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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.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 12/31/97 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 March 20, 1998:
Common Stock, $.10 par value -- $ 22,562,581
As of December 31, 1997, 138,583,978 shares of common stock, par value $.10 per
share, were outstanding. As of December 31, 1997, no shares of preferred stock,
par value $10 per share, were outstanding.
Exhibit index is located on pages 34 to 37.
Item 1. Business
General Development of Business
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 primary business of the Company is the development of new 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 cancer and the human
immunodeficiency virus ("HIV"), bioremediation products, and a paint product
which is designed to prevent the buildup of certain substances on underwater
surfaces. In addition, the Company is currently manufacturing and selling
functional electrical stimulators. In early 1998, the Company acquired a
majority interest in a company which manufactures and sells metal coating
products.
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; the ability of the Company to maintain a national listing
for its common stock; and the dilution of the Company's common stock.
Industry Segments
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.
Description of Business
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 March 1998, a total of
five U.S. and six foreign 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 present and future models at some or all of the other
hospitals from which IRB approval has been obtained.
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 legally 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 in the U.S. and will be calibrated in the patient
s home. This feature may limit the marketability of the Diasensor 1000, and,
if the device is unable to qualify for third-party reimbursement, the Company's
ability to market the device could be adversely effected.
Current Status of the Noninvasive Glucose Sensor
Due to continued delays of the FDA approval process, which are summarized
below, and while continuing to work with the FDA and conduct its mandated
testing, the Companies have also focused their efforts on obtaining approval to
market the Diasensor 1000 overseas. The Companies are in the process of
obtaining a CE mark, which will facilitate sales in Europe. As discussed
below, in connection with obtaining a CE mark, BICO has been awarded ISO 9001
certification, and continues to work with its European consultants to expedite
the process as much as possible. BICO, as designer and manufacturer of the
device, was recently audited for ISO certification by TUV Rheinland, a company
authorized to conduct such audits, which was contracted to perform a
conformity assessment of BICO s quality system. BICO has received
certification to ISO 9001, a standard defined by the International
Organization for Standardization ( ISO ), evidencing that BICO has in place a
total quality system for the design, development and manufacture of its
products. The certificate formalizing the ISO 9001 certification was received
by BICO on January 14, 1998. In February and March, 1998, BICO submitted its
technical file on the Diasensor to TUV in order to satisfy requirements of the
European Medical Device Directive. Once satisfied, BICO will receive approval
to apply a CE mark to the device. Much like an Underwriters Laboratory UL
mark, the CE mark is provided by the regulatory bodies of the European
Community, or by authorized private bodies, such as TUV Rheinland, to indicate
that the device adheres to quality systems of the ISO and the European
Committee for Standardization. The CE mark will permit the Companies to sell
the Diasensor and other medical products in Europe.
With regard to marketing the device within the United States, the Companies
continue to work with the FDA to obtain approval. A revised 510(k)
Notification was submitted in October, 1996, and was followed by continued
discussions with the FDA. During 1997, the Company continued to meet with the
FDA, and established a protocol for in-home testing of the Diasensor 1000,
which commenced in early 1997. The Companies plan to resubmit a 510(k)
Notification after it obtains the CE mark and all the data has been analyzed.
As with all other FDA-related activities, the Companies cannot provide any
assurances as to the date upon which the next 510(k) Notification will be
submitted, or when the FDA will complete its review of such Notification.
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.
FDA approval is necessary to market the Diasensor 1000 in the United States.
The Companies are continuing their efforts to develop software with a more
"universal" algorithm, which can be used by a larger population. After
introduction of the Diasensor 1000, BICO plans to finalize the 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 was 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. 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 1997 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.
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.
In connection with this project, BICO created a subsidiary, Petrol Rem, Inc.
("Petrol Rem"). Petrol Rem's officers and directors include Anthony J. Feola
and Fred E. Cooper, who are also directors and/or officers of BICO and its
other affiliates.
Part of Petrol Rem 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.
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, which is used for
small oil cleanups on hard surfaces such as the floors of manufacturing
facilities, garages and machine shops.
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. As illustrative
evidence, management notes that only thirteen of the original fifty-three
products in the bioremediation agents category remain listed.
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 been 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.
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 tube, 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 waters clear.
In addition, BIO-SOK helps to eliminate the chore of bilge cleanup, and helps
users such as boaters and marinas to avoid fines for pumping oil and fuel into
the waterways, which is prohibited.
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 were
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.
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 tube 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.
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. 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.
As a result of marketing efforts in Abu Dhabi, UAE from December 1997, Petrol
Rem was invited to demonstrate the efficacy of PRP . A recent spill in Umm Al
Qaiwain afforded Petrol Rem a field application in a mangrove site and beach
front property. These applications were made in February of 1998 and are
presently being evaluated. Future presentations/applications are scheduled with
ADNOC (Abu Dhabi National Oil Company).
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
$8,499,000 on this project through December 31, 1997.
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 Glenn Keeling, who is also an officer and
director of BICO.
IDT and HemoCleanse are currently engaged in a project which involves the
experimental use of a delivery system, the ThermoChem System , for
perfusion-induced systemic hyperthermia ( PISH ) to treat persons with certain
types of cancer and HIV/AIDS. HemoCleanse is an Indiana corporation with
offices located at 2700 Kent Avenue, West Lafayette, Indiana 47906.
HemoCleanse designs, manufactures and markets products that treat blood outside
the body to remove toxins and simultaneously balance blood chemistries.
HemoCleanse believes that its systems are unique in being able to selectively
remove both small, intermediate and protein-bound toxins, and to provide
extracorporeal hyperthermia to selectively kill infected or rapidly dividing
cells without the risk of electrolyte imbalances.
HemoCleanse has developed two models of the device. The BioLogic-DT is
designed for use as a detoxifier for the treatment of drug overdose and was
approved for marketing in the United States by the FDA in September 1994. The
ThermoChem System , which incorporates this technology, is designed for use in
the hyperthermia procedure. The ThermoChem System is used in IDT s clinical
trials.
Perfusion-induced systemic hyperthermia, a form of whole-body hyperthermia,
achieved through extracorporeal blood heating ( PISH ) involves heating the
patient s blood outside the body to approximately 48 degrees centigrade and
returning it back to the body, thus raising the body s core temperature to the
desired treatment temperature up to a maximum of 42.5 degrees centigrade.
Blood passes a roller pump which sends it onward to the heat exchanger where
indirect heating of the blood occurs, raising the outside blood temperature to
approximately 48 degrees centigrade. A portion of the blood passes through a
T-connection to the ThermoChem-SB, located between the roller pump and the
heat exchanger, where it is chemically balanced on a real-time basis and then
returned to the blood flow path before it reaches the heat exchanger.
Continually circulating blood is returned to the patient at 46 degrees
centigrade, gradually raising the patient s core body temperature to the
desired treatment temperature, which is measured by various temperature probes
throughout the body. Experimentation outside the United States to date, to the
best knowledge of the Company, has been somewhat limited and not
well-documented. IDT, and IDT s Scientific and Medical Advisory Board believe
that once a safe delivery system is established, serious, extensive and
well-documented testing will determine whether PISH can be used as an effective
treatment for persons with clinical cancer or HIV.
Although other entities have experimented with the use of PISH, one significant
problem has been the safe delivery of the procedure. IDT believes that the
improvements inherent to their ThermoChem System increase the safety of the
procedure. The ThermoChem System incorporates a single access device,
utilizing a parallel plate, cellulosic membrane dialyzer and a unique sorbent
suspension which can effectively remove a wide range of chemicals and toxins
from the blood, while maintaining a balance of electrolytes and important
nutrients. The system is also comprised of several specially integrated devices
that perform blood propulsion, water heating and cooling to control
extracorporeal blood temperature, air embolism detection, auxiliary unit roller
pump occlusion detection, catheter access occlusion, and monitoring and
recording of cardiac output and patient temperatures.
As a result, IDT believes that they have taken a significant step towards the
creation of a safe delivery system. Although there can be no assurances that
the ThermoChem System is safe for all humans, clinical trials to date have
confirmed that the humans tested were able to safely tolerate PISH at a core
temperature of 42 degrees centigrade for two hours. Based in part upon the
results of its initial clinical trials, the FDA has approved additional
clinical trials.
The ThermoChem System is a combination of three system components: 1) the
ThermoChem-HT, which circulates and heats blood extracorporeally up to
approximately 48 C and monitors the patient s core temperature, which provides
constant up to the minute access information on the status of the patient; 2)
the ThermoChem-SB, which can effectively remove a wide range of chemicals and
toxins from the blood, while maintaining a balance of electrolytes and
important nutrients; and 3) the Disposable Kit, which contains the patented
sorbent suspension, as well as temperature probes, catheters, and tubing set,
etc. .
The ThermoChem System s specifications include an extracorporeal continuous
blood circuit, a blood flow rate of 2000 ml/minute maximum, an integrated
device which heats blood outside the body to approximately 48 degrees
centigrade and core temperature to a maximum of 42.5 degrees centigrade, and a
sorbent suspension system where optimum chemical transfer between the blood and
sorbent is attained, which balances critical blood chemistries.
Pre-clinical trials were conducted on six swine to assure safety at an
increased flow rate and maintenance of a higher core temperature of 43 degrees
centigrade for a period of two hours. This study concluded that blood
chemistries were normalized with the use of the ThermoChem System . In
November 1996, the Companies submitted an IDE application to the FDA for a
study utilizing the ThermoChem System for PISH for metastatic non-small cell
lung cancer. This protocol was developed by the University of Texas in
Galveston. The FDA responded in December 1996 with an approval to conduct a
Phase I trial. The University of Texas Institutional Review Board (IRB)
granted approval of this study in May 1997.
On September 11, 1997, IDT entered into an agreement with the University of
Texas Medical Branch at Galveston (UTMB) to begin a human clinical trial in
October 1997. The trial will utilize the ThermoChem System and disposables to
deliver perfusion-induced systemic hyperthermia to treat patients with
metastatic non-small cell lung cancer.
One of the objectives of this Phase I trial is to evaluate the ThermoChem
System for the use in the treatment of metastatic non-small cell lung cancer
with regard to patient selection, tumor response, patient performance status,
and patient survival. The follow-up of the patients is patterned after the
Southwest Oncology Group protocols, which are considered state-of-the-art
studies to follow response of cancer to the therapy.
The study is being conducted at the General Clinical Research Center (GCRC) at
UTMB, which is supported by the National Institute of Health (NIH). This is
the only PISH study for metastatic non-small cell lung cancer approved by the
FDA.
The ThermoChem-HT , a component of the ThermoChem System , which circulates and
heats blood extracorporeally up to approximately 48 C and monitors the patient's
core temperature, through various temperature probes, and also provides
constant up to the minute access information on the patient can be used
independently from the ThermoChem System for regional hyperthermia. Regional
hyperthermia is utilized where a systemic treatment is not necessary, and
isolated limb perfusion, a form of regional hyperthermia, which was developed
40 years ago to treat patients with melanoma and sarcoma of the limb.
Preclinical trials are also being conducted for a Phase I trial to involve
isolated limb perfusion for melanomas and sarcomas of the limbs.
Pre-clinical trials are being conducted at M.D. Anderson Cancer Center in
preparation for a Phase I/II trials to involve thermochemotherapy
hemi-perfusion of patients with pelvic or lower extremity recurrences of
different types of cancer. These pre-clinical studies are being used to
develop the surgical techniques necessary for a clinical trial on humans and to
train and familiarize the center s staff in the use of the system.
The Cancer Center Protocol Committee of Bowman Gray School of Medicine has
approved a protocol concept to conduct a pilot study investigating the safety
of the ThermoChem-HT for intraperitoneal hyperthermic chemotherapy (IPHC) in
the treatment of advanced gastrointestinal and ovarian cancers.
The technique of IPHC has been done at Bowman Gray since 1992 utilizing a
non-standardized perfusion setup. The ThermoChem-HT can possibly make the
technique more efficient with better temperature monitoring and control. An
IDE is being submitted to the FDA to conduct this human trial.
IDT s Medical and Scientific Advisory Board consists of the three following
professionals. Currently, none of the board members receive a fee for serving
on the board, but are reimbursed for expenses incurred.
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.
Stephen R. Ash, M.D., F.A.C.P., is the Chairman of the Board and Director of
Research and Development of HemoCleanse, a corporation located in West
Lafayette, Indiana.
The Company has expensed approximately $8,402,000 on this project through
December 31, 1997, 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, 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.
In late 1994, NeuroControl Corporation in Cleveland, Ohio ("NeuroControl")
acquired the rights to Case Western's IRS Devices for hand functions. 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. 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 August, 1997, NeuroControl received approval
from the FDA to market the IRS Device.
BICO expects to complete delivery of the devices on the initial order in the
first quarter of 1998. In November 1997, NeuroControl placed a second contract
for 400 devices to be delivered in 1998 after the first contract is complete.
The value of that contract is $2.146 million. In addition to the contracts for
the devices, NeuroControl has placed several purchase orders 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
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 began selling the standard ports
during the second quarter of 1997. A second device with a low profile has been
developed for pediatric use, and a 510(k) was submitted to the FDA in November
1997 for marketing approval. In early February, 1998, BICO submitted a
supplement to the FDA in response to a request for additional information. The
Company is currently developing a dual port device and plans to submit another
510(k) for that device in the near future.
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. 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.
In connection with the development of this product, the Company has formed a
wholly-owned subsidiary, Barnacle Ban Corporation ("Barnacle Ban"). Barnacle
Ban's officers and directors include Fred E. Cooper and Anthony J. Feola, who
are officers and directors of BICO and its other affiliates. Barnacle Ban has
leased space in Robinson Township, Pennsylvania for its operations. 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.
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 $2,525,000 on this
project through December 31, 1997.
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.
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").
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.
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 March, 1998, a total of five U.S. and six foreign patents have been
issued, all of which have been assigned to Diasense, and additional patents are
pending. 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 BICO 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 the Companies 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 BICO and Diasense 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 filed for trademark protection for the term "Diasensor 1000",
which is intended for use in connection with the Diasensor models; such
filing will remain pending until the first production unit is shipped. The
Company intends to apply, at the appropriate time, for registrations of other
trademarks as to any future products of the Company.
Whole-Body Hyperthermia
In September 1992, a research team funded by the Company applied for a domestic
patent in connection with the use of PISH and the treatment of HIV-positive
patients; the patent has been assigned to IDT. 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 ThermoChem System was filed by IDT, was allowed in
July 1995 and issued in December 1995.
The patent, 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. A Continuation in Part, which was filed by IDT and included the
ThermoChem System , was allowed in July 1995 and was issued in December 1995.
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.
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
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
In connection with the 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
Noninvasive Glucose Sensor
With the rapid progress of medical technology, and in spite of continuing
research and development programs, the Company's developmental products are
always subject to the risk of obsolescence through the introduction by others
of new products or techniques. 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. To the best knowledge of the Companies, there is no other
company currently producing or marketing noninvasive sensors for the
measurement of blood glucose similar to those being developed by the Company.
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 Miles 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 30 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.
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: Rio Grande Medical
Technology ("Rio Grande"), which is working with the University of New Mexico,
CME Telemetrix, Inc. ( CME ), Cygnus, Inc. ("Cygnus"), Technical Chemicals and
Products, Inc. ( TCPI ); Samsung Fine Chemicals ( SFC ) and SpectRX. 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.
Rio Grande, formerly associated with Sandia, is affiliated with the University
of New Mexico, continues to develop its noninvasive glucose sensor based on
infrared spectroscopy and using near-infrared light. To the best knowledge of
the Company, no submission have been made to the FDA in connection with this
device. CME, a Canadian company is developing a device which claims to
measure glucose noninvasively via a finger receptacle. Testing has been
conducted in Canada and the U.S.; however, no approval has been received to
sell the device in Canada, and no FDA submission has been made to date. 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, has not yet submitted its device for FDA
scrutiny and, to the best of the Companies' knowledge, must complete additional
clinical trials prior to applying for FDA approval to market the device. Cygnus
latest reports indicate that its plans make a submission for FDA approval have
been further delayed until late 1998. TCPI recently announced that it began
clinical studies of its system to correlate interstitial glucose fluid data
with various blood glucose; although TCPI claims that its technology is
noninvasive, it utilizes electronic charges to penetrate the skin and draw
fluid from the body. SFC, a Korean company, announced in February that it had
developed a hand-held device which the company claims measures glucose using an
electromagnetic radiant ray (which management believes is a laser similar to
the TCPI technology) to measure glucose. SFC s announcement stated that
marketing would be limited to Korea and other parts of Asia, and would begin in
mid-1988 pending government approvals. SpectRX, which is funded by Abbott
Laboratories, also uses lasers to penetrate the skin and measure interstitial
fluids; like the TCPI and SFC devices, it claims to be noninvasive; however,
body fluids are drawn from the body via lasers.
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.
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.
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.
BICO 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.
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. BICO 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 ThermoChem System
model which is used in the hyperthermia project. IDT and HemoCleanse
continuing to hold discussions with the FDA regarding the number of patients
which must be treated with the ThermoChem System before the FDA will accept an
application to market the delivery system in the U.S., and the such 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 to market the
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
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.
HUMAN RESOURCES
As of December 31, 1997, the Company had 147 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, 1997, 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 ten 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 1998, 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.
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.
The Pennsylvania Securities Commission is conducting a private investigation of
BICO and Diasense in connection with sales of securities. Both companies have
cooperated with the investigation. To the best knowledge of the Companies, no
findings have been made and no orders have been issued.
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
20, 1998 the closing price for the common stock of the Company as reported by
NASDAQ was $.125. 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, 1997, as
reported by NASDAQ:
Calendar Year and Quarter High Low
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
1997 First Quarter 1.500 .625
Second Quarter 1.000 .3125
Third Quarter .719 .3125
Fourth Quarter .406 .0937
As of December 31, 1997 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 revised its requirements for companies listed on its Small-Cap
market. Such requirements, which include a minimum trading price of $1.00,
will limit the Company s option to continue 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
1997 1996 1995 1994 1993
Total Assets $12,981,300 $14,543,991 $9,074,669 $6,375,778 $2,995,334
Long-Term
Obligations $ 2,697,099 $ 2,669,727 $ 175,330 $ 163,201 $ 104,917
Working Capital $ 888,082 $ 1,785,576 $3,188,246 $2,612,884 $1,112,541
Preferred Stock $ 0 $ 0 $ 37,900 $ 54,900 $ 54,900
Net Sales $ 1,155,907 $ 597,592 $ 461,257 $ 184,507 $ 54,000
TOTAL $ 1,426,134 $ 776,727 $ 755,991 $ 481,453 $ 134,329
REVENUES
Warrant $ 4,046,875 $ 9,175,375 $12,523,220 $ 0 $ 0
Extensions
Benefit $ 0 $ 0 $ 0 $ 0 $ 0
(Provision)for
Income Taxes
Net Loss ($24,154,324)($22,395,702)($29,420,345)($11,672,123)($ 7,855,998)
Net Loss per ($ .34)($ .53)($ .84)($ .43)($ .45)
Common Share
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.
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 $888,082 at December 31, 1997, as compared to $1,785,576 at
December 31, 1996, and to $3,188,246 at December 31, 1995. Working Capital
fluctuations are due primarily to the varied capital- raising efforts of the
Company and its affiliate Diasense, which aggregated approximately $22,300,000
in 1997; $21,600,000 in 1996; and $19,275,000 in 1995, as well as a decrease
net in inventory from $3,340,120 as of December 31, 1996 to $1,834,018 as of
December 31, 1997.
Cash decreased from $3,802,874 at December 31, 1996 to $2,759,067 at December
31, 1997, as compared to $3,204,501 at December 31, 1995. These changes were
attributable to the following factors. The Company s sales of its securities
raised funds aggregating $22,600,000 during 1997 ; $21,600,000 during 1996 and
$19,275,000 during 1995. During those periods, the Company s cash flows used
by operating activities aggregated $19,121,752; $19,972,000 and $16,891,000,
respectively. During 1997, such activities included a $2.1 million increase in
inventory reserves. In addition, the Company recorded a $4 million charge
against operations due to warrant extensions by the Company and its subsidiary
in 1997, with similar charges of approximately $9 million in 1996 and $12.5
million charge in 1995. (See, Note J to the Financial Statements). The Company
s cash flows used by investing activities aggregated $1.4 million in 1997 as
compared to $1 million in 1996, and $2.7 million in 1995. The primary
difference in such activities was the absence of over $1 million in notes
receivable which was recorded in 1995, but not 1996 or 1997. The Company s
other assets increased by $816,000 from 1996 to 1997; such increase was due in
large part to an increase in notes receivable from related parties (See, Note C
to the Financial Statements) and a $300,000 deposit on equipment during 1997.
The Company's current liabilities decreased by $1,635,000 from 1996 to 1997;
the decrease was due to the Company s decreased issuance of convertible
debentures as part of its capital-raising efforts, $3.3 million of which were
outstanding as of December 31, 1997, as compared to $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 $110,000 at 1997 year end (See, Note H
to the Financial Statements).
The Company continued to fund operations mostly from sales of its securities.
During 1997, the Company sold 22,000 shares of its Series B convertible
preferred stock; and issued $20.2 million in subordinated convertible
debentures. All convertible securities contain mandatory conversion
provisions which expire at various dates during 1998 and require minimum
holding periods prior to conversion.
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.
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, 1998, 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 CE mark 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 1997, BICO and its affiliate Diasense have raised over $100,000,000 in
private and public offerings alone.
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 1995, 1996 and 1997, 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 $168,461, $508,561 and
$880,919 1995, 1996 and 1997, respectively (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, 1997 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, 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 1997, the Company's net sales increased to $1,155,907 from $597,592 in 1996
and $461,257 in 1995. The increase was due to an increase in all product
sales, including its Petrol Rem and Barnacle Ban products (See, Note F to the
Financial Statements) Of the total net sales, the Company had $880,919 in
implantable device revenues in 1997 as compared to $508,561 in 1996 and
$168,461 in 1995.
In 1997, 1996 and 1995, the Company received interest income in the amount of
$165,977; $176,478; and $294,734, 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. The Company s other income increased to $104,250 in
1997 from $2,657 in 1996 and $0 in 1995; the increase was due primarily to
amounts due from directors in connection with the settlement of certain
lawsuits.
In 1997, the Company's costs of products sold was $641,331 as compared to
$325,414 in 1996 and $198,542 in 1995. 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 $6,977,590 in 1997, a
decrease from $8,742,922 in 1996, and $7,649,678 in 1995. The overall decrease
was due to the Company s realignment of personnel and resources in an effort to
obtain a CE Mark for sale of the Noninvasive Glucose Sensor outside the U.S.
(See, Business of the Company - Current Status of the Noninvasive Glucose
Sensor ).
In 1997, General and Administrative expenses were $12,704,146, an increase from
$8,963,693 in 1996 and $11,117,107 in 1995. The increase was due, in part, to
the allocation of funds to outside consultants and other advisors to assist the
Company in its efforts to obtain a CE Mark.
During 1997, the Company extended 177,800 warrants originally granted to
certain officers, directors, employees and consultants in 1992, as compared to
similar extension of 351,482 warrants in 1996, and 2,069,500 warrants in 1995.
Because the exercise price of some such warrants ($.25 to $3.50) 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. During
1997, no expense was charged to operations since the market price was lower
than of the original warrant exercise price. In addition, a similar charge of
$4,046,875 in 1997; $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 $315,624 in 1997
as compared to $133,460 in 1996 and $17,048 in 1995. 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 1997. As of December 31, 1997, the Company and
its subsidiaries, except for Diasense and Petrol Rem, had available net
operating loss carryforwards for federal income tax purposes of approximately
$63,260,000, which expire during the years 1998 through 2012 (See, Note K to
the Financial Statements).
Supplemental Financial Information
As of March 25, 1998, the Company has outstanding approximately $5,020,000 in
subordinated convertible debentures with expiration dates ranging from December
29, 1998 through March 25, 1999.
On February 2, 1998, BICO s shareholders approved an increase in the number of
authorized shares of common stock from 150,000,000 to 300,000,000 at a Special
Shareholders Meeting convened for that purpose.
Effective March 4, 1998, the Company acquired a majority interest in
International Chemical Technologies, Inc. ("ICTI"), a company which produces
metal-coating products (See, Note O to the Financial Statements).
Item 8. Financial Statements and Supplementary Data
The Company's financial statements appear on pages F-1 through F-22 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 as of December 31, 1997
were as follows:
Director
Name Age Since Position
David L. Purdy 69 1972 President, Chaairman of the Board,
Treasurer, Director
Fred. E. Cooper 52 1989 Chief Executive Officer, Executive Vice
President, Director
Anthony J. Feola 50 1990 Senior Vice President, Director
Glenn Keeling 47 1991 Vice President, Director
_________________________________
DAVID L. PURDY, 69 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.
FRED E. COOPER, 52, 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, 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 and Coraflex.
ANTHONY J. FEOLA, 50, 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, Petrol Rem and Barnacle Ban.
GLENN KEELING, 47, joined 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 through 1997 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. 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.
In February 1998, the Company appointed two new members to its Board of
Directors: Stan Cottrell and Richard Bourret. Both Mssrs. Cottrell and Bourret
are outside directors.
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, 1997, 1996 and 1995, of those persons who were, at December
31, 1997 (i) the Chief Executive Officer, and (ii) the other most highly
compensated executive officers of the Company whose remuneration exceeded
$100,000 (the "Named Executives").
SUMMARY COMPENSATION TABLE
==============================================================================
Annual Compensation | (1)Long Term Compensation
- ------------------------------------------------------------------------------
| Awards
Name and | Securities
Principal (2) | Underlying (2) All other
Position Year Salary($) Bonus($) Other($) | Warrants(#) Compensation
==============================================================================
David L. |
Purdy , 1997 $154,167 $0 $0 | 0 $0
President, 1996 $300,000 $0 $0 | 0 $0
Treasurer (4) 1995 $300,000 $0 $0 | 820,000 (3) $0
- ------------------------------------------------------------------------------
Fred E. 1997 $442,000 $0 $0 | 0 $0
Cooper, 1996 $442,000 $0 $0 | 0 $0
CEO (5) 1995 $330,000 $0 $0 | 575,000 (3) $0
- ------------------------------------------------------------------------------
Anthony J. 1997 $300,000 $0 $0 | 0 $0
Feola , Sr. 1996 $300,000 $0 $0 | 350,000 (3) $0
Vice Pres.(6) 1995 $250,000 $93,125 $0 | 200,000 (3) $0
- ------------------------------------------------------------------------------
Glenn 1997 $200,000 $0 $0 | 0 $0
Keeling, VP 1996 $200,000 $0 $0 | 100,000 (8) $0
(7) 1995 $175,000 $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 1997, 1996,
or 1995. The Company did not award any restricted stock to the Named
Executives during any year, including the years 1997, 1996 or 1995. The
Company did not award any warrants, options or Stock Appreciation Rights
("SARs") to the Named Executives during the years ended December 31, 1997,
1996 or 1995; 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, 1997, 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.
(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 1997, 1996 and 1995, Mr.
Purdy was paid $87,500; $100,000 and $100,000 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
1997, 1996 and 1995, Mr. Cooper was paid $96,000; $96,000; and $40,000
respectively by both Petrol Rem and IDT, both of which are subsidiaries of
BICO. In 1997, 1996, and 1995, Mr. Cooper was paid $150,000 in salary by
Diasense.
(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.
(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 $1.48 per share (the
market price as of that date) until August 26, 2001.
Option/Warrant/SAR Grants in Last Fiscal Year
No options, warrants or SARs were granted or extended to the Named Executives
during 1997.
AGGREGATED OPTION/WARRANT/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL
YEAR-END OPTION/WARRANT/SAR VALUE TABLE
=========================================================================
Number of Value of
Securities Unexercised
Underlying In-the-Money
Unexercised Options/SARs
Options/SARs 12/31/97 ($)
at 12/31/97 (#)
Shares Value
Acquired on Realized ($) Exercisable Exercisable/
Exercise (2) Unexercisable(3) Unexercisable (4)
Name (#)(1)
- -------------------------------------------------------------------------------
David L. 52,800 $ 8,239 767,200 $ 0
Purdy (5) (6) (7) (13)
- -------------------------------------------------------------------------------
Fred E. 100,000 $33,440 300,000 $ 0
Cooper (8) (9) (10) (13)
- -------------------------------------------------------------------------------
Anthony J. 0 $ 0 550,000 $ 0
Feola (11) (13)
- -------------------------------------------------------------------------------
Glenn 0 $ 0 100,000 $ 0
Keeling (12) (13)
===============================================================================
__________________
(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, 1997 as reported by Nasdaq
($.1875).
(5) During the year ended December 31, 1997, Mr. Purdy exercised warrants to
purchase 52,800 shares of common stock at $.25 per share.
(6) The closing sales price as reported by Nasdaq on May 1, 1997, the date of
the warrant exercise set forth in note (5) was $.406 per share.
(7) Includes warrants to purchase: 187,200 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").
(8) During year ended December 31, 1997, Mr. Cooper exercised warrants to
purchase 100,000 shares of common stock at $.25 per share.
(9) The closing sales price as reported by Nasdaq on April 21, 1997, the date
of the warrant exercise set forth in note (8), was $.594.
(10) Includes warrants to purchase: 300,000 shares of common stock at $.25 per
share until May 1, 1995 (extended until May 1, 1998) (See, "Warrants").
(11) 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").
(12) Includes warrants to purchase: 100,000 shares of common stock at $1.48 per
share until August 26, 2001.
(13) Because the market price as of December 31, 1997 was less than the
exercise price of the warrants, such warrants were not in-the-money .
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.
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; 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,
1997 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, 1997, there were 138,583,978 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, 1997
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, 1997 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) 240,140 * 1,007,340(6) *
300 Indian Springs Road
Indiana, PA 15701
Fred E. Cooper 776,200 * 1,076,200(7) *
Building 2500, 2nd Floor
2275 Swallow Hill Rd.
Pittsburgh, PA 15220
Anthony J. Feola 354,000 * 904,000(8) *
Building 2500, 2nd Floor
2275 Swallow Hill Rd.
Pittsburgh, PA 15220
Glenn Keeling 138,500 * 238,500(9) *
200 Julrich Drive
McMurray, PA 15317
All directors and 1,508,840 1.1% 3,226,040(10) 2.3%
executive officers
as a group (4 persons)
* Less than one percent
________________________
(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,
1997.
(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, 1997. For
computation purposes, the total number of shares of common stock
outstanding as of December 31, 1997 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 children. Mr.
Purdy disclaims any beneficial interest to shares held by members of his
family.
(6) Includes currently exercisable warrants to purchase the following: 187,200
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, "Employment
Agreements").
(7) Includes currently exercisable warrants to purchase the following: 300,000
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. 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,
"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). 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, "Employment Agreements").
(9) Includes currently exercisable warrants to purchase 100,000 shares of
common stock at $1.48 per share until August 26, 2001. 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, "Employment
Agreements").
(10) Includes shares of common stock, including stock currently owned,
available under currently exercisable warrants as set forth above.
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 (See "Employment Agreements").
David L. Purdy, President, Treasurer and a director of the Company, is a
director of Diasense and Coraflex. 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 $87,500 and $100,000 by Diasense in
1997 and 1996, respectively. Fred E. Cooper, Chief Executive Officer,
Executive Vice President and a director of the Company, is a director of
Diasense, Coraflex, Petrol Rem, and Barnacle Ban. He is also the President of
Diasense, and Barnacle Ban. Mr. Cooper devotes approximately 60% of his time
to BICO and 40% to Diasense. In addition to his salary and bonus paid by BICO,
he was paid $150,000 by Diasense in 1996 and 1997. Anthony J. Feola, Senior
Vice President and a director of the Company, is also a director of Diasense,
Coraflex, Petrol Rem, and Barnacle Ban. Glenn Keeling, Vice President and a
director of the Company, was employed on January 1, 1992 as BICO's manager of
product development. Mr. Keeling is also the President and a director of IDT.
Gary Keeling, the brother of Glenn Keeling, resigned as an officer and director
of Diasense in August, 1997.
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.
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 1995 through 1997. 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,
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS", and Note J to the Financial Statements).
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. In 1997, the Companies granted loans to Fred E.
Cooper aggregating $158,000; Mr. Cooper signed promissory notes promising to
pay the principal amounts upon demand plus 8.25% simple interest. In 1998,
the Company granted loans to Fred E. Cooper aggregating $275,000; Mr. Cooper
signed a promissory note promising to pay the principal amount upon demand plus
8.25% simple interest. Except for the joint liability set forth below, the
aggregate balance of the loans as of March 15, 1998, including accrued
interest, was $597,636.
In November 1997, the Companies granted a loan to Anthony J. Feola in the
amount of $50,000. Mr. Feola signed a promissory note promising to pay the
principal amount upon demand plus 8.25% simple interest. In February 1998, the
Company granted a loan to Anthony J. Feola in the amount of $185,000. Mr.
Feola signed a promissory note promising to pay the principal upon demand plus
8.25% simple interest. Except for the joint liability set forth below, the
aggregate balance of the loans as of March 15, 1998, including accrued
interest, was $237,762.
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. In November, 1997, the Company granted a
loan to Glenn Keeling in the amount of $20,000. Mr. Keeling signed a
promissory note promising to pay the principal upon demand plus 8.25% simple
interest. In February 1998, the Company granted a loan to Glenn Keeling in the
amount of $190,000. Mr. Keeling signed a promissory note promising to pay the
principal upon demand plus 8.25% simple interest. Except for the joint
liability set forth below, the aggregate balance of the loans as of March 15,
1998, including accrued interest, was $275,310.
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,
1997, the balance was $250,000. Joseph Kondisko, a former director of Diasense,
is a principal owner of Allegheny Food Services.
In 1997, the Company paid $35,000 in connection with the settlement of a
lawsuit. The payment was secured with a loan executed jointly by all of the
directors: Fred E. Cooper, David L. Purdy, Anthony J. Feola and Glenn Keeling.
The balance of the loan as of December 31, 1997 and March 20, 1998 was $35,000.
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.
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, 1997 and 1996. . . . . . . . . . . . . . . . . . . . .F-2
Consolidated Statements of Operations
for the years ended December 31, 1997, 1996 and 1995. . . . . . . .F-4
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1997, 1996, 1995 and 1994. . . . .F-5
Consolidated Statements of Cash Flows
for the years ended December 31, 1997, 1996 and 1995. . . . . . . .F-6
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . . .F-8
2. Exhibits:
(b) Reports on Form 8-K
The Company filed a Form 8-K report dated April 7, 1997. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated April 14, 1997. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated April 24, 1997. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated May 2, 1997. The items listed
were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated May 8, 1997. The items listed
were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated May 14, 1997. The items listed
were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated May 21, 1997. The items listed
were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated June 3, 1997. The items listed
were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated June 18, 1997. The items listed
were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated July 15, 1997. The items listed
were Item 5, Other Events, and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated July 17, 1997. The items listed
were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated July 23, 1997. The items listed
were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated August 12, 1997. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated August 19, 1997. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated August 26, 1997. The item
listed was Item 5, Other Events.
The Company filed a Form 8-K report dated September 11, 1997. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated September 15, 1997. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated September 22, 1997. The item
listed was Item 5, Other Events.
The Company filed a Form 8-K report dated September 30, 1997. The item
listed was Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated October 31, 1997. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated October 31, 1997. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated November 3, 1997. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated November 4, 1997. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated November 13, 1997. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated November 18, 1997. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated December 3, 1997. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated January 6, 1998. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated January 21, 1998. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated January 30, 1998. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated February 2, 1998. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated February 23, 1998. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated February 25, 1998. The item
listed was Item 5, Other Events.
The Company filed a Form 8-K report dated February 27, 1998. The items
listed were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated March 5, 1998. The items listed
were Item 5, Other Events; and Item 7(c), Exhibits.
The Company filed a Form 8-K report dated March 17, 1998. 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
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
Conformed Copy 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, 1998.
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, 1998
Fred E. Cooper (principal executive
officer, principal
financial officer and
principal accounting
officer)
/s/ Anthony J. Feola Senior Vice President, March 31, 1998
Anthony J. Feola Director
/s/ Glenn Keeling Director March 31, 1998
Glenn Keeling
/s/ Stan Cottrell Director March 31, 1998
Stan Cottrell
/s/ Richard Bourret Director March 31, 1998
Richard Bourret
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,
1997 and 1996, 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, 1997. 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, 1997 and 1996, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
1997 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, 1997 and these conditions are expected to continue through 1998,
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 25, 1998
Thompson Dugan
/s/Thompson Dugan
- -----------------
F-1
Biocontrol Technology, Inc. and Subsidiaries
Consolidated Balance Sheets
Dec. 31, 1997 Dec. 31, 1996
------------- -------------
CURRENT ASSETS
Cash and equivalents (note A) $ 2,759,067 $ 3,802,874
Accounts receivable - net of allowance for doubtful accounts
of $14,931 at Dec. 31, 1997 and $195,840 at Dec. 31, 1996 417,329 98,769
Inventory - net of valuation allowance (notes A and D) 1,834,018 3,340,120
Notes receivable - related parties (notes C and L) 35,000 300,000
Notes receivable (note C) 87,000 12,000
Interest receivable (note C) 2,134 -
Prepaid expenses 164,012 277,409
------------- -------------
TOTAL CURRENT ASSETS 5,298,560 7,831,172
PROPERTY, PLANT AND EQUIPMENT (notes A and H)
Building 1,444,273 1,442,423
Land 246,250 246,250
Construction in progress 1,465,152 1,240,320
Leasehold improvements 1,197,977 1,157,239
Machinery and equipment 5,042,736 4,386,364
Furniture, fixtures & equipment 812,221 735,962
------------- -------------
Subtotal 10,208,609 9,208,558
Less accumulated depreciation 3,516,677 2,670,207
------------- -------------
6,691,932 6,538,351
OTHER ASSETS
Notes receivable - related parties (notes C and L) 598,900 95,900
Interest receivable - related parties (notes C and L) 75,343 53,958
Deposit on Equipment 300,000 -
Patents, net of amortization (note A) 6,765 11,097
Other assets 9,800 13,513
------------- -------------
990,808 174,468
------------- -------------
TOTAL ASSETS $ 12,981,300 $ 14,543,991
============= =============
The accompanying notes are an integral part of these statements.
F-2
Biocontrol Technology, Inc. and Subsidiaries
Consolidated Balance Sheets
(Continued)
Dec. 31, 1997 Dec. 31, 1996
------------- -------------
CURRENT LIABILITIES
Accounts payable $ 646,535 $ 1,035,171
Current portion of long-term debt (note G) 18,765 30,478
Current portion of capital lease obligations (note H) 109,933 48,944
Debentures payable (note I) 3,301,280 4,600,000
Accrued liabilities (note E) 215,119 148,303
Escrow payable (note J) 2,700 2,700
Deferred revenue on contract billings (note A) 116,146 180,000
------------- -------------
TOTAL CURRENT LIABILITIES 4,410,478 6,045,596
LONG-TERM LIABILITIES
Capital lease obligations (note H) 2,688,293 2,660,730
Long-term debt (note G) 8,806 38,997
------------- -------------
2,697,099 2,699,727
COMMITMENTS AND CONTIGENCIES (notes M and O)
UNRELATED INVESTORS'INTEREST
IN SUBSIDIARY (note A) 1,409,647 1,881,437
STOCKHOLDERS' EQUITY (notes J and O)
Common stock, par value $.10 per share,
authorized 150,000,000 shares, issued and
outstanding 138,583,978 at Dec. 31, 1997 and
49,213,790 at Dec. 31, 1996 13,858,398 4,921,379
Additional paid-in capital 97,004,067 80,704,749
Notes receivable issued for common stock-related party (note C) (25,000) -
Warrants 6,396,994 6,907,162
Accumulated deficit (112,770,383) (88,616,059)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 4,464,076 3,917,231
TOTAL LIABILITIES AND
STOCKHOLDER' EQUITY $12,981,300 $14,543,991
============= =============
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,
1997 1996 1995
------------- ------------- -------------
Revenues
Net Sales $ 1,155,907 $ 597,592 $ 461,257
Interest income 165,977 176,478 294,734
Other income 104,250 2,657 -
------------- ------------- -------------
1,426,134 776,727 755,991
Costs and expenses
Cost of products sold 641,331 325,414 198,542
Research and development (notes A and L) 6,977,590 8,742,922 7,649,678
General and administrative 12,704,146 8,963,693 11,117,107
Debt issue costs (note A) 3,306,812 502,000 -
Warrant extensions (note J) - 604,342 7,228,220
Warrant extensions - Subsidiary (note J) 4,046,875 8,571,033 5,295,000
Interest expense 315,624 133,460 17,048
------------- ------------- -------------
27,992,378 27,842,864 31,505,595
------------- ------------- -------------
Loss before unrelated investors' interest (26,566,244) (27,066,137) (30,749,604)
Unrelated investors' interest in net loss of
subsidiary 2,411,920 4,670,435 1,329,259
------------- ------------- -------------
Net loss ($24,154,324) ($22,395,702) ($29,420,345)
============= ============= ==============
Loss per common share (note A) $ (0.34) $ (0.53) $ (0.84)
============= ============== ==============
The accompanying notes are an integral part of these statements.
F-4
Biocontrol Technology, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Note rec.
Preferred Stock Common Stock issued for Additional
--------------- ---------------- Common Stk Paid in Accumulated
Shares Amount Shares Amount Warrants Rel Party Capital Deficit Total
------- -------- --------- ---------- ---------- --------- ----------- -------------- -----------
Balance at Dec. 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 Dec. 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 stk. (1,700) (17,000) 17,000 1,700 - - 15,300 - -
Additional PIC from
subsidiary stock offering - - - - - - 1,648,677 - 1,648,677
Warrant extensions - - - - $7,228,220 - - - 7,228,220
Warrant extensions - sub. - - - - - - 4,984,755 - 4,984,755
Change in ownership int.-sub. - - - - - - (2,012,785) - (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 from stock offering - - 7,839,065 783,907 - - 12,571,822 - 13,355,729
Conversion of preferred stk.(22,730)(227,300) 1,958,602 195,860 - - 31,440 - -
Cash redemp. at par-pref stk.(1,060) (10,600) - - - - - - (10,600)
Proceeds from sale of
preferred stk.- 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 - sub. - - - - - - 4,441,262 - 4,441,262
Change in ownership int.-sub. - - - - - - (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 Dec. 31, 1996 - - 49,213,790 4,921,379 6,907,162 - 80,704,749 (88,616,059) 3,917,231
-------- -------- ----------- ---------- ---------- -------- ------------ ------------ ----------
Proceeds from stk offering - - 1,705,000 170,500 - - 765,648 - 936,148
Conversion of preferred stk.(22,000)(220,000) 6,913,366 691,337 - - (471,337) - -
Proceeds from sale of
preferred stk.-Series B 22,000 220,000 - - - - 1,807,000 - 2,027,000
Conversion of debenture - - 80,599,022 8,059,902 - - 11,554,077 - 19,613,979
Warrant extensions - sub. - - - - - - 2,108,421 - 2,108,421
Change in ownership int-sub. - - - - - - 2,421 - 2,421
Warrants exercised - - 152,800 15,280 (510,168) ($25,000) 533,088 - 13,200
Net loss - - - - - - - (24,154,324) (24,154,324)
-------- -------- ----------- ---------- ----------- --------- ----------- ------------- ----------
Balance at Dec. 31, 1997 - $ - 138,583,978 $13,858,398 $6,396,994 $(25,000) $97,004,067 $(112,770,383) $4,464,076
======== ======== =========== =========== =========== ========= =========== ============== ===========
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,
1997 1996 1995
------------- ------------- -------------
Cash flows used by operating activities:
Net loss (24,154,324) (22,395,702) (29,420,345)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 850,802 587,507 459,778
Unrelated investors' interest in susidiary (2,411,920) (4,670,435) (1,329,259)
Stock issued in exchange for services 936,148 17,200 180,373
Stock issued in exchange for services by subsidiary 600 7,000 -
Debenture interest converted to stock 164,055 - -
Premium for extension on Debenture 527,113 - -
Provision for potential loss on notes receivable - - 1,050,000
Warrant extensions - 604,342 7,228,220
Warrant extensions by subsidiary 4,046,875 8,571,033 5,295,000
(Decrease)increase in allowance for losses on accounts receivable (180,909) 195,840 -
(Increase) in accounts receivable (137,651) (92,083) (169,805)
(Increase) in inventories (586,029) (1,679,981) (2,379,694)
(Increase) in inventory valuation allowance 2,092,131 - 900,000
(Increase) decrease in prepaid expenses 113,397 (128,883) 38,934
(Increase) decrease in other assets 3,713 (2,445) 79,472
Increase (decrease) in accounts payable (388,636) (803,237) 1,195,044
Increase (decrease) in other liabilities 66,737 (35,960) (18,960)
(Decrease) in deferred revenue (63,854) (146,000) -
------------- ------------- -------------
Net cash flow used by operating activities (19,121,752) (19,971,804) (16,891,242)
------------- ------------- -------------
Cash flows from investing activities:
Purchase of property, plant and equipment (845,512) (954,610) (1,441,509)
(Increase) in notes receivable (313,000) (50,000) (1,312,000)
Deposit on equipment (300,000) - -
(Increase) in interest receivable (23,519) (11,721) (9,792)
------------- ------------- -------------
Net cash used by investing activites (1,482,031) (1,016,331) (2,763,301)
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from stock offering - 13,338,531 16,195,788
Proceeds from sale by subsidiary of its common stock 3,500 (172,315) 3,079,200
Proceeds from warrants exercised 13,200 30,600 273,325
Proceeds from warrants exercised-subsidiary - 2,000 -
Proceeds from sale of Preferred stock-Series A - 1,840,000 -
Proceeds from sale of Preferred stock-Series B 2,027,000 - -
Cash redemption at par - Preferred stock - (7,900) -
Proceeds from debentures payable 20,230,000 6,600,000 -
Payments on debentures payable (2,605,833) - -
Payments on notes payable (41,904) (19,509) (5,115)
Payments on capital lease obligations (65,987) (24,899) -
------------- ------------- -------------
Net cash provided by financing activities 19,559,976 21,586,508 19,543,198
Net increase (decrease) in cash (1,043,807) 598,373 (111,345)
------------- ------------- -------------
Cash and cash equivalents, beginning of year 3,802,874 3,204,501 3,315,846
------------- ------------- -------------
Cash and cash equivalents, end of year $2,759,067 $3,802,874 3,204,501
============= ============= =============
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,
1997 1996 1995
------------- ------------- -------------
Supplemental Information:
Interest paid $ 155,647 $ 72,578 $ 17,048
============= ============ ============
Supplemental schedule of non-cash
investing and financing activities:
Acquisition of equipment with note payable $ 0 $ 145,063 $ 47,282
============= =========== ============
Acquisition of property under a capital lease:
Building $ - $ 1,205,760 $ -
Land - 246,250 -
Construction in progress - 1,137,500 -
Equipment 154,539 - -
------------- ------------- -------------
$ 154,539 $ 2,589,510 $ -
============= ============= =============
Conversion of Series I-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 Series B- preferred stock for common stock:
Common stock $ 220,000 $ - $ -
Additional paid-in capital 1,807,000 - -
------------- ------------- -------------
2,027,000 $ - -
============= ============= =============
Conversion of debentures for common stock $ 19,449,924 $ 2,000,000 $ -
============= ============= =============
Converion of debenture interest for common stock $ 164,055 $ 27,122 $ -
============= ============= =============
Stock granted to related party for note receivable $ 25,000 $ 0 $ -
============= ============= =============
Conversion of warrants for common stock $ 510,168 $ 375,000 $ 550,400
============= ============= =============
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, 1997, 1996 and 1995
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: Diasense,
Inc. (Diasense) a 52% owned subsidiary as of December 31, 1997 and 1996;
Petrol Rem, Inc., a 67% owned subsidiary as of December 31, 1997 and 1996;
IDT,Inc., a 99.1% owned subsidiary as of December 31, 1997 and 1996; and
Barnacle Ban Corporation, a 100% owned subsidiary as of December 31, 1997
and 1996. 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.
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 $90,176 and $85,844 at December
31, 1997 and 1996, respectively.
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 71,415,351 shares in 1997, 42,266,597
shares in 1996 and 35,025,237 shares in 1995, respectively. Shares
issuable under stock options, stock warrants, convertible debentures and
convertible preferred stock are excluded from computations as their effect
is antidilutive.
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
Continued
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.
Total interest incurred for the periods December 31, 1997, 1996, and 1995
was $528,942, $236,280 and $17,048, respectively, of which $315,624,
$133,460 and $17,048, respectively, 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. 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) for
the periods ending December 31, 1997, 1996 and 1995 would have been
approximately $27,150,101, $24,173,787 and $29,911,000, respectively.
Net loss per share under the fair value based accounting method for the
periods ending December 31, 1997, 1996 and 1995 would have been
approximately $.38, $.88 and $.85, respectively.
14. Debt Issue Costs
The Company follows the policy of expensing debt issue costs on debentures
during the period of debenture issuance. Total debt issue costs incurred
for the periods December 31, 1997, 1996, and 1995 was $3,306,812, $502,000
and $0, respectively.
15. Concentration of Credit Risk
Financial instruments which potentially subject the Company to significant
concentrations of credit risk consist principally of cash investments at
commercial banks and receivables from officers and directors of the
Company. Cash and cash equivalents are temporarily invested in interest
bearing accounts in financial institutions, and such investments may be in
excess of the FDIC insurance limit. Receivables from directors and
officers of the Company (Note L) are unsecured and represent a
concentration of credit risk due to the common employment and financial
dependency of these individuals on the Company.
NOTE B - OPERATIONS AND LIQUIDITY
The Company and its subsidiaries have incurred substantial losses in 1997
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, 1997, 1996 and 1995, 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, 1997.
NOTE C - NOTES RECEIVABLE
Notes receivable due from various related and unrelated parties consisted of:
Dec. 31, 1997 Dec. 31, 1996
------------- -------------
Related Parties
Note receivable from Fred E. Cooper, Chief Executive $ 8,500 $ 8,500
Officer, payable upon demand with 12% interest.
Note receivable from Fred E. Cooper, Chief Executive
Officer, payable upon demand with 10% simple interest. 82,400 82,400
Note receivable from Fred E. Cooper, Chief Executive
Officer, payable upon demand with 8.25% simple interest. 83,000 -
Note receivable from Fred E. Cooper, Chief Executive
Officer, payable upon demand with 8.25% simple interest. 35,000 -
Note receivable from Fred E. Cooper, Chief Executive
Officer, payable upon demand with 8.25% simple interest. 15,000 -
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 50,000
Note receivable from Glenn Keeling, Director,
payable upon demand with 8.25% interest. 20,000 -
Note receivable from T.J. Feola, Director,
payable upon demand with 8.25% interest 50,000 -
NOTE C - NOTES RECEIVABLE Continued
Note receivable from Dave Purdy, T.J. Feola, Fred Cooper,
Glenn Keeling, all directors who are jointly liable to the 35,000 -
Company.
Note receivable from Allegheny Food Services,Inc. of
which Joseph Kondisko, a former director, is principal owner, 250,000 250,000
payable 9/1/98 with interest at prime plus 1% interest.
Unrelated Parties
Note receivable from an individual, payable upon
demand with 8.75% interest. 12,000 12,000
Note receivable from HemoCleanse Inc, payable without
interest on demand. 75,000 -
------------- -----------
720,900 407,900
Less current notes receivable 122,000 312,000
------------- -----------
Noncurrent $598,900 $95,900
============= ===========
Accrued interest receivable on the related party notes as of December 31,
1997 and 1996 was $77,477 and $53,958, respectively.
NOTE D - INVENTORY
Inventories consisted of the following as of:
Dec. 31, 1997 Dec. 31, 1996
------------- -------------
Raw materials $4,380,254 $3,928,565
Work-in-process 47,976 191,220
Finished goods 1,005,788 728,204
------------- -------------
5,434,018 4,847,989
Less valuation allowance (3,600,000) (1,507,869)
------------- -------------
$1,834,018 $3,340,120
============= =============
The inventory valuation allowance was increased to $3,600,000 in 1997
based upon management's estimation of market value for materials for
products for which market has not yet been established. There was no
change in the allowance during 1996.
NOTE E - ACCRUED LIABILITIES
Accrued liabilities consisted of the following as of:
Dec. 31, 1997 Dec. 31, 1996
------------- -------------
Current
Accrued payroll taxes $ 13,606 $ 18,537
Accrued vacation 87,652 68,344
Other accrued liabilities 113,861 61,422
------------- -------------
$215,119 $148,303
============= =============
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, 1997 Dec. 31, 1996 Dec. 31, 1995
------------- ------------- -------------
Sales
Implantable Devices $ 880,919 $ 508,561 $ 168,461
Petrol Rem 138,362 47,625 215,211
Barnacle Ban 136,624 41,406 77,585
------------- ------------- -------------
1,155,905 597,592 461,257
CGS
Implantable Devices 445,843 288,537 91,859
Petrol Rem 88,178 16,092 53,813
Barnacle Ban 107,310 20,785 52,870
------------- ------------- -------------
641,331 325,414 198,542
------------- ------------- -------------
Gross Profit $514,574 $272,178 $262,715
============= ============= =============
NOTE G - LONG TERM DEBT
Long term debt consisted of the following as of:
Dec. 31, Dec. 31,
1997 1996
----------- -----------
Note Payable to a bank in monthly payments of
$999 including interest at a rate of 7.35%.
Collateralized by cash on deposit. $13,007 $ 23,584
Note Payable in monthly payments of $495 including
interest at a rate of 8.48%. Collateralized by equipment. - 15,095
Cancelled and reissued as a Capital Lease in 1997.
Note Payable in monthly payments of $374 including
interest at a rate of 18.00%. Collateralized by equipment. 5,452 7,810
Note Payable in monthly payments of $851 including
interest at a rate of 10.11%. Collateralized by equipment. - 9,675
Note Payable to a bank in monthly payments of $433 including
interest at a rate of 8.75%. Collateralized by equipment. 9,112 13,311
------------- -------------
27,571 69,475
Current portion of long-term debt 18,765 30,478
------------- -------------
Long-term debt $ 8,806 $ 38,997
============= =============
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 1997, 1996 and 1995. Future minimum lease payments as
of December 31, 1997 are $105,720 for 1998 and 1999 and $61,670 for 2000
on which date the rental payments shall be renegotiated.
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 $295,809, $239,096 and $216,143 in the years ended
December 31, 1997, 1996 and 1995, respectively.
Capital Leases
During 1997, 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, 1997 Dec. 31, 1996
------------- -------------
Building $ 1,207,610 $ 1,205,760
Construction in Progress 1,465,152 1,240,320
Land 246,250 246,250
Equipment 243,271 166,026
------------- -------------
Sub Total 3,162,283 2,858,356
Less: Accumulated Depreciation 165,951 46,278
------------- -------------
Total Property under Cap. Leases $ 2,996,332 $ 2,812,078
============= =============
Minimum future lease payments to related and unrelated parties are
as follows:
Related Unrelated
Parties Parties Total
------------- ------------- -------------
1998 $ 105,720 $ 635,536 $ 741,256
1999 105,720 466,938 572,658
2000 61,670 394,872 456,542
2001 0 393,617 393,617
2002 0 362,958 362,958
Thereafter 0 3,142,160 3,142,160
------------- ------------- ------------
Future minimum lease payments $ 273,110 $5,396,081 $5,669,191
============= ============= ============
NOTE I - SUBORDINATED CONVERTIBLE DEBENTURE
During 1997 and 1996 the Company issued subordinated convertible 4% debentures
totaling $20,230,000 and $6,600,000, respectively, with a one year mandatory
maturity. At December 31, 1997 and 1996, the subordinated convertible
debentures totaled $3,301,280 and $4,600,000 respectively.
NOTE J - STOCKHOLDERS' EQUITY
Preferred Stock
The Board of Directors of the Company may issue preferred stock in series which
would have rights as determined by the Board.
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.
During 1997, 22,000 shares of the Series B convertible preferred stock were sold
and converted.
Common Stock Warrants
During 1997, warrants ranging from $.22 to $1.25 per share to purchase 2,594,000
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 5,346,662 shares of common stock were exercisable at December 31,
1997. The per share exercise prices of these warrants are as follows:
Shares Exercise Price
------------- ------------
10,000 $.22
1,226,700 $.25
180,000 $.33
50,000 $.38
1,482 $.45
350,000 $.50
2,334,000 $1.00
200,000 $1.25
994,480 $1.48 - $4.03
-------------
Total 5,346,662
=============
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:
Fiscal Warrants Warrants Expire During Fiscal Year
Year Granted Granted 1998 1999 2000 2001 2002
- -------------- ---------- --------- --------- --------- --------- ---------
1990 506,700 506,700 - - -
1991 1,251,482 900,000 351,482 - -
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
1997 2,594,000 - 200,000 1,400,000 994,000
------------ ----------- ----------- ----------- ----------- ---------
5,346,662 1,675,180 681,482 46,000 1,950,000 994,000
============ =========== =========== =========== =========== =========
The following is a summary of warrant transactions during 1997:
Outstanding beginning of period: 2,905,462
Granted during the twelve month period: 2,594,000
Cancelled during the twelve month period: -0-
Exercised during the twelve month period: (152,800)
-------------
Outstanding, and eligible for exercise: 5,346,662
=============
Common Stock Reserve
At December 31, 1997 the Company has reserved unissued common stock
as follows:
Warrants 5,346,662
Convertible debentures 23,874,729
-------------
Total 29,221,391
=============
Warrant Extensions
During 1997, the Company extended the exercise date of warrants to purchase
177,800 shares of common stock to certain officers and consultants. The
warrant shares were originally granted at exercise prices ranging from $.25 to
$3.50, and were extended at the original grant price. No expense was charged
to operations since the market price was less than the original warrant price.
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.
NOTE J - STOCKHOLDERS' EQUITY - Continued
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, 1997, warrants to purchase 7,476,513 shares of Diasense common
stock were exercisable. The per share exercise price for 4,055,000 shares is
$.50, for 2,286,763 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, 1997 to 39.2%.
Diasense Warrant Extensions
During 1997, Diasense extended the exercise date of warrants to purchase
2,236,550 shares of common stock to certain officers, directors, employees and
consultants. The warrant shares were originally granted at an exercise price
of $1.00, and extended at the same price. Diasense recorded a $4,046,875
expense for the difference between the assumed value on the date
the warrants were extended and the warrants' exercise prices.
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 difference between the assumed 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 assumed values on the
date the warrants were extended and the warrants' exercise prices.
Petrol Rem Common Stock
At December 31, 1997 warrants to purchase 3,920,000 shares of Petrol Rem
common stock were exercisable at the exercise price of $.10. The warrants
expire at various dates through 2002. To the extent that if all the warrants
were exercised, the Company's proportionate ownership would be diluted from
67% at December 31, 1997 to 53.3%.
IDT Common Stock
At December 31, 1997 warrants to purchase 3,875,000 shares of IDT common stock
were exercisable. The per share exercise price for 3,780,000 shares is $.10
and for 75,000 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, 1997 to 71.6%.
NOTE K - INCOME TAXES
As of December 31, 1997, the company and its subsidiaries, except Diasense
and Petrol Rem, have available approximately $63,260,000 of net operating loss
carryforwards for federal income tax purposes. These carryforwards are
available, subject to limitations, to offset futue taxable income, and expire
in tax years 1998 through 2012. The Company also has research and
development credit carryforwards available to offset federal income taxes of
approximately $580,000 subject to limitations, expiring in tax years 2005
through 2012.
As of September 30, 1997, the end of its fiscal year, Diasense had
available approximately $21,500,000 of net operating loss carryforwards for
federal income tax purposes. These carryforwards, which expire during the
years 2005 through 2012, 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, 1997, Petrol Rem had available approximately
$8,700,000 of net operating loss carryforwards for federal income tax
purposes. These carryforwards, which expire during the years 2008 through
2012, 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 expense are recognized in different
periods for financial and income tax reporting purposes. In the years ended
December 31, 1996 and 1995, a warrant exercise adjustment of $211,520 and
$1,267,640, respectively, was reported for tax purposes. The fair market value
of warrant extensions have been recorded and expensed for financial statement
purposes in the years ended December 31, 1996 and 1995 in the amounts of
$604,342 and $7,228,220, respectively.
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.
The following is a summary of the composition of the Company's
deferred tax asset (all long-term) and associated valuation allowance at
December 31, 1997, December 31, 1996 and December 31, 1995:
Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1995
------------- ------------- -------------
Net Operating Loss $ 21,508,400 $ 15,330,642 $ 10,959,420
Warrant Expense 2,741,397 2,741,397 2,529,877
Tax Credit Carryforward 580,000 520,000 400,000
------------ ------------- -------------
24,829,797 18,592,039 13,899,297
Valuation Allowance (24,829,797) (18,592,039) (13,899,297)
------------ ------------- -------------
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, 1997 $ (6,237,758) $ 6,237,758 $ 0
Year-ended December 31, 1996 $ (4,702,742 $ 4,702,742 $ 0
Year-ended December 31, 1995 $ (6,977,857 $ 6,977,857 $ 0
From March 20, 1972 (inception)
through December 31, 1997 $ (24,829,797) $ 24,829,797 $ 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 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 discussed 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.
NOTE L - RELATED PARTY TRANSACTIONS - Continued
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.
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.
Amounts due from Officers
At December 31, 1997 and 1996, Mr. Cooper owed the Company $8,500
related to a 12 percent simple interest demand loan. At December 31,
1997 and 1996, Mr. Cooper owed the Company $82,400, related to 10 percent
simple interest demand loans. At December 31, 1997, Mr. Cooper owed
the Company in aggregate notes of $158,000, related to 8.25 percent
simple interest demand loans The accrued interest owed by Mr. Cooper
on all demand notes at December 31, 1997 and 1996 was $66,121 and
$50,070, respectively.
At December 31, 1997 and 1996, the Company had a demand loan of $5,000
with 10 percent simple interest with Glenn Keeling, a Director. At
December 31, 1997 and 1996 the Company had a demand loan of $50,000 with
8.25 percent interest with Mr. Keeling. At December 31, 1997, 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, 1997 and 1996 was $7,664 and $2,804, respectively.
At December 31, 1997, the Company had a demand loan of $50,000 with
8.25 percent simple interest with TJ Feola, a Director. The accrued
interest owed by Mr. Feola on the demand note at December 31, 1997 was
$1,254 .
At December 31, 1997, the Company had a note receivable of $35,000 with
8.25 percent simple interest with Dave Purdy, Fred Cooper, TJ Feola and
Glenn Keeling, all Directors who are jointly liable. As of December
31, 1997, there was no accrued interest owed.
At December 31, 1997 and 1996, 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, 1997 and 1996 there was no
accrued interest owed.
NOTE L - RELATED PARTY TRANSACTIONS - Continued
Advances to Officers
During the periods 1997 and 1996, the Company and its subsidiaries made
advances to Mr. Cooper. At December 31, 1997 and 1996, these advances
accumulated to $26,150 and $32,535, respectively.
Employment Contracts
The Company's employment contracts with four officers and two employees
commenced November 1, 1994 and end October 31, 1999. These employment
contracts set forth annual basic salaries aggregating $1,500,000 in
1997 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
Several class action lawsuits have been filed against the company and
its subsidiary Diasense as well as certain of their directors, all of
which have been consolidated into a single action. The suit alleges
various violations of federal securities laws on behalf of a class of
plaintiffs who purchased common stock of the Company between April 25,
1995 and February 26, 1996, at which time the value of the Company's
stock dropped as a result of an unfavorable recommendation of a
Panel Review convened by the United States Food and Drug Administration
with respect to a certain medical device owned by Diasense and
manufactured by the Company. To date, a complaint has been filed in the
action, to which the defendants have filed a Motion to Dismiss. The
Company has engaged in voluntary mediation in order to explore
whether settlement is an option. As a result of the mediation, the
plaintiffs agreed to a "standstill" period, which has now expired;
however, no further activity has been conducted by the plaintiffs to
move the case forward. Management believes that no federal securities
violation has occurred, and they intend to strongly defend the action.
At this time it is not possible to predict the outcome of the litigation
or to estimate the potential damages arising from the claims, since the
number of class members, and the volume and pricing of shares traded, are
unknown.
Pennsylvania Securities Commission
The Pennsylvania Securities Commission is conducting a private
investigation of the Company and its subsidiary, Diasense, Inc. in
connection with the sale of securities. The Companies have cooperated
with and provided information to the Pennsylvania Securities Commission
in connection with the private investigation. As the Commission's
investigation is not yet complete, there can be no estimate or
evaluation of the likelihood of an unfavorable outcome in this matter or
the range of possible loss, if any.
NOTE M - COMMITMENTS AND CONTINGENCIES - Continued
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 minimum royalty payments of $120,000 per year for each year
starting in 1994 through 2001.
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, 1997.
NOTE O - SUBSEQUENT EVENTS
Special Meeting
On February 2, 1998 BICO's shareholders approved an increase in the
special shareholders meeting convened for that purpose.
Debentures
Debentures Subsequent to December 31, 1997, and through March 25, 1998.
the Company issued additional 4% subordinated convertible debentures
totaling $4,595,000 with a one year mandatory maturity and converted
$4,271,280 of subordinate debentures into common stock.
Common Stock
Subsequent to December 31, 1997 and through March 25, 1998, the Company
issued additional 4% subordinate convertible debentures totaling
$5,020,000 with a one year mandatory maturity and converted $4,271,280
of subordinate debentures into common stock.
The Company's common stock is currently traded on the NASDAQ Small-Cap
Market. Revised requirements for this market include a minimum trading
price of $1.00 which will limit the Company's option to continue to trade
on NASDAQ.
Related Party Transactions
Subsequent to December 31, 1997, the company issued Mr. Cooper
demand notes in the amount of $275,000 with 8.25 percent simple
interest.
Subsequent to December 31, 1997, the company issued Mr. Keeling a
demand note in the amount of $190,000 with 8.25 percent simple interest.
Subsequent to December 31, 1997, the company issued Mr. Feola a demand
note in the amount of $185,000 with 8.25 percent simple interest.
Stock Purchase Agreement
Effective March 4, 1998, pursuant to a Stock Purchase Agreement dated
February 20, 1998, the Company acquired 58.4% of International Chemical
Technologies, Inc. (ICTI) a development stage corporation. ICTI commenced
operations in May 1997 and plans to engage in the business of
manufacturing and marketing, and licensing rights with respect to certain
corrosion/wear-resistant metal alloy coating compositions. The unaudited
financial statements of ICTI as of December 31, 1997 present accumulated
losses of $680,335, a working capital defeciency of $457,164, and a net
defeciency in assets of $678,335.
Consideration for the purchase of the 58.4% interest in ICTI included a
cash payment of $1,030,000; a promissory note for $3,350,000 at 8%;
2,000,000 shares of Biocontrol common stock (fair market value of
$250,000); a warrant to purchase 1,000,000 shares of Biocontrol stock for
$2 per share anytime through March 4, 2003; and the guarantee by
Biocontrol of a promissory note for $1,300,000 payable by ICTI to the
seller.
The Biocontrol promissory note for $3,350,000 is payable in monthly
installments as follows; (i) on the first day of each calendar month from
April 1, 1998 through and including September 1, 1998 a principal payment
of $150,000 per month plus accrued interest (ii) on October 1, 1998, a
principal payment of $1,100,000 plus accrued interest (iii) on the first
day of each calendar month from November 1, 1998 through and including
November 1, 1999 a principal payment of $100,000 per month plus accrued
interest and (iv) on December 1, 1999 a final payment equal to the
remaining outstanding principal balance plus all accrued interest thereon.
The note is collateralized by the shares of ICTI purchased by Biocontrol.
The ICTI promissory note, guaranteed by Biocontrol, is for $1,300,000 at
an annual interest rate of 9.5% and is payable in monthly principal
amounts of $36,111 plus interest. This note is collateralized by all
tangible and intangible assets of ICTI.
In addition, Biocontrol has agree to make nonscheduled capital
contributions totaling $3,000,000 to ICTI on or before September 4, 1998.
[ARTICLE] 5
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] DEC-31-1997
[PERIOD-END] DEC-31-1997
[CASH] 2,759,067
[SECURITIES] 0
[RECEIVABLES] 1,215,706
[ALLOWANCES] (14,931)
[INVENTORY] 1,834,018
[CURRENT-ASSETS] 5,298,560
[PP&E] 10,208,609
[DEPRECIATION] (3,516,667)
[TOTAL-ASSETS] 12,981,300
[CURRENT-LIABILITIES] 4,410,478
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 13,858,398
[OTHER-SE] (9,394,322)
[TOTAL-LIABILITY-AND-EQUITY] 12,981,300
[SALES] 1,155,907
[TOTAL-REVENUES] 1,426,134
[CGS] 641,311
[TOTAL-COSTS] 641,311
[OTHER-EXPENSES] 27,035,423
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 315,624
[INCOME-PRETAX] 0
[INCOME-TAX] 0
[INCOME-CONTINUING] 0
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (24,154,324)
[EPS-PRIMARY] (.34)
[EPS-DILUTED] (.34)