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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 12/31/98 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 25, 1999:
Common Stock, $.10 par value --$ 20,960,000
As of December 31, 1998, 420,773,568 shares of common stock,
par value $.10 per share, were outstanding.
As of December 31, 1998, 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 currently located at Kolter Drive, 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
Diasensor.com, Inc., its 52% owed subsidiary. Where
applicable, BICO and Diasensor.com 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"), and bioremediation
products. Due to economic and other factors, including the
loss of orders, the Company has discontinued its functional
electrical stimulator and Barnacle Ban projects (See
"Management's Discussion and Analysis"). 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.
Description of Business
Development of the Noninvasive Glucose Sensor
BICO and Diasensor.com have completed the development of the
first commercial Noninvasive Glucose Sensor, which is 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 milligrams per
deciliter (mg/dl) to 500 mg/dl range in the ingrared region
of the electromagnetic spectrum. The method was studied as
early as 1986 and 1987 by BICO and is consultants at
Battelle Memorial Institute in Columbus, Ohio, using
laboratory instruments. These 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 Diasensor.com from BICO pursuant to a purchase
agreement (See, "Intercompany Agreements"). Other patent
applications were filed by BICO, which contained new claims,
extending to new discoveries made during the development of
the Sensor. As of March 1999, a total of seven U.S. patents
assigned to Diasensor.com have been granted, with additional
U.S. and foreign 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 Diasensor.com (See, "Intercompany Agreements").
BICO's research team advanced its technology base through
the development of several research prototypes, which were
tested in human clinical trials. In a trial conducted by
BICO on 110 human subjects in March 1992, spectral, blood
and chemical data was recorded for analysis in order to
develop calibration data for the Sensor. A second trial on
40 human subjects in July 1992 indicated that the device did
not have a satisfactory signal-to-noise ratio to allow for
the calculation of algorithms of sufficient accuracy to be
acceptable for patient use. Signal-to-noise ratio is
determined by the relationship of the signal (the glucose
level) and the noise (random interferences). Other trials
were conducted at several testing sites under the guidance
of the sites' Institutional Review Board using prototypes,
which addressed the signal -to-noise problem. These
prototypes were designed and constructed to simulate
production models.
On January 6, 1994, BICO submitted its initial 501(k)
Notification to the Food and Drug Administration (the "FDA")
for approval to market the production model, the
Diasensorr1000. The submission was based on data obtained
from the advanced research prototypes, since management
believed that the production model would be identical to the
advanced prototypes. 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 of a production model prior to marketing the
Diasensor 1000. BICO and Diasensor.com 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.
The Diasensor 1000 uses internal algorithms to calculate a
glucose measurement.
The Diasensor 1000 is the first home-use noninvasive blood
glucose monitor for use by patients with diabetes mellitus.
Unlike currently marketed invasive home-use devices, the
Diasensor 1000 does not require that patients prick their
fingers to obtain a sample of blood to test their blood
glucose. A patient only needs to place his or her arm on
the Diasensor 1000 and press a button to perform a blood
glucose test. The Diasensor is currently approved for sale
in the 15-country European Union, and plans are currently
being formulated for the next submission to the FDA to seek
approval to market the device in the U.S. (See, "Current
Status of the Noninvasive Glucose Sensor").
Current Status of the Noninvasive Glucose Sensor
Due to continued delays in the FDA approval process, which
are summarized below, and while continuing to work with the
FDA and conduct its mandated testing, the Companies turned
their focus to other markets for the Diasensor 1000 besides
the U.S. BICO, as design authority and manufacturer of the
Diasensor 1000, applied for 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 certification formalizing
the ISO 9001 certification was received by BICO in January
1998. At the same time, BICO also received certification to
EN46001, a standard specifically for medical products. The
certifications were received after an extensive audit by TUV
Rheinland, a company authorized to conduct "conformity
assessments" of an entity's quality system. In early 1998,
BICO submitted its technical file on the Diasensor 1000 to
TUV Rheinland to satisfy requirements of the European
Medical Device Directive. In addition, it submitted its
device to a TUV testing center in Connecticut for device
electrical safety testing. In March 1998 BICO received
approval to apply a CE mark to the device. 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 has permitted the Companies to begin selling the
Diasensor in Europe.
In order to facilitate sales in Europe, the Companies have
contracted with EuroSurgical Ltd., a distributor of medical
products in the United Kingdom. During 1998 BICO educated
the marketing and technical staffs of EuroSurgical in the
use and repair of the Diasensor 1000. Devices have now been
placed with patients in Portugal, Spain, Germany, South
Africa and England. Because of the lengthy calibration
procedures, and the Companies' agreement with the
distributor to invoice after successful calibration was
completed, minimal sales were recorded for 1998.
With regard to marketing the device within the United
States, the Companies are continuing to work with the FDA to
obtain approval. Upon advice from the FDA, the Companies
are planning to submit, under the FDA's new modular review,
a Premarket Approval Application ("PMA"). In addition, the
Companies plan to submit an Investigational Device Exemption
("IDE") to conduct human clinical trials at three clinical
centers to obtain additional data.
FDA approval is necessary to market the Diasensor 1000 in
the United States. In addition to the Diasensor 1000, the
Companies are conducting further developments which will
allow future models of the device to be smaller, less
costly, with reduced calibration and evaluation periods.
The Companies cannot speculate as to when such developments
will be completed. Any future models of the Diasensor may
be subject to the same regulatory testing and approval
processes as have been required for the Diasensor 1000, both
in the United States and abroad.
The Diasensor 1000 is intended to promote greater compliance
for self-monitoring blood glucose ("SMBG") for those
patients concerned with the pain and discomfort of frequent
finger prick procedures by allowing patients to perform a
majority of their daily SMBG with a noninvasive device. The
use of the Diasensor 1000 in a defined target population is
intended to assist the physician responsible for the
patient's diabetes care in making appropriate treatment
adjustments. Such adjustments may include changes to the
patient's daily insulin dose, caloric intake, and exercise
regimen. Averages of daily blood glucose test results from
the Diasensor 1000 obtained at clinically relevant times of
the day (e.g. fasting, pre-meal, post-meal, and bedtime)
over at least two to four weeks are to be used by physicians
together with other test results (including invasive home-
use meters, laboratory test such as HbA1c and fructosamine)
changes in weight, patient-reported acute complications
(such as hypoglycemia or ketonuria) and changes in
lifestyle, to make appropriate treatment decisions.
Because of the current need for 60-day calibration, after
which there is a 30-day evaluation period, and the inability
of the Diasensor 1000 to completely replace a patient's
invasive meter at this point, the market will be limited by
the number of patients who opt to use the device. 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 1998 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 are in poor glycemic control, who are currently under a
physicians care, and who do not perform SMBG because of the
pain and discomfort of fingersticks 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, PRPr, 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 PRPr comes in
contact with the petroleum substances, the contaminants are
bound to the PRPr, 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.
PRPr is now being manufactured and marketed for use in water
and on solid surfaces in the form of Petrol Rem's OIL BUSTER
r 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 PRPr 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 PRPr. 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 PRPr in quantities of 2,500 pounds per day, and
Petrol Rem has built an adequate inventory.
Petrol Rem has also completed development of a new spray
applicator for its PRPr product. The new applicator is a
lightweight, 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 PRPr, Petrol Rem has also developed other
products. In order to address water pollution issues at
marinas, Petrol Rem has introduced BIO-SOKr, which is PRPr
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-SOKr, 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-SOKr helps to
keep waters clear. In addition, BIO-SOKr 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.
BIO-SOKr 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 BUSTERr, which is a
mixture of PRPr and an absorbent material. OIL BUSTERr is
used to clean up and remediate oil spills on hard surfaces.
Petrol Rem's BIO-BOOMr product is used in water clean-up
projects. The product is a 3" x 10' fabric tube which is
filled with PRPr, and is used to both contain and biodegrade
contaminants in water. BIO-BOOMr 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 PRPr 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 PRPr 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 PRPr will be a viable
product in the bioremediation marketplace.
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
$9,963,700 on this project through December 31, 1998.
Whole-Body Extracorporeal Hyperthermia
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, an unaffiliated company located in
Lafayette, Indiana, are currently engaged in a project
which involves the experimental use of a delivery system,
the ThermoChem SystemT, 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 SystemT, which incorporates this technology, is
designed for use in the hyperthermia procedure. The
ThermoChem SystemT 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 SystemT increase the safety of the
procedure. The ThermoChem SystemT 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
SystemT 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 SystemT 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 SystemT. In
November 1996, the Companies submitted an IDE application to
the FDA for a study utilizing the ThermoChem SystemT 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 SystemT 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 SystemT 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-HTT, a component of the ThermoChem SystemT,
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
SystemT 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 Wake Forest School
of Medicine has approved a protocol concept to conduct a
pilot study investigating the safety of the ThermoChem-HTT
for intraperitoneal hyperthermic chemotherapy (IPHC) in the
treatment of advanced gastrointestinal and ovarian cancers.
The technique of IPHC has been done at Wake Forest School of
Medicine since 1992 utilizing a non-standardized perfusion
setup. The ThermoChem-HTT can possibly make the technique
more efficient with better temperature monitoring and
control. An IDE has been approved by 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 $9,789,000 on this
project through December 31, 1998, 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.
Other Projects
Implantable Technology
In April 1996, BICO was granted FDA approval to market its
theraPORTr 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 theraPORTr 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 Coraflexr 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
Coraflexr 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.
Functional Electrical Stimulator Project. The Company has
discontinued its functional electrical stimulator project
due to a loss of orders from NeuroControl, its sole
purchaser. Because these products accounted for the
majority of the Company's sales revenues, this loss is
significant and will have a corresponding negative impact
upon the Company's cash flows, liquidity and revenue
Metal-Plating Technology
During 1998, the Company acquired a majority interest in
International Chemical Technologies, Inc. ("ICTI") from its
existing majority shareholders, none of whom had any prior
affiliation with the Company. In connection with such
purchase, the Company paid consideration consisting of cash,
common stock, and the undertaking to make certain additional
payments (See, "Management's Discussion and Analysis").
ICTI developed a metal-coating or plating process known as
cemkoter, a hard, wear-resistant coating engineered to be
environmentally safe and cost effective. ICTI obtained a
patent on the product. Cemkoter began as an answer to the
search for an environmentally friendly replacement for
chrome, and testing revealed additional attractive features.
During 1998, ICTI focused on the research and development,
testing and application of cemkoter on a number of parts and
products for various companies. For example, research and
testing was conducted to determine whether cemkoter could be
produced to meet military and commercial aircraft
specifications.
When the Company acquired its interest in ICTI, the Company
made disclosures in its Form 8-K, which contained estimates
of the potential revenues of both the metal-finishing
industry and the potential revenue of ICTI. The Company
also disclosed, based on estimates as of the date of the
acquisition, that it expected cemkoter to "generate
immediate revenue and be a major profit center" for the
Company. The results have differed materially from the
Company's initial estimates. ICTI did not achieve any
significant revenue during 1998. The Company's early
estimates were based upon its assessment not only of the
marketability of the product, but on the Company's ability
to penetrate the metal finishing market using the features
of the product. The Company's actual experience has
indicated that it is much more difficult to exploit the
existing market, regardless of whether the Company's product
has superior features. As a result, the Company has been
compelled to adjust its marketing strategy. Accordingly,
the Company can no longer estimate the amounts or timing of
any revenue or profit which may be generated by cemkoter.
A new Chief Executive Officer for ICTI has been hired and
assumed his position effective January 1, 1999. Among other
duties, the new CEO, who has more than 37 years' experience
in the metal finishing industry, will thoroughly evaluate
the Company's current cemkoter product as well as other
metal coatings for use at ICTI.
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 Diasensor.com 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,
PRPr, 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. 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,
Diasensor.com 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
Diasensor.com 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 Diasensor.com 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. Diasensor.com's Patent relates
only to noninvasive sensing of glucose but not to other
blood constituents. Diasensor.com 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 Diasensor.com. 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, 1999, a total of seven U.S., including two
design patents, have been issued, all of which have been
assigned to Diasensor.com, and additional patents are
pending. Corresponding patent applications have been
filed in foreign countries where the Company anticipates
marketing the Noninvasive Glucose Sensor.
Diasensor.com 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 Diasensor.com 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 was granted trademark protection for the term
"Diasensorr 1000", which is intended for use in connection
with the Diasensorr models. 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 SystemT 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 SystemT, 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 Coraflexr, which was originally
granted in 1988. The Company has also obtained trademark
registration for the name theraPORTr (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 PRPr, BIO-
SOKr, BIO-BOOMr, and Oil Busterr (See, "BUSINESS -
Bioremediation").
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 of certain products, including its
former pacemaker line and its functional electrical
stimulators, 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 Diasensor.com, and may have other competitive
advantages over Diasensor.com (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 Diasensor.com 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
Diasensor.com'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 Diasensor.com 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: CME Telemetrix, Inc. ("CME"), Cygnus, Inc.
("Cygnus"), Technical Chemicals and Products, Inc. ("TCPI").
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.
CME has developed a product called GlucoNIRr. In February
1999, they announced an FDA meeting concerning the
development and initial testing of their device for use in
institutional settings such as nursing homes. CME is a
Canadian company, and have received approval to sell their
device in Canada.
Cygnus of Redwood City, California has developed a device
which, when fastened to the wrist, extracts interstitial
fluid by means of an electrical voltage applied between the
wrist and the device. Cygnus has submitted the first part
of a Premarket Approval Application for the device, called
the Gluco Watchr AutomaticGlucose Biographer. Cygnus plans
to submit the remainder of their submission by June 1999.
TCPI of Pompano Beach, Florida, is developing the use of a
disposable patch which is a dermal transport system for the
transport of interstitial fluid. The patch is applied to
the forearm and read with a portable reflective meter. TCPI
estimates that the company is approximately 30% of the way
toward the completion of its FDA application.
Although not noninvasive like the Diasensor 1000r, devices
which claim to be less invasive than standard fingerpricks
are being introduced. One device, made by Chronimed in
Minneapolis, uses a laser rather than a sylett to draw blood
from the finger. Another company, Amira Medical, uses a
small needle in conjunction with a meter, which draws blood
from the forearm, upper arm or thigh. The FDA has approved
these devices. These devices are purported by their makers
to be improvements on the fingerprick glucose sensors, which
use stylets to draw blood.
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. Diasensor.com 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 hyperthermia 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.
In 1997, Congress enacted legislation directed toward
regulation of pharmaceutical and medical devices. The
impact of the FDA Administration Modernization Act of 1997
("FDAMA") is expected to reduce the quantity of information
a company must submit for approval of devices and allows
product and establishment licenses to be combined. In
certain sections of the FDAMA concerned with Risk-Based
Regualtion of Medical Devices, the agency promulgated
guidance for industry on the use of national and
international consensus standards. The FDA anticipates that
the use of consensus standards will accelerate premarket
notification clearance. The impact of the FDAMA on the
approval process for obtaining marketing approval for the
Diasensor 1000r has yet to be established.
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"). In January 1994 the Company
submitted a 510(k) Notification to the FDA for approval to
market the Diasensor 1000r. The 510(k) Notification
indicated that the device is "substantially equivalent" a
similar existing device based on 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. The Company formally
withdrew its 510(k) Notification after an FDA panel review,
in which the majority of the reviewers were not satisfied
that the Company had produced sufficient evidence to prove
equivalence to an existing device. In further discussions
with the FDA, it was recommended that the Company filed a
PMA and conduct an additional clinical study under an IDE.
Biocontrol will submit a modular PMA, which allows the
various aspects of the submission to be made in modules over
a period of time. The Modular PMA is a new method of
submitting information to the FDA, and resulted from the
passage of the FDAMA in 1997. The Company recently
submitted a PMA Shell, which outlines plans for the Modular
PMA submission.
The submission of a PMA will require that the Company
conduct additional testing, and may result in significant
delays and increased expenses. The FDA's PMA process is
more expensive and time consuming than a 510(k)
Notification, and may also result in additional delays in
the time period in which the Companies could begin
manufacturing and marketing the device for sale in the
United States. 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 device in the U.S. will ultimately be
obtained.
In June of 1998, the FDA instituted new Quality System
Regulations ("QSR"s) which took the place of Good
Manufacturing Practices. These regulations align closely
with those guidelines specified by the ISO which sets
quality requirements for products being shipped to the
European Union ("EU"). These regulations have added control
of the design process as well as the manufacturing process.
On January 14, 1998, the Company received certification to
ISO 9001, and on June 23, 1998, it received the CE mark.
The CE mark and the ISO certification is provided by the
regulatory bodies of the EU or private "notified bodies"
which are third-party companies certified by the EU as able
to also provide the certifications. The CE mark indicates
that the device adheres to quality systems guidelines of the
ISO and its European signatory, European Norm Standards for
Medical Devices ("EN"). Rigorous audits were conducted at
the Company to certify that the Company's development and
manufacturing procedures, as well as the Diasensor 1000r
itself met the international standards laid down by the
Medical Device Directive. In order to maintain its approval
to ship the device into the EU, the Company must be vigilant
in its adherence to its quality system, and audits will be
conducted on an annual basis by its third-party notified
body to verify that the Company continues to meet the
standards.
The Company may also be required to comply with the same
regulatory requirements prior to introducing the Diasensorr
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 SystemT 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 SystemT
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, 1998, the Company had 76 full-time
employees who were located primarily in either the Indiana
or Pittsburgh locations. Due to its cash flow problems
during 1998, the Company was compelled to lay off certain
employees; other employees
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.
Item 2. Properties
During 1998, 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.
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"). The Company has vacated this
building and the partnership has listed it for sale. The
operations and activities formerly located on Indian Springs
Road have been moved to the manufacturing space discussed
below.
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. BICO
recently moved the balance of its Indiana, Pennsylvania
operations to this space. This facility contains
sufficient additional space to accommodate the Company's
projected operations through 1999.
Item 3. Legal Proceedings
During April 1998, the Company and its affiliates were
served with subpoenas by the U.S. Attorneys' office for the
U.S. District Court for the Western District of
Pennsylvania. The subpoenas requested certain corporate,
financial and scientific documents and the Company continues
to provide documents in response to such requests.
On April 30,1996, a class action lawsuit was filed against
the Company, Diasensor.com and individual officers and
directors. The suit, captioned Walsingham v. Biocontrol
Technology, et al., has been certified as a class action,
and is pending in the U.S. District Court for the Western
District of Pennsylvania. The suit alleges misleading
disclosures in connection with the noninvasive glucose
sensor and other related activities. By mutual agreement of
the parties, the suit remains in the pre-trial pleading
stage, and the Company is unable to determine the outcome or
its impact upon the Company at this time.
The Company had leased space in two locations in Indiana
County for its manufacturing facilities. One space, which
has been upgraded with leasehold improvements, is still
being used by the Company. The other space, which had been
leased as expansion space, was the subject of a judgment
proceeding. The Company has given up possession of its
expansion space in Indiana County in response to the filing
of such judgment for nonpayment of lease fees. In return
for possession of the space, the leaseholder agreed not to
pursue any action on the judgment at this time.
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
MARKET PRICE FOR COMMON STOCK
The Company's common stock is traded on the Nasdaq
Electronic Bulletin Board under the symbol "BICO" and is
also reported under the symbol "BIOCNTRL TEC". On March 15,
1999, the closing price for the common stock of the Company
as reported by Nasdaq was $.06. 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, 1998 as reported by Nasdaq:
Calendar Year and Quarter High Low
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
1998 First Quarter .25 .0937
Second Quarter .1875 .0313
Third Quarter .359 .0313
Fourth Quarter .126 .049
As of December 31, 1998, the Company had approximately
40,000 holders, including those who hold in street name, for
its common stock and no holders of record for its preferred
stock.
Because Nasdaq revised its requirements for companies
listed on its Small-Cap market to include a minimum trading
price of $1.00, the Company's common stock was delisted from
the Small-Cap Market and is now listed on the Nasdaq
Electronic Bulletin Board. The risk exists that its trading
volume and price will decrease.
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
1998 1997 1996 1995 1994
Total Assets $9,835,569 $12,981,300 $14,543,991 $9,074,669 $6,375,778
Long-Term
Obligations $1,412,880 $ 2,697,099 $ 2,669,727 $ 175,330 $ 163,201
Working Capital($9,899,008)$ 888,082 $ 1,785,576 $3,188,246 $2,612,884
Preferred Stock $ 0 $ 0 $ 0 $ 37,900 $ 54,900
Net Sales $1,145,968 $ 1,155,907 $ 597,592 $ 461,257 $ 184,507
TOTAL $1,378,213 $ 1,426,134 $ 776,727 $ 755,991 $ 481,453
REVENUES
Warrant $ 0 $ 4,046,875 $ 9,175,375 $12,523,220 $ 0
Extensions
Benefit $ 0 $ 0 $ 0 $ 0 $ 0
(Provision)for
Income Taxes
Net Loss ($22,402,644)($30,433,177)($24,045,702)($29,420,345)($11,672,123)
Net Loss per ($ .08)($ .43)($ .57)($ .84)($ .43)
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. Except as noted otherwise, all
discussions reflect fully consolidated financial
information.
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 ($9,899,008) at December 31, 1998 as
compared to $888,082 at December 31, 1997, and $1,785,576
at December 31, 1996. Working Capital fluctuations are due
primarily to the varied capital-raising efforts of the
Company and its affiliate Diasensor.com, which aggregated
approximately $10,700,000 in 1998; $22,300,000 in 1997; and
$21,600,000 in 1996, as well as a decrease in net inventory
from $3,340,120 as of December 31, 1996 to $1,834,018 as of
December 31, 1997, and to $74,515 as of December 31, 1998.
Cash decreased from $3,802,874 at December 31, 1996 to
$2,759,067 at December 31, 1997 to $125,745 at December 31,
1998. These changes were attributable to the following
factors. The Company's sales of its securities raised funds
aggregating $10,700,000 during 1998; $22,600,000 during 1997
; and $21,600,000 during 1996. During those periods, the
Company's cash flows used by operating activities aggregated
$ 11,855,294; $19,121,752; and $19,972,000 respectively.
During 1998 and 1997, such activities included a $ .8 and
$2.1 million increase in inventory reserves, respectively.
The Company expended cash and other resources in connection
with its purchase of a majority interest in ICTI, which is
described below. 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. (See, Note J to
the Financial Statements). The Company's other assets
decreased from $669,243 at year-end 1997 to $200,000 at year-
end 1998 due to an allowance for related party receivables
in 1998.
In March 1998, the Company acquired a majority interest of
ICTI, a metal-plating company in Florida.. ICTI is a
development-stage company, which commenced operations in May
1997, but has incurred losses to date. The purchase
required the Company to make a cash payment of $1,030,000,
issue a $3,350,000 promissory note, 2 million shares of the
Company's common stock, and other consideration (See Note A
to the Financial Statements).
The Company's current liabilities increased by $5,915,293
from 1997 to 1998; such increase was primarily due to an
increased issuance of convertible debentures and cash flow
problems during 1998.
The Company continued to fund operations mostly from sales
of its securities. During 1998, the Company issued
$10,700,000 of its 4% Subordinated Convertible Debentures.
The debentures have one-year terms, minimum holding periods
prior to conversion and mandatory conversion provisions
During 1997, the Company sold 22,000 shares of its Series B
convertible preferred stock; and issued $20.2 million in
subordinated convertible debentures.
As of December 31, 1998 and 1997, the conversion price of
the debentures would have been approximately $.059 and $.146
per share, respectively, based upon a formula which applies
a discount to the average market price for the previous week
and determined by the length of the holding period. As of
December 31, 1998 and 1997, the number of shares issued upon
conversion of all outstanding debentures was approximately
60.1 million and 23.9 million shares, respectively, which
would have reflected discounts of approximately 23% and 18%,
respectively.
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 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, 1999, the Company estimates that its short-term
liquidity needs will be met from currently available funds.
The Company estimates that such funds will be sufficient to
complete the research and development stage of the
Noninvasive Glucose Sensor, to complete the FDA submission
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 1998, BICO
and its affiliate Diasensor.com have raised over
$110,000,000 in private and public offerings alone.
In prior years, the Company met 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 1996, 1997 and 1998, 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 $508,561, $880,919 and $1,028,484 in 1996, 1997 and
1998, respectively. During 1998, orders related to such
contracts were terminated by these other entities. As a
result, the Company has terminated FES project activities
for the present, and may not receive any additional revenue
on a going-forward basis. (See, "BUSINESS").
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, 1998 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. 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 PRPr bioremediation product, and other new
products. There can be no assurances that any such products
will be successfully marketed or commercially viable.
Results of Operations
The following seven paragraphs discuss the Results of
Operations of the entire Company based on its consolidated
financial statements. A discussion of the business segments
follows.
In 1998, the Company's net sales increased to $1,145,968
from $1,155,907 in 1997 and $597,592 in 1996. The increase
was due to an increase in all product sales, the vast
majority of which were from FES sales, which have been
discontinued. (See, Note F to the Financial Statements).
In 1998, 1997 and 1996, the Company received interest income
in the amount of $182,033; $165,977 and $176,478,
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 decreased to $50,212 in 1998 as compared to
$104,250 in 1997 from $2,657 in 1996. The fluctuation was
due primarily to payments made in connection with legal
actions.
In 1998, the Company's costs of products sold were $587,821
as compared to $641,331 in 1997 and $325,414 in 1996. The
increase is primarily due to the Company's corresponding
increases in product sales, and products produced pursuant
to FES and IRS Device contracts, which have been
discontinued.
The Company's research and development expenses were
$6,340,676 in 1998, a decrease from $6,977,590 in 1997 and
$8,742,922 in 1996. 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., and, in 1998, to a loss of
personnel due to cash flow problems.
In 1998, General and Administrative expenses were
$11,560,345 a decrease from $12,704,146 in 1997, and
compared to $8,963,693 in 1996. The decrease in 1998 from
1997 was due to a loss in personnel and reduction in related
expenses. The increase from 1996 to 1997 was due, in part,
to the allocation of funds to outside consultants and other
advisors to assist the Company in its efforts to obtain a CE
Mark.
During 1997, the Company extended 177,800 warrants
originally granted to certain officers, directors, employees
and consultants in 1992, as compared to similar extension of
351,482 warrants in 1996. No such extensions were made
during 1998. Because the exercise price of some such
warrants ($.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. 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 and $8,571,033 in
1996 was made by the Company's subsidiary, Diasensor.com
(See, "EXECUTIVE COMPENSATION" and Note J to the Financial
Statements).
Interest expense on the Company's outstanding indebtedness
was $481,025 in 1998 as compared to $315,624 in 1997 and
$133,460 in 1996. The increase was due to an increase in
capital leases and interest payment on the Company's
subordinated debentures.
Segment Discussion
For purposes of accounting disclosure, the Company provides
the following discussion regarding three business segments:
Biomedical devices, which includes the operations of
Biocontrol Technology, Inc. and Diasensor.com, Inc.;
Bioremediation, which includes the operations of Petrol Rem,
Inc.; and Marine Paint Products, including the operations of
Barnacle Ban Corporation, which have been discontinued.
More complete financial information on these segments is set
forth in Note F to the accompanying financial statements.
Biomedical Device Segment. During the year ended December
31, 1998, sales to external customers increased to
$1,028,484 from $880,919 in 1997 and $508,561. These
increases were primarily due to increased sales of the
functional electrical stimulators, which have been
discontinued. Corresponding increases in costs of products
goods sold occurred for the same reason, from $288,537 in
1996 to $445,843 in 1997, and $483,388 in 1998.
Bioremediation Segment. During the year ended December 31,
1998, sales to external customers decreased to $45,382 as
compared to $138,362 in 1997 and $47,625 in 1996. The
decrease from 1997 to 1998 was due to an inability to
effectively penetrate the market with products other than
the Bio-Sok. The increase from 1996 to 1997 was due to
increased sales of the Bio-Sok to boating suppliers and
users through trade shows and marketing exposure. Costs of
products sold fluctuated due to the same factors, from
$16,092 in 1996 to $88,178 in 1997 and $33,061 in 1998. The
relatively higher costs of products sold in 1997 were due to
the higher cost of producing the Bio-Sok as opposed to other
bioremediation products.
Marine Paint Products Segment. Sales to external customers
decreased to $40,835 in 1998 from $136,624 in 1997 and
$41,406 in 1996. This decrease was due primarily to the
Company's decision to discontinue this segment's operations.
Costs of products sold reflect the same impact, with $32,777
in 1998, $107,310 in 1997 and $20,785 in 1996.
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 1998. As of December 31, 1998, the Company and
its subsidiaries, except for Diasensor.com and Petrol Rem,
had available net operating loss carryforwards for federal
income tax purposes of approximately $83,220,000, which
expire during the years 1998 through 2019 (See, Note K to
the Financial Statements).
Year 2000 Issue
The Year 2000 Issue is the result of computer programs being
written using two digits (rather than four) to define the
applicable year. Programs which are susceptible to problems
after December 31, 1999 are those which would recognize the
year 2000 as "00", creating confusion with the year 1900,
which could result in miscalculations or system failures.
Based upon a review of its internal programs and software,
as well as a survey of its outside suppliers, landlords and
vendors, the Company currently believes that the Year 2000
will not pose significant operational or other problems
because such systems and third parties are either already
compliant or have undertaken to become compliant with minor
adjustments. It has not been necessary for the Company to
expend any material amounts in its effort to address the
Year 2000 issue. The Company has determined that minimal
contingency plans may be necessary to assure the avoidance
of interruptions, and are finalizing the preparation of
such plans on a departmental basis. However, the Company
can make no assurances regarding certain global system
operations, which are beyond the Company's control such as
utilities and banks. As a result, there can be no assurance
that Year 2000 issues will not adversely affect the
Company's systems or operations (See, Note P to the
Financial Statements).
Supplemental Financial Information
In January 1999, the Company's Form S-1 Registration
Statement was declared effective by the SEC. Approximately
$4.3 million has been raised pursuant to such registration
as of March 20, 1999.
Item 8. Financial Statements and Supplementary Data
The Company's financial statements appear on pages F-1
through F-25 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 Diasensor.com,
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, 1998 were as follows:
Director
Nominee Age Since Position
David L. Purdy 70 1972 President, Chairman 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
Stan Cottrell 55 1998 Director
Paul W. Stagg 51 1998 Director
_________________________________
DAVID L. PURDY, 70, 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 Diasensor.com. Mr. Purdy is
also an officer and director of Diasensor.com 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 Diasensor.com. 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. Mr. Cooper was
appointed Chief Executive Officer in January 1990. He is
also an officer and director of Diasensor.com 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
Diasensor.com'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
Diasensor.com, Coraflex, and Petrol Rem.
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.
STAN COTTRELL, 55, was appointed to the Board of Directors
in 1998. Mr. Cottrell is the Chairman and Founder of
Cottrell Associates International, Inc., which provides
international business development, brokerage, specialty
marketing and promotional services. He is a former director
of marketing for Inhalation Therapy Services and was
employed by Boehringer Ingelheim, Ltd. as a national product
manager. Mr. Cottrell is a world ultra-distance runner and
the author of several books.
PAUL W. STAGG, 51, was appointed to the Board of Directors
in 1998. Mr. Stagg is the marketing manager for the
Wholesale Division of First Financial Resources, Inc., where
he is responsible for marketing, underwriting, sorting and
coordination various types of financing for institutional
investors. Prior to his current position, he was District
Distributor of Marketing for Ginger Mae, a division of
United Companies of Baton Rouge, LA.
Pursuant to the disclosure requirements of Item 405 of
Regulation S-K regarding timely filings required by Section
16(a) of the Securities and Exchange Act, the Company
represents the following. Based solely on its review of
copies of forms received and written representations from
certain reporting persons, the Company believes that all of
its officers, directors and greater than ten percent
beneficial owners complied with applicable filing
requirements.
Item 11. Executive Compensation
The following table sets forth information concerning the
annual and long-term compensation for services in all
capacities to the Company for the fiscal years ended
December 31, 1998, 1997 and 1996, of those persons who were,
at December 31, 1998 (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 , 1998 $166,802 $0 $0 | 0 $0
President, 1997 $241,667 $0 $0 | 0 $0
Treasurer (4) 1996 $400,000 $0 $0 | 0 $0
- ------------------------------------------------------------------------------
Fred E. 1998 $556,173 $0 $0 | 0 $0
Cooper, 1997 $592,000 $0 $0 | 0 $0
CEO (5) 1996 $592,000 $0 $0 | 0 $0
- ------------------------------------------------------------------------------
Anthony J. 1998 $326,912 $0 $0 | 0 $0
Feola , Sr. 1997 $300,000 $0 $0 | 0 $0
Vice Pres.(6) 1996 $300,000 $0 $0 | 350,000 (3) $0
- ------------------------------------------------------------------------------
Glenn 1998 $180,003 $0 $0 | 0 $0
Keeling, VP 1997 $200,000 $0 $0 | 0 $0
(7) 1996 $200,000 $0 $0 | 100,000(8) $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 1998, 1997, or
1996. The Company did not award any restricted stock
to the Named Executives during any year, including the
years 1998, 1997 or 1996. The Company did not award
any warrants, options or Stock Appreciation Rights
("SARs") to the Named Executives during the years ended
December 31, 1998, 1997 or 1996; however, the Company
did extend warrants owned by the Named Executives,
which would have expired during 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.
(2) During the year ended December 31, 1998, 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 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 November1, 1994 through October 31,
1999. All other terms of the contract remained
substantially the same (See, "Employment Agreements").
During 1995, Mr. Purdy's salary was increased by
$50,000. In 1996, 1997 and 1998, Mr. Purdy was paid
$87,500, $100,000 and $100,000 by Diasensor.com; such
amounts are included in the table above. Mr. Purdy is
paid a salary by the Company based on his employment
contract. Amounts paid to Mr. Purdy by Diasensor.com
are determined by the Diasensor.com Board of Directors
based upon services performed on its behalf. During
1998, Mr. Purdy voluntarily reduced his salary by 69%.
(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 1998, 1997 and 1996, Mr. Cooper was
paid $84,000, $96,000, and $96,000, respectively by
both Petrol Rem and IDT, both of which are subsidiaries
of BICO; such amounts are included in the table above.
In 1998, 1997, and 1996, Mr. Cooper was paid $177,542,
$150,000, and $150,000 in salary by Diasensor.com,
respectively; such amounts are included in the table
above. Mr. Cooper is paid a salary by the company
based on his employment agreement. Amounts paid to Mr.
Cooper by Diasensor.com, Petrol Rem and IDT are
determined by the Boards of Directors of those
companies based upon services performed on their
behalf.
(6) In April, 1994, Mr. Feola's employment agreement with
Diasensor.com was assigned to BICO when he left
Diasensor.com 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 1998, 1997, and 1996,
Mr. Feola's salary was increased by $27,000, $50,000
and $50,000 per year respectively.
(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 $1.48 per share (the market price as of
that date) until August 26, 2001.
Option/Warrant/SAR Grants in Last Fiscal Year
No options, warrants or SARs were granted or extended to the
Named Executives during 1998.
AGGREGATED OPTION/WARRANT/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/WARRANT/SAR VALUE TABLE
Number of Value of
Securities Unexercised
Underlying In-the-Money
Unexercised Options/SARs
Options/SARs 12/31/98 ($)
at 12/31/98 (#)
Shares Value
Acquired on Realized ($) Exercisable Exercisable/
Exercise (2) Unexercisable(3) Unexercisable (4)
Name (#)(1)
- -------------------------------------------------------------------------------
David L. 0 $ 0 767,200 $ 0
Purdy (5) (9)
- -------------------------------------------------------------------------------
Fred E. 0 $ 0 300,000 $ 0
Cooper (6) (9)
- -------------------------------------------------------------------------------
Anthony J. 0 $ 0 550,000 $ 0
Feola (7) (9)
- -------------------------------------------------------------------------------
Glenn 0 $ 0 100,000 $ 0
Keeling (8) (9)
__________________
(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, 1998 as reported by Nasdaq
($.06).
(5) Includes warrants to purchase: 187,200 shares of
common stock at $.25 per share until April 24, 1995
(extended until April 24, 1999); 500,000 shares of
common stock at $.25 per share until May 1, 1995
(extended until May 1, 1999); and 80,000 shares of
common stock at $.33 per share until June 29, 1995
(extended until June 29, 1999) (See, "Warrants").
(6) Includes warrants to purchase: 300,000 shares of common
stock at $.25 per share until May 1, 1995 (extended
until May 1, 1999) (See, "Warrants").
(7) Includes warrants to purchase: 100,000 shares of
common stock at $.25 per share until May 1, 1995
(extended until May 1, 1999); 100,000 shares of common
stock at $.25 per share until November 26, 1995
(extended until November 26, 1999); and 350,000 shares
of common stock at $.50 per share until October 11,
1996 (extended until October 11, 1999) (See,
"Warrants").
(8) Includes warrants to purchase: 100,000 shares of common
stock at $1.48 per share until August 26, 2001.
(9) Because the market price as of December 31, 1998 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, 1998 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, 1998, there were 420,773,569 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, 1998 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, 1998 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) 400,140 * 1,167,340(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 1,668,840 * 3,386,040(10) *
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, 1998.
(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, 1998. For
computation purposes, the total number of shares of
common stock outstanding as of December 31, 1998 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 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,
1999); 80,000 shares of common stock at $.33 per share
until June 29, 1995 (extended until June 29, 1999); and
500,000 shares of common stock at $.25 per share until
May 1, 1995 (extended until May 1, 1999) 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, 1999)
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, 1999); 100,000 shares of common stock at $.25 per
share until May 1, 1995 (extended until May 1, 1999)
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 Diasensor.com 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 Diasensor.com and Coraflex. He
is also the chairman and Chief Scientist of Diasensor.com,
and the President and Treasurer of Coraflex. Mr. Purdy
devotes 60% of his time to BICO, and 40% to Diasensor.com.
Fred E. Cooper, Chief Executive Officer, Executive Vice
President and a director of the Company, is a director of
Diasensor.com, Coraflex and Petrol Rem. He is also the
President of Diasensor.com. Mr. Cooper devotes
approximately 60% of his time to BICO and 40% to
Diasensor.com. Anthony J. Feola, Senior Vice President
and a director of the Company, is also a director of
Diasensor.com, Coraflex, and Petrol Rem. 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.
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. Mr.
Adkins, who was a director at the time of the transaction,
resigned from the Board of Directors on March 30, 1992. 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, Diasensor.com 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
Diasensor.com 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 1996 through 1998. 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. The aggregate balance of the loans
as of December 31, 1998, including accrued interest, was
$633,499.
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.
The aggregate balance of the loans as of December 31, 1998,
including accrued interest, was $253,219.
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. The aggregate balance of the loans as of
December 31, 1998, including accrued interest, was $292,810.
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 and principal payments have been made on the note,
and as of December 31, 1998, the balance was $200,000.
Joseph Kondisko, a former director of Diasensor.com, is a
principal owner of Allegheny Food Services.
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 Diasensor.com, 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. Diasensor.com 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 Diasensor.com common stock which BICO
received pursuant to the License and Marketing Agreement.
Purchase Agreement. BICO and Diasensor.com entered into a
Purchase Agreement dated November 18, 1991 whereby BICO
conveyed to Diasensor.com 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, Diasensor.com may
endeavor, at its own expense, to obtain patents on other
inventions relating to the Noninvasive Glucose Sensor.
Diasensor.com 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 Diasensor.com 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
Diasensor.com in connection with any sales by BICO of its
proposed closed-loop system.
Research and Development ("R&D") Agreement. Diasensor.com
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 Diasensor.com 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.
Diasensor.com 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 Diasensor.com
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 Diasensor.com 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. Diasensor.com 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 Diasensor.com's sales price of each Sensor.
Diasensor.com's sales price of each Sensor is defined as the
price paid by any purchaser, whether retail or wholesale,
directly to Diasensor.com for each Sensor. Subject to
certain restrictions, BICO may assign its manufacturing
rights to a subcontractor with Diasensor.com'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, 1998 and 1997 F-2
Consolidated Statements of Operations
for the years ended December 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1998, 1997, 1996
and 1995 F-5
Consolidated Statements of Cash Flows
for the years ended December 31, 1998, 1997 and 1996 F-6
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996 F-8
2. Exhibits:
(b) Reports on Form 8-K
The Company filed a Form 8-K report dated April 8,
1998. The items listed were Item 5, Other Events; and
Item 7(c), Exhibits.
The Company filed a Form 8-K report dated April 20,
1998. The items listed were Item 5, Other Events; and
Item 7(c), Exhibits.
The Company filed a Form 8-K report dated May 6, 1998.
The items listed were Item 5, Other Events; and Item
7(c), Exhibits.
The Company filed a Form 8-K report dated May 8, 1998.
The items listed were Item 5, Other Events; and Item
7(c), Exhibits.
The Company filed a Form 8-K report dated May 12,1998.
The items listed were Item 5, Other Events; and Item
7(c), Exhibits.
The Company filed a Form 8-K report dated May 28, 1998.
The items listed were Item 5, Other Events; and Item
7(c), Exhibits.
The Company filed a Form 8-K report dated June 9, 1998.
The items listed were Item 5, Other Events; and Item
7(c), Exhibits.
The Company filed a Form 8-K report dated June 22,
1998. The items listed were Item 5, Other Events; and
Item 7(c), Exhibits.
The Company filed a Form 8-K report dated July 14,
1998. The items listed were Item 5, Other Events; and
Item 7(c), Exhibits.
The Company filed a Form 8-K report dated July 16,
1998. The items listed were Item 5, Other Events, and
Item 7(c), Exhibits.
The Company filed a Form 8-K report dated August 4,
1998. The items listed were Item 5, Other Events; and
Item 7(c), Exhibits.
The Company filed a Form 8-K report dated August 7,
1998. The items listed were Item 5, Other Events; and
Item 7(c), Exhibits.
The Company filed a Form 8-K report dated September 9,
1998. The items listed were Item 5, Other Events; and
Item 7(c), Exhibits.
The Company filed a Form 8-K report dated October 5,
1998. The items listed were Item 5, Other Events; and
Item 7(c), Exhibits.
The Company filed a Form 8-K report dated October 9,
1998. The item listed was Item 5, Other Events.
The Company filed a Form 8-K report dated October 21,
1998. The items listed were Item 5, Other Events; and
Item 7(c), Exhibits.
The Company filed a Form 8-K report dated October 22,
1998. The items listed were Item 5, Other Events; and
Item 7(c), Exhibits.
The Company filed a Form 8-K report dated November 24,
1998. The item listed was Item 5, Other Events.
The Company filed a Form 8-K report dated January 1,
1999. The item listed was Item 5, Other Events; and
Item 7(c), Exhibits.
The Company filed a Form 8-K report dated January 29,
1999. The items listed were Item 5, Other Events; and
Item 7(c), Exhibits.
The Company filed a Form 8-K report dated February 16,
1999. The items listed were Item 5, Other Events; and
Item 7(c), Exhibits.
The Company filed a Form 8-K report dated March 1,
1999. 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 29th day of
March, 1999.
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 29, 1999
Fred E. Cooper (principal executive
officer, principal
financial officer and
principal accounting
officer)
/s/ Anthony J. Feola Senior Vice President, March 29, 1999
Anthony J. Feola Director
/s/ Glenn Keeling Director March 29, 1999
Glenn Keeling
/s/ Stan Cottrell Director March 29, 1999
Stan Cottrell
/s/ Paul W. Stagg Director March 29, 1999
Paul W. Stagg
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,
1998 and 1997, and the related consolidated statements of operations,
changes in stockholders' equity (deficiency) and cash flows for each
of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended
December 31, 1998 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, 1998 and these conditions are expected to
continue through 1999, 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, 1999
F-1
Biocontrol Technology, Inc. and Subsidiaries
Consolidated Balance Sheets
Dec. 31, 1998 Dec. 31, 1997
------------- -------------
CURRENT ASSETS
Cash and equivalents (note A) $ 125,745 $ 2,759,067
Accounts receivable - net of allowance for doubtful accounts
of $27,059 at Dec. 31, 1998 and $14,931 at Dec. 31, 1997 55,959 383,747
Inventory - net of valuation allowance (notes A and D) 74,515 1,834,018
Notes receivable - related parties (notes C and L) 0 35,000
Notes receivable (note C) 0 87,000
Interest receivable (note C) 0 2,134
Prepaid expenses 170,544 137,862
Advances - Officers 0 34,732
------------- -------------
TOTAL CURRENT ASSETS 426,763 5,273,560
PROPERTY, PLANT AND EQUIPMENT (notes A and H)
Building 1,429,906 1,444,273
Land 133,750 246,250
Construction in progress 0 1,465,152
Leasehold improvements 1,477,573 1,197,977
Machinery and equipment 5,014,103 5,042,736
Furniture, fixtures & equipment 794,740 812,221
------------- -------------
Subtotal 8,850,072 10,208,609
Less accumulated depreciation 4,244,650 3,516,677
------------- -------------
4,605,422 6,691,932
OTHER ASSETS
Related Party Receivables
Notes receivable - (notes C and L) 1,223,900 623,900
Interest receivable - (notes C and L) 155,628 75,343
Advances-Officers 90,779 0
------------- -------------
1,470,307 699,243
Allowance for related party receivables (1,270,307) 0
------------- ------------
200,000 699,243
Notes receivable - (notes C) 142,493 0
Interest receivable 19,778 0
Goodwill, net of amortization - (note A) 4,423,421 0
Deposit on equipment 0 300,000
Patents, net of amortization (note A) 2,433 6,765
Other assets 15,259 9,800
------------- -------------
4,803,384 1,015,808
------------- -------------
TOTAL ASSETS $ 9,835,569 $ 12,981,300
============= =============
The accompanying notes are an integral part of these statements.
F-2
Biocontrol Technology, Inc. and Subsidiaries
Consolidated Balance Sheets
(Continued)
Dec. 31,1998 Dec. 31, 1997
------------- -------------
CURRENT LIABILITIES
Accounts payable $ 1,750,188 $ 646,535
Current portion of long-term debt (note G) 4,552,178 18,765
Current portion of capital lease obligations (note H) 99,061 109,933
Debentures payable (note I) 2,825,000 3,301,280
Accrued liabilities (note E) 1,096,644 215,119
Escrow payable (note J) 2,700 2,700
Deferred revenue on contract billings (note A) 0 116,146
------------- -------------
TOTAL CURRENT LIABILITIES 10,325,771 4,410,478
LONG-TERM LIABILITIES
Capital lease obligations (note H) 1,412,880 2,688,293
Long-term debt (note G) 0 8,806
------------- -------------
1,412,880 2,697,099
COMMITMENTS AND CONTIGENCIES (notes M)
UNRELATED INVESTORS'INTEREST
IN SUBSIDIARY (note A) 24,162 1,409,647
STOCKHOLDERS' EQUITY (notes J and O)
Common stock, par value $.10 per share,
authorized 600,000,000 shares, issued and
outstanding 420,773,568 at Dec. 31, 1998 and
138,583,978 at Dec. 31, 1997 42,077,357 13,858,398
Additional paid-in capital 92,725,285 104,932,920
Notes receivable issued for common stock-related party (note L) (25,000) (25,000)
Warrants 6,396,994 6,396,994
Accumulated deficit (143,101,880) (120,699,236)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY (1,927,244) 4,464,076
-------------- --------------
TOTAL LIABILITIES AND
STOCKHOLDER' EQUITY $9,835,569 $12,981,300
============= =============
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,
1998 1997 1996
------------- ------------- -------------
Revenues
Net Sales $1,145,968 $ 1,155,907 $ 597,592
Interest income 182,033 165,977 176,478
Other income 50,212 104,250 2,657
------------- ------------- -------------
1,378,213 1,426,134 776,727
Costs and expenses
Cost of products sold 587,821 641,331 325,414
Research and development (notes A and L) 6,340,676 6,977,590 8,742,922
General and administrative 11,560,345 12,695,628 8,963,693
Loss on disposal of assets 531,066 8,518 -
Debt issue costs (note A) 1,865,682 3,306,812 502,000
Warrant extensions (note J) - - 604,342
Warrant extensions - Subsidiary (note J) - 4,046,875 8,571,033
Interest expense 481,025 315,624 133,460
Beneficial convertible debt feature (note P) 3,799,727 6,278,853 1,650,000
------------- ------------- -------------
25,166,342 34,271,231 29,492,864
------------- ------------- -------------
Loss before unrelated investors' interest (23,788,129) (32,845,097) (28,716,137)
Unrelated investors' interest in net loss of
subsidiary 1,385,485 2,411,920 4,670,435
------------- ------------- -------------
Net loss (note P) $(22,402,644) $ (30,433,177) $ (24,045,702)
============= ============= ==============
Loss per common share (notes A and P) ($0.08) ($0.43) ($0.57)
============= ============== ==============
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 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
Issuance of convertible
debt (note P) - - - - - - 1,650,000 - 1,650,000
Net loss (note P) - - - - - - - (24,045,702) (24,045,702)
-------- -------- ----------- ---------- ---------- -------- ------------ -------------- ----------
Balance at Dec. 31, 1996 - - 49,213,790 4,921,379 6,907,162 - 82,354,749 (90,266,059) 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
Issuance of convertible
debt (note P) - - - - - - 6,278,853 - 6,278,853
Net loss (note P) - - - - - - - (30,433,177) (30,433,177)
-------- ------- ---------- ---------- --------- ------- --------- ----------- -----------
Balance at Dec. 31, 1997 - - 138,583,978 13,858,398 6,396,994 (25,000) 104,932,920 (120,699,236) 4,464,076
-------- ------- ---------- ---------- -------- ------- ---------- ------------ ----------
Proceeds from stock offering - - 2,055,000 205,500 - - 22,423 - 227,923
Conversion of debenture - - 280,134,590 28,013,459 - - (16,029,785) - 11,983,674
Issuance of convertible debt - - - - - - 3,799,727 - 3,799,727
Net Loss - - - - - - - (22,402,644) (22,402,644)
-------- ------- ---------- ---------- ---------- --------- ---------- ------------ ------------
-------- -------- ----------- ---------- ----------- --------- ----------- ------------- ----------
Balance at Dec. 31, 1998 - $ - 420,773,568 $42,077,357 $6,396,994 ($25,000) $92,725,285 ($143,101,880) ($1,927,244)
======== ======== =========== =========== =========== ========= =========== ============== ===========
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,
1998 1997 1996
------------- ------------- -------------
Cash flows used by operating activities:
Net loss ($22,402,644) ($30,433,177) ($24,045,702)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 1,706,537 850,802 587,507
Loss of disposal of assets 531,066 - -
Unrelated investors' interest in susidiary (1,385,485) (2,411,920) (4,670,435)
Stock issued in exchange for services (22,063) 936,148 17,200
Stock issued in exchange for services by subsidiary - 600 7,000
Debenture interest converted to stock 106,894 164,055 -
Premium for extension on Debenture 680,500 527,113 -
Beneficial convertible debt feature 3,799,727 6,278,853 1,650,000
Provision for potential loss on notes receivable 1,270,307 - -
Warrant extensions - - 604,342
Warrant extensions by subsidiary - 4,046,875 8,571,033
(Decrease)increase in allowance for losses on accounts receivable 12,128 (180,909) 195,840
(Increase) in accounts receivable 268,195 (137,651) (92,083)
(Increase) in inventories 987,948 (586,029) (1,679,981)
(Increase) in inventory valuation allowance 779,050 2,092,131 -
(Increase) decrease in prepaid expenses (31,495) 113,397 (128,883)
(Increase) decrease in other assets 36,927 3,713 (2,445)
Increase (decrease) in accounts payable 1,078,124 (388,636) (803,237)
Increase (decrease) in other liabilities 845,136 66,737 (35,960)
(Decrease) in deferred revenue (116,146) (63,854) (146,000)
------------- ------------- -------------
Net cash flow used by operating activities (11,855,294) (19,121,752) (19,971,804)
------------- ------------- -------------
Cash flows from investing activities:
Purchase of property, plant and equipment (111,216) (845,512) (954,610)
(Increase) in notes receivable (31,493) (313,000) (50,000)
Deposit on equipment - (300,000) -
(Increase) in interest receivable (97,929) (23,519) (11,721)
Acquisition of ICTI (1,030,000) - -
------------- ------------- -------------
Net cash used by investing activites (1,270,638) (1,482,031) (1,016,331)
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from stock offering - - 13,338,531
Proceeds from sale by subsidiary of its common stock - 3,500 (172,315)
Proceeds from warrants exercised - 13,200 30,600
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 10,720,000 20,230,000 6,600,000
Payments on debentures payable - (2,605,833) -
Payments on notes payable (675,393) (41,904) (19,509)
Increase in notes payable 550,000 - -
Payments on capital lease obligations (101,997) (65,987) (24,899)
------------- ------------- -------------
Net cash provided by financing activities 10,492,610 19,559,976 21,586,508
Net increase (decrease) in cash (2,633,322) (1,043,807) 598,373
------------- ------------- -------------
Cash and cash equivalents, beginning of year 2,759,067 3,802,874 3,204,501
------------- ------------- -------------
Cash and cash equivalents, end of year $ 125,745 $2,759,067 $3,802,874
============= ============= =============
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,
1998 1997 1996
------------- ------------- -------------
Supplemental Information:
Interest paid $ 364,716 $ 155,647 $ 72,578
============= ============ ============
Supplemental schedule of non-cash
investing and financing activities:
Acquisition of equipment with note payable $ - $ - $ 145,063
============= =========== ============
Acquisition of ICTI with note payable $ 3,350,000 $ - $ -
============= =========== ============
Acquisition of property under a capital lease:
Building $ - $ - $ 1,205,760
Land - - 246,250
Construction in progress - - 1,137,500
Equipment 24,050 154,539 -
------------- ------------- -------------
$ 24,050 $ 154,539 $ 2,589,510
============= ============= =============
Capital Lease Termination
Reduction of capital lease obligation $ 1,184,288 $ - $ -
============= ============= =============
Reduction of property
Construction of Progress $ 1,459,110 $ - $ -
Land 112,500 - -
------------- ------------- -------------
$ 1,571,610 $ - $ -
============= ============= =============
Conversion of Series I-preferred stock for common stock:
Common stock $ - $ - $ 2,730
Additional paid-in capital - - 24,570
------------- ------------- -------------
$ - $ - $ 27,300
============= ============= =============
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 $ 11,876,780 $19,449,924 $ 2,000,000
============= ============= =============
Converion of debenture interest for common stock $ 106,894 $ 164,055 $ 27,122
============= ============= =============
Stock granted to related party for note receivable $ - $ 25,000 $ -
============= ============= =============
Conversion of warrants for common stock $ - $ 510,168 $ 375,000
============= ============= =============
The accompanying notes are an integral part of these statements.
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: Diasensor.com, Inc. (Diasense) a 52% owned subsidiary as
of December 31, 1998 and 1997; Petrol Rem, Inc., a 67% owned
subsidiary as of December 31, 1998 and 1997; IDT, Inc., a
99.1% owned subsidiary as of December 31, 1998 and 1997;
International Chemical Technologies, Inc., a 58.4% owned
subsidiary as of December 31, 1998 and Barnacle Ban
Corporation, a 100% owned subsidiary as of December 31, 1998
and 1997. 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. Amortization of assets recorded under capital
leases is included with depreciation expense.
6. Patents
Patents are amortized over their legal or useful lives,
whichever is less. Accumulated amortization on patents was
$94,508 and $90,176 at December 31, 1998, and 1997,
respectively.
7. Goodwill
The Company recognized $5,310,501 of goodwill in connection
with a Stock Purchase Agreement dated February 20, 1998 to
acquire 58.4% of International Chemical Technologies, Inc.
For purposes of amortizing this goodwill, management has
determined a useful life of 5 years. Accumulated
amortization on goodwill was $878,080 at December 31, 1998.
8. 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.
9. Loss Per Common Share
Loss per common share is based upon the weighted average
number of common shares outstanding which amounted to
266,362,526 shares in 1998, 71,415,351 shares in 1997 and
42,266,597 shares in 1996, respectively. Shares issuable
under stock options, stock warrants, convertible debentures
and convertible preferred stock are excluded from
computations, as their effect is antidilutive.
10. 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.
11. 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.
12. 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, 1998, 1997, and 1996 was $589,300
$528,942, and $236,280, respectively, of which $481,025,
$315,624, and $133,460, respectively, was charged to
operations.
13. 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, accounts receivable,
and receivables from related parties.
14. 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, 1998, 1997 and
1996 would have been approximately $25,500,000, $33,400,000,
and $25,800,000, respectively. Net loss per share under the
fair value based accounting method for the periods ending
December 31, 1998, 1997 and 1996 would have been approximately
$.10, $.47, and $.92, respectively.
15. 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, 1998,
1997, and 1996 was $1,865,682, $3,306,812, and $502,000,
respectively.
16. 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 C
and L) are unsecured and represent a concentration of credit
risk due to the common employment and financial dependency of
these individuals on the Company.
17. Comprehensive Income
The Company's consolidated net income (loss) is substantially
the same as comprehensive income to be disclosed under
Statement of Financial Accounting Standards No. 130.
18. Beneficial Convertible Debt Feature
Beneficial conversion terms included in the Company's
convertible debentures are recognized as expense and
additional paid in capital at the time the associated
debentures are issued.
19. Reclassification
Certain items included in the financial statements of prior
periods have been reclassified to conform to classifications
in the 1998 financial statements. Such reclassification had
no effect on prior year reported net losses.
NOTE B - OPERATIONS AND LIQUIDITY
The Company and its subsidiaries have incurred substantial
losses in 1998 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, 1998,
1997 and 1996, 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, 1998.
NOTE C - NOTES RECEIVABLE
Notes receivable due from various related and unrelated
parties consisted of:
Dec. 31, Dec. 31,
1998 1997
Related Parties
Note receivable from Fred E.
Cooper, Chief Executive
Officer, payable upon demand $ 8,500 $ 8,500
with 12% interest.
Note receivable from Fred E.
Cooper, Chief Executive
Officer, payable upon demand 82,400 82,400
with 10% simple interest.
Note receivable from Fred E.
Cooper, Chief Executive
Officer, payable upon demand 83,000 83,000
with 8.25% simple interest.
Note receivable from Fred E.
Cooper, Chief Executive
Officer, payable upon demand 25,000 25,000
with 8.25% simple interest.
Note receivable from Fred E.
Cooper, Chief Executive
Officer, payable upon demand 35,000 35,000
with 8.25% simple interest.
Note receivable from Fred E.
Cooper, Chief Executive
Officer, payable upon demand 15,000 15,000
with 8.25% simple interest.
Note receivable from Fred E.
Cooper, Chief Executive
Officer, payable upon demand 25,000 -
with 8.25% simple interest.
Note receivable from Fred E.
Cooper, Chief Executive
Officer, payable upon demand 250,000 -
with 8.25% simple interest.
Note receivable from Glenn
Keeling, Director,
Payable upon demand with 10% 5,000 5,000
simple interest.
Note receivable from Glenn
Keeling, Director
Payable upon demand with 8.25% 50,000 50,000
interest.
Note receivable from Glenn
Keeling, Director
Payable upon demand with 8.25% 190,000 -
interest.
Note receivable from Glenn
Keeling, Director
Payable upon demand with 8.25% 20,000 20,000
interest.
Note receivable from T.J. Feola,
Director
Payable upon demand with 8.25% 50,000 50,000
interest.
Note receivable from T.J. Feola,
Director
Payable upon demand with 8.25% 185,000 -
interest.
Note receivable from Dave Purdy,
T.J. Feola, Fred Cooper, Glenn - 35,000
Keeling, all directors who are
jointly liable to the company.
Note receivable from Allegheny
Food Services, Inc. of which
Joseph Kondisko, a former 200,000 250,000
director, is principal owner,
payable in monthly installments
of $3,630, including interest at
9.25%, with a final balloon
payment on April 1, 2001.
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
Note receivable from HemoCleanse
Inc, payable on demand after
December 31,2002 with interest
accrued at a Rate of 20% per annum. 130,493 -
----------- ---------
1,366,393 745,900
Less current notes receivable 0 122,000
----------- ---------
Noncurrent $ 1,366,393 $ 623,900
============== ===========
Accrued interest receivable on the related party notes as of
December 31, 1998 and 1997 was $155,628 and $75,343,
respectively.
Due to the financial dependency of the above officers and
directors on the Company, an allowance of $1,270,307 was
provided by Management during 1998.
NOTE D - INVENTORY
Inventories consisted of the following as of:
Dec. 31, Dec. 31,
1998 1997
Raw materials $ 3,498,976 $ 4,380,254
Work-in-process 0 47,976
Finished goods 954,589 1,005,788
------------ -------------
4,453,565 5,434,018
Less valuation allowance (4,379,050) (3,600,000)
------------- -------------
$ 74,515 $ 1,834,018
============= =============
The inventory valuation allowance was increased to $4,379,050
in 1998, from $3,600,000 in 1997 and $ 1,507,869 in 1996
based upon management's estimation of market value of
materials for products for which a market has not yet been
established.
NOTE E - ACCRUED LIABILITIES
Accrued liabilities consisted of the following as of:
Dec. 31, Dec. 31,
1998 1997
Current
Accrued interest $ 276,378 $ 37,347
Accrued payroll 733,657 12,500
Accrued payroll taxes 1,919 13,606
and withholdings
Accrued vacation 46,654 87,652
Other accrued liabilities 38,036 64,014
----------- ---------
$ 1,096,644 $215,119
=========== =========
NOTE F - BUSINESS SEGMENTS
The Company operates in three reportable business segments:
Biomedical devices, which includes the operations of Biocontrol
Technology, Inc., and Diasensor.com, Inc.; Bioremediation, which includes
the operations of Petrol Rem, Inc.; and Marine Paint Products, which
includes the operations of Barnacle Ban Corporation. Following is
summarized financial information for the Company's reportable
segments:
Biomedical Bioremediation Marine All Consolidated
Devices Paint Other
Products
1998
Sales to external customers 1,028,484 45,382 40,835 31,267 1,145,968
Cost of products sold 483,388 33,061 32,777 38,595 587,821
Gross profit (Loss) 545,096 12,321 8,058 (7,328) 558,147
Identifiable assets 8,614,498 168,315 8,770 1,043,986 9,835,569
Capital expenditures 105,827 0 0 5,389 111,216
Depreciation & amortization 1,563,366 36,061 5,938 105,504 1,710,869
1997
Sales to external customers $ 880,919 $138,362 $136,624 $ 0 $ 1,155,905
Cost of product sold 445,843 88,178 107,310 0 641,331
Gross profit 435,076 50,184 29,314 0 514,574
Identifiable assets 11,122,314 602,460 56,860 999,666 12,981,300
Capital expenditures 661,095 4,460 8,680 526,933 1,000,051
Depreciation & amortization 720,150 33,976 2,751 93,925 850,802
1996
Sales to external customers 508,561 47,625 41,406 0 597,592
Cost of products sold 288,537 16,092 20,785 0 325,414
Gross profit 220,024 31,533 20,621 0 272,178
Identifiable assets 13,683,657 380,851 96,710 382,773 14,543,991
Capital expenditures 3,362,400 9,188 23,755 293,840 3,689,183
Depreciation & amortization 498,256 35,725 5,406 48,120 587,507
NOTE G - LONG TERM DEBT
Long term debt consisted of the following as of:
Dec. 31, Dec. 31,
1998 1997
Note Payable to individuals with interest at $ 250,000 $ 0
prime plus 2%, collateralized by a
confession of judgement, payable in monthly
installments of $60,000 beginning on
February 10, 1999 with a final balloon
payment of all remaining principal and
interest on May 10, 1999.
Note Payable in connection with stock 2,900,000 0
purchase agreement for 58.4% interest in
International Chemical Technologies, Inc.
(ICTI). The note bears interest at a rate of
8% and is collateralized by the shares of
ICTI purchased in the transaction. The note
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 interest
(ii) on October 1, 1998, a principal
payment of $1,000,000 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. At December 31,
1998, the Company was, and continues to be,
in default on the terms of this loan.
Accordingly, the unpaid balance could be
declared immediately due and payable at the
option of the lender.
Note Payable by the Company's subsidiary, 1,191,667 0
International Chemical Technologies, Inc.
(ICTI) to, it's former shareholder. The
loan is guaranteed by the Company and
collateralized by all tangible and
intangible assets of ICTI, and assignment of
ICTI's interest in its lease for its
production facilities. Principle and
interest at 9.5% per annum are payable in
thirty-five equal monthly installments of
$36,111 each commencing on April 1,1998 with
a final payment of all remaining principal
and interest due on March 1, 2001. At
December 31, 1998, the Company was, and
continues to be in default on the terms of
this loan. Accordingly, the unpaid balance
could be declared immediately due and
payable at the option of the lender.
Commercial Premium Finance Agreement payable 53,296 0
in nine monthly installments of $7,818
including interest at 8% per annum beginning
November 1, 1998.
Note Payable due on January 5, 1999 with 150,000 0
interest at a rate of 8% per annum.
Collateralized by 5,444,644 shares of the
Company's common stock.
Note Payable to a bank in monthly payments
of $999 including interest at a rate of 7.35%. - 13,007
Collateralized by cash on deposit.
Note Payable in monthly payments of $374
including interest at a rate of 18.00%. 2,682 5,452
Collateralized by equipment.
Note Payable to a bank in monthly payments
of $433 including interest at a rate of 8.75%. 4,533 9,112
Collateralized by equipment.
---------- ---------
4,552,178 27,571
Current portion of long-term debt 4,552,178 18,765
---------- ---------
Long-term debt $ 0 $ 8,806
=========== =========
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 1998, 1997 and 1996. Future minimum lease payments
as of December 31, 1998 are $ 105,720 for 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 $173,609,
$295,809, and $239,096 in the years ended December 31, 1998,
1997 and 1996, respectively.
During 1996, the Company leased two manufacturing buildings
under capital leases expiring in various years through 2011.
The assets and liabilities under capital leases are recorded
at the lower of the present value of the minimum lease
payments or the fair value of the asset. The assets are
depreciated over the lower of their related lease terms or
their estimated productive lives. Depreciation of assets
under capital leases is included in depreciation expense.
During 1998, the Company terminated the lease of one of its
two manufacturing buildings in response to the filing of a
judgement for nonpayment under the terms of the lease. The
company recognized a loss of $387,321 based upon the
difference between the remaining lease obligation and the
property relinquished.
The following is a summary of property held under capital
leases:
Dec. 31, Dec. 31,
1998 1997
Building $ 1,207,610 $ 1,207,610
Construction in Progress 0 1,465,152
Land 133,750 246,250
Equipment 289,531 297,828
----------- ---------
Sub Total 1,630,891 3,216,840
Less: Accumulated Depreciation 277,069 159,129
----------- ---------
Total Property under Capital Leases $ 1,353,822 $ 3,057,711
=========== ===========
Minimum future lease payments to related and unrelated
parties are as follows:
Related Unrelated
Parties Parties Total
1999 105,720 423,314 529,034
2000 61,670 360,586 422,256
2001 0 337,893 337,893
2002 0 268,724 268,724
2003 0 252,720 252,720
Thereafter 0 1,630,566 1,630,566
-------- --------- ---------
Future minimum lease
payments 167,390 3,273,803 3,441,193
======== ========= =========
NOTE I - SUBORDINATED CONVERTIBLE DEBENTURE
During 1998, 1997 and 1996 the Company issued subordinated 4%
convertible debentures totaling $10,720,000, $20,230,000 and
$6,600,000, respectively. Such convertible debentures were
issued pursuant to Regulation S, Regulation D, and/or Section
4(2) and have a one-year mandatory maturity and are not
saleable or convertible for a minimum of 45 to 90 days from
issuance. At December 31, 1998 and 1997, the subordinated
convertible debentures totaled $2,825,000 and $3,301,280,
respectively.
As of December 31, 1998, and 1997, the conversion price of
the debentures would have been approximately $.059 and $.146
per share, respectively, based upon a formula which applies a
discount to the average market price for the previous week
and determined by the length of the holding period. As of
December 31, 1998, and 1997, the number of shares issuable
upon conversion of all outstanding debentures was
approximately 60.1 million and 23.9 million shares,
respectively, which would have reflected discounts of
approximately 23% and 18%, respectively.
NOTE J - STOCKHOLDERS' EQUITY
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 1998, warrants ranging from $.05 to $2.00 per share to
purchase 2,670,000 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 7,831,662 shares of common stock were
exercisable at December 31, 1998. The per share exercise
prices of these warrants are as follows:
Shares Exercise
Price
20,000 $.05
20,000 $.06
400,000 $.13
10,000 $.22
1,226,700 $.25
80,000 $.33
50,000 $.38
1,482 $.45
350,000 $.50
3,484,000 $1.00
200,000 $1.25
150,000 $1.48
2,000 $1.69
1,425,000 $2.00
2,000 $2.09
94,000 $2.125
2,000 $2.13
69,480 $2.25
50,000 $2.41
105,000 $2.75
25,000 $3.00
25,000 $3.20
5,000 $3.31
25,000 $3.50
10,000 $4.03
----------
Total 7,831,662
==========
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 1999 2000 2001 2002 2003
Granted
1990 406,700 - - 226,700 - 180,000
1991 1,251,482 351,482 - 900,000 - -
1992 25,000 - 25,000 - - -
1993 154,000 - - 144,000 - 10,000
1994 130,000 130,000 - - - -
1995 21,000 - 21,000 - - -
1996 609,480 59,480 - 550,000 - -
1997 2,544,000 200,000 - 1,400,000 944,000 -
1998 2,690,000 - - - 1,200,000 1,490,000
--------- ------- ------- ------ --------- ---------
7,831,662 740,962 46,000 3,220,700 2,144,000 1,680,000
========= ========= ======= ========= ========= =========
The following is a summary of warrant transactions during
1998:
Outstanding beginning of period: 5,346,662
Granted during the twelve-month period: 2,690,000
Canceled during the twelve-month period: 205,000
Exercised during the twelve-month period: 0
----------
Outstanding and eligible for exercise: 7,831,662
==========
Common Stock Reserve
At December 31, 1998 the Company has reserved unissued common
stock as follows:
Warrants 7,831,662
Convertible debentures 63,422,600
Loan Security 5,444,644
----------
Total 76,698,906
==========
Warrant Extensions
During 1998, the Company extended the exercise date of
warrants to purchase 1,510,180 shares of common stock to
certain officers, employees and consultants. The warrant
shares were originally granted at exercise prices ranging
from $.25 to $3.20, 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 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.
Diasensor.com, Inc. Common Stock
At December 31, 1998, warrants to purchase 6,674,113 shares
of Diasensor.com, Inc. common stock were exercisable. The per
share exercise price for 3,255,000 shares is $.50, for
2,286,763 shares is $1.00 and for 1,132,350 shares is $3.50.
The warrants expire at various dates through 2003. To the
extent that all the warrants are exercised, the Company's
proportionate ownership would be diluted from 52% at December
31, 1998 to 40.3%.
Diasensor.com,Inc. Warrant Extensions
During 1998, Diasensor.com,Inc. extended the exercise date of
warrants to purchase 825,000 shares of common stock to
certain officers, directors, employees and consultants. The
warrant shares were originally granted at an exercise price
of $.50 and extended at the same price.No expense was charged
to operations since the market price was less than the
original warrant price.
During 1997, Diasensor.com, Inc. 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. Diasensor.com, Inc.
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, Diasensor.com, Inc. 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.
Diasensor.com, Inc. 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.
Petrol Rem Common Stock
At December 31, 1998 warrants to purchase 4,140,000 shares of
Petrol Rem common stock were exercisable. The per share
exercise price for 3,940,000 is $.10 and for 2,000,000 is
$1.00. The warrants expire at various dates through 2003.
To the extent that if all the warrants were exercised, the
Company's proportionate ownership would be diluted from 75%
at December 31, 1998 to 62.1%.
IDT Common Stock
At December 31, 1998 warrants to purchase 4,330,000 shares of
IDT common stock were exercisable. The per share exercise
price for 4,135,000 shares is $.10 and for 175,000 shares is
$1.00 and for 20,000 shares is $2.00. The warrants expire at
various dates through 2003. To the extent that if all the
warrants were exercised, the Company's proportionate
ownership would be diluted from 99.1% at December 31, 1998 to
69.3%.
NOTE K - INCOME TAXES
As of December 31, 1998, the company and its subsidiaries,
except Diasensor.com, Inc. and Petrol Rem, have available
approximately $83,220,000 of net operating loss carryforwards
for federal income tax purposes. These carryforwards are
available, subject to limitations, to offset future taxable
income, and expire in tax years 1998 through 2019. The
Company also has research and development credit
carryforwards available to offset federal income taxes of
approximately $1,100,000 subject to limitations, expiring in
tax years 2005 through 2019.
As of September 30, 1998, the end of its fiscal year,
Diasensor.com, Inc. had available approximately $24,700,000
of net operating loss carryforwards for federal income tax
purposes. These carryforwards, which expire during the years
2005 through 2019, are available, subject to limitations, to
offset future taxable income. Diasensor.com, Inc. 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 2012.
As of December 31, 1998, Petrol Rem had available
approximately $10,150,000 of net operating loss carryforwards
for federal income tax purposes. These carryforwards, which
expire during the years 2008 through 2019, 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 $15,000.
Certain items of income and expense are recognized in
different periods for financial and income tax reporting
purposes.
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 and associated valuation
allowance at December 31, 1998, December 31, 1997 and
December 31, 1996:
Dec. 31,1998 Dec. 31,1997 Dec. 31, 1996
Net Operating Loss $28,294,800 $ 21,508,400 $ 15,330,642
Warrant Expense 2,741,397 2,741,397 2,741,397
Tax Credit
Carryforward 1,100,000 580,000 520,000
----------- ------------ -----------
32,136,197 24,829,797 18,592,039
Valuation Allowance (32,136,197) (24,829,797) (18,592,039)
----------- ------------ -----------
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 Allowance Net
Benefit
Year-ended December 31, 1998 ($ 7,306,400) $ 7,306,400 $ 0
Year-ended December 31, 1997 ($ 6,237,758) $ 6,237,758 $ 0
Year-ended December 31, 1996 ($ 4,702,742) $ 4,702,742 $ 0
From March 20,1972(inception) ------------- ----------- ---
through December 31, 1998 ($32,136,197) $32,136,197 $ 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
Diasensor.com, Inc. If successfully developed,the Sensor will
enable users to measure blood glucose levels without taking
blood samples. Diasensor.com, Inc. 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 Diasensor.com, Inc.. If BICO is unable to
perform under the Research and Development or Manufacturing
Agreements, Diasensor.com, Inc. would need to rely on other
arrangements to develop and manufacture the Sensor or perform
these efforts itself.
BICO and Diasensor.com, Inc. 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. Diasensor.com, Inc. 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 Diasensor.com,
Inc. 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 Diasensor.com, Inc. at a price
determined by the agreement. The term of the agreement is
fifteen years.
Research and Development Agreement
Under a January 1992 agreement between BICO and Diasense.com,
Inc. 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 Diasensor.com, Inc. $2,955,863 in research and
development and general and administrative expenses for the
year ending December 31, 1995. In July 1995, BICO and
Diasensor.com, Inc. 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.com, Inc. under which Diasens.com, Inc. 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 Diasens.com, Inc. 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, 1998 and 1997, Mr. Cooper owed the Company
$8,500 related to a 12 percent simple interest demand loan.
At December 31, 1998 and 1997, Mr. Cooper owed the Company
$82,400, related to a 10 percent simple interest demand loan.
At December 31, 1998, Mr. Cooper owed the Company $458,000,
(including a $25,000 note for common stock purchased in
1997), related to 8.25 percent simple interest demand loans.
The accrued interest owed by Mr. Cooper on all demand notes
at December 31, 1998 and 1997 was $ 109,599 and $67,092,
respectively.
At December 31, 1998 and 1997, the Company had a demand loan
of $5,000 with 10 percent simple interest with Glenn Keeling,
a Director. At December 31, 1998 and 1997 the Company had a
demand loan of $50,000 with 8.25 percent interest with Mr.
Keeling. At December 31, 1998 and 1997, the Company had a
demand loan of $20,000 with 8.25 percent interest with Mr.
Keeling. At December 31, 1998 the Company had a demand loan
of $190,000 with 8.25 percent interest with Mr. Keeling. The
accrued interest owed by Mr. Keeling on all demand notes at
December 31, 1998 and 1997 was $ 27,810 and $7,664,
respectively.
At December 31, 1998 and 1997, the Company had a demand loan
of $50,000 with 8.25 percent simple interest with T.J. Feola,
a Director. At December 31,1998 the Company had a demand loan
of $185,000 with 8.25 percent simple interest with Mr.
Feola. The accrued interest owed by Mr. Feola on the demand
note at December 31, 1998 and 1997 was $ 18,219 and $588,
respectively.
At December 31, 1997, the Company had a note receivable of
$35,000 with 8.25 percent simple interest with Dave Purdy,
Fred Cooper, T.J. Feola and Glenn Keeling, all Directors who
are jointly liable. As of December 31, 1998, this loan had
been repaid in full.
At December 31, 1997, 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, 1998, this loan had been reduced to $200,000,
and restructured to require monthly installments of $3,630,
including interest of 9.25% with a final balloon payment on
April 1, 2001.
Advances to Officers
During the periods 1998 and 1997, the Company and its
subsidiaries made advances to Mr. Cooper. At December 31,
1998 and 1997, these advances accumulated to $90,779 and
$34,732, 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 Diasensor.com, Inc. 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 Diasensor.com, Inc. 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.com, 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.
Additional Legal Proceedings
During April 1998, the Company and its affiliates were served
with subpoenas by the U.S. Attorneys' office for the U.S.
District Court for the Western District of Pennsylvania. The
subpoenas requested certain corporate, financial and
scientific documents and the Company has provided documents
in response to such requests.
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
$50,000 per year for each year starting in 1999 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, 1998.
NOTE O - SUBSEQUENT EVENTS
Public Offering
Subsequent to December 31, 1998, and through March 19, 1999,
the Company raised funds totaling $4,290,000 pursuant to its
public offering.
Common Stock
Subsequent to December 31, 1998 and through March 19, 1999,
the Company issued a total additional 143,455,285 shares of
common stock bringing total outstanding common stock at March
19, 1999, to 564,228,854.
NOTE P -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.
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 pro forma results listed below are unaudited and reflect
purchase price accounting adjustments assuming the acquisition
occurred at January 1, 1997. The pro forma results are not
necessarily indicative of what actually would have occurred if
the acquisition had been in effect for the entire period
presented. In addition, they are not intended to be a
projection of future results and do not reflect any efficiencies
that might be achieved from the combined operation.
Revenue $ 1,434,953
Net loss $(32,404,191)
Loss per share $ (0.45)
NOTE Q - YEAR 2000 ISSUE
The Company is currently working to resolve the potential impact
of the Year 2000 on the processing of date-sensitive
information. The Year 2000 Issue is the result of computer
programs being written using two digits (rather than four) to
define the applicable year. Programs which are susceptible to
problems after December 31,1999 are those which recognize a date
using "00" as the year 1900 rather than the year 2000, which
could result in miscalculations or system failures. Based upon
a review of its own internal programs and software, the Company
currently believes that the Year 2000 will not pose significant
operational problems to its information systems, because such
systems are already compliant or will be made compliant with
minor adjustments. In addition, ChaseMellon Shareholder
Services, the Company's transfer agent, has disclosed that it
will be Year 2000 compliant and that no interruptions in service
will occur. The Company is also conducting an investigation of
its major suppliers, vendors and other parties to determine
their respective plans for the Year 2000 compliance. The
Company's common stock currently trades on the Nasdaq electronic
bulletin board; Nasdaq and its parent, the NASD, have analyzed
its products and systems; are addressing their Year 2000 issues;
and are implementing a plan to test their systems and to
remediate any Year 2000 problems. As of this date, Nasdaq has
not made a definitive statement regarding when it will be
compliant, but has stated that it is making all necessary
changes to its trading systems. The Company's current estimates
indicate that the costs of addressing potential problems are not
expected to have a material impact upon the Company's financial
position, results of operations or cash flows in future periods.
There can be no assurance, however, that modifications to
information systems which impact the Company and which are
required to remediate year 2000 issues will be made on a timely
basis and that they will not adversely affect the Company's
systems or operations.