, Europe and South East Asia. In addition, the Barnacle
Ban HotBottom Paint product is currently being manufactured and marketed.
These projections are based on management's belief, as to which there can be no
assurances, that the development and manufacture of those products will
continue to proceed successfully and on schedule.
PATENTS, TRADEMARKS AND LICENSES
The Company owns patents on certain of its products and files applications to
obtain patents on new inventions when practical. Additionally, the Company
endeavors to obtain licenses from others as it deems necessary to conduct its
business.
The Company also relies upon trade secret protection for its confidential and
proprietary information. Although BICO , Diasense and their affiliates take
all reasonable steps to protect such information, including the use of
Confidentiality Agreements and similar provisions, there can be no assurance
that others will not independently develop substantially equivalent
proprietary information or techniques, otherwise gain access to the Company's
trade secrets, disclose such technology, or that the Company can meaningfully
protect its trade secrets.
12
Noninvasive Glucose Sensor
Diasense owns a patent entitled "Non-Invasive Determination of Glucose
Concentration in Body of Patients" (the "Patent") which covers certain aspects
of a process for measuring blood glucose levels noninvasively . Such Patent
was awarded to BICO 's research team in December 1991 and was sold to Diasense
pursuant to a Purchase Agreement dated November 18, 1991 (See, " Intercompany
Agreements"). The Patent will expire, if all maintenance fees are paid, no
earlier than the year 2008. If marketing of a product made under the Patent is
delayed by clinical testing or regulatory review, an extension of the term of
the Patent may be obtained. Diasense 's Patent relates only to noninvasive
sensing of glucose but not to other blood constituents. Diasense has filed
corresponding patent applications in a number of foreign countries.
A second patent application was filed by BICO in December 1992, which was
assigned to Diasense . This second patent contained new claims which extend
the coverage based upon additional discoveries and data obtained since the
original patent was filed. The patent application was amended in October 1993,
and was granted in January 1995. In May 1993, four additional patent
applications were filed by BICO 's research teams related to the methods,
measurement and noninvasive determination of analyte concentrations in blood.
As of February 1997, a total of five patents have been issued, all of which
have been assigned to Diasense . Corresponding patent applications have been
filed in foreign countries where the Company anticipates marketing the
Noninvasive Glucose Sensor.
BICO 's research team continues to file patent applications, provisional patent
applications, some of which are being converted into " PCTs " (Patent
Cooperative Treaty) which reflect the continued research and development and
additional refinements to the Noninvasive Glucose Sensor.
Diasense or BICO may file applications in the United States and other
countries, as appropriate, for additional patents directed to other features
of the Noninvasive Glucose Sensor and related processes.
Those competitors known by Diasense to be currently developing non-invasive
glucose sensors own patents directed to various devices and processes related
to the non-invasive monitoring of concentrations of glucose and other blood
constituents. It is possible that such patents may require Diasense to alter
any model of the Noninvasive Glucose Sensor or the underlying processes
relating to the Noninvasive Glucose Sensor, to obtain licenses, or to cease
certain activities.
The Company also relies upon trade secret protection for its confidential and
proprietary information. Although Diasense and BICO take all reasonable steps
to protect such information, including the use of Confidentiality Agreements
and similar provisions, there can be no assurance that others will not
independently develop substantially equivalent proprietary information or
techniques, otherwise gain access to the Company's trade secrets, disclose such
technology, or that the Company can meaningfully protect its trade secrets.
The Company has registered the name Diasensor for use in connection with the
Diasensor models. The Company intends to apply, at the appropriate time, for
registrations of other trademarks as to any future products of the Company.
13
Whole-Body Hyperthermia
In September 1992, a research team funded by the Company applied for a protocol
and domestic patent in connection with the use of hyperthermia and the
treatment of blood in HIV-positive patients; the patent has been assigned to
IDT. The protocol was approved in October 1992. In October 1994, IDT
received notification that the patent application for its specialized method
for whole-body extracorporeal hyperthermia had been issued. A Continuation in
Part, which included the BioLogic -HT System was filed by IDT , and the patent
was issued in December 1995. The patent, which is also the subject of foreign
filings, is entitled "Specialized Perfusion Protocol for Whole-Body
Hyperthermia", contains seventeen claims for the hyperthermia procedure,
including the method of heating all of the blood in the extracorporeal blood
circuit to raise the patient's core temperature to approximately 42 degrees
centigrade (See, "BUSINESS - Whole-Body Extracorporeal Hyperthermia").
Implantable Technology
During 1995, the Company renewed its U.S. trademark registration for the name
Coraflex , which was originally granted in 1988. The Company has also obtained
trademark registration for the name theraPORT (See, "BUSINESS - Implantable
Technology).
In October, 1996, a patent was issued for the Company s heart valve product. A
Continuation in Part has been filed in connection with the Company s method of
making the heart valve.
Bioremediation
In 1992 and 1993, Petrol Rem applied for patents in connection with its
bioremediation product, all of which are still pending. The Company has
received trademark authorization for the use of the product names PRP , BIO-
SOK , BIO-BOOM , and Oil Buster (See, "BUSINESS - Bioremediation ").
Marine Anti-Fouling Paint
In 1993, the Company acquired the rights to certain patents, both issued and
pending, in connection with its Barnacle Ban project. A patent was issued on
July 13, 1993 for a marine organism repellant and its application. A
Continuation-In-Part Patent application is pending. The Company also filed
patent applications in various foreign countries in November 1993, all of which
are pending. The Company has filed for trademark authorization for the
product names Barnacle Ban and HotBottom for the anti-fouling paint. In July
1995, the EPA approved the registration of HotBottom Paint (See, "BUSINESS -
Barnacle Ban").
WARRANTIES AND PRODUCT LIABILITY
Warranties on the Company's lithium-powered pacemakers range from six to nine
years from implantation, and the isotopic-powered pacemakers carry warranties
ranging from twenty years to the patient's lifetime. Under the Company's
warranty policy, any purchaser whose pacemaker malfunctions due to a defect or
whose pacemaker proves to be defective within the applicable warranty period
will receive a replacement pacemaker, provided that another of the Company's
pacemakers is implanted and the defective pacemaker is returned to the Company.
The Company had no warranty claims in 1993, 1994 or 1995 and believes that
since the Company's pacemakers are no longer considered to be
"state-of-the-art" technology, its pacemakers would not be replaced by one of
its devices. The Company's implant experience in its laboratory tests indicates
that the useful life of its pacemakers should be in excess of their applicable
warranty periods, and the Company believes it has little exposure to future
warranty claims.
The Company's present product liability insurance coverage is $1,000,000 in the
aggregate, which management considers to be a sufficient amount due to the
Company's discontinuance of sales and potential exposure to liability.
SOURCE OF SUPPLY
14
Once the Company begins to manufacture the Noninvasive Glucose Sensor, the
Company will be dependent upon suppliers for some of the components required
for the devices fabrication. The Company plans to assemble the devices, but
will need to purchase components, including some components which will be
custom made for the Company from certain suppliers. These components will not
be generally available, and the Company may become dependent upon those
suppliers which do provide such specialized products.
If the Company successfully develops other new products, and receives the
regulatory approvals to manufacture such products, it may become dependent on
certain suppliers for custom parts.
COMPETITION
With the rapid progress of technology, and in spite of continuing research and
development programs, the Company's products or developmental products are
always subject to the risk of obsolescence through the introduction of new
products or techniques by others. Management is aware that other research
groups are developing noninvasive glucose sensors, but has limited knowledge as
to the technology used or stage of development of these devices. There is a
risk that those other groups will complete the development of their devices
before the Company does. There is no other company currently producing or
marketing noninvasive sensors for the measure of blood glucose similar to those
being developed by the Company. However, some of the Company's other products
and proposed products compete with those of a number of other domestic and
foreign manufacturers. Competitive success in the medical device field is
dependent upon product characteristics including performance, reliability and
design innovations.
Noninvasive Glucose Sensor
The Noninvasive Glucose Sensor will compete with existing invasive glucose
sensors. Although the Company believes that the features of the Noninvasive
Glucose Sensor, particularly its convenience and the fact that no blood samples
are required, will compete favorably with existing invasive glucose sensors,
there can be no assurance that the Noninvasive Glucose Sensor will compete
successfully. Most currently available invasive glucose sensors yield accuracy
levels of plus or minus 25% to 30%, range in price from $80 to $200, not
including monthly costs for disposable supplies and accessories, and are
produced and marketed by eight to ten sizable companies. Those companies
include Bayer Laboratories, Inc., Boehringer Mannheim Diagnostics, and
Lifescan (an affiliate of Johnson & Johnson).
Such companies have established marketing and sales forces, and represent
established entities in the industry. Certain of the Company's competitors
(including their corporate or joint venture partners or affiliates) currently
marketing invasive glucose sensors have substantially greater financial,
technical, marketing and other resources and expertise than Diasense , and may
have other competitive advantages over Diasense (based on any one or more
competitive factors such as accuracy, convenience, features, price or brand
loyalty). Additionally, competitors marketing existing invasive glucose
sensors may from time to time improve or refine their products (or otherwise
make them more price competitive) so as to enhance their marketing
competitiveness relative to the Company's Noninvasive Glucose Sensor.
Accordingly, there can be no assurance that the product, or Diasense as
marketer for the Noninvasive Glucose Sensor, will be able to compete favorably
with such competition.
In addition to the invasive glucose sensors discussed above, there exist
invasive sensors, such as the Yellow Springs Sensor (the "Clinical Sensors")
which the Company believes achieve accuracy levels within 10 minutes which are
within plus or minus 3% of actual glucose levels. The Company will also
compete with this technology, which is relatively non-portable and bears a
price of approximately $8,000. The Clinical Sensors are presently used almost
exclusively by hospitals and other institutions, and, like all invasive
sensors, still require repeated blood samples. It is anticipated that the
Company will also face competition from the Clinical Sensors, at least in some
markets. For example, certain institutions that might otherwise purchase
Diasense 's products may decide to continue to use the Clinical Sensors,
whether due to the superior accuracy levels of that sensor or institutional or
historical bias, despite what Diasense believes will be the superior
convenience and cost factors of the Noninvasive Glucose Sensor.
15
At this time, the Company estimates that the anticipated selling price of the
Diasensor 1000 will range from $7,950 to $8,500, depending upon the country in
which it is sold and other factors; such estimate is subject to change as the
FDA process continues. Such price will be a factor in the Company's ability to
compete with other available technology.
The Company faces more direct competition from other companies who are
currently researching and developing noninvasive glucose sensors. The Company
has very limited knowledge as to the stage of development of these sensors;
however, should another company successfully develop a noninvasive glucose
sensor, achieve FDA approval, and reach the market prior to the Company, it
would have an adverse effect upon the Company's ability to market its sensor.
The companies which are currently engaged in the research and/or development of
noninvasive glucose sensors include the following: Sandia National Laboratories
("Sandia"), which is working with the University of New Mexico, Futrex , Inc.
(" Futrex "), Abbott Laboratories ( Abbott ) and Cygnus, Inc. ("Cygnus").
Although the Company is not aware, there may be other companies engaged in
similar research and development. The named companies, and others, may be
further along in their development than the Company is aware, and may have
access to capital and other resources which would give them a competitive
advantage over the Company. The following is a summary of the Company's
current knowledge regarding the companies listed.
Sandia, which is funded by the U.S. Department of Energy and administered by
AT&T, has publicly reported that it has developed a noninvasive glucose sensor
based on infrared spectroscopy and using near-infrared light. In May 1993,
Sandia disclosed that it entered into agreements with Rio Grande Medical
Technologies, Inc. ("Rio Grande"), transferring certain rights and patents
relating to a noninvasive glucose sensor, and that Rio Grande was seeking
financing to develop the technology. In November 1994, a representative of
Sandia publicly stated that their research and development still required no
less than two years to perfect the device. The Company is not aware of
Sandia's commencement of clinical trials through IRBs which would satisfy FDA
approval requirements. Futrex , which has been granted four patents relating to
the noninvasive detection of glucose, conducted unsuccessful clinical trials in
1991. Futrex conducted additional clinical trials, and has disclosed in August
1995 IPO filings with the SEC that it plans to file a 510(k) Notification with
the FDA for its device in the fourth quarter of 1995; however, media reports
indicate that Futrex and its founder are now the subject of a federal court
suit initiated by the SEC, which could have a significant negative impact on
Futrex 's future. Abbott, which acquired Medisense , Inc. (the leading
manufacturer of portable invasive blood glucose monitors) in 1996, signed a
research and development agreement with SpectRX for a painless, bloodless
technology for monitoring glucose. This procedure, which is still invasive,
utilizes inerstitial fluid using a proprietary technology to create a micropore
in the outer layer of skin; similar technology is also being developed by Integ
, Inc, which is called the Lifeguard System. Clinical trials on this
technology are continuing. Cygnus has disclosed that it is developing a "
GlucoWatch ", which it claims periodically directs an electrical current into
the diabetic in order to monitor glucose levels. Cygnus, which has signed
pacts with several large pharmaceutical companies, recently disclosed that it
will not be prepared to take its product to the FDA until 1998.
Certain organizations are also actively engaged in researching and developing
technologies that may regulate the use or production of insulin or otherwise
affect or cure the underlying causes of diabetes. Diasense is not aware of any
new or anticipated technology that would effectively render the Noninvasive
Glucose Sensor obsolete or otherwise not marketable as currently contemplated.
However, there can be no assurance that future technological developments or
products will not make the Noninvasive Glucose Sensor significantly less
competitive or, in the case of the discovery of a cure for diabetes, even
effectively obsolete.
16
GOVERNMENT REGULATIONS
Since most of the Company's products are "medical devices" as defined by the
Federal Food, Drug and Cosmetic Act, as amended (the "Act"), they are subject
to the regulatory authority of the FDA. The FDA regulates the testing,
marketing and registration of new medical devices, in addition to regulating
manufacturing practices, labeling and record keeping procedures. The FDA can
subject the Company to inspections of its facilities and operations and may
also audit its record keeping procedures at any time. The FDA's Good
Manufacturing Practices for Medical Devices specifies various requirements for
BICO 's manufacturing processes and maintenance of certain records.
In March 1993, the FDA announced that it intends to take steps to enhance its
review and approval procedures and guidelines relating to the testing of
medical devices, including imposing a higher standard of proof on medical
devices that might pose potential health risks. BICO is unable to determine at
this time whether such action may have a material adverse effect on the
approval by the FDA of the Noninvasive Glucose Sensor, the WBH delivery system,
any other product, or on BICO 's business generally. The extent of federal,
state, local or foreign governmental regulations that might result from any
future legislation or administrative action, and the impact of any such action
on BICO 's products or business, cannot be accurately determined.
Future sales of BICO 's products may also be affected by the Clinical
Laboratory Improvement Amendments of 1988 (" CLIA "), which are intended to
assure the quality and reliability of all medical testing in the United States,
regardless of where the testing is performed. Regulations to implement CLIA
became effective in 1992, and, accordingly, the current or future impact of
such regulations on Diasense 's products cannot fully be determined at this
time. These regulations affect previously unregulated testing markets,
including physician office laboratories and small volume test sites. These
market segments may be discouraged from initiating, continuing or expanding
patient testing as a result of CLIA . There can be no assurance that the
regulations will not have an effect on the potential uses for the Noninvasive
Glucose Sensor, the WBH delivery system, or any other product, with a resulting
impact on its potential markets.
Noninvasive Glucose Sensor
Because the Noninvasive Glucose Sensor is subject to regulation by the FDA, the
Company will be required to meet applicable FDA requirements prior to marketing
the device in the United States. These requirements include clinical testing,
which must be supervised by the IRBs of chosen hospitals. Clinical testing
began on the Noninvasive Glucose Sensor in May 1993 (See, "Current Status of
the Noninvasive Glucose Sensor"). The clinical trials have been conducted
based on a determination by the Company and the IRBs that the device is a
"non-significant risk" device, thus obviating the need for an Investigational
Device Exemption ("IDE") filing with the FDA. Should any of the IRBs
determine, and are successful in convincing the FDA, that the device is a
"significant risk" device, the Company would be required to submit an IDE
filing to the FDA. Such filing would result in material delays and expenses
for the Company, and a resulting significant delay in the completion, marketing
and sale of the Noninvasive Glucose Sensor. To date, neither the IRBs nor the
FDA have informed the Company that they are of the opinion that the device is a
"significant risk" device.
Diasense may conclude clinical testing on any device at any point at which it
believes additional data is not necessary for inclusion in the 510(k)
Notification. Such notification will include a detailed description of the
prototype and data produced during clinical trials. The 510(k) Notification
review by the FDA involves a substantial period of time, and requests for
additional information and clinical data will require additional time. There
can be no assurance that the 510(k) Notification will ultimately be approved,
or when it will be approved.
17
The 510(k) Notification filed by the Company for the Diasensor 1000 indicated
that the device is "substantially equivalent" to similar existing devices,
namely invasive glucose sensors. In connection with its review of the
Company's 510(k) Notification, the FDA will determine whether the device is
"substantially equivalent" to a similar existing device based upon the
following factors: ( i ) whether the device has the same "intended use" as an
existing device; and (ii) whether the device has the same technological
characteristics as the existing device, unless the different technological
characteristics do not adversely affect its safety and effectiveness. Although
the Company and the IRBs believe that the Noninvasive Glucose Sensor satisfies
those requirements, thus qualifying for a 510(k) Notification, there can be no
assurance that the FDA will agree. Although its correspondence with the
Company appears to indicate that the FDA believes that the 510(k) Notification
is the appropriate filing for the Diasensor 1000, should the FDA determine that
the device is not "substantially equivalent" to an existing device, or refuse
to approve the 510(k) Notification for any reason, the Company would be
required to submit to the FDA's full pre- market approval process, which would
require additional testing, and result in significant delays and increased
expenses. The FDA's pre-market approval process is more extensive,
time-consuming and will result in increased research and development expenses,
while delaying the time period in which BICO and Diasense could begin
manufacturing and marketing the product.
The time elapsed between the completion of clinical testing at IRBs and the
grant of marketing approval by the FDA is uncertain, and no assurance can be
given that approval to market the Noninvasive Glucose Sensor will ultimately be
obtained. In addition, delays or rejections may be encountered based upon
changes in the FDA's regulatory policies during the period of research and
development and the FDA's review.
The Company may also be required to comply with the same regulatory
requirements prior to introducing the Diasensor 2000, or other models of the
Noninvasive Glucose Sensor, to the market. Any changes in FDA procedures or
requirements will require corresponding changes in the Company's obligations in
order to maintain compliance with FDA standards. Such changes may result in
additional delays or increased expenses.
Diasense 's products may also be subject to foreign regulatory approval prior
to any sales.
The FDA's Good Manufacturing Practices for Medical Devices specifies various
requirements for BICO 's manufacturing processes and maintenance of certain
records.
Whole-Body Extracorporeal Hyperthermia
HemoCleanse has received FDA approval of its Form 510(k) Notification in
connection with the use of the BioLogic - DT model, which is used in drug
detoxification procedures. However, the 510(k) Notification process, which is
intended to be a shorter, less complex FDA procedure as compared to a full
Pre-Market Approval process, may not be available for the BioLogic -HT model,
which is used in the hyperthermia project. The WBH Companies are continuing to
hold discussions with the FDA regarding the number of patients which must be
treated with the BioLogic -HT model before the FDA will accept an application
to market the delivery system in the U.S., and the WBH Companies have retained
a biostatistician to assist them in making that determination. The Company
believes, based on the federal government's statements regarding the priority
treatment to be afforded to drugs and procedures in connection with the
treatment of HIV and AIDS, that its FDA application, in whatever form, may
receive expedited review. If either a Pre-Market Approval application or a
510(k) Notification is approved by the FDA, it would allow IDT , via the
License Agreement, to market the BioLogic-HT device.
Although the federal government has publicly stated that experimental drugs and
procedures in connection with the treatment of HIV will receive priority
treatment, there can be no assurances that any future 510(k) Notifications,
Pre- Market Approval applications, or IDEs will obtain FDA approval. Without
FDA approval, the delivery system cannot be used or marketed in the United
States.
Bioremediation
18
The Company's bioremediation project will be supervised by NETAC , a private
group endorsed and supervised by the EPA and the Pennsylvania Department of
Environmental Resources. In addition, each state in which the bioremediation
products are used will apply its own environmental regulations to the use and
sale of the products.
Pacemakers
The Company is subject to NRC regulations in connection with all of its
isotopically-powered pacemakers and the storage of nuclear materials at its
Indiana facility. The Company maintains a renewable license to continue
storing and handling such pacemakers in order to satisfy warranty claims.
The FDA's Good Manufacturing Practices for Medical Devices specifies various
requirements for the Company's manufacturing processes and maintenance of
certain records. The Company maintains quality assurance records for every
pacemaker manufactured as well as for all of its implanted pacemakers. The
Company also requires the return of all explanted units for analysis by its
quality control personnel. In some cases, such as the death of the bearer, a
pacemaker may not be explanted or returned to the Company.
HUMAN RESOURCES
As of December 31, 1996, the Company had 165 full-time employees who were
located primarily in either the Indiana or Pittsburgh locations. The Company
offers employee benefits which include group life, health, and disability
insurance, and the option to participate in a 401(k) plan. The Company
believes that its relations with its employees are good.
The Company has employment contracts with some of its non-officer employees,
most of whom are scientists and engineers employed in the Company's research
and development operations. Such contracts are typically for terms of five
years and contain confidentiality provisions. The Company also employs
consultants as needed; some of the consultants are employed pursuant to
consulting contracts which contain confidentiality provisions.
As of December 31, 1996, in addition to BICO 's full-time employees, its
subsidiaries IDT had three full-time employees; Barnacle Ban had eleven
full-time employees; Diasense had three full-time employees; and Petrol Rem
had eleven full-time employees. No employees of any of the companies are
currently represented by a collective bargaining unit.
Item 2. Properties
- -------------------
The Company's research and development operations are located in a 20,000
square foot one-story building at 300 Indian Springs Road, Indiana,
Pennsylvania. This facility contains sufficient additional space to
accommodate the Company's projected operations through 1997, except for its
manufacturing space which is described below. The building is leased by the
Company from the 300 Indian Springs Road Real Estate Partnership (the
"Partnership"). The lease period is 20 years and runs concurrently for ten
years with a mortgage arranged by the Partnership at a stated amount of rent.
At the end of ten years, the amount of rent paid by the Company is subject to
renegotiation, based on refinancing of a balloon payment due on the mortgage,
unless the mortgage has been satisfied by the Partnership. In addition to
rent, the Company pays all taxes, utilities, insurance, and other expenses
related to its operations at that location (See, "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS").
In September 1992, BICO entered into a ten-year lease agreement with the
Indiana County Board of Commissioners for 22,500 square feet of space which
BICO plans to use for the manufacture of the Noninvasive Glucose Sensor, once
developed. The facility, comprised of 22,500 square feet, has been
reconfigured to BICO 's specifications, and the machinery and equipment
necessary to manufacture have been ordered. In addition, the Company has made
arrangements with Indiana County Commerce Park, the location of the
manufacturing facility, for an additional 32,250 square feet of manufacturing
space.
19
BICO also leases office space at various locations in Pennsylvania and Maryland
for its administrative and sales offices, as well as manufacturing space for
such operations.
Item 3. Legal Proceedings
- --------------------------
In May 1996, BICO and Diasense , along with BICO 's individual directors, was
served with a federal class action lawsuit based on alleged violations of
federal securities laws. The Companies have filed a Motion to Dismiss the suit
and are aggressively defending against it. No determinations as to possible
liability or exposure are possible at this time, although the Company does not
believe that any violations of the securities laws have occurred.
In June, 1996, a shareholders derivative suit was filed against the directors
of BICO in Pennsylvania state court. The suit makes claims that directors
breached their fiduciary duties to the shareholders. The directors counsel
is challenging the suitability of the named plaintiff to bring such a suit.
Because the Company itself is not a party to the suit, it is not expected that
BICO will be adversely affected.
A suit against Petrol Rem was filed in federal court in New Jersey in June,
1996. The suit alleges patent infringement in connection with one of Petrol
Rem s products. The Company denies that any infringement has occurred, and is
vigorously opposing the suit.
The Company was one of several named defendants in a lawsuit filed in
connection with one of its pacemakers. The suit was initiated in Indiana state
court by an individual who is the administrator of an estate. All claims
against the Company were withdrawn or dismissed during 1996.
In November, 1994, BICO 's counsel was notified by the staff of the
Philadelphia office of the U.S. Securities and Exchange Commission (the "SEC")
that the SEC had decided to discontinue its investigation of BICO , its
officers and directors. The SEC concluded its informal investigation, which
was originally initiated in mid-1991, and determined that no enforcement
action was necessary.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
Not applicable.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------------------
The Company's common stock is traded on the NASDAQ Small-Cap Market under the
symbol " BICO " and is also reported under the symbol " BIOCNTRL TEC ". On
March 3, 1997 the closing price for the common stock of the Company as reported
by NASDAQ was $.906. Pursuant to current disclosure guidelines, the following
table sets forth the high and low sales prices for the common stock of the
Company during the calendar periods indicated, through December 31, 1996, as
reported by NASDAQ:
Calendar Year and Quarter High Low
1994 First Quarter 4.500 2.563
Second Quarter 3.125 2.375
Third Quarter 2.969 2.125
Fourth Quarter 3.063 1.438
20
1995 First Quarter 2.719 1.500
Second Quarter 4.689 2.375
Third Quarter 4.125 3.000
Fourth Quarter 6.438 2.688
1996 First Quarter 3.9375 1.500
Second Quarter 3.0625 1.406
Third Quarter 2.969 1.625
Fourth Quarter 2.4375 .656
As of December 31, 1996 the Company had approximately 29,000 holders, including
those who hold in street name, for its common stock and no holders of record
for its preferred stock.
Nasdaq has announced plans to revise its requirements for companies listed on
its Small-Cap market. Such requirements, which will include a minimum trading
price of $1.00, may limit the Company s option to trade on Nasdaq.
Employment Agreement Provisions Related to Changes in Control
BICO has entered into agreements (the "Agreements") with Fred E. Cooper, David
L. Purdy , Anthony J. Feola , Glenn Keeling, and two non-executive officer
employees. The Agreements provide that in the event of a "change of control"
of BICO , BICO is required to issue the following shares of common stock,
represented by a percentage of the outstanding shares of common stock of the
Company immediately after the change in control: five percent (5%) to Mr.
Cooper and Mr. Purdy ; four percent (4%) to Mr. Feola ; three percent (3%) to
Mr. Keeling; and two percent (2%) each to the two non-executive officer
employees. In general, a "change of control" is deemed to occur for purposes
of the Agreement: ( i ) when 20% or more of BICO 's outstanding voting stock is
acquired by any person, (ii) when one-third (1/3) or more of BICO 's directors
are not Continuing Directors (as defined in the Agreements), or (iii) when a
controlling influence over the management or policies of BICO is exercised by
any person or by persons acting as a group within the meaning of Section 13(d)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (See,
"MANAGEMENT - Employment Agreements").
Item 6. Selected Financial Data
- --------------------------------
YEARS ENDED DECEMBER 31st
1996 1995 1994 1993 1992
Ttl Assets $14,543,991 $9,074,669 $6,375,778 $2,995,334 $2,920,277
Long-Term
Obligations $2,669,727 $175,330 $163,201 $104,917 $0
Working Cap $1,785,576 $3,188,246 $2,612,884 $1,112,541 $1,144,891
Preferred Stk $0 $37,900 $54,900 $54,900 $54,900
21
Net Sales $597,592 $461,257 $184,507 $54,000 $199,620
TTL Revenue $776,727 $755,991 $481,453 $134,329 $313,348
Warrant Exts $9,175,375 $12,523,220 $0 $0 $0
Benefit (Provision)
for Income Taxes $0 $0 $0 $0 $157,855
Net Loss ($22,395,702) ($29,420,345) ($11,672,123) ($7,855,998) ($3,068,048)
Net Loss per
Common Share ($.53) ($.84) ($.43) ($.45) ($.23)
Cash Dividends per share:
Preferred $0 $0 $0 $0 $0
Common $0 $0 $0 $0 $0
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- ------------------------------------------------------------------------
The following is a summary of the more detailed information set forth in the
financial statements attached hereto. Data from all year-end periods are from
the Company's Audited Financial Statements.
In December 1995, BICO and Diasense announced that their respective Boards of
Directors had determined that it would be in the best interest of both
companies to combine them. Although the Boards of Directors anticipated that
such combination would be accomplished via an exchange of all Diasense 's
outstanding common stock for BICO common stock, the transaction is subject to
the approval of the shareholders of the Companies, and the terms have not been
finalized. As of the date of this document, the Companies were still
functioning as two different corporations; such status is reflected in the
discussions set forth herein.
Forward-Looking Statements
In addition to other sections of this report, the Management's Discussion and
Analysis section also contains the type of forward-looking statements discussed
on page 2 herein. Please refer to such discussion in connection with the
information presented here.
Liquidity and Capital Resources
- --------------------------------
Working capital was $1,785,576 at December 31, 1996, as compared to $3,188,246
at December 31, 1995, and $2,612,884 at December 31, 1994. Working Capital
fluctuations are due primarily to the varied capital-raising efforts of the
Company and its affiliate Diasense , which aggregated approximately $21,600,000
in 1996; $19,275,000 in 1995; and $14,910,000 in 1994, as well as an increase
in inventory from $1,660,139 as of December 31, 1995 to $3,340,120 as of
December 31, 1996.
22
Cash increased to $3,802,874 at December 31, 1996 from $3,204,501 at December
31, 1995, a decrease from $3,315,846 at December 31, 1994. These changes were
attributable to the following factors. The Company s sales of its securities
raised funds aggregating $21,600,000 during 1996 as compared to $19,275,000
during 1995. During those periods, the Company s cash flows used by operating
activities aggregated $19,972,000 and $16,891,000, respectively. During 1996,
such activities included a $1.6 million increase in inventory and an $800,000
decrease in accounts payable, which consisted primarily of costs incurred for
the research and manufacturing build-up of the noninvasive glucose sensor. In
addition, the Company recorded a $9 million charge against operations due to
warrant extensions by the Company and its subsidiary in 1996, and a similar
$12.5 million charge in 1995; no such charges were recorded in 1994 (See, Note
J to the Financial Statements). The Company s cash flows used by investing
activities aggregated $1 million in 1996 as compared to $2.7 million in 1995.
The primary difference in such activities was a decrease in property, plant and
equipment investments of $500,000 and the absence of over $1 million in
provisions for potential losses in notes receivable which was recorded in 1995,
but not 1996. The Company s accounts receivable decreased by $104,000 from
1995 to 1996 due primarily to a $200,000 allowance for doubtful accounts which
was recognized in 1996 and not in 1995.
The Company s current liabilities increased by $3.7 million from 1995 to 1996.
This increase was due primarily to the Company s issuance of convertible
debentures aggregating $6.6 million in 1996 as part of its capital-raising
efforts, $4.6 million of which were outstanding as of December 31, 1996.
During 1996, the Company incurred $2.6 million in capital leases in connection
with the lease of two buildings used for the manufacture of the Diasensor 1000,
the current portion of which was $49,000 at year end (See, Note H to the
Financial Statements).
The Company continued to fund operations mostly from sales of its securities.
During 1996, the Company redeemed its prior class of preferred stock; sold
20,000 shares of its Series A convertible preferred stock; sold 7.8 million
shares of its common stock; and issued $6.6 million in subordinated convertible
debentures. Net proceeds from these sales aggregated approximately $21.6
million. All convertible securities contain mandatory conversion provisions
which expire at various dates during 1997 and require a minimum 90-day holding
period prior to conversion.
On February 15, 1993, BICO exercised its option with Joseph Resnick to enter
into an agreement regarding the acquisition of developmental and marketing
rights to the bioremediation product PRP , and other biological remediation
products and inventions. Payments aggregate a minimum of $120,000 per year
through 2001. Petrol Rem has also entered into an employment agreement with
Mr. Resnick , which paid him a salary of $42,500 in 1996.
Due to the Company's current limited sources of revenue, the Company plans to
seek additional financing which will be used to finance development of, and to
proceed to manufacture, the Noninvasive Glucose Sensor and to complete the
development of its other projects. No assurances are made as to the
availability of any such financing (See, "BUSINESS").
The Company's products are at various stages of development and will require
additional funding for completion. This paragraph summarizes the Company's
estimates as to the aggregate amounts needed to complete each project, assuming
continued testing and development is successful. The Company may choose to
discontinue any of its projects at any time if research and development efforts
indicate that continuation would be inadvisable. The Diasensor 1000 has been
submitted to the FDA for marketing approval and the Diasensor 2000 is in the
pre- clinical trial stage of development. At this time, the Company estimates
that approximately $500,000 will be required to complete the FDA approval
process, although, due to the uncertainty of the FDA approval process, the
Company can make no assurances that such estimate is accurate. In addition,
the Company estimates that approximately $1.1 million will be required to
complete the renovations to the Company's expanded manufacturing facility in
order to manufacture the Noninvasive Glucose Sensor; additional funds may be
needed to purchase equipment as demand dictates. The Company anticipates that
an additional $1.5 million will be used for inventory build-up and
work-in-progress. The Company cannot estimate the amount required to complete
the hyperthermia project because of the continuous expansion of its uses and
the uncertainty regarding the timing of its commercialization.
23
The Company currently has a commitment for capital leases on certain of its
capital equipment and future commitments for new capital expenditures will be
required to continue the Company's efforts in research and development, and to
manufacture and market its existing products and any other products it may
develop.
As of March, 1997, the Company estimates that its short-term liquidity needs
will be met from currently available funds. The Company estimates that such
funds will be sufficient to complete the research and development stage of the
Noninvasive Glucose Sensor, to complete the FDA approval process, and to begin
marketing the device. The Company anticipates that it will finance those
expenses with existing funds, as well as funds raised through the sales of its
securities and from the other sources of funds described herein. The Company
has a history of successful capital-raising efforts; since 1989, and through
December 1996, BICO and its affiliate Diasense have raised over $80,000,000 in
private and public offerings alone. Those funds were supplemented by the
Company's receipt of over $1,318,000 as a result of the exercise of warrants
and options from 1993-1996.
Management also expects to meet a portion of its short-term working capital
needs through development contracts with other organizations and through
manufacturing for other companies on a contractual basis, as described herein.
During 1994, 1995 and 1996, the Company was awarded contracts by the Department
of Veteran's Affairs Medical Center for Case Western Reserve University,
Shriners Hospital - Philadelphia Unit, and Austin Hospital to manufacture FES
products. Such contracts generated revenues of $177,259, $168,461 and
$508,561 in 1994, 1995 and 1996, respectively. In February, 1995, the Company
was awarded an additional contract for $2.2 million in connection with its
manufacturing project (See, "BUSINESS").
Pursuant to a Research and Development Agreement (the "R&D Agreement") Diasense
is obligated to pay BICO for its work to develop the Noninvasive Glucose
Sensor. During 1995, both billings and payments pursuant to the R&D Agreement
were suspended. In May, 1995, BICO agreed to accept 3,000,000 shares of
Diasense common stock at an assigned value of $3.50 per share in return for a
reduction of $10,500,000 in amounts due to BICO . As of December 31, 1995, all
amounts due to BICO by Diasense pursuant to the R&D Agreement had been paid.
In view of BICO 's expenses resulting from its product development projects,
and other factors discussed herein, as compared to BICO 's contract revenues,
currently available funds, and established ability to raise capital in public
and private markets, BICO estimates that it will meet its liquidity needs for a
period of at least twelve months from December 31, 1996 from currently
available funds, including those expected to be raised via additional sales of
the Company's securities. This estimate is based, in part, upon the current
absence of any extraordinary technological, regulatory or legal problems.
Should such problems, which could include unanticipated delays resulting from
new developmental hurdles in product development, FDA requirements, or the loss
of a key employee, arise the Company's estimates would require re-evaluation.
There can be no assurances that despite the Company's good-faith efforts, its
estimates will lead to accurate results.
The Company's long-term liquidity needs are expected to include working capital
to fund manufacturing expenses for its products and continued research and
development expenses for existing and future projects. Such needs are expected
to be met from continued FES and IRS Device contract revenues, sales of its
bioremediation products,
24
HotBottom paint, and, once production begins, the Noninvasive Glucose Sensor
and other products. Delays in the development of the Company's products will
result in increased needs for capital from other sources. The Company
anticipates that such other sources will include continued sales of common
stock, and investment partners such as venture capital funds and private
investment groups. There can be no assurances given that adequate funds will
be available. If the Company is unable to raise the funds necessary to fund
the long-term expenses necessary to complete the development or manufacture
of its products, the Company will be unable to continue its operations.
As described hereinabove , management believes the Company has sufficient
liquidity to meet its projected expenditures on a short-term basis. Absent
additional funding, the Company will have limited liquidity on a long-term
basis. Moreover, many demands on liquidity, such as technological, regulatory
or legal problems, could cause the Company's liquidity to be inadequate. At
present, the Company does not have any additional sources of liquidity,
including bank lines of credit. Long-term working capital needs are expected
to be met through sales of the Noninvasive Glucose Sensor, the PRP
bioremediation product, HotBottom paint, and other new products. There can be
no assurances that any such products will be successfully marketed or
commercially viable.
Results of Operations
- ---------------------
In 1996, the Company's net sales increased to $597,592 from $461,257 in 1995
and $184,507 in 1994. The increase was due to an increase in the number of
products produced pursuant to FES and IRS Device contracts. Of the total net
sales, the Company had $508,561 in implantable device revenues in 1996 as
compared to $168,461 in 1995 and $177,259 in 1994.
In 1996, 1995 and 1994, the Company received interest income in the amount of
$176,478, $294,734, and $284,938, respectively. The fluctuation was due to the
investment of the Company's liquid assets (which are composed primarily of
funds raised via sales of securities), the availability of such assets and
applicable interest rates.
In 1996, the Company's costs of products sold was $325,414 as compared to
$198,542 in 1995 and $98,668 in 1994. The increase is primarily due to the
Company's corresponding increases in product sales, and products produced
pursuant to FES and IRS Device contracts.
The Company's research and development expenses were $8,742,922 in 1996, an
increase from $7,649,678 in 1995, and $5,214,386 in 1994. The overall
increase was due to the Company's receipt of funds pursuant to sales of stock,
which funds were used primarily to finance the Company's accelerated efforts in
the research and development of the Noninvasive Glucose Sensor, as well as the
hyperthermia project.
In 1996, General and Administrative expenses were $9,465,693, a decrease from
$11,117,107 in 1995 and an increase from $7,460,602 in 1994. The decrease was
due to the reorganization of some manufacturing personnel to assist with the
research and development of the Noninvasive Glucose Sensor. The prior year s
increase was due to the hiring of additional personnel in connection with the
Noninvasive Glucose Sensor project.
During 1996, the Company extended 351,482 warrants originally granted to
certain officers, directors, employees and consultants in 1991, as compared to
similar extension of 2,069,500 warrants in 1995. Because the exercise price of
such warrants ($.25 to $.50) was lower than the market price of the common
stock at the time of the extensions $604,342 was charged to operations during
1996, as compared to $7,228,220 in 1995. In addition, a similar charge of
$8,571,033 in 1996 and $5,295,000 in 1995 was made by the Company's subsidiary,
Diasense (See, "EXECUTIVE COMPENSATION" and Note J to the Financial
Statements).
Interest expense on the Company's outstanding indebtedness was $133,460 in 1996
as compared to $17,048 in 1995, and $9,766 in 1994. The increase was due to an
increase in capital leases and interest payment on the Company s subordinated
debentures.
Income Taxes
- ------------
Due to the Company's net operating loss carried forward from previous years and
its current year losses, no federal or state income taxes were required to be
paid for the years 1987 through 1996. As of December 31, 1996, the Company and
its subsidiaries, except for Diasense and Petrol Rem, had available net
operating loss carryforwards
25
for federal income tax purposes of approximately $43,800,000, which expire
during the years 1997 through 2011 (See, Note K to the Financial Statements).
Supplemental Financial Information
- ----------------------------------
Subsequent to December 31, 1996, and through March 20, 1997, the Company
issued convertible preferred stock and subordinated convertible debentures,
which resulted in net proceeds to the Company of approximately $2,957,000.
On February 24, 1997, BICO s shareholders approved an increase in the number of
authorized shares of common stock from 60,000,000 to 100,000,000 at a Special
Shareholders Meeting convened for that purpose.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The Company's financial statements appear on pages F-1 through F-23 of this
report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
- ------------------------------------------------------------------------
Effective January 25, 1995, upon a determination by the Board of Directors, the
Company engaged Thompson Dugan , P.C. as its independent auditors and
accountants to replace Grant Thornton LLP . Thompson Dugan , P.C. also serves
as the independent auditors and accountants for Diasense , replacing Grant
Thornton LLP . Neither company had any disagreements with Grant Thornton LLP
or Thompson Dugan , P.C. on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure.
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The directors and executive officers of the Company are as follows:
Name Age Director Since Position
David L. Purdy 68 1972 President, Chairman of the
Board, Treasurer, Director
Fred E. Cooper 51 1989 Chief Executive Officer,
Executive Vice President, Director
Anthony J. Feola 49 1990 Senior Vice President, Director
Glenn Keeling 46 1991 Vice President, Director
______________________________
DAVID L. PURDY , 68 is President, Chairman of the Board, Treasurer and a
director of the Company. Mr. Purdy has been a director and Chairman of the
Board since its organization in 1972 and is considered the organizer and
founder of the Company; he devotes 60% of his time to the business of the
Company, and 40% of his time to Diasense . He has also served as President of
the Company from 1972 through December 1990, with the exception of five months
in 1980, when he served as Chairman and full-time Program Director of the
Company's implantable medicine dispensing device program with St. Jude Medical,
Inc., and from October 1, 1987 through July 15, 1988, when he served as
Chairman and Director of Research and Development for the Company. Prior to
founding the Company, he was employed by various companies in the medical
technology field, including Arco Medical, Inc. Mr. Purdy is also an officer and
director of Diasense and Coraflex , and a director of Petrol Rem and IDT .
26
FRED E. COOPER, 51, is the Chief Executive Officer, Executive Vice President
and a director of the Company; he devotes approximately 60% of his time to the
business of the Company, including Petrol Rem and IDT , and 40% to Diasense .
Prior to joining the Company, Mr. Cooper co-founded Equitable Financial
Management, Inc. of Pittsburgh, PA, a company in which he served as Executive
Vice President until his resignation and divestiture of ownership in August
1990. In 1972, Mr. Cooper founded Cooper Leasing Corp., Pittsburgh,
Pennsylvania, a company specializing in equipment and venture financing. Mr.
Cooper was appointed Chief Executive Officer in January 1990. He is also an
officer and director of Diasense and Barnacle Ban, and a director of Petrol
Rem, Coraflex and IDT .
ANTHONY J. FEOLA , 49, rejoined the Company as its Senior Vice President in
April 1994, after serving as Diasense 's Vice President of Marketing and Sales
from January 1992 until April 1994. Prior to January 1992, he was the Company's
Vice President of Marketing and Sales. Prior to joining the Company in
November 1989, Mr. Feola was Vice President and Chief Operating Officer with
Gateway Broadcasting in Pittsburgh in 1989, and National Sales Manager for
Westinghouse Corporation, also in Pittsburgh, from 1980 until 1989. He was
elected a director of the Company in February 1990, and also serves as a
director of Diasense , Coraflex and Barnacle Ban. He is also the President,
CEO and a director of Petrol Rem, and the Secretary/Treasurer and a director
of IDT .
GLENN KEELING, 46, became a member of the Board of Directors in April 1991. Mr.
Keeling currently is a full- time employee of BICO in the position of Vice
President of Marketing; his primary responsibilities during 1994 and 1995 have
been the management and operation of IDT 's Whole-Body Extracorporeal
Hyperthermia project. From 1976 through 1991, he was a Vice President in
charge of new business development at Equitable Financial Management, Inc., a
regional equipment lessor specializing in export leasing and leasing of income
producing equipment. His responsibilities included initial contacts with banks
and investment firms to open new lines of business referrals in connection with
financing large equipment transactions. He is also President and a director of
IDT. Pursuant to the disclosure requirements of Item 405 of Regulation S-K
regarding timely filings required by Section 16(a) of the Securities and
Exchange Act, the Company represents the following. Based solely on its review
of copies of forms received and written representations from certain reporting
persons, the Company believes that all of its officers, directors and greater
than ten percent beneficial owners complied with applicable filing
requirements.
Item 11. Executive Compensation
- --------------------------------
The following table sets forth information concerning the annual and long-term
compensation for services in all capacities to the Company for the fiscal years
ended December 31, 1996, 1995 and 1994, of those persons who were, at December
31, 1996 ( i ) the Chief Executive Officer, and (ii) the other most highly
compensated executive officers of the Company whose remuneration exceeded
be $100,000 (the "Named Executives").
27
SUMMARY COMPENSATION TABLE
==============================================================================
Annual Compensation | (1)Long Term Compensation
- ------------------------------------------------------------------------------
| Awards
Name and | Securities
Principal (2) | Underlying (2) All other
Position Year Salary($) Bonus($) Other($) | Warrants(#) Compensation
==============================================================================
David L. |
Purdy , 1996 $300,000 $0 $0 | 0 $0
President, 1995 $300,000 $0 $0 | 820,000 (3) $0
Treasurer (4) 1994 $250,000 $0 $0 | 0 $0
- ------------------------------------------------------------------------------
Fred E. 1996 $442,000 $0 $0 | 0 $0
Cooper, 1995 $330,000 $0 $0 | 575,000 (3) $0
CEO (5) 1994 $260,000 $0 $0 | 0 $0
- ------------------------------------------------------------------------------
Anthony J. 1996 $300,000 $0 $0 | 350,000 (3) $0
Feola , Sr. 1995 $250,000 $93,125 $0 | 200,000 (3) $0
Vice Pres.(6) 1994 $133,333 $0 $0 | 0 $0
- ------------------------------------------------------------------------------
Glenn 1996 $200,000 $0 $0 | 100,000 (8) $0
Keeling, 1995 $175,000 $0 $0 | 0 $0
VP (7) 1994 $150,000 $0 $0 | 0 $0
==============================================================================
(1) The Company does not currently have a Long-Term Incentive Plan (" LTIP "),
and no payouts were made pursuant to any LTIP during the years 1996, 1995,
or 1994. The Company did not award any restricted stock to the Named
Executives during any year, including the years 1996, 1995 or 1994. The
Company did not award any warrants, options or Stock Appreciation Rights
(" SARs ") to the Named Executives during the years ended December 31,
1996, 1995 or 1994; however, the Company did extend warrants owned by the
Named Executives, which would have expired during 1995 and 1996 (See Note
3, below). The Company has no retirement, pension or profit-sharing
programs for the benefit of its directors, officers or other employees.
The Company currently has key-man life insurance for David L. Purdy and
Fred E. Cooper in the amount of $1,000,000 each.
(2) During the year ended December 31, 1996, the Named Executives received
medical benefits under the Company's group insurance policy, including
disability and life insurance benefits. The aggregate amount of all
perquisite compensation was less than 10% of the total annual salary and
bonus reported for each Named Executive.
(3) During 1995 and 1996, the Company extended warrants previously issued to
the Named Executives which would have otherwise expired. Although the
extensions were in connection with warrants already held by the Named
Executives, they are shown in the table set forth above as "awards" for
executive compensation disclosure purposes because at the time of the
extension, the exercise price of the warrants (which remained unchanged)
was less than the "market price" of the common stock (See,
"Option/Warrant/SAR Grants in Last Fiscal Year" Table).
28
(4) In November, 1994, Mr. Purdy 's employment agreement was renegotiated to
provide for an annual salary of $250,000 effective November 1, 1994
through October 31, 1999. All other terms of the contract remained
substantially the same (See, "Employment Agreements"). During 1995, Mr.
Purdy 's salary was increased by $50,000. In 1996, 1995 and 1994, Mr.
Purdy was paid $100,000, $100,000 and $72,727 by Diasense .
(5) In November, 1994, Mr. Cooper's employment agreement was renegotiated to
provide for an annual salary of $250,000 effective November 1, 1994
through October 31, 1999. All other terms of the contract remained
substantially the same (See, "Employment Agreements"). In addition, in
1996, 1995 and 1994, Mr. Cooper was paid $96,000, $40,000 and $30,000,
respectively by both Petrol Rem and IDT , both of which are subsidiaries
of BICO . In 1996, 1995, and 1994, Mr. Cooper was paid $150,000, $150,000
and $130,454 in salary and bonuses by Diasense , respectively.
(6) In April, 1994, Mr. Feola's employment agreement with Diasense was
assigned to BICO when he left Diasense to rejoin BICO as its Senior
Vice President. In November, 1994, Mr. Feola's employment agreement was
renegotiated, provides for an annual salary of $200,000 and is effective
November 1, 1994 through October 31, 1999. All other terms of the
contract remained substantially the same (See, "Employment Agreements").
During 1996 and 1995, Mr. Feola's salary was increased by $50,000 per
year. In 1994, Mr. Feola was paid $116,667 by Diasense.
(7) In November, 1994, Mr. Keeling entered into an employment agreement
with the Company which provides for an annual salary of $150,000
effective November 1, 1994 through October 31, 1999 (See, "Employment
Agreements"). During 1996 and 1995, Mr. Keeling's salary was increased
by $25,000 per year.
(8) On August 26, 1996, Mr. Keeling was granted warrants to purchase 100,000
shares of the Company s common stock at a price of $1.48 per share (the
market price as of that date) until August 26, 2001.
Option/Warrant/SAR Grants in Last Fiscal Year
=============================================================================
INDIVIDUAL GRANTS POTENTIAL REALIZED VALUE AT
ASSUMED ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR OPTION TERM
_______________________________________________________________________________
| |Percentof| | | | |
|Number of |Total | | | | |
|Securities |Grantedto|Exercise| | | |
|Underlying |Employees|or Base | | | |
|Options/SAR|in Fiscal|Price |Expire| | |
Name|Granted (#)|Year (2)|($/Sh) |Date | 5% ($) | 10% ($) | 0% ($)
- -------------------------------------------------------------------------------
Anthony J. | | | | | |
Feola 350,000(1)|53.7% |$0.50 |10/11/99| $724,150(3)|$858,550(3)|$601,650(3)
- -------------------------------------------------------------------------------
Glenn | | | | | |
Keeling 100,000(4)|15.3% |$1.48 |08/26/01| $40,900(5)| $90,300(5)| $0(5)
===============================================================================
__________________________________________
(1) The warrants set forth in this row represent the warrants already held by
the Named Executive which were extended by the Company during 1996. These
warrants to purchase the Company's common stock were originally granted to
the Named Executive in 1991 (See, "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS"). Although the warrants were not actually awarded during
1996, they are included in this Executive Compensation disclosure section
because the exercise price of the warrants, which was not changed at the
time of the extension, was less than the "market price" of the common
stock at the time of the extension.
29
(2) For purposes of calculating these percentages, the total number of
warrants granted or extended during 1996 was 651,482 which included
300,000 new grants in 1996, and extensions of 351,482 warrants originally
granted in 1991.
(3) Potential realizable values reflect the difference between the warrant
exercise price at the end of 1996 and the fair value of the Company's
common stock price from the date of the extension until the expiration of
the warrant. The 5% and 10% appreciation rates, compounded annually, are
assumed pursuant to the rules promulgated by the SEC and do not reflect
actual historical or projected rates of appreciation of the common stock.
Assuming such appreciation, the following illustrates the per share value
on the dates set forth (the expiration dates for the warrants), assuming
the values set forth (the closing bid price on the date of the extension
as reported by NASDAQ):
STOCK PRICE ON EXPIRATION
DATE OF EXTENSION DATE 5% 10%
---------------- --------- ------ ------
10/11/96: $2.219 10/11/99 $2.569 $2.953
The foregoing values do not reflect appreciation actually realized by the
Named Executive (See, "Option/Warrant/SAR Exercises in Last Fiscal Year
and Fiscal Year-End Option/Warrant/SAR Value" Table, Below).
(4) Warrants to purchase 100,000 shares of common stock at $1.48 per share
until August 26, 2001 were granted to the Named Executive on August 26,
1996.
(5) Potential realizable values reflect the difference between the warrant
exercise price at the end of 1996 and the fair value of the Company's
common stock price from the date of the grant until the expiration of the
warrant. The 5% and 10% appreciation rates, compounded annually, are
assumed pursuant to the rules promulgated by the SEC and do not reflect
actual historical or projected rates of appreciation of the common stock.
Assuming such appreciation, the following illustrates the per share value
on the dates set forth (the expiration dates for the warrants), assuming
the values set forth (the closing bid price on the date of the extension
as reported by Nasdaq ):
STOCK PRICE ON EXPIRATION
DATE OF EXTENSION DATE 5% 10%
---------------- --------- ------ ------
08/26/96: $1.48 08/26/01 $1.889 $2.383
The foregoing values do not reflect appreciation actually realized by the
Named Executive (See, "Option/Warrant/SAR Exercises In Last Fiscal Year
Table, Below).
30
AGGREGATED OPTION/WARRANT/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL
YEAR-END OPTION/WARRANT/SAR VALUE TABLE
=========================================================================
Number of Value of
Securities Unexercised
Underlying In-the-Money
Unexercised Options/SARs
Options/SARs FY-End ($)
at FY-End (#)
Shares Value
Acquired on Realized ($) Exercisable Exercisable/
Name Exercise (#)(1) (2) Unexerciseable(3) Unexercisable
- --------------------------------------------------------------------------
David L.
Purdy 0 $0 820,000 (5) $557,350
- --------------------------------------------------------------------------
Fred E.
Cooper 100,000 (6) $206,250 (7) 400,000 (8) $275,000
- --------------------------------------------------------------------------
Anthony J.
Feola 0 $0 550,000 (9) $290,625
- --------------------------------------------------------------------------
Glenn Keeling 0 $0 100,000 (10) ($54,250)
==========================================================================
__________________
(1) This figure represents the number of shares of common stock acquired by
each named executive officer upon the exercise of warrants.
(2) The value realized of the warrants exercised was computed by determining
the spread between the market value of the underlying securities at the
time of exercise minus the exercise price of the warrant.
(3) All warrants held by the Named Executives are currently exercisable.
(4) The value of unexercised warrants was computed by subtracting the exercise
price of the outstanding warrants from the closing sales price of the
Company's common stock on December 31, 1996 as reported by Nasdaq
($.9375).
(5) Includes warrants to purchase: 240,000 shares of common stock at $.25 per
share until April 24, 1995 (extended until April 24, 1998); 500,000 shares
of common stock at $.25 per share until May 1, 1995 (extended until May 1,
1998); and 80,000 shares of common stock at $.33 per share until June 29,
1995 (extended until June 29, 1998) (See, "Warrants").
(6) During the year ended December 31, 1996, Mr. Cooper exercised warrants to
purchase 100,000 shares of common stock at $.25 per share.
(7) The closing sales price as reported by Nasdaq on April 23, 1996, the date
of the warrant exercise set forth in note (6), was $2.3125.
(8) Includes warrants to purchase: 400,000 shares of common stock at $.25 per
share until May 1, 1995 (extended until May 1, 1998) (See, "Warrants").
31
(9) Includes warrants to purchase: 100,000 shares of common stock at $.25 per
share until May 1, 1995 (extended until May 1, 1998); 100,000 shares of
common stock at $.25 per share until November 26, 1995 (extended until
November 26, 1998); and 350,000 shares of common stock at $.50 per share
until October 11, 1996 (extended until October 11, 1999) (See,
"Warrants").
(10) Includes warrants to purchase: 100,000 shares of common stock at $1.48 per
share until August 26, 2001.
Employment Agreements
- ---------------------
BICO has entered into employment agreements (the "Agreements") with its Named
Executives Fred E. Cooper, David L. Purdy , Anthony J. Feola and Glenn Keeling
effective November 1, 1994, pursuant to which they are currently entitled to
receive annual salaries of $250,000, $300,000, $300,000 and $200,000
respectively, which are subject to review and adjustment. The initial term of
the Agreements with Messrs. Cooper and Purdy expires on October 31, 1999, and
continues thereafter for additional three-year terms unless any of the parties
give proper notice of non-renewal. The initial term of the Agreements with
Messrs. Feola and Keeling expires on October 31, 1999, and continues thereafter
for additional two-year terms unless either of the parties give proper notice
of non-renewal. The Agreements also provide that in the event of a "change of
control" of BICO , BICO is required to issue the following shares of common
stock, represented by a percentage of the outstanding shares of common stock of
the Company immediately after the change in control: five percent (5%) to Mr.
Cooper and Mr. Purdy ; four percent (4%) to Mr. Feola ; and three percent (3%)
to Mr. Keeling. In general, a "change of control" is deemed to occur for
purposes of the Agreements ( i ) when 20% or more of BICO's outstanding voting
stock is acquired by any person, (ii) when one-third (1/3) or more of BICO 's
directors are not Continuing Directors (as defined in the Agreement), or (iii)
when a controlling influence over the management or policies of BICO is
exercised by any person or by persons acting as a group within the meaning of
Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act").
In addition, in the event of a change in control within the term of the
Agreements or within one year thereafter, Messrs. Cooper, Purdy , Feola and
Keeling are entitled to receive severance payments in amounts equal to: 100% of
their most recent annual salary for the first three years following
termination; 50% of their most recent annual salary for the next two years; and
25% of their most recent salary for the next five years. BICO is also required
to continue medical insurance coverage for Messrs. Cooper, Purdy , Feola and
Keeling and their families during such periods. Such severance payments will
terminate in the event of the employee's death.
In the event that either Mr. Purdy or Mr. Cooper becomes disabled, as defined
in their Agreements, he will be entitled to the following payments, in lieu of
salary, such payments to be reduced by any amount paid directly to him pursuant
to a disability insurance policy provided by the Company or its affiliates:
100% of his most recent annual salary for the first three years; and 70% of his
most recent salary for the next two years. In the event that either Mr. Feola
or Mr. Keeling becomes disabled, as defined in their Agreements, he will be
entitled to the following payments, in lieu of salary, such payments to be
reduced by any amount paid directly to him pursuant to a disability insurance
policy provided by the Company or its affiliates: 100% of his most recent
annual salary for the first year; and 70% of his most recent salary for the
second year.
The Agreements also generally restrict the disclosure of certain confidential
information obtained by Messrs. Cooper, Purdy, Feola and Keeling during the
term of the Agreements and restricts them from competing with BICO for a period
of one year in specified states following the expiration or termination of the
Agreements.
32
In addition to the Employment Agreements described above, BICO also entered
into employment agreements with two of its non-executive officer employees
effective November 1, 1994. The terms of such agreements are similar to those
described for Messrs. Feola and Keeling above, with the following amendments:
the term of one agreement is from November 1, 1994 through October 31, 2002,
and is renewable for successive two-year terms; the term of the other agreement
is from November 1, 1994 through October 31, 1999, and is renewable for
successive two-year terms; the annual salaries are $100,000 and $75,000
respectively; and, in the event of a "change in control", BICO is required to
issue both employees shares of common stock equal to two percent (2%) of the
outstanding shares of the common stock of the Company immediately after the
change in control.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The following table sets forth the indicated information as of December 31,
1996 with respect to each person who is known by the Company to be the
beneficial owner of more than five percent (5%) of the outstanding common
stock, each director of the Company, and all directors and executive officers
of the Company as a group. The table excludes disclosure of entities such as
Cede & Co. and other companies which would reflect the ownership of entities
who hold stock on behalf of shareholders.
As of December 31, 1996, there were 49,213,790 shares of the Company's common
stock outstanding. The first column sets forth the common stock currently
owned by each person or group, excluding currently exercisable warrants for the
purchase of common stock. The second column sets forth the percentage of the
total number of shares of common stock outstanding as of December 31, 1996
owned by each person or group, excluding exercisable warrants. The third
column sets forth the total number of shares of common stock which each named
person or group has the right to acquire, through the exercise of warrants,
within sixty (60) days, plus common stock currently owned. The fourth column
sets forth the percentage of the total number of shares of common stock
outstanding as of December 31, 1996 which would be owned by each named person
or group upon the exercise of all of the warrants held by such person or group
together with common stock currently owned, as set forth in the third column.
Except as otherwise indicated, each person has the sole power to vote and
dispose of each of the shares listed in the columns opposite his name.
Amount and Nature Percent of
Name and Address of of Beneficial Percent of Ownership with Class with
Beneficial Owner Ownership(1) Class (2) Warrants (3) Warrants(4)
- ------------------- ----------------- ---------- -------------- -----------
David L. Purdy (5) 187,340 * 1,007,340(6) 2.0%
300 Indian Springs Road
Indiana, PA 15701
Fred E. Cooper 676,200 1.4% 1,076,200(7) 2.2%
Building 2500, 2nd Floor
2275 Swallow Hill Rd.
Pittsburgh, PA 15220
Anthony J. Feola 354,000 * 904,000(8) 1.8%
Building 2500, 2nd Floor
2275 Swallow Hill Rd.
Pittsburgh, PA 15220
Glenn Keeling 138,500 * 238,500(9) *
Building 2500, 2nd Floor
2275 Swallow Hill Road
Pittsburgh, PA 15220
All directors and 1,356,040 2.7% 3,226,040(10) 6.3%
executive officers
as a group (4 persons)
*Less than one percent
________________________
33
(1) Excludes currently exercisable warrants set forth in the third column and
detailed in the footnotes below.
(2) Represents current common stock owned by each person, as set forth in the
first column, excluding currently exercisable warrants, as a percentage of
the total number of shares of common stock outstanding as of December 31,
1996.
(3) Includes ownership of all shares of common stock which each named person
or group has the right to acquire, through the exercise of warrants,
within sixty (60) days, together with the common stock currently owned.
(4) Represents total number of shares of common stock owned by each person, as
set forth in the third column, which each named person or group has the
right to acquire, through the exercise of warrants within sixty (60) days,
together with common stock currently owned, as a percentage of the total
number of shares of common stock outstanding as of December 31, 1996. For
computation purposes, the total number of shares of common stock
outstanding as of December 31, 1996 has been increased by the number of
additional shares which would be outstanding if the person or group owned
the number of shares set forth in the third column.
(5) Does not include shares held by Mr. Purdy 's spouse or adult child. Mr.
Purdy disclaims any beneficial interest to shares held by members of his
family.
(6) Includes currently exercisable warrants to purchase the following: 240,000
shares of common stock at $.25 per share until April 24, 1995 (extended
until April 24, 1998); 80,000 shares of common stock at $.33 per share
until June 29, 1995 (extended until June 29, 1998); and 500,000 shares of
common stock at $.25 per share until May 1, 1995 (extended until May 1,
1998) pursuant to Mr. Purdy 's previous employment agreement. In
addition, Mr. Purdy is entitled to certain shares of Common Stock upon a
change of control of BICO as defined in his employment agreement (See,
"MANAGEMENT - Employment Agreements").
(7) Includes currently exercisable warrants to purchase the following: 400,000
shares of common stock at $.25 per share until May 1, 1995 (extended until
May 1, 1998) pursuant to Mr. Cooper's previous employment agreement. Mr.
Cooper s securities are held in joint name with his spouse. In addition,
Mr. Cooper is entitled to certain shares of Common Stock upon a change of
control of BICO as defined in his employment agreement (See, "MANAGEMENT -
Employment Agreements").
(8) Includes currently exercisable warrants to purchase the following:
100,000 shares of common stock at $.25 per share until November 26, 1995
(extended until November 26, 1998); 100,000 shares of common stock at $.25
per share until May 1, 1995 (extended until May 1, 1998) pursuant to Mr.
Feola 's previous employment agreement; and 350,000 shares of common stock
at $.50 per share until October 11, 1996 (extended until October 11,
1999). Mr. Feola s securities are held in joint name with his spouse.
In addition, Mr. Feola is entitled to certain shares of Common Stock upon
a change of control of BICO as defined in his employment agreement (See,
"MANAGEMENT - Employment Agreements").
(9) Includes currently exercisable warrants to purchase 100,000 shares of
common stock at $1.48 per share until August 26, 2001. Mr. Keeling s
securities are held in joint name with his spouse. In addition, Mr.
Keeling is entitled to certain shares of Common Stock upon a change of
control of BICO as defined in his employment agreement (See, "MANAGEMENT -
Employment Agreements").
(10) Includes shares of common stock, including stock currently owned,
available under currently exercisable warrants as set forth above.
34
Item 13. Certain Relationships and Related Transactions
- ---------------------------------------------------------
The Company and its affiliates share common officers and directors. In
addition, BICO and Diasense have entered into several intercompany agreements
including a Purchase Agreement, a Research and Development Agreement and a
Manufacturing Agreement, which are summarized herein. Management believes that
it was in the best interest of the Company to enter into such agreements and
that the transactions were based upon terms as fair as those which may have
been available in comparable transactions with third parties. However, no
unaffiliated third party was retained to determine independently the fairness
of such transactions. The Company's policy concerning related party
transactions requires the approval of a majority of the disinterested directors
of both the corporations involved, if applicable.
Employment Relationships
- ------------------------
The Board of Directors of the Company approved employment agreements on
November 1, 1994 for its officers, David L. Purdy , Fred E. Cooper, Anthony J.
Feola and Glenn Keeling. According to the terms of the agreements, Messrs.
Purdy and Cooper currently receive annual salaries of $300,000 and $250,000.
Mr. Feola currently receives an annual salary of $300,000, and Mr. Keeling
currently receives an annual salary of $200,000 (See "Employment Agreements").
David L. Purdy , President, Treasurer and a director of the Company, is a
director of Diasense , Coraflex , IDT , and Petrol Rem. He is also the
chairman and Chief Scientist of Diasense , and the President and Treasurer of
Coraflex . Mr. Purdy devotes 60% of his time to BICO , and 40% to Diasense . In
addition to his salary paid by BICO , Mr. Purdy was paid $100,000 by Diasense
in 1996. Fred E. Cooper, Chief Executive Officer, Executive Vice President and
a director of the Company, is a director of Diasense , Coraflex , IDT , Petrol
Rem, and Barnacle Ban. He is also the President of Diasense , Coraflex and
Barnacle Ban. Mr. Cooper devotes approximately 60% of his time to BICO ,
Petrol Rem and IDT , and 40% to Diasense . In addition to his salary paid by
BICO and its other subsidiaries, he was paid $150,000 by Diasense in 1996.
Anthony J. Feola , Senior Vice President and a director of the Company, is
also a director of Diasense, Coraflex, IDT, Petrol Rem, and Barnacle Ban. He
is also the Secretary/Treasurer of IDT, and the President and CEO of Petrol
Rem. Glenn Keeling, Vice President and a director of the Company, is also the
President and a director of IDT . Gary Keeling, the brother of Glenn Keeling,
is an officer and director of Diasense . He has an employment contract with
Diasense and was paid $125,000 in 1996.
Property
- --------
Three of the Company's current executive officers and/or directors and two
former directors of the Company are members of the nine-member 300 Indian
Springs Road Real Estate Partnership (the "Partnership") which in July 1990,
purchased the Company's real estate in Indiana, Pennsylvania, and each has
personally guaranteed the payment of lease obligations to the bank providing
the funding. The five members of the Partnership who are also current or
former officers and/or directors of the Company, David L. Purdy , Fred E.
Cooper, Glenn Keeling, Jack H. Onorato and C. Terry Adkins , each received
warrants on June 29, 1990 to purchase 100,000 shares of the Company's common
stock at an exercise price of $.33 per share until June 29, 1995 (those
warrants still outstanding as of the original expiration date were extended
until June 29, 1998). Mr. Adkins , who was a director at the time of the
transaction, resigned from the Board of Directors on March 30, 1992, and is
currently an officer and director of Diasense . Mr. Keeling, who was not a
director at the time of the transaction, joined the Board of Directors on May
3, 1991. Mr. Onorato , who was not a director at the time of the transaction,
was a BICO director from September 1992 until April 1994.
In all instances where warrants were issued in connection with the transactions
set forth above, the exercise price of the warrants was equal to or above the
current quoted market price of the Company's common stock on the date of
issuance.
35
In April 1992, Diasense purchased an office condominium located at the Bourse
Office Park, Virginia Manor, Building 2500, Second Floor, Pittsburgh,
Pennsylvania 15220 for $190,000. The Company has entered into a lease with
Diasense and pays rent in the amount of $3,544 per month, plus one-half of the
utilities.
Warrants
- --------
The following paragraphs, along with the notes to the financial statements,
include disclosure of the warrants which were granted to executive officers and
directors of the Company from 1994 through 1996. These warrants were accounted
for in accordance with Accounting Principles Board Opinion 25 (based on the
spread, if any, between the exercise price and the quoted market price of the
stock on the date that the warrants were granted). No value was recorded for
these warrants since they were all granted at exercise prices which were equal
to or above the current quoted market price of the stock on the date issued
(See, Note J to the Financial Statements). In 1995 and 1996, the Company
extended warrants granted in 1990 and 1991, which were scheduled to expire in
1995 and 1996, until 1998-2000. Because the exercise price of the warrants,
which remained unchanged, was less than the market price of the common stock on
the dates of the extensions, charges were made against operations (See, Report
to Shareholders - "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS").
On August 25, 1994, the Board of Directors approved the granting of warrants
to purchase common stock at $2.75 per share until August 25, 1999 to Raymond
Carr, a director in return for his meritorious service.
On August 26, 1996, the Board of Directors approved the granting of warrants to
purchase 100,000 shares of common stock at $1.48 per share to Glenn Keeling, an
officer and director of the Company.
Loans
- -----
On October 1, 1990, the Board of Directors approved a $75,000 loan from the
Company to Fred E. Cooper. Mr. Cooper signed a Promissory Note promising to
pay the principal amount plus twelve percent (12%) simple interest. Mr. Cooper
repaid $66,500 of the $75,000 principal balance during 1991. During 1991, the
Company granted loans to Fred E. Cooper in the aggregate amount of $57,400.
Mr. Cooper signed Promissory Notes promising to pay the principal amounts upon
demand plus ten percent (10%) simple interest. In January 1992, the Company
granted a loan to Fred E. Cooper in the amount of $25,000. Mr. Cooper signed a
Promissory Note promising to pay the principal amount upon demand plus ten
percent (10%) simple interest. The aggregate balance of the loans as of
December 31, 1996, including accrued interest, was $140,970.
In December 1991, the Company granted a loan to Glenn Keeling in the amount of
$5,000. Mr. Keeling signed a Promissory Note promising to pay the principal
amount upon demand plus ten percent (10%) simple interest. In December 1996,
the Company granted a loan to Glenn Keeling in the amount of $50,000. Mr.
Keeling signed a promissory note promising to pay the principal amounts upon
demand plus 8.25% simple interest. The balance of the loans as of December 31,
1996, including accrued interest, was $57,804.
In September 1995, the Company granted a loan in the amount of $250,000 to
Allegheny Food Services in the form of a one-year renewable note bearing
interest at prime rate as reported by the Wall Street Journal plus one percent
(1%). Interest payments have been made on the note, and as of December 31,
1996, the balance was $250,000. Joseph Kondisko , a former director of Diasense
, is a principal owner of Allegheny Food Services.
During 1995, the Company granted loans to HemoCleanse , an Indiana Corporation,
aggregating $1,050,000 in the form of one-year notes accruing interest at prime
rate as reported by the Wall Street Journal. The notes were converted, at the
Company's option, into shares of HemoCleanse common stock at $3.50 per share
during 1996.
36
Each of the loans made to officers or directors and their affiliates was made
for a bona fide business purpose. All future loans to officers, directors and
their affiliates will be made for bona fide business purposes only.
Intercompany Agreements
- -----------------------
Management of the Company believes that the agreements between BICO and
Diasense , which are summarized below, were based upon terms which were as
favorable as those which may have been available in comparable transactions
with third parties. However no unaffiliated third party was retained to
determine independently the fairness of such transactions.
License and Marketing Agreement. Diasense acquired the exclusive marketing
rights for the Noninvasive Glucose Sensor and related products and services
from BICO in August 1989 in exchange for 8,000,000 shares of its common stock.
That agreement was canceled pursuant to a Cancellation Agreement dated November
18, 1991, and superseded by a Purchase Agreement dated November 18, 1991. The
Cancellation Agreement provides that BICO will retain the 8,000,000 shares of
Diasense common stock which BICO received pursuant to the License and Marketing
Agreement.
Purchase Agreement. BICO and Diasense entered into a Purchase Agreement dated
November 18, 1991 whereby BICO conveyed to Diasense its entire right, title and
interest in the Noninvasive Glucose Sensor and its development, including its
extensive knowledge, technology and proprietary information. Such conveyance
includes BICO 's patent received in December 1991 (See, Report to Shareholders
- - "Business").
In consideration of the conveyance of its entire right in the Noninvasive
Glucose Sensor and its development, BICO received $2,000,000. In addition,
Diasense may endeavor, at its own expense, to obtain patents on other
inventions relating to the Noninvasive Glucose Sensor. Diasense also guaranteed
BICO the right to use such patented technology in the development of BICO 's
proposed implantable closed-loop system, a related system in the early stages
of development.
In December 1992, BICO and Diasense executed an amendment to the Purchase
Agreement which clarified terms of the Purchase Agreement. The amendment
defines "Sensors" to include all devices for the noninvasive detection of
analytes in mammals or in other biological materials. In addition, the
amendment provides for a royalty to be paid to Diasense in connection with any
sales by BICO of its proposed closed-loop system.
Research and Development ("R&D") Agreement. Diasense and BICO entered into an
agreement dated January 20, 1992 in connection with the research and
development of the Noninvasive Glucose Sensor. Pursuant to the agreement, BICO
will continue the development of the Noninvasive Glucose Sensor, including the
fabrication of prototypes, the performance of clinical trials, and the
submission to the FDA of all necessary applications in order to obtain market
approval for the Noninvasive Glucose Sensor. BICO will also manufacture the
models of the Noninvasive Glucose Sensor to be delivered to Diasense for sale
(See, "Manufacturing Agreement"). Upon the delivery of the completed models,
the research and development phase of the Noninvasive Glucose Sensor will be
deemed complete.
Diasense has agreed to pay BICO $100,000 per month for indirect costs beginning
April 1, 1992, during the 15 year term of the agreement, plus all direct
costs, including labor. BICO also received a first right of refusal for any
program undertaken to develop, refine or improve the Noninvasive Glucose
Sensor, and for the development of other related products. In July 1995, BICO
and Diasense agreed to suspend billings, accruals of amounts due and payments
pursuant to the R&D Agreement pending the FDA's review of the 510(k)
Notification.
Manufacturing Agreement. BICO and Diasense entered into an agreement dated
January 20, 1992, whereby BICO will act as the exclusive manufacturer of the
Noninvasive Glucose Sensor and other related products. Diasense will provide
BICO with purchase orders for the products and will endeavor to provide
projections of future quantities needed. The original Manufacturing Agreement
called for the products to be manufactured and sold at a price to be determined
in accordance with the following formula: Cost of Goods (including actual or
275% of overhead, whichever is lower) plus a fee of 30% of Cost of Goods. In
July 1994, the formula was amended to be as follows: Costs of Goods Sold
(defined as BICO 's aggregate cost of materials, labor and associated
manufacturing overhead) + a fee equal to one third (1/3) of the difference
between the Cost of Goods Sold and Diasense 's sales price of each Sensor.
Diasense 's sales price of each Sensor is defined as the price paid by any
purchaser, whether retail or wholesale, directly to Diasense for each Sensor.
Subject to certain restrictions, BICO may assign its manufacturing rights to a
subcontractor with Diasense 's written approval. The term of the agreement is
fifteen years.
37
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- --------------------------------------------------------------------------
(a) 1. Financial Statements
The financial statements, together with the report thereon of the Company's
independent accountants, are included in this report on the pages listed below.
Financial Statements Page
----
Report of Independent Certified Public Accountants
Thompson Dugan , P.C. . . . . . . . . . . . . . . . . . . . . . . .F-1
Consolidated Balance Sheets
December 31, 1996 and 1995. . . . . . . . . . . . . . . . . . . . .F-2
Consolidated Statements of Operations
for the years ended December 31, 1996, 1995 and 1994. . . . . . . .F-4
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1996, 1995 and 1994. . . . . . . .F-5
Consolidated Statements of Cash Flows
for the years ended December 31, 1996, 1995 and 1994. . . . . . . .F-6
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994. . . . . . . . . . . . . . . . . .F-8
2. Exhibits:
(b) Reports on Form 8-K
The Company filed a Form 8-K report dated January 25, 1996. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated February 1, 1996. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated February 8, 1996. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated February 20, 1996. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
38
The Company filed a Form 8-K report dated February 26, 1996. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated February 27, 1996. The item
listed was Item 5, Other Events.
The Company filed a Form 8-K report dated March 6, 1996. The items listed
was Item 5, Other Events.
The Company filed a Form 8-K report dated March 7, 1996. The items listed
was Item 5, Other Events.
The Company filed a Form 8-K report dated March 22, 1996. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated March 25, 1996. The items
listed were Item 5, Other Events, and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated March 27, 1996. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated March 29, 1996. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated April 9, 1996. The items listed
were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated April 12, 1996. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated April 29, 1996. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated May 8, 1996. The items listed
were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated May 17, 1996. The items listed
were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated May 28, 1996. The items listed
were Resignation of Director; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated June 14, 1996. The item listed
was Item 5, Other Events.
The Company filed a Form 8-K report dated June 20, 1996. The items listed
were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated June 25, 1996. The items listed
were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated July 2, 1996. The items listed
were Item 5, Other Events; and Item 7(c), Exhibits.
39
The Company filed a Form 8-K report dated July 16, 1996. The items listed
were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated July 17, 1996. The items listed
were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated August 26, 1996. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated September 20, 1996. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated September 20, 1996. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated September 27, 1996. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated October 1, 1996. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated October 2, 1996. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated October 11, 1996. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated October 17, 1996. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated October 25, 1996. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated November 11, 1996. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated November 14, 1996. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated November 27, 1996. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated December 10, 1996. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated December 18, 1996. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated December 19, 1996. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
40
The Company filed a Form 8-K report dated January 23, 1997. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated January 31, 1997. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated February 3, 1997. The items
listed were Item 5, Other Events and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated February 5, 1997. The items
listed were Item 5, Other Events and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated February 5, 1997. The items
listed were Item 5, Other Events and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated February 18, 1997. The items
listed were Item 5, Other Events and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated February 20, 1997. The items
listed were Item 5, Other Events and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated March 20, 1997. The items
listed were Item 5, Other Events and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated March 26, 1997. The items
listed were Item 5, Other Events and Item 7(c), Exhibits.
(c) Exhibits Required by Item 601 of Regulation S-K
The following exhibits required by Item 601 of Regulation S-K are
filed as part of this report. Except as otherwise noted, all exhibits
are incorporated by reference from exhibits to Form S-1 (Registration
#33-55200) filed December 1, 1992 or from exhibits to Form 10-K
filings prior to or subsequent to that date.
3.1 Articles of Incorporation as filed March 20, 1972
3.2 Amendment to Articles filed May 8, 1972
3.3 Restated Articles filed June 19, 1975
3.4 Amendment to Articles filed February 4, 1980
3.5 Amendment to Articles filed March 17, 1981
3.6 Amendment to Articles filed January 27, 1982
3.7 Amendment to Articles filed November 22, 1982
3.8 Amendment to Articles filed October 30, 1985
3.9 Amendment to Articles filed October 30, 1986
41
3.10 By-Laws
3.11(1) Amendment to Articles filed December 28, 1992
4.1 Incentive Stock Option Plan and Schedule
4.2 Form of Warrant and Schedule
5.1(2) Legal Opinion of Sweeney & Associates P.C.
16.1(3) Disclosure and Letter Regarding Change in Certifying Accountants
dated January 25, 1995
____________________________
(1) Incorporated by reference to First Amendment to Registration Statement on
Form S-1 (Registration #33-55200) filed February 8, 1993
(2) Incorporated by reference from Exhibit with this title to Form S-1 and
Prospectus dated August 16, 1993
(3) Incorporated by reference from Report on Form 8-K dated November 1, 1995
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on the 31st day of
March, 1997
BIOCONTROL TECHNOLOGY, INC.
By: /s/ David L. Purdy
-------------------------
David L. Purdy
President, Treasurer, Director
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.
Signature Title Date
--------- ----- ----
/s/ Fred E. Cooper Director, CEO, March 31, 1997
Fred E. Cooper (principal executive
officer, principal
financial officer and
principal accounting
officer)
/s/ Anthony J. Feola Senior Vice President, March 31, 1997
Anthony J. Feola Director
/s/ Glenn Keeling Director March 31, 1997
Glenn Keeling
43
THOMPSON DUGAN
CERTIFIED PUBLIC ACCOUNTANTS
________________________
Pinebridge Commons
1580 McLaughlin Run Rd.
Pittsburgh, PA 15241
Report of Independent Certified Public Accountants
Board of Directors
Biocontrol Technology, Inc.
We have audited the accompanying consolidated balance sheets of
Biocontrol Technology, Inc. and its subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1996. These financial
statements are the responsibility of the Corporation'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, such consolidated financial statements present
fairly, in all material respects, the consolidated financial position
of Biocontrol Technology, Inc. and its subsidiaries as of December
31, 1996 and 1995, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
1996 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming
that the Corporation will continue as a going concern. As discussed in
Note B to the financial statements, the Corporation has incurred losses
and negative cash flows from operations in recent years through December
31, 1996 and these conditions are expected to continue through 1997,
raising substantial doubt about the Corporation's ability to continue as a
going concern. Management's plans in regard to these matters are also
discussed in Note B. These financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Pittsburgh, Pennsylvania
March 21, 1997
F-1
Biocontrol Technology, Inc. and Subsidiaries
Consolidated Balance Sheets
Dec. 31, 1996 Dec. 31, 1995
_____________ _____________
CURRENT ASSETS
Cash and equivalents (note A) $ 3,802,874 $ 3,204,501
Accounts receivable - net of allowance for doubtful accounts
of $195,840 at Dec. 31, 1996 and $0 at Dec. 31, 1995 98,769 202,526
Notes receivable - related parties (note C) 300,000 250,000
Notes receivable (note C) 12,000 12,000
Inventory - net of valuation allowance (notes A and D) 3,340,120 1,660,139
Prepaid expenses 277,409 148,526
_________ _________
TOTAL CURRENT ASSETS 7,831,172 5,477,692
PROPERTY, PLANT AND EQUIPMENT (notes A and H)
Building 1,442,423 234,863
Land 246,250 -
Construction in progress 1,240,320 -
Leasehold improvements 1,157,239 1,092,311
Furniture, fixtures & equipment 735,962 633,237
Machinery and equipment 4,386,364 3,558,964
_________ _________
Subtotal 9,208,558 5,519,375
Less accumulated depreciation 2,670,207 2,087,032
_________ _________
6,538,351 3,432,343
OTHER ASSETS
Notes receivable - related parties (note C) 95,900 95,900
Interest receivable - related parties (note C) 53,958 42,237
Patents, net of amortization (note A) 11,097 15,429
Other assets 13,513 11,068
_________ _________
174,468 164,634
TOTAL ASSETS $ 14,543,991 $ 9,074,669
========== =========
The accompanying notes are an integral part of these statements.
F-2
Biocontrol Technology, Inc. and Subsidiaries
Consolidated Balance Sheets
(Continued)
Dec. 31, 1996 Dec. 31, 1995
_____________ _____________
CURRENT LIABILITIES
Accounts payable $ 1,035,171 $ 1,838,408
Current portion of long-term debt (note G) 30,478 28,404
Current portion of capital lease obligations (note H) 48,944 -
Debenture payable (note I) 4,600,000 -
Accrued liabilities (note E) 148,303 96,634
Escrow payable (note J) 2,700 -
Deferred revenue on contract billings (note A) 180,000 326,000
_____________ _____________
TOTAL CURRENT LIABILITIES 6,045,596 2,289,446
LONG-TERM LIABILITIES
Accrued liabilities (note E) - 114,750
Capital lease obligations (note H) 2,660,730 -
Long-term debt (note G) 38,997 60,580
_____________ _____________
2,699,727 175,330
COMMITMENTS AND CONTIGENCIES
UNRELATED INVESTORS'INTEREST IN SUBSIDIARY (note A) 1,881,437 2,562,543
STOCKHOLDERS' EQUITY (notes J and O)
Convertible preferred stock, par value $10 per share
authorized, 500,000 shares issuable in series
Series 1 outstanding 0 at Dec. 31 1996 and 3,790 at - 37,900
Dec. 31, 1995
Common stock, par value $.10 per share, authorized
60,000,000 shares, issued and outstanding 49,213,790
at Dec. 31, 1996 and 37,021,118 at Dec. 31, 1995 4,921,379 3,702,112
Additional paid-in capital 80,704,749 59,849,875
Warrants 6,907,162 6,677,820
Accumulated deficit (88,616,059) (66,220,357)
____________ ____________
TOTAL STOCKHOLDERS' EQUITY 3,917,231 4,047,350
TOTAL LIABILITIES AND STOCKHOLDER' EQUITY $14,543,991 $ 9,074,669
============ ============
The accompanying notes are an integral part of these statements.
F-3
BIOCONTROL TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
1996 1995 1994
_____________ _____________ _____________
Revenues
Sales $ 597,592 $ 461,257 $ 184,507
Interest income 176,478 294,734 284,938
Other income 2,657 - -
_____________ _____________ _____________
776,727 755,991 469,445
Costs and expenses
Cost of products sold 325,414 198,542 98,668
Research and development (notes A and L) 8,742,922 7,649,678 5,214,386
General and administrative 9,465,693 11,117,107 7,460,602
Warrant extensions (note J) 604,342 7,228,220 -
Warrant extensions-Subsidiary (note J) 8,571,033 5,295,000 -
Interest expense 133,460 17,048 9,766
_____________ _____________ _____________
27,842,864 31,505,595 12,783,422
_____________ _____________ _____________
Loss before unrelated investors' interest (27,066,137) (30,749,604) (12,313,977)
Unrelated investors' interest in net loss of
subsidiary 4,670,435 1,329,259 641,854
_____________ _____________ _____________
Net loss ($22,395,702) ($29,420,345) ($11,672,123)
============== ============= ==============
Loss per common share ($0.53) ($0.84) ($0.43)
============== ============== ==============
The accompanying notes are an integral part of these statements.
F-4
Biocontrol Technology, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Preferred Stock Common Stock Additional
_______________ ____________________ paid in Accumulated
Shares Amount Shares Amount Warrants capital deficit Total
______ _______ __________ _________ ________ ___________ ___________ _____
Balance at December 31, 1993 5,490 $54,900 21,108,847 $2,110,885 - $25,025,643 ($25,127,889) $2,063,539
------ ------- ---------- ---------- -------- --------- ------------ -----------
Proceeds from stock offering - - 7,224,690 722,469 - 13,206,152 - 13,928,621
Additional paid in capital from
subsidiary stock offering - - - - 507,370 - 507,370
Warrants exercised - - 977,542 97,754 - 183,129 - 280,883
Net Loss - - - - - - (11,672,123) (11,672,123)
------ ------- ---------- -------- -------- ---------- ------------ ----------
Balance at December 31, 1994 5,490 54,900 29,311,079 2,931,108 - 38,922,294 (36,800,012) 5,108,290
------- ------- ----------- ---------- -------- ---------- ----------- ----------
Proceeds from stock offering - - 6,892,325 689,233 - 15,580,180 - 16,269,413
Conversion of preferred stock (1,700) (17,000) 17,000 1,700 - 15,300 - -
Additional paid in capital from
subsidiary stock offering - - - - - 1,648,677 - 1,648,677
Warrant extensions - - - - $7,228,220 - - 7,228,220
Warrant extensions - subsidiary - - - - - 4,984,755 - 4,984,755
Decrease in ownership interest - sub. - - - - - (2,012,758) - (2,012,785)
Warrants exercised - - 800,714 80,071 (550,400) 711,454 - 241,125
Net Loss - - - - - - (29,420,345) (29,420,345)
------- ------- ----------- ---------- --------- ---------- ------------ ----------
Balance at December 31, 1995 3,790 37,900 37,021,118 3,702,112 6,677,820 59,849,875 (66,220,357) 4,047,350
------- ------- ----------- ---------- --------- ---------- ----------- ----------
Proceeds form stock offering - - 7,839,065 783,907 - 12,571,822 - 13,355,729
Conversion of preferred stock (22,730) (227,300) 1,958,602 195,860 - 31,440 - -
Cash redemption at par-preferred stock (1,060) (10,600) - - - - - (10,600)
Proceeds from sale of
preferred stock-series A 20,000 200,000 - - - 1,640,000 - 1,840,000
Conversion of debenture - - 2,275,005 227,500 - 1,799,623 - 2,027,123
Warrant extensions - - - - 604,342 - - 604,342
Warrant extensions - subsidiary - - - - - 4,441,262 - 4,441,262
Decrease in ownership interest-subsidiary - - - - - (22,873) - (22,873)
Warrants exercised - - 120,000 12,000 (375,000) 393,600 - 30,600
Net loss - - - - - - (22,395,702) (22,395,702)
------- ------- ----------- ---------- -------- ---------- ----------- ----------
Balance at December 31, 1996 - $- 49,213,790 $4,921,379 $6,907,162 $80,704,749$(88,616,059) $3,917,231
======= ======= =========== ========== ========== =========== ============ ==========
The accompanying notes are an integral part of these statements.
F-5
Biocontrol Technology, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31,
1996 1995 1994
_____________ _____________ _____________
Cash flows used by operating activities: Net loss ($22,395,702) ($29,420,345) ($11,672,123)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 587,507 459,778 250,532
Unrelated investors' interest in susidiary (4,670,435) (1,329,259) (641,854)
Stock issued in exchange for services 17,200 180,373 167,928
Stock issued in exchange for services by subsidiary 7,000 - -
Provision for potential loss on notes receivable - 1,050,000 -
Warrant extensions 604,342 7,228,220 -
Warrant extensions by subsidiary 8,571,033 5,295,000 -
Provision for losses on accounts receivable 195,840 - -
(Increase) decrease in accounts receivable (92,083) (169,805) 79,652
(Increase) in inventories (1,679,981) (2,379,694) (499,511)
Increase in inventory valuation reserve - 900,000 455,595
(Increase) decrease in prepaid expenses (128,883) 38,934 (119,014)
(Increase) decrease in other assets (2,445) 79,472 (59,163)
Increase (decrease) in accounts payable (803,237) 1,195,044 199,651
Increase (decrease) in other liabilities (35,960) (18,960) 43,762
Increase (decrease) in deferred revenue (146,000) - 24,500
____________ ____________ ____________
Net cash used by operating activities (19,971,804) (16,891,242) (11,770,045)
____________ ____________ ____________
Cash flows from investing activities:
Purchase of property, plant and equipment (954,610) (1,441,509) (1,752,353)
(Increase) in notes receivable (50,000) (1,312,000) -
Collection of other notes receivable - - 45,000
(Increase) decrease in interest receivable (11,721) (9,792) 19,644
____________ ___________ ___________
Net cash used by investing activites (1,016,331) (2,763,301) (1,687,709)
____________ ___________ ___________
Cash flows from financing activities:
Proceeds from sale by subsidiaries of
its common stock (172,315) 3,079,200 1,124,096
Proceeds from stock offering 13,338,531 16,195,788 13,785,821
Proceeds from warrants exercised 30,600 273,325 280,883
Proceeds from warrants exercised-subsidiary 2,000 - -
Proceeds from sale of Preferred stock-Series A 1,840,000 - -
Cash redemption at par - Preferred stock (7,900) - -
Proceeds from notes payable - - 50,000
Payments on notes payable (19,509) (5,115) (8,160)
Proceeds from debenture payable 6,600,000 - -
Payments on capital lease obligations (24,899) - -
____________ ____________ ____________
Net cash provided by financing activities 21,586,508 19,543,198 15,232,640
Net increase (decrease) in cash and equivalents 598,373 (111,345) 1,774,886
____________ ____________ ____________
Cash and equivalents, beginning of period 3,204,501 3,315,846 1,540,960
____________ ____________ ____________
Cash and equivalents, end of period $3,802,874 $3,204,501 3,315,846
============ ============ ============
The accompanying notes are an integral part of these statements.
F-6
Biocontrol Technology, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Continued)
Year ended December 31,
1996 1995 1994
_____________ _____________ ______________
Supplemental Information:
Interest paid $ 72,578 $ 17,048 $ 9,766
============= ============== ==============
Supplemental schedule of non-cash
investing and financing activities:
Acquisition of equipment with note payable $ 145,063 $ 47,282 $ 25,940
============= ============== ==============
Acquisition of property under a capital lease:
Building $ 1,205,760 $ - $ -
Land 246,250 - -
Construction in progress 1,137,500 - -
_____________ ______________ ______________
$ 2,589,510 $ - $ -
============= ============== ==============
Conversion of preferred stock for common stock:
Common stock $ 2,730 $ 1,700 $ -
Additional paid-in capital 24,570 15,300 -
_____________ ______________ ______________
$ 27,300 $ 17,000 -
============= ============== ==============
Redemption of preferred stock held in escrow $ 2,700 $ - $ -
============= ============== ==============
Conversion of Series A - preferred stock
for common stock
Common stock $ 193,130 $ - $ -
Additional paid in capital 6,870 - -
------------- -------------- --------------
$ 200,000 $ - $ -
============= ============== ==============
Conversion of debenture for common stock $ 2,000,000 $ - $ -
============= ============== ==============
Converion of debenture interest for common stock $ 27,122 $ - $ -
============= ============== ==============
The accompanying notes are an integral part of these statements.
F-7
Biocontrol Technology, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Organization
Biocontrol Technology, Inc. - BICO (the Company) and its subsidiaries
are engaged in the development, manufacturing and marketing of biomedical
products and biological remediation products.
2. Principles of Consolidation
The consolidated financial statements include the accounts of: Coraflex,
Inc. an 89.9% owned subsidiary as of December 31, 1996 and 1995; Diasense,
Inc. (Diasense) a 52% owned subsidiary as of December 31, 1996 and 1995;
Petrol Rem, Inc., a 67% owned subsidiary as of December 31, 1996 and
1995; IDT, Inc., a 99.1% owned subsidiary as of December 31, 1996 and
1995; and Barnacle Ban Corporation, a 100% owned subsidiary as of December
31, 1996 and 1995. All significant intercompany accounts and transactions
have been eliminated. Subsidiary losses in excess of the unrelated
investors' interest are charged against the Company's interest.
3. Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less at
acquisition to be cash equivalents. The Company places temporary cash
deposits in financial institutions, and such deposits may be in excess
of the FDIC insurance limit.
4. Inventory
Inventory is valued at the lower of cost (first-in, first-out method) or
market. An inventory valuation allowance is provided against finished
goods and raw materials for products for which a market has not yet
been established.
5. Property and Equipment
Property and equipment are accounted for at cost and are depreciated over
their estimated useful lives on a straight-line basis.
6. Patents
Patents are amortized over their legal or useful lives, whichever
is less. Accumulated amortization on patents was $85,844 and $81,512
at December 31, 1996 and 1995, respectively.
F-8
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - Continued
7. Deferred Revenue on Contract Billings
Revenue is recognized from sales when products are shipped and/or
services performed. Advance billings are recorded as deferred revenue
until shipment or performance.
8. Loss Per Common Share
Loss per common share is based upon the weighted average number of
common shares outstanding which amounted to 42,266,597 shares in 1996,
35,025,237 shares in 1995, and 26,967,255 shares in 1994, respectively.
Shares issuable under stock options, stock warrants, convertible
debentures and convertible preferred stock are excluded from computations
as their effect is antidilutive.
9. Research and Development Costs
Research and development costs are charged to operations as
incurred. Machinery, equipment and other capital expenditures which
have alternative future use beyond specific research and development
activities are capitalized and depreciated over their estimated useful
lives.
10. Income Taxes
The Company previously adopted Statement of Financial Accounting
Standards No. 109 (FAS 109), Accounting for Income Taxes, which requires
the asset and liability method of accounting for income taxes. Enacted
statutory tax rates are applied to temporary differences arising from
the differences in financial statement carrying amounts and the tax
bases of existing assets and liabilities. Due to the uncertainty of the
realization of income tax benefits, (Note K), the adoption of FAS 109 had
no effect on the financial statements of the Company.
11. Interest
The Company follows the policy of capitalizing interest as a
component of the cost of property, plant and equipment
constructed for its own use. For the year ended December 31, 1996,
total interest incurred was $236,280 of which $133,460 was charged to
operations. Total interest for the periods December 31, 1995, and 1994
was $17,048 and $9,766, respectively, all of which was charged to
operations.
12. Estimates and Assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period.
F-9
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - Continued
12. Estimates and Assumptions - Continued
Actual results could differ from those estimates. The Company has
established allowances based upon management's evaluation of inventories
and accounts receivable.
13. Common Stock Warrants
The Company recognizes cost, if any, on warrants granted based upon the
excess of the market price of the underlying shares of common stock as
of the warrant grant date over the warrant exercise price. Had the
Company adopted the fair value based accounting method for recognizing
stock-based compensation (as permitted by Financial Accounting Standard
No. 123) its reported net losses (utilizing the Black-Scholes method of
valuation) would have been approximately $24,173,787 for the twelve
months ended Decemeber 31, 1996, and approximately $29,911,000 for the
year ended December 31, 1995. Net loss per share under the fair value
based accounting method would have been approximately $.88 for the twelve
months ended December 31, 1996, and approximately $.85 for the year ended
December 31, 1995.
NOTE B - OPERATIONS AND LIQUIDITY
The Company and its subsidiaries have incurred substantial losses in 1996
and in prior years and have funded their operations and product
development primarily through the sale of stock and issuance of debt
instruments. Until such time that products can be successfully
developed and marketed, the Company and its subsidiaries will continue
to need to fulfill working capital requirements through the sale of
stock and issuance of debt. The inability of the Company to continue its
operations as a going concern would impact the recoverability and
classification of recorded asset amounts.
The ability of the Company to continue in existence is dependent on its
having sufficient financial resources to complete the research and
development necessary to successfully bring products to market and
for marketplace acceptance. As a result of its significant losses,
negative cash flows from operations, and significant accumulated deficits
for each of the periods ending December 31, 1996, 1995 and 1994, there
is substantial doubt about the Company's ability to continue as a
going concern.
Management believes that its currently available working capital,
anticipated contract revenues, subsequent sales of stock and future
debt issuance will be sufficient to meet its projected expenditures for
a period of at least twelve months from December 31, 1996.
F-10
NOTE C - NOTES RECEIVABLE
Notes receivable due from various related and unrelated parties consisted of:
Dec. 31, 1996 Dec. 31, 1995
------------- -------------
Related Parties
Note receivable from Fred E. Cooper,
Chief Executive Officer, payable upon
demand with 12% interest. $8,500 $8,500
Note receivable from Fred E. Cooper,
Chief Executive Officer, payable upon
demand with 10% simple interest. 82,400 82,400
Note receivable from Glenn Keeling,
Director, payable upon demand with
10% simple interest. 5,000 5,000
Note receivable from Glenn Keeling,
Director, payable upon demand with
8.25% interest. 50,000 0
Note receivable from Allegheny Food
Services, Inc. of which Joseph Kondisko,
a former director, is principal owner,
payable 9/1/97 with interest at prime plus
1% interest. 250,000 250,000
Unrelated Parties
Note receivable from an individual,
payable upon demand with 8.75% interest. 12,000 12,000
------- -------
407,900 357,900
Less current notes receivable 312,000 262,000
------- -------
Noncurrent $95,900 $95,900
------- -------
------- -------
Accrued interest receivable on the related party notes as of December, 31,
1996 and 1995 was $53,958 and $42,237, respectively.
During 1995, IDT, a subsidiary of BICO, financially supported the research
and development efforts of HemoCleanse, Inc., an unaffiliated company, to
assist the funding of a feasibility study related to whole-body
extracorporeal hyperthermia through the extension of credit in the form of
loans. HemoCleanse, which is still in a development stage, has not yet
established profitable operations. On the basis of HemoCleanse's
developmental status and financial statements for the year ended December
31, 1995, management of IDT has established an allowance for
uncollectability for the entire amount of principal and no interest has
been accrued on these loans. These loans which aggregated to $1,050,000
were all converted to HemoCleanse's common stock during 1996.
F-11
NOTE D - INVENTORY
Inventories consisted of the following as of:
Dec. 31, 1996 Dec. 31, 1995
------------- -------------
Raw materials $ 3,928,565 $ 2,457,235
Work-in-process 191,220 102,911
Finished goods 728,204 607,862
----------- -----------
4,847,989 3,168,008
Less valuation allowance (1,507,869) (1,507,869)
----------- -----------
$ 3,340,120 $ 1,660,139
----------- -----------
----------- -----------
NOTE E - ACCRUED LIABILITIES
Accrued liabilities consisted of the following as of:
Dec. 31, 1996 Dec. 31, 1995
Current ------------- -------------
-------
Accrued payroll taxes $18,537 $15,405
Accrued vacation 68,344 43,728
Other accrued liabilities 61,422 37,501
-------- --------
$148,303 $96,634
======== ========
Long - Term
-----------
Accrued rent $ 0 $114,750
-------- --------
$ 0 $114,750
======== ========
NOTE F - SALES AND COST OF GOODS SOLD
The following is a schedule that details Sales and Cost of Goods Sold by
segment:
Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1994
------------- ------------- -------------
Sales
Implantable Devices $508,561 $168,461 $177,259
Petrol Rem 47,625 215,211 4,432
Barnacle Ban 41,406 77,585 2,816
-------- -------- --------
597,592 461,257 184,507
CGS
Implantable Devices 288,537 91,859 97,687
Petrol Rem 16,092 53,813 981
Barnacle Ban 20,785 52,870 0
-------- -------- --------
325,414 198,542 98,668
-------- -------- --------
Gross Profit $272,178 $262,715 $ 85,839
======== ======== ========
F-12
NOTE G - LONG TERM DEBT
Long term debt consisted of the following as of:
Dec. 31, Dec. 31,
1996 1995
-------- --------
Note Payable to a bank in monthly
payments of $999 including interest
at a rate of 7.35%. Collateralized
by cash on deposit. $23,584 $33,423
Note Payable in monthly payments
of $495 including interest at a
rate of 8.48%. Collateralized
by equipment. 15,095 19,986
Note Payable in monthly payments
of $374 including interest at a
rate of 18.00%. Collateralized
by equipment. 7,810 0
Note Payable in monthly payments
of $851 including interest at a
rate of 10.11%. Collateralized
by equipment. 9,675 18,418
Note Payable to a bank in monthly
payments of $433 including interest
at a rate of 8.75%. Collateralized
by equipment. 13,311 17,157
------ ------
69,475 88,984
------- -------
Current portion of long-term debt 30,478 28,404
------- -------
Long-term debt $ 38,997 $ 60,580
======= ========
NOTE H - LEASES
Operating Leases
The Company is committed under a noncancelable operating lease for its
research and product development facility. The lease between the
Company and a group of investors (lessor) which includes four of the
Company's Executive Officers and/or Directors is for a period of 240
months beginning September 1, 1990. Monthly rental under the terms of
the lease is $8,810 for a period of 119 months to August 1, 2000 when the
monthly rental payments shall be fixed at an amount equal to the fair
rental value of the property as determined by mutual agreement of
lessor and the Company for the balance of the lease. Total rent expense
was $105,720 in each of the years 1996, 1995 and 1994. Future minimum
lease payments as of December 31, 1996 are $105,720 per year for
each of the next three succeeding years and subsequent commitment of
$61,670 through August 1, 2000, on which date the rental payments shall
be renegotiated.
F-13
NOTE H - LEASES - Continued
Operating Leases - Continued
The Company and its related subsidiaries also lease other office
facilities, various equipment and automobiles under operating leases
expiring in various years through 2002. Total lease expense related
to these leases was $239,096, $216,143 and $188,701 in the years
ended December 31, 1996, 1995 and 1994, respectively.
Capital Leases
During 1996, the Company leased two manufacturing buildings
under capital leases expiring in various years through 2011.
The assets and liabilities under capital leases are recorded at the lower
of the present value of the minimum lease payments or the fair value of
the asset. The assets are depreciated over the lower of their related
lease terms or their estimated productive lives. Depreciation of
assets under capital leases is included in depreciation expense.
The following is a summary of property held under capital
leases:
Dec. 31, 1996 Dec. 31, 1995
_____________ _______________
Building $1,205,760 $ 0
Construction in Progress 1,240,320 0
Land 246,250 0
Equipment 166,026 0
__________ _____________
Sub Total 2,858,356 0
Less: Accumulated Depreciation 46,278 0
__________ _____________
Total Property under Capital Leases $2,812,078 $ 0
__________ _____________
__________ _____________
Minimum future lease payments to related and unrelated parties are as
follows:
Related Unrelated
Parties Parties Total
________ ________ _______
1997 $105,720 $516,710 $622,430
1998 105,720 441,428 547,148
1999 105,720 369,406 475,126
2000 61,670 325,790 387,460
2001 0 348,610 348,610
Thereafter 0 3,470,814 3,470,814
________ _________ __________
Future minimum lease payments $378,830 $5,472,758 $5,851,588
________ _________ __________
________ _________ __________
F-14
NOTE I - SUBORDINATED CONVERTIBLE DEBENTURE
During 1996 the Company issued subordinated convertible
debentures totaling $6,600,000. At year end, the subordinated
convertible debentures totaled $4,600,000 with mandatory
conversions to common stock during 1997.
NOTE J - STOCKHOLDERS' EQUITY
Preferred Stock
The Series I preferred stock (nonvoting and nondividend) is
convertible at any time into ten shares of common stock.
Additionally, the preferred stock is redeemable at the option of the
Company at a redemption price of $10.00 per share, and also has a
liquidation preference of $10.00 per share.
During 1996, 2,730 shares of the Series I preferred stock were converted
to common stock, 790 shares were redeemed for cash and an escrow payable
of $2,700 was established for the redemption of the remaining 270 shares.
During 1996, 20,000 shares of the Series A convertible preferred stock
were sold and converted.
The Board of Directors of the Company may issue preferred stock in series
which would have rights as determined by the Board.
Common Stock Warrants
During 1996, warrants ranging from $1.48 to $2.41 per share to
purchase 609,480 shares of common stock were granted at exercise prices
which were equal to or above the current quoted market price of the
stock on the date issued. Warrants to purchase 2,905,462 shares of
common stock were exercisable at December 31, 1996. The per share
exercise prices of these warrants are as follows:
Shares Exercise Price
_________ ______________
1,379,500 $ .25
180,000 $ .33
350,000 $ .50
139,000 $2.125
856,962 $1.48 - $2.41
_________
Total 2,905,462
_________
_________
F-15
NOTE J - STOCKHOLDERS' EQUITY - Continued
Common Stock Warrants - Continued
The fiscal year in which common stock warrants were granted and
the various expiration dates by fiscal year are as follows:
Warrants Expire During Fiscal Year
Fiscal Warrants __________________________________
Year Granted Granted 1997 1998 1999 2000 2001
____________ _______ ____ ____ ____ ____ ____
1990 559,500 - 559,500 - - -
1991 1,351,482 - 1,000,000 351,482 - -
1992 25,000 25,000 - - - -
1993 209,000 - 209,000 - - -
1994 130,000 - - 130,000 - -
1995 21,000 - - - 21,000 -
1996 609,480 - 59,480 - - 550,000
___________________________________________________________
2,905,462 25,000 1,827,980 481,482 21,000 550,000
_________ ______ _________ _______ ______ _______
_________ ______ _________ _______ ______ _______
The following is a summary of warrant transactions during 1996:
Outstanding beginning of period: 2,415,982
Granted during the twelve month period: 609,480
Canceled during the twelve month period: -0-
Exercised during the twelve month period
at $.25 and $.28 per share: (120,000)
_________
Outstanding, and eligible for exercise: 2,905,462
_________
_________
Common Stock Reserve
At December 31, 1996 the Company has reserved unissued common stock as
follows:
Warrants 2,905,462
Convertible debentures 5,750,000
_________
Total 8,655,462
_________
_________
F-16
NOTE J - STOCKHOLDERS' EQUITY - Continued
Warrant Extensions
During 1996, the Company extended the exercise date of warrants to purchase
351,482 shares of common stock to certain officers and consultants. The
warrant shares were originally granted at exercise prices ranging from $.45
to $.50, and were extended at the original grant price. The Company
recorded a $604,342 expense for the difference between the fair market
value on the date the warrants were extended and the warrant exercise
prices.
During 1995, the company extended the exercise date of warrants to purchase
2,069,500 shares of common stock to certain officers, directors, employees
and consultants. The warrant shares were originally granted at exercise
prices ranging from $.25 to $.33, and were extended at the original grant
price. The company recorded a $7,228,220 expense for the difference
between the fair market values on the date the warrants were extended and
the warrants' exercise prices.
Diasense Common Stock
At December 31, 1996, warrants to purchase 7,565,763 shares of Diasense
common stock were exercisable. The per share exercise price for 4,055,000
shares is $.50, for 2,376,013 shares is $1.00 and for 1,134,750 shares is
$3.50. The warrants expire at various dates through 2001. To the extent
that all the warrants are exercised, The Company's proportionate ownership
would be diluted from 52% at December 31, 1996 to 39.2%.
Diasense Warrant Extensions
During 1996, Diasense extended the exercise date of warrants to purchase
2,970,013 shares of common stock to certain officers, directors, employees
and consultants. The warrant shares were originally granted at exercise
prices ranging from $.50 to $1.00, and extended at the same price.
Diasense recorded a $8,571,033 expense for the differnce between the
estimated fair market value on the date the warrants were extended and the
warrants' exercise prices.
During 1995, Diasense extended the exercise date of warrants to purchase
1,765 000 shares of common stock to certain officers, directors, employees
and consultants. The warrant shares were originally granted at exercise
prices of $.50, and extended at the same price. Diasense recorded a
$5,295,000 expense for the difference between the fair market values on the
date the warrants were extended and the warrants' exercise prices.
Petrol Rem Common Stock
At December 31, 1996 warrants to purchase 1,450,000 shares of Petrol Rem
common stock were exercisable. The per share exercise price for 1,450,000
shares is $.10. The warrants expire at various dates through 2000. To the
extent that if all the warrants were exercised, the Company's proportionate
ownership would be diluted from 67% at December 31, 1996 to 61.3%.
F-17
NOTE J - STOCKHOLDERS' EQUITY - Continued
IDT Common Stock
At December 31, 1996 warrants to purchase 1,570,000 share of IDT common
stock were exercisable. The per share exercise price for 1,500,000 shares
is $.10 and for 50,000 shares is $1.00 and for 20,000 shares is $2.00. The
warrants expire at various dates through 2001. To the extent that if all
the warrants were exercised, the Company's proportionate ownership would be
diluted from 99.1% at December 31, 1996 to 85.8%.
NOTE K - INCOME TAXES
As of December 31, 1996, the company and its subsidiaries, except Diasense
and Petrol Rem, have available approximately $43,800,000 of net operating
loss carryforwards for federal income tax purposes. These carryforwards
are available, subject to limitations, to offset future taxable income, and
expire in tax years 1997 through 2011. The Company also has research and
development credit carryforwards available to offset federal income taxes
of approximately $520,000 subject to limitations, expiring in tax years
2005 through 2011.
As of September 30, 1996, the end of its fiscal year, Diasense had
available approximately $20,700,000 of net operating loss carryforwards for
federal income tax purposes. These carryforwards, which expire during the
years 2005 through 2010, are available, subject to limitations, to offset
future taxable income. Diasense also has research and development credit
carryforwards available for federal income tax purposes of approximately
$700,000, subject to limitations, expiring in the years 2005 through 2010.
As of December 31, 1996, Petrol Rem had available approximately $7,600,000
of net operating loss carryforwards for federal income tax purposes. These
carryforwards, which expire during the years 2008 through 2013, are
available, subject to limitations, to offset future taxable income. Petrol
Rem also has research and development credit carryforwards available for
federal income tax purposes of approximately $75,000.
Certain items of income and expenses are recognized in different periods
for financial and income tax reporting purposes. In the year ended
December 31, 1994, a warrant exercise adjustment of $321,736 was reported
for tax purposes. In the year ended December 31, 1995 and 1996 a warrant
exercise adjustment of $1,309,060 and $40,650, respectively was reported
for tax purposes. The fair market value of warrant extensions hace been
recorded and expensed for financial statement purposes in the amount of
$604,342 as of December 31, 1996, and $7,228,220 for the year ended
December 31, 1995.
The Company has not reflected any future income tax benefits for these
temporary differences or for net operating loss and credit carryforwards
because of the uncertainty as to realization. Accordingly, the adoption of
FAS 109 had no effect on the financial statements of the Company.
F-18
NOTE K - INCOME TAXES - Continued
The following is a summary of the composition of the Company's deferred tax
asset and associated valuation allowance at December 31, 1996, December 31,
1995 and December 31, 1994:
Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1994
----------- ----------- ----------
Net Operating Loss $15,330,642 $10,959,420 $6,631,440
Warrant Expense 2,741,397 2,529,877 0
Tax Credit Carryforward 520,000 400,000 280,000
___________ ___________ __________
18,592,039 13,889,297 6,911,440
Valuation Allowance (18,592,039) (13,889,297) (6,911,440)
___________ ___________ __________
Net Deferred Tax Asset $ 0 $ 0 $ 0
=========== =========== ==========
The deferred tax benefit and the associated increase in the valuation
allowance are summarized in the following schedule:
Increase in
Deferred Valuation
Tax Benefit Allowance Net
___________ ____________ _____
Year-ended December 31, 1996 $ (4,702,742) $ 4,702,742 $0
Year-ended December 31, 1995 $ (6,977,857) 6,977,857 $0
Year-ended December 31, 1994 $ (1,569,335) 1,569,335 $0
From March 20, 1972 (inception)
through December 31, 1996 $(18,592,039) $18,592,039 $0
NOTE L - RELATED PARTY TRANSACTIONS
Research and Development Activities
The Company is currently performing research and development activities
related to the non-invasive glucose sensor (the Sensor) under a
Research and Development Agreement with Diasense. If successfully
developed, the Sensor will enable users to measure blood glucose levels
without taking blood samples. Diasense acquired the rights to the
Sensor, including one United States patent from BICO for $2,000,000 on
November 18, 1991. Such patent covers the process of measuring blood
glucose levels non-invasively. Approval to market the Sensor is subject
to federal regulations including the Food and Drug Administration
(FDA). The Sensor
F-19
NOTE L - RELATED PARTY TRANSACTIONS - Continued
is subject to clinical testing and regulatory approvals by the FDA. BICO
is responsible for substantially all activities in connection with the
development, clinical testing, FDA approval and manufacturing of the
Sensor. As discusssed in Note B, BICO finances its operations from the
sales of stock and issuance of debt and was reimbursed for costs incurred
under the terms and conditions of the Research and Development Agreement
for the research and development of the Sensor by Diasense. If BICO is
unable to perform under the Research and Development or Manufacturing
Agreements, Diasense would need to rely on other arrangements to develop
and manufacture the Sensor or perform these efforts itself.
BICO and Diasense have entered into a series of agreements related to
the development, manufacturing and marketing of the Sensor. BICO is to
develop the Sensor and carry out all steps necessary to bring the Sensor
to market including 1) developing and fabricating the prototypes necessary
for clinical testing; 2) performing the clinical investigations leading
to FDA approval for marketing; 3) submitting all applications to the
FDA for marketing approval; and 4) developing a manufacturable and
marketable product. Diasense is to conduct the marketing of the Sensor.
The following is a brief description of the agreements:
Manufacturing Agreement
The manufacturing agreement between BICO and Diasense was entered
into on January 20, 1992. BICO is to act as the exclusive
manufacturer of production units of the Sensor upon the completion of
the Research and Development Agreement and sell the units to Diasense
at a price determined by the agreement. The term of the agreement is
fifteen years.
Research and Development Agreement
Under a January 1992 agreement between BICO and Diasense, beginning
in April 1992, BICO received $100,000 per month, plus all direct costs for
the research and development activities of the Sensor. This agreement
replaced a previous agreement dated May 14, 1991. The term of the new
agreement is fifteen years. Under the terms of this agreement, the
Company billed Diasense $2,955,863 in research and development and
general and administrative expenses for the year ending December
31, 1995. In July 1995, BICO and Diasense agreed to suspend billings,
accruals of amounts due and payments pursuant to the research and
development agreement pending the FDA's review of the Sensor.
F-20
NOTE L - RELATED PARTY TRANSACTIONS - Continued
Purchase Agreement
In November 1991, BICO entered into a Purchase Agreement with Diasense
under which Diasense acquired BICO's rights to the Sensor for a cash
payment of $2,000,000. This agreement permits BICO to use Sensor
technology for the manufacture and sale by BICO of a proposed implantable
closed loop system. BICO will pay Diasense a royalty equal to five percent
of the net sales of such implantable closed loop system.
Real Estate Activities
Four of the Company's Executives and/or Directors are members of an
eight-member partnership which in July 1990 purchased the Company's
real estate in Indiana, Pennsylvania, and each has personally
guaranteed the payment of lease obligations to the bank providing the
funding. For their personal guarantees, the four individuals each
received warrants to purchase 100,000 shares of the Company's common
stock at an exercise price of $.33 per share until June 29, 1998.
Company Loans to Officers
At December 31, 1996 and 1995, Mr. Cooper owed the Company $8,500 related
to a 12 percent simple interest demand loan. At December 31, 1996 and
1995, Mr. Cooper owed the Company $82,400, related to 10 percent simple
interest demand loans. The accrued interest owed by Mr. Cooper on all
demand notes at December 31, 1996 and 1995 was $50,070 and $40,197,
respectively.
At December 31, 1996 and 1995, the Company had a demand loan of $5,000
with 10 percent simple interest with Glenn Keeling, a Director. At
December 31, 1996 the Company had a demand loan of $50,000 with 8.25
percent interest with Mr. Keeling. The accrued interest owed by Mr.
Keeling on all demand notes at December 31, 1996 and 1995 was $2,804 and
$2,008, respectively.
At December 31, 1996 and 1995, the Company had extended a one year
judgment note payable September 1, 1997, for $250,000, with an interest
rate of prime plus one percent, with Joseph Kondisko, Allegheny
Food Services, Inc. of which Joseph Kondisko, a former director, is
principal owner. As of December 31, 1996 and 1995 there was no accrued
interest owed.
F-21
NOTE L - RELATED PARTY TRANSACTIONS - Continued
Advances to Officers
During 1996, the Company and its subsidiaries made advances to Mr.
Cooper. At December 31, 1996, these advances accumulated to $32,535.
Employment Contracts
The Company's employment contracts with four officers and two employees
commenced November 1, 1994 and end October 31, 1999. These original
employment contracts set forth annual basic salaries aggregating
$1,050,000 in 1996 and expiring in periods beginning October 1999 through
2002, which are subject to review and adjustment. The contracts may
be extended for two to three - year periods. In the event of change in
control in the Company and termination of employment, continuation of
annual salaries at 100% decreasing to 25% are payable in addition to the
issuing of shares of common stock as defined in the contracts. The
contracts also provide for severance, disability benefits and issuances
of BICO common stock under certain circumstances.
NOTE M - COMMITMENTS AND CONTINGENCIES
Litigation
In May 1996, the Company, along with BICO and BICO's individual directors,
was served with a federal class action lawsuit based on alleged violations
of federal securities laws. The Companies have filed a Motion to dismiss
the suit and are aggressively defending against it. No determinations
as to possible liability or exposure are possible at this time,
although the Company does not believe that any violations of the
securities laws have occurred.
Pennsylvania Securities Commission
In April, 1996, the Pennsylvania Securities Commission commenced an
informal investigation into Diasense's sales of its common stock pursuant
to its public offering in an effort to determine whether sales were made
improperly to Pennsylvania residents. Diasense has been cooperating
fully with the state and has provided all of the information
requested. To date, no determinations have been made.
License Agreement
Under terms of a license agreement with a shareholder of Petrol Rem for
the marketing rights with respect to certain inventions Petrol Rem is to
make royalty payments beginning in 1994 and for each year through 2001.
Minimum royalty payments are $120,000 per year.
F-22
NOTE N - EMPLOYEE BENEFIT PLAN
The Company has a defined contribution plan with 401k provisions which
covers all employees meeting certain age and period of service
requirements. Employer contributions are discretionary as determined by
the Board of Directors. There have been no employer contributions to
the plan through December 31, 1996.
NOTE O - SUBSEQUENT EVENTS
Subsequent to December 31, 1996, and through March 20, 1997, the Company
issued convertible preferred stock and subordinate convertible debentures,
which resulted in net proceeds to the Company of approximately $2,957,000.
On February 24, 1997, BICO's shareholders approved an increase in the
number of authorized common shares from 60,000,000 to 100,000,000 at a
special shareholders meeting convened for that purpose.
F-23