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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 09/30/2000 Commission File Number 0-26504
Diasensor.com, Inc.
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1605848
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2275 Swallow Hill Road, Building 2500; Pittsburgh, PA 15220
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (412) 279-9740
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 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 November 30, 2000:
Common Stock, $.01 par value -- $__________*
*The market value cannot be determined because there is no
established trading market for the stock.
As of November 30, 2000, 22,980,051 shares of Common Stock, par
value $.01 per share were outstanding. As of November 30, 2000,
no shares of Preferred Stock were outstanding.
Exhibit index is located on page 38.
PART I
Item 1. Business
General Development of Business
Diasensor.com, Inc. was incorporated in the Commonwealth of
Pennsylvania on July 5, 1989 as Diasense, Inc., a wholly owned
subsidiary of Biocontrol Technology, Inc., which changed its name
to BICO, Inc. in June 2000.
In June 2000, BICO decided to create a new division to focus on
its biomedical products. The new division retained the name
Biocontrol Technology, and is headquartered in Indiana,
Pennsylvania. At that time, David L. Purdy resigned his position
as a director and chairman of the board of BICO in order to
become the president and CEO of the new division so he could
focus his full-time efforts and energy on the continued
development and refinement of our noninvasive glucose sensor. In
November 2000, Mr. Purdy resigned from all his positions with us
and with BICO.
Our business is the development, marketing and manufacture of a
noninvasive glucose sensor for use by diabetics. In connection
with the noninvasive glucose sensor, we are also developing a
telemedicine system, a monitoring system which would allow
diabetics to transmit glucose readings via the internet, allowing
both a central monitoring department and the diabetic's own
physician to monitor glucose levels and assist in glucose
control. During Fiscal 2000, we continued to focus our efforts
on the noninvasive glucose sensor. We are working with Joslin
Diabetes Center, an affiliate of Harvard Medical School and an
international leader in diabetes treatment, to conduct FDA-
approved clinical trials on the Diasensor in the U.S. - those
trials began in October 2000. Based on several agreements
between Diasensor.com and BICO, Diasensor.com owns the patent,
marketing and distribution rights to the sensor. BICO has the
exclusive rights to the research and development and manufacture
of the sensor. Those agreements are described more fully in the
Intercompany Agreements section.
Financial Information About Industry Segments
Diasensor.com operates in a single industry segment consisting of
the research, development, marketing and sale of biomedical
products and devices.
Forward-Looking Statements
From time to time, we 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. You need to know that a
variety of factors could cause our actual results to differ
materially from the anticipated results or other expectations we
expressed in our forward-looking statements. The risks and
uncertainties that may affect our operations, performance,
research and development and results 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 our other products and medical
devices; our future capital needs and the uncertainty of
additional funding; Diasensor.com's substantial reliance on BICO
and BICO's uncertainty of additional funding; competition and the
risk that the noninvasive glucose sensor or our other products
may become obsolete; our continued operating losses, negative net
worth and uncertainty of future profitability; potential
conflicts of interest; the status and risk to our 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; our limited
sales, marketing and manufacturing experience; the amount of time
or funds required to complete or continue any of our 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 us; our ability
to maintain a trading market for our common stock; and the
dilution of our common stock.
Description of Business
Development of the Noninvasive Glucose Sensor
Along with BICO, we 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 monitors
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 points on the infrared spectrum that
are reflected by electromagnetic energy through the skin. BICO
studied this method in 1986 and 1987 using laboratory instruments
and working with consultants at Battelle Memorial Institute in
Columbus, Ohio. The results of the studies provided information
regarding the use of infrared light in the noninvasive
measurement of glucose. The information from the studies, along
with later additional work, led to a patent application by BICO's
research team in 1990. A patent covering the method was granted
to BICO's research team and assigned to Diasensor.com in December
1991. We purchased those patent rights from BICO under a
purchase agreement. BICO filed a second patent application in
December 1992, which was granted in January 1995. That second
filing contained new claims, which extended the coverage of the
patent based on additional discoveries and data obtained since
the original patent was filed. BICO assigned the rights to that
patent to us. BICO developed additional concepts to improve the
capability of the instrument to recognize blood glucose, and, in
May 1993, filed corresponding patent applications. As of
November 2000, a total of 13 patents have been issued, with
additional patent applications pending. BICO has the right to
develop and manufacture sensors based on contracts with
Diasensor.com.
BICO's research team advanced this technology base through the
development of several research prototypes, which were tested in
human clinical trials. BICO conducted a trial on 110 human
subjects in March 1992. In that trial, BICO recorded spectral,
blood and chemical data for analysis in order to develop
calibration data for the noninvasive glucose sensor. BICO
conducted a second trial on 40 human subjects in July 1992 that
indicated that the device did not have a satisfactory signal-to-
noise ratio to allow for sufficient accuracy to be acceptable for
patient use. Signal-to-noise ratio is determined by the
relationship of the signal, which is the glucose level, and the
noise, which are the random interferences, such as differences in
skin surfaces. BICO conducted other trials at several testing
sites under the guidance of the sites' Institutional Review Board
using prototypes, which addressed the signal -to-noise problem.
BICO designed and constructed those prototypes to simulate
production models.
On January 6, 1994, BICO submitted the initial 510(k)
Notification to the Food and Drug Administration for approval to
market the production model, the Diasensorr1000. A 510(k)
Notification is a type of FDA filing used to ask the FDA to
approve a device for sale in the U.S. BICO based the submission
on data obtained from the advanced research prototypes, since we
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 our 510(k)
Notification. The majority of the panel members recommended that
we conduct additional testing and clinical trials of a production
model prior to marketing the Diasensor 1000. We, along with
BICO, announced that we would remain committed to bringing the
Diasensor 1000 to diabetics, and that additional research,
development and testing would continue.
Due to continued delays in the FDA approval process, and while
continuing to work with the FDA and conduct its mandated testing,
we turned our focus to other markets for the Diasensor 1000
besides the U.S.
In 1998, BICO - as designer and manufacturer of the device, was
awarded International Organization for Standardization
certification by TUV Rheinland, a German company authorized to
conduct such audits, which was contracted to perform an audit of
BICO's quality system. BICO was awarded ISO Certification to the
9001 standard, which is evidence that BICO has, in place, a total
quality system for the design, development and manufacture of our
products. BICO was also awarded EN46001 Certification,
indicating we meet European standards for medical devices. Once
the ISO 9001 certification was approved, and a technical file was
submitted and approved by TUV Rheinland, BICO received approval
to apply a CE mark to the device. Much like an Underwriters
Laboratory "UL" mark, the CE mark is provided by the regulatory
bodies of the European Community, or by authorized private
bodies, such as TUV Rheinland, to indicate that the device
adheres to "quality systems" of the ISO and the European
Committee for Standardization. The CE mark permits us to sell
the Diasensor in Europe.
With regard to marketing the device within the United States, we
continued to work with the FDA to obtain approval. After
discussions with the FDA, we submitted a revised 510(k)
Notification in October 1996, which was followed by continued
discussions with the FDA. During 1997 and 1998, we continued to
meet with the FDA, and established a protocol for in-home testing
of the Diasensor 1000. Due to our cash flow problems during
1998, testing did not proceed at the pace originally anticipated,
and completion of the testing was delayed.
We continued various aspects of the Diasensor development, which
resulted in a method that will allow the patient to transmit the
readings generated by the noninvasive glucose sensor to the
patient's clinic or physician. Following an in-depth marketing
study, we determined that the machines with this capability are
more attractive to the patient, since there is the possibility of
selling a telemedicine service which includes the machine, the
patient, and his or her physician. This model of the Diasensor
has been named the Diasensor 2000 to differentiate between the
earlier models. Based on advice from the FDA, we decided it was
in our best interest to submit a PreMarket Approval Application
to the FDA, rather than continue with the 510(k) Notification
process, in order to seek FDA approval for the Diasensor 2000.
In 1999 the FDA implemented a new PMA system. Under the new
system, individual modules - or parts - of a PMA submission could
be made as they were ready. We discuss our PMA submissions in
the "Current Status of the Noninvasive Glucose Sensor" section,
which follows.
The Diasensor is a spectrophotometer, which is a machine capable
of illuminating a small area of skin on a patient's arm with
infrared light, and then making measurements from the infrared
light that is reflected back into the device. The device then
displays the measurement in a window on the top of the device for
the user to read. The Diasensor uses internal mathematical
calculations and customized software to calculate a glucose
measurement.
Since the Diasensor will be calibrated individually, each
instrument will be sold in the U.S. by prescription only and will
be calibrated in the patient's home. This feature may limit the
marketability of the Diasensor, and if the device is unable to
qualify for third-party reimbursement - which means if the health
insurance companies won't pay for it -we will have a hard time
marketing and selling the device.
Current Status of the Noninvasive Glucose Sensor
We were hampered by cash flow problems during 1998, so we didn't
make as much progress on the noninvasive glucose sensor project
as we planned. Once we raised more money, we re-started our
discussions with the FDA. We hired Joslin Diabetes Center to
help us with the FDA in August 1999. Joslin Diabetes Center
designed and is conducting the clinical trials the FDA requires
before they will give us approval to market the sensor.
Our contract with Joslin calls for Joslin's representatives to
conduct a clinical study on the effectiveness of the Diasensor
2000. The study is contingent upon FDA approval of the Joslin
protocol for the clinical study, which we obtained in August
2000. We had a meeting with the FDA in October 1999 to focus on
the protocol, and we made revisions to the protocol to comply
with the FDA's recommendations. In the Joslin contract, we
agreed to pay for the study, and Joslin agreed to provide us with
a report on the data gathered. Joslin also has the right,
subject to confidentiality provisions, to publish the results of
the clinical trials. The Joslin contract requires us to pay fees
for their services - those fees will be paid when we pay for the
clinical trials and are based on the budgeted amounts for the
trials. The budgets, and therefore the total payments due under
the contract, have not been finalized.
In addition to the agreement with Joslin, we took other
significant steps toward FDA approval. In February 1999 we
submitted a PMA shell to the FDA for the Diasensor. The PMA
shell is part of a relatively new FDA procedure, which divides
submissions into modules, or parts. These modules, which were
designed to facilitate and expedite FDA review, contain different
pieces of the full PMA submission. However, from both our own
experience and by observing other module submissions, we do not
believe that the FDA intends to "approve" the PMA one module at a
time. Rather, we have had meetings with the FDA, including the
October 1999 meeting, where requirements for the "next step" in
the process have been discussed without a specific FDA finding on
prior submissions.
In May 1999, we submitted the first module, which covered
manufacturing methods and procedures for the Diasensor 2000. The
FDA asked for additional information in September 1999, and we
responded. We filed the second module in May 2000. The second
module contained information regarding electrical and mechanical
standards for the FDA's requirements on safety and effectiveness,
and a description of how our noninvasive glucose sensor will be
used by patients. Future modules will include raw data and
laboratory study methods and test results. The final PMA
submission will include human clinical results and a summary of
safety and effectiveness data.
We met with the FDA in October 1999, and at that meeting, the FDA
made further recommendations regarding the protocol for the
upcoming clinical trials. In November 1999, the FDA requested
further information. With the help of our outside consultants,
we finished compiling all that additional information, and in
July 2000 we submitted an Investigational Device Exemption to the
FDA that included the protocol for our clinical trials. An
Investigational Device Exemption is a request to the FDA for
approval to conduct clinical trials on a device that is not FDA-
approved. The FDA approved the protocol for our clinical trials
in August 2000.
Clinical trials began in October 2000 at Joslin Diabetes Center
in Boston. The trials are designed for a total of 50 diabetics,
all of whom will participate for 9 months. Trials will also be
conducted at two other sites: St. Luke's-Roosevelt Hospital
Center in New York City and SUNY Health Science Center in
Syracuse, New York. We hired Amarex, LLC, an independent
research organization headquartered in Washington, D.C., which
has experience in conducting clinical trials, to monitor our
clinical trials. Amarex will also collect data, and provide
training, data and site management, including statistics and
report writing, at all three sites. Working with Joslin and
Amarex, we plan to submit data to the FDA when the trials are
completed. We will also work with outside biomedical consultants
to help us obtain FDA approval following these clinical trials;
however, we can't assure you when or if that will happen.
The Diasensor 2000 will be used as part of a system of care that
includes home use of the Diasensor with regular evaluation of the
patient's blood glucose trends as determined by the device. The
Diasensor also contains a telemedicine feature - a software
program that automatically transmits the patient's glucose
measurements to a secure website via the internet, where they can
be viewed and evaluated by the patient's health care provider.
The data can be graphed and displayed in a variety of ways and
for a variety of time periods as needed. This use of historical
readings is critical in the patient's analysis of trends in
glucose levels, an important tool in both the treatment of
diabetes and the use of insulin. We believe that this
telemedicine program, which would involve a monthly fee for the
use of the device and the service, rather than a purchase of the
device, will make the Diasensor technology available to larger
numbers of diabetics. We are conducting market studies on the
best way to market and service the telemedicine program, but we
have not yet begun to market or provide the service.
As with all other FDA-related activities, we cannot provide any
assurances as to the date when we'll complete our studies, when
we'll submit our next PMA module, or when the FDA will complete
its review of our submission.
Although our research and development team continues to have
discussions with the FDA, due to the complex, technical nature of
the information being evaluated by the FDA, it is impossible for
us to estimate how much longer the FDA approval process will
take.
FDA approval is necessary to market the Diasensor in the United
States. In 1999, we also focused additional effort on the
European market; since no material sales have occurred, we
decided to re-assess our marketing plan. During 2000 and 2001,
we plan to send devices to different European sites for clinical
evaluation in order to encourage those markets to use the
Diasensor. In connection with adjusting our marketing plan, we
are currently re-evaluating our pricing structure for the
Diasensor in Europe.
Based on contracts between BICO and Diasensor.com, BICO has the
exclusive right to manufacture the noninvasive glucose sensor.
Diasensor.com will pay BICO for manufacturing, and that's how
BICO will make money if we ever successfully market and sell the
noninvasive glucose sensor.
Diasensor.com is responsible for the marketing and sales of the
noninvasive glucose sensor. We plan to market the noninvasive
glucose sensor and the telemedicine program directly to
diabetics, through their doctors' orders. Prescriptions are not
needed in Europe. The telemedicine program will involve a
monthly fee for the use of both the sensor and the service. We
may set those prices too high, which will limit our sales, unless
we can convince health insurance companies to pay for them.
Because the health insurance industry is in a constant state of
change, we can't predict whether - when - or if - we will
convince them to pay for our noninvasive glucose sensor or the
telemedicine program. We have estimated, based on information
from the American Diabetes Association, that there are about 15.7
million diabetics in the United States, but not all diabetics
will be suitable users of our noninvasive glucose sensor. Those
diabetics who require and benefit from frequent glucose
monitoring and whose physicians adjust their insulin dosages
based on glucose averages over time make up the potential market
for our sensor, and we can't accurately estimate the size of that
market at this time.
Invasive Glucose Sensors
Currently, blood glucose levels are generally measured by use of
invasive glucose sensors using two different methods. The
simplest method for monitoring blood glucose levels requires the
user to prick a finger, draw a drop of blood, and place the blood
on a chemically-treated test strip. After a specified amount of
time has elapsed, the blood must be blotted or wiped off. After
an additional amount of time has elapsed, the color of the test
strip is visually compared to that of a color chart, and the
glucose level is read from the chart. The second method
requires the user of an invasive glucose sensor to prick a
finger, draw a drop of blood, and to place the blood on a test
strip similar to those described above. Later, the user must
wait a prescribed period of time and place the test strip in the
invasive glucose sensor, which will display a readout of the
blood glucose level. We believe that many of the existing
invasive glucose sensors are complicated, time-consuming, prone
to user error, inconvenient, unpleasant and entail significant
ongoing expenditures by the user for supplies.
We believe that these methods generally yield accuracy levels
within plus or minus 25-30 mg/dl of actual glucose levels,
depending upon testing conditions. We believe that if current
research and development efforts are successful, our noninvasive
glucose sensor will have a range of accuracy at least as accurate
as currently available invasive glucose sensors.
With either method, adequate control of blood glucose levels
requires several finger pricks each day, which is an unpleasant
experience for the user, especially for children. Depending upon
the relative facility of the user, it generally takes at least
two to four minutes for a readout to be provided from existing
invasive glucose sensors. Moreover, the ongoing costs of
repeated testing are significant to the average user, given the
cost of test strips, lancets, swabs, antiseptics, test solutions,
etc., and could represent a monthly cost of up to $100 or more.
We believe that if our noninvasive glucose sensor is successfully
developed, manufactured and marketed, the unpleasantness of
existing testing methods will be effectively eliminated, and the
expense and inconvenience will, over the long term, be
significantly reduced.
A clinical invasive glucose sensor marketed by Yellow Springs
Instruments, Inc. called the "Yellow Springs Sensor" is an
invasive glucose sensor, which is relatively non-portable and
costs approximately $8,000 per unit. It is used nearly
exclusively by hospitals and other institutions. The Yellow
Springs Sensor has significantly different abilities,
characteristics and limitations than existing invasive glucose
sensors. Although we believe that the Yellow Springs Sensor
yields higher accuracy levels than other invasive glucose sensors
- - within plus or minus 3% of actual glucose levels - within up to
30 minutes, we believes that our noninvasive glucose sensor may
be more desirable to most users of existing invasive glucose
sensors, who typically value speed and convenience, who do not
require the higher accuracy levels achieved by the Yellow Springs
Sensor, and who do not want to utilize invasive methods.
Diabetes
The American Diabetes Association has estimated that diabetes is
the seventh leading cause of death in the United States. The ADA
also estimates that there are 15.7 million diabetics in the
United States, with corresponding estimated annual health care
and work loss costs of more than $98 billion, and that about
798,000 people will be diagnosed with diabetes this year.1
Diabetics who are stricken with juvenile diabetes, the most
severe form of the disease, can survive with insulin injections.
However, the quality and length of their lives are generally
reduced by problems associated with insulin therapy and by the
onset of serious diabetic complications, including blindness,
kidney failure, impotence and increased susceptibility to
infection.
Many tissues of the body normally rely on glucose, a form of
sugar, as a source of metabolic energy. Most cells store
significant amounts of glucose as glycogen, but certain tissues,
especially the brain, depend upon the blood to deliver a
continuous supply of glucose. The concentration of glucose in
the bloodstream must be controlled within a relatively tight
range to maintain normal health. If blood glucose drops too low,
causing hypoglycemia, the brain and nervous system stop working
properly, thereby causing faintness, weakness, tremulousness,
headache, confusion, and personality changes. Severe
hypoglycemia can progress to convulsions, coma, and death. If
blood glucose rises too high, causing hyperglycemia, there may be
excess urine production, thirst, weight loss, fatigue, and in the
most severe cases, dehydration, coma, and death. Moreover,
hyperglycemia causes damage from chemical reactions between the
excess glucose and proteins in cells, tissues, and organs. Over
long periods of time, episodes of hyperglycemia are thought to
lead to diabetic complications, including blindness, kidney
failure, impotence and increased susceptibility to infection.
To control the storage and metabolism of blood glucose, the
pancreas makes hormones that signal either removal or addition of
glucose to the blood, depending on the need. Insulin is a
pancreatic hormone that lowers blood glucose levels. Glucagon is
a pancreatic hormone that raises blood glucose levels. Although
certain other hormones affect blood glucose levels, insulin and
glucagon have been considered the principal regulators of glucose
metabolism associated with eating.
When the concentration of glucose in the bloodstream is not
controlled within a relatively tight range, severe complications
result. The principal disease associated with abnormal glucose
metabolism is diabetes mellitus, which is defined by the presence
of elevated blood glucose levels. Over the last 20 years, it has
become generally accepted that there are several distinct
subclasses of diabetes, the two most important of which are Type
I diabetes and Type II diabetes. Type I Diabetes, or insulin-
dependent diabetes mellitus, typically begins during childhood or
early adulthood, and is therefore termed juvenile diabetes. Type
II Diabetes, or non-insulin-dependent diabetes mellitus,
typically begins during or after middle age, and is therefore
termed adult onset diabetes.
Type I Diabetes. The ADA estimates that there are between
500,000 and 1 million Type I diabetics in the United States.2
Type I Diabetes is caused by the destruction of the pancreatic
cells that make insulin, resulting in deficient hormonal control
of glucose metabolism and abnormally high blood glucose. High
blood glucose levels can lead to coma and death if not adequately
controlled.
Before the discovery of insulin, Type I Diabetes was a rapidly
fatal disease. Insulin therapy corrects the most serious
metabolic disorders, and the discovery of insulin is regarded as
a major triumph of medical science. However, even with modern
insulin therapy, Type I diabetics cannot lead normal lives. Type
I diabetics' life spans can be shortened by the onset of serious
complications, including blindness, kidney failure, impotence and
increased susceptibility to infection. Consequently, intensive
insulin therapy to control blood glucose is an objective of
modern diabetes treatment. For Type I diabetics, glucose control
requires frequent monitoring of glucose levels and rigid
management of diet, exercise and therapy and is difficult to
achieve for many patients.
Type II Diabetes. The ADA estimates that there are nearly 10
million diagnosed Type II diabetics in the United States plus
another 5 million who are undiagnosed Type II diabetics3 and
people with impaired glucose tolerance, a condition characterized
by normal blood glucose levels before eating but a tendency
toward hyperglycemia afterward.
The cause of Type II Diabetes is not precisely known. What is
known is that Type II Diabetes usually occurs during or after
middle age, heredity plays a role, and energy-rich diets coupled
with sedentary lifestyles are involved. These factors appear to
combine to cause insulin resistance, which is a failure of
insulin to act normally to reduce blood glucose levels. As a
consequence, even though insulin continues to be secreted by the
pancreas, sometimes in above-normal amounts, blood glucose is
poorly controlled. Over time, the resulting episodes of
hyperglycemia are thought to cause widespread tissue damage,
including possible damage to insulin secretion mechanisms in the
pancreas. Current therapies for Type II diabetics include rigid
dietary control, often in conjunction with the prescription of
sulfonylurea compounds or, in the late stages of the disease,
daily insulin injections. Again, frequent monitoring of glucose
levels is required.
Foreign Subsidiaries
In connection with our office in London, we formed Diasensor.com
U.K. Limited.
Diabecore Medical, Inc.
During 2000, we invested in Diabecore Medical, Inc., a Canadian
company that is conducting research and working with other
research institutions to develop a new type of insulin to treat
diabetes. In preliminary studies, this new insulin has
demonstrated effectiveness in controlling hyperglycemia without
risk of severe hypoglycemia. Laboratory tests indicate that this
new insulin, when administered in large doses, extends the
duration of insulin action for improved control of glucose
levels, rather than producing hypoglycemia. Those tests also
have shown the new insulin to be 3 to 4 times less hypoglycemic
when compared to presently available insulin. William D.
Lougheed and Kusiel Perlman, M.D. are developing Diabecore's
insulin with the support of the Research Institute of the
Hospital for Sick Children in Toronto, where insulin was
discovered, and the Loyal True Blue and Orange Research Institute
in Richmond Hill, Ontario. We plan to invest a total of
approximately $1.6 million in Diabecore, and will own 35% of
Diabecore's stock.
MicroIslet, Inc.
During 2000, we also invested in MicroIslet, Inc. MicroIslet is
a California company that is developing several diabetes research
technologies with Duke University that focus on optimizing
microencapsulated islets for transplantation. The current
research involves the use of microencapsulated pancreatic cells,
which are transplanted into diabetic animals. The initial trial
on a non-human primate continues to provide very encouraging
results. The diabetic animal achieved and maintained normal
glucose readings for over six months following the transplant.
MicroIslet believes that there are several benefits to using the
microencapsulated islets for transplants, rather than
transplanting human pancreatic cells. One benefit is the supply;
the only source of human cells is from deceased organ donors, and
more than one donor is needed for each transplant. In addition,
human transplants involve a serious course of immuno-suppression
therapy so the human recipient does not reject the transplanted
cells. Dr. Emmanuel Opara, Ph.D. is the director of islet
transplantation research at Duke University Medical Center, and
he is heading up the research team. Dr. Opara's team plans to
replicate the testing on 3 more primates to obtain additional
data to support a planned request to the FDA to conduct human
trials. We plan to invest a total of approximately $1.5 million
in MicroIslet, and will own 20% of MicroIslet's stock.
Net Sales
Although we have been attempting to market our sensor in Europe,
only minimal sales have occurred to date. In 2000, we engaged
consultants to assist with European marketing and sales.
Research and Development
BICO is continuing the research and development of our
noninvasive glucose sensor. The research and development is
being conducted by BICO under the terms of a research and
development agreement with Diasensor.com.
Product Development
BICO is currently developing other models of the noninvasive
glucose sensor for more universal use.
Manufacturing
During 2000, we completed production of the Diasensor models
needed for our clinical trials. During 2001, we anticipate that
production and inventory buildup of the Diasensor 2000 will
continue. We don't plan to begin full scale manufacturing of the
Diasensor 2000 for sale in the U.S. until we receive FDA
approval. Based on our manufacturing agreement, BICO will act as
Diasensor.com's exclusive manufacturer of production units of our
noninvasive glucose sensor for fifteen years. Under that
manufacturing agreement, BICO will manufacture units of the
noninvasive glucose sensor for sale to Diasensor.com at the
manufacturing facility in Indiana, PA, although BICO may use
various subcontractors to provide certain components. We plan to
have the optics, software, electronics and other mechanical
components supplied to BICO for assembly on a coordinated basis
with BICO's production schedule. After manufacturing is
underway, BICO does not expect to maintain significant
inventories and, as a result, backlogs may occur from time to
time.
In September 1992, BICO entered into a 10-year lease with the
Indiana County Board of Commissioners for a 35,000 square foot
facility located in Indiana, PA. BICO renovated the facility and
ordered the required capital equipment and machinery necessary
for assembly operations. During 1999, all of the companies'
Indiana, PA operations were moved to this location, which is now
used for manufacturing, research and development and
administrative functions. During 2000, BICO obtained an
additional 33,000 square feet of manufacturing space, which is
being completed for manufacturing. That space, which was
originally obtained in 1995, was vacated in 1998 in return for
the lessor's agreement not to pursue legal action against BICO
for nonpayment of rent. In 2000, BICO and the lessor settled any
pending legal issues when BICO re-acquired the space.
BICO has undertaken, in a manufacturing agreement, to comply with
good manufacturing practices and other regulatory standards and
intends to establish a quality control and quality assurance
program once manufacturing begins. Although we plan to work
closely with BICO to coordinate the implementation of these
undertakings, there can be no assurance that BICO will meet
Diasensor.com's requirements for quality, quantity, or
timeliness.
Marketing and Distribution
Although our officers and marketing employees have experience in
sales, marketing, and/or distribution, we have no direct prior or
existing experience. Our officers have such experience, but not
specifically in the biomedical device industry. In 2000, we
retained an outside firm to assist with European marketing of the
sensor. Although we believe that a successfully developed
noninvasive glucose sensor will attract a market, we anticipate
that substantial marketing efforts and the expenditure of
significant funds may be necessary to inform potential customers
and distributors of the distinctive characteristics and benefits
of the our sensor. Our success will also depend to a significant
extent on our ability to establish an effective internal
marketing organization.
In addition, our operating results will depend largely on our
ability to establish successful arrangements with domestic and
international distributors and marketing partners. We also
anticipate that we will employ a direct sales force focusing
directly on diabetics. Although we believe that a successfully
developed noninvasive glucose sensor, including the telemedicine
internet monitoring program, will be a profitable product for us,
there can be no assurances that we will be able to establish
sufficient direct sales capabilities and distribution
relationships or that we will be successful in gaining market
acceptance and profitability through sales of our products.
Patents, Trademarks and Licenses
We own a patent entitled "Non-Invasive Determination of Glucose
Concentration in Body of Patients" which covers certain aspects
of a process for measuring blood glucose levels noninvasively.
That patent was awarded to BICO's research team in December 1991
and was sold to Diasensor.com under a purchase agreement dated
November 18, 1991. The patent will expire, if all maintenance
fees are paid, no earlier than the year 2008. If clinical
testing or regulatory review delays marketing of a product made
under the patent, we may be able to obtain an extension of the
term of the patent. Our patent relates only to noninvasive
sensing of glucose but not to other blood constituents. We have
filed corresponding patent applications in a number of foreign
countries.
BICO filed a second patent application 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, BICO's research teams filed four additional patent
applications related to the methods, measurement and noninvasive
determination of analyze concentrations in blood.
As of November 2000, a total of 13 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 we anticipate marketing the
noninvasive glucose sensor.
BICO's research team continues to file patent applications,
provisional patent applications, some of which are being
converted into PCTs - Patent Cooperative Treaty - that reflect
the continued research and development and additional refinements
to 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.
We know that competitors 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 those patents may require us 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.
We also rely upon trade secret protection for our confidential
and proprietary information. Although we, along with BICO, take
all reasonable steps to protect such information, including the
use of confidentiality agreements and similar provisions, there
can be no assurance that others will not independently develop
substantially equivalent proprietary information or techniques,
otherwise gain access to the our trade secrets, disclose such
technology, or that we can meaningfully protect our trade
secrets.
We have registered our trademark "Diasensor ", which is intended
for use in connection with the Diasensor models. We intend to
apply, at the appropriate time, for registrations of other
trademarks as to any future products.
Warranties and Product Liability
Our current product liability insurance coverage is $1,000,000 in
the aggregate, and we believe that's sufficient due to our sales
levels to date, as well as our potential exposure to liability.
Source of Supply
In connection with the manufacture of the noninvasive glucose
sensor, BICO will be dependent upon suppliers for some of the
components required to manufacture the device. BICO plans to
assemble the devices, but will need to purchase components,
including some components that will be custom made for us by
certain suppliers. These components will not be generally
available, and we may become dependent upon those suppliers,
which do provide such specialized products.
Competition
With the rapid progress of medical technology, and in spite of
continuing research and development programs, our developmental
products are always subject to the risk of obsolescence if some
other company introduces a better product or technique. We are
aware that other research groups are developing noninvasive
glucose sensors, but we have limited knowledge about the actual
technology or the stage of development for most of our
competitors. There is a risk that some other group will complete
the development of their devices before we do. There is no other
company currently producing or marketing noninvasive sensors for
the measurement of blood glucose similar to ours. Competitive
success in the medical device field is dependent upon product
characteristics including performance, reliability, and design
innovations.
Our noninvasive glucose sensor will compete with existing
invasive glucose sensors. Although we believe that the features
of our noninvasive glucose sensor, particularly its convenience
and the fact that no blood samples are required, will compete
favorably with existing invasive glucose sensors, we can't assure
that it will succeed. Most currently available invasive glucose
sensors yield accuracy levels of plus or minus 25% to 30%, range
in price from $80 to $200, not including monthly costs for
disposable supplies and accessories, and are produced and
marketed by eight to ten sizable companies. Those companies
include Bayer, Inc., Boehringer Mannheim Diagnostics, and
Lifescan, an affiliate of Johnson & Johnson.
Those companies have established marketing and sales forces, and
represent established entities in the industry. Certain
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 we do, and may have other
competitive advantages over us, 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
over our noninvasive glucose sensor. As a result, we can't make
any guarantees that our sensor will be able to compete
successfully.
We face more direct competition from other companies who are
currently researching and developing noninvasive glucose sensors.
We have very limited knowledge as to the stage of development of
these other devices; however, if another company successfully
develops a noninvasive glucose sensor, obtains FDA approval, and
reaches the market before we do, we would suffer.
Among the other companies investigating infrared technology to
measure blood glucose levels noninvasively is CME Telemetrix in
Waterloo, Ontario, Canada. CME is reportedly conducting tests
with a desktop monitor that uses one type of infrared
wavelengths. OptiScan Biomedical in Alameda, California is
developing a device that uses another type of infrared
wavelengths. Rio Grande Medical Technologies of Albuquerque, New
Mexico is designing a photo-based device. Rio Grande is
currently funded by Johnson & Johnson.
Other companies claim that they are designing systems that are
semi-invasive. SpectRx in Norcross, Georgia is using a laser to
create small holes in the skin without the invasive penetration
of a metal needle or lancet. The device, called the Accu-Chek D-
Tector, then gives a glucose reading from the fluid collected
from the holes in the skin. SpectRx has partnered with Roche
Diagnostics, and reported in November 2000 that they had received
expedited review status from the FDA for a three-module premarket
approval filing for their diabetes detection device; they expect
to file the first module by the end of 2000, and clinical trials
are underway. Cell Robotics International, Inc. in Albuquerque,
New Mexico is also using a laser device that pierces the skin.
Called the Lasette, a laser makes a small hole in the fingertip
to draw blood for glucose testing. A continuous glucose
monitoring system from MiniMed, Inc. in Sylmar, California
received FDA approval in June 1999. The device includes a tube
with a small sensor at its tip that is inserted through the skin,
sending readings via a small wire to a sensor. A new sensor must
be reinserted under the skin every two to three days.
Cygnus of Redwood, California recently underwent an FDA panel
review for its GlucoWatch that draws glucose through the skin
through an electric needle. The glucose triggers a reaction in a
disposable pad. Although Cygnus claims that its device is
noninvasive, the fact remains that, in addition to the use of
electrical charges to draw fluid through the skin, each person
must use finger prick technology every day to set and use the
device. Although the panel recommended FDA approval, to the best
of our knowledge, the FDA has not issued that approval without
conditions. We were interested to learn that the FDA panel
accepted Cygnus' use of the same error grid data analysis - a
specific method for displaying data - that the FDA rejected when
we used it for our own panel review.
Certain organizations are also researching and developing
technologies that may regulate the use or production of insulin
or otherwise affect or cure the underlying causes of diabetes.
We are not aware of any new or anticipated technology that would
effectively render our noninvasive glucose sensor obsolete or
otherwise not marketable. However, future technological
developments or products could make our noninvasive glucose
sensor significantly less competitive or, in the case of the
discovery of a cure for diabetes, even obsolete.
Government Regulations
Since our noninvasive glucose sensor is a medical device as
defined by the Federal Food, Drug and Cosmetic Act, as amended,
it is 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 inspect our
facilities and operations and may also audit our record keeping
procedures at any time. The FDA's Quality System Regulation
specifies various requirements for our manufacturing processes
and the way we must maintain certain records.
In 1997, Congress passed legislation that addresses the
regulation of pharmaceutical and medical devices. Although the
impact of the FDA Administration Modernization Act of 1997 was
expected to reduce the quantity of information a company must
submit for approval of devices that has not been our experience.
Because the FDA regulates our noninvasive glucose sensor, we have
to meet all FDA requirements before we can market and sell our
device in the United States. These requirements include clinical
testing, which must be supervised by the chosen hospitals.
During 1999, the FDA recommended we file a Pre-Market Application
and conduct an additional clinical study. We are in the process
of submitting a modular PMA, which allows us to submit parts of
the submission to the FDA over a period of time. This modular
PMA is a new method of submitting information to the FDA, and
resulted from the passage of FDA legislation in 1997. We have
submitted the first two parts of the PMA and we began our
clinical trials in October 2000, after the FDA approved our
submission that included the testing protocol.
We don't know how long it will take for the FDA to accept our
filings or approve our device, if ever.
In June of 1998, the FDA instituted a new Quality System
Regulation that took the place of Good Manufacturing Practices.
These regulations align closely with similar guidelines required
by the European Union and have added control of the design
process as well as the manufacturing process.
There are different requirements for selling our device in
Europe. On January 14, 1998, we received certification to ISO
9001, and on June 23, 1998, we received the CE mark. The CE mark
and the ISO certification are provided by the regulatory bodies
or other approved companies of the European Union. The CE mark
indicates that the device adheres to quality systems guidelines.
Rigorous audits were conducted at our Indiana, Pennsylvania
facility to certify that our development and manufacturing
procedures, as well as the Diasensor 1000r itself met the
international standards laid down by Europe's medical device
directive. In order to maintain our approval to ship the device
into the European Union, we must be vigilant in our adherence to
our quality system. We will also be subject to annual audits to
be sure that we continue to meet the required standards.
Any changes in FDA or European procedures or requirements will
require corresponding changes in our obligations in order to
maintain compliance those standards. Those changes may result in
additional delays or increased expenses. Depending on which
other countries we target, our products may also be subject to
additional foreign regulatory approval before we can sell our
devices.
Human Resources
We currently have no full-time employees. We believe that, if
and when FDA approval is obtained for our noninvasive glucose
sensor, or manufacturing and marketing begins, we will employ
approximately 48 people on a full-time or part-time basis in the
United States, and approximately 16 people in each foreign
office. Our success will depend upon the efforts of our key
management personnel, the departure of any of whom may adversely
affect our business. None of our employees are represented by a
collective bargaining unit, and we consider our relations with
our employees to be good.
Financial Information About Foreign and Domestic Operations and
Export Sales
Our operations are located primarily in the United States of
America. In 1994, we incorporated a majority-owned foreign
subsidiary, Diasensor.com U.K. Limited, in order to facilitate
the opening of our office in London, England. Although we have
taken some orders from our distributor in the U.K. and have
delivered devices for patient use, we have had no material sales,
foreign or domestic, since our inception. We are in the process
of applying to receive approval to market our device in Canada.
Item 2. Properties
Due to cash flow problems, we sold our office condominium in
1999, and we now lease the same space for our administrative
offices. BICO and its subsidiaries continue to lease a portion of
the office at a monthly rental amount of $5,175 plus one-half of
the utilities.
As of November 2000, we have an office in London, England for the
purpose of taking orders for the Diasensor 1000.
We believe that our existing facilities will be sufficient to
meet our needs through Fiscal 2001. If we require additional
space, we believe such space will be available at reasonable
commercial rates.
Item 3. Legal Proceedings
In April 1996, the Pennsylvania Securities Commission commenced a
private investigation into sales of our common stock in our
public offering in an effort to determine whether any sales were
made improperly to Pennsylvania residents. We cooperated fully
with the state and provided all of the information requested. As
of the date of this filing, no determinations had been made, and
no orders have been issued.
In May 1996, we, along with BICO and BICO's individual directors,
including David Purdy, Fred Cooper, and Anthony J. Feola, who are
also our officers and directors, were served with a federal class
action lawsuit based on alleged misrepresentations and violations
of federal securities laws. In 2000, even though we don't
believe any violations of the securities laws occurred, we agreed
to settle the lawsuit. The parties reached a settlement, and
BICO has paid an aggregate of $2,150,000 toward the settlement to
date. An additional $1,300,000 is due in June 2001. Although we
don't know whether the class action plaintiffs have been formally
notified of the settlement, or if they have accepted its terms,
we believe the existing settlement agreement will end this
matter.
In April 1998, we, along with our corporate affiliates, were
served with subpoenas requesting documents in connection with an
investigation by the U.S. Attorneys' office for the U.S. District
Court for the Western District of Pennsylvania. We continue to
submit various scientific, financial and contractual documents in
response to their requests.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Diasensor.com was incorporated in the Commonwealth of
Pennsylvania on July 5, 1989. We have the authority to issue
40,000,000 shares of common stock at a par value of $.01, and
1,000,000 shares of preferred stock. As of November 30, 2000,
22,980,051 shares of common stock were outstanding. No shares of
preferred stock are outstanding. As of November 30, 2000, there
were currently exercisable warrants outstanding to purchase
10,463,013 shares of our common stock at exercise prices ranging
from $.50 to $3.50 per share. The warrants have various
expiration dates through April 4, 2005.
As of November 30, 2000, we had approximately 600 holders of
record for our common stock and no holders of record for our
preferred stock.
Our stock is not currently listed on any stock exchange or
market. We currently act as our own registrar and transfer agent
for our common stock and warrants. Currently, there is no
established public trading market for our common stock.
Common Stock
The holders of our common stock are entitled to one vote per
share on all matters to be voted on by shareholders and are
entitled to cumulative voting rights in the election of
directors. In cumulative voting, the holders of common stock are
entitled to cast, for each share held, the number of votes equal
to the number of directors to be elected. A holder may cast all
of his or her votes for one nominee or distribute them among any
number of nominees for election. Subject to any preferences that
may be granted to any holders of preferred stock, the holders of
common stock are entitled to receive, on a pro rata basis,
dividends out of funds legally available for distribution, when
and if declared by the board of directors, and to share ratably
in our assets legally available for distribution to our
shareholders in the event of liquidation, dissolution or winding-
up of Diasensor.com. The holders of common stock have no
preemptive, redemption or conversion rights. The shares of our
common stock currently outstanding are fully paid and
nonassessable.
Preferred Stock
Our Articles of Incorporation permit the issuance of up to
1,000,000 shares of preferred stock. No shares of preferred
stock are currently issued or outstanding. We have no present
intention to issue any such shares; although there can be no
assurance that we won't issue preferred stock in the future.
Dividends
We have not paid cash dividends on our common stock or our
preferred stock since our inception, and cash dividends are not
presently contemplated at any time in the foreseeable future. In
accordance with our Articles of Incorporation, cash dividends are
restricted under certain circumstances.
Warrants
As of November 30, 2000 there were outstanding warrants, all of
which are currently exercisable, to purchase 10,463,013 shares of
our common stock at exercise prices ranging from $0.50 to $3.50
per share and having expiration dates ranging from December 20,
2000 to April 5, 2005. During Fiscal 2000, 2,085,000 warrants
were granted. The warrants were issued to our directors,
officers and employees and to certain other persons for certain
goods and services transferred or rendered to us and, in the case
of certain officers, in consideration of meritorious service.
The number of shares of common stock issuable upon the exercise
of the warrants and the exercise prices relating thereto are
subject to adjustment upon the occurrence of certain events,
including stock dividends, stock splits, mergers, consolidations
and reorganizations. We may not redeem the warrants prior to
their expiration.
Employment Agreement Provisions Related to Changes in Control
We entered into agreements with Fred E. Cooper and David L. Purdy
under which they were originally entitled to receive annual
salaries of $100,000, and $50,000, respectively, although those
salaries are subject to review and adjustment annually. As of
the end of Fiscal 2000, their annual salaries had been increased
to $497,000 and $450,000 respectively, although, due to our cash
flow problems, full payment was not made during Fiscal 1998. The
initial term of Messrs. Cooper and Purdy's agreements expired on
October 31, 1999, but the agreements were automatically renewed
for additional three-year periods; similar renewals will continue
unless any party gives proper notice of non-renewal. In
November 2000, Mr. Purdy gave his notice that he would resign.
The agreements also provide that in the event of a change of
control, we are required to issue to Mr. Cooper and Mr. Purdy
shares of common stock equal to 5% of the outstanding shares of
our common stock immediately after the change in control. In
general, a change of control is deemed to occur for purposes of
the agreements: when 20% or more of our outstanding voting stock
is acquired by any person; when one-third or more of our
directors are not continuing directors, as defined in the
agreements; or when a controlling influence over our management
or policies 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.
Item 6. Selected Financial Data
The selected financial data presented herein has been derived
from our audited consolidated financial statements. These
financial statements have been audited by Goff Backa Alfera &
Company, LLC, for the twelve-month periods ended September 30,
2000, 1999, 1998; and by our previous auditors, Thompson Dugan,
P.C, for the twelve-month periods ended September 30, 1997, 1996,
1995 and 1994, the reports of all of which include explanatory
paragraphs as to "going concern" considerations. The selected
financial data should be read in conjunction with "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and our financial statements and related notes
thereto included elsewhere in this report.
FISCAL YEARS ENDED SEPTEMBER 30th
2000 1999 1998 1997 1996
Total Assets $1,299,610 $ 38,324 $ 292,322 $3,108,243 $4,171,910
Total
Liabilities $1,817,760 $ 91,214 $ 92,327 $ 22,419 $ 20,624
Working Capital
(Deficit) ($1,704,662) ($ 84,559) ($ 44,724) $2,862,349 $3,914,198
Total Revenues $ 0 $ 0 $ 0 $ 0 $ 0
General and
Administrative $2,110,922 $1,354,066 $ 669,764 $1,023,961 $1,509,298
Expenses
Warrant
Extensions $ 0 $ 272,078 $ 25,000 $5,593,875 $7,644,033
Benefit
(Provision) $ 0 $ 0 $ 0 $ 0 $ 0
for Income
Taxes
Net Loss ($ 695,438) ($ 753,501) ($2,914,329) ($6,564,837)($9,021,823)
Net Loss
per Common
Share:
Basic ($.03) ($.03) ($.13) ($.29) ($.39)
Diluted ($.03) ($.03) ($.13) ($.29) ($.39)
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.
We operate on a fiscal year ended September 30th. Therefore,
years are referred to as fiscal years; for example, the year from
October 1, 1999 through September 30, 2000 is referred to as
fiscal 2000.
Forward-Looking Statements
In addition to Part I of this Form 10-K, this Management's
Discussion and Analysis section also contains the type of forward-
looking statements we discussed on page 2. Please refer to such
discussion in connection with the information presented here.
Liquidity and Capital Resources
Our cash balance at September 30, 2000 was $113,098, an increase
from $6,525 at September 30, 1999 and $41,811 at September 30,
1998. The increase occurred because BICO advanced us additional
funds during fiscal 2000. We did not raise any of our own
additional capital during fiscal 1998, Fiscal 1999, or Fiscal
2000, and we had no income generated from our operations. As a
result, we continue to suffer significant cash flow problems. We
had negative working capital of ($1,704,662) at September 30,
2000; ($84,559) at September 30, 1999; and ($44,724) at
September 30, 1998. This fluctuation in working capital was
primarily attributable to net advances and repayments of advances
to BICO, which supports our operations from sales of BICO stock.
In fiscal 2000, we paid rent for our office space at 2275 Swallow
Hill Road. BICO and its other subsidiaries use part of that
space for their offices, and the subsidiaries' portion of the
rent is shown as $19,838 due from subsidiaries of BICO on our
balance sheet. We did not have any similar amounts due in fiscal
1999, because we owned the space during fiscal 1999 and BICO paid
its portion, as well as the subsidiaries' portion, of the rent
directly to us.
During fiscal 2000, we made investments in unconsolidated
subsidiaries. In January 2000, we initiated an alliance with
MicroIslet, Inc.; in return for our initial equity investment of
$500,000, we received a 10% stake with an option to purchase an
additional 10% in the future, which we partially exercised during
Fiscal 2000. We invested a total of $900,000 in MicroIslet
during Fiscal 2000, and we plan to invest an additional $600,000
during fiscal 2001. MicroIslet is developing several diabetes
research technologies with Duke University that focus on
optimizing microencapsulated islets for transplantation. The
project is in the research and development phase. We also
invested in Diabecore Medical, Inc. Diabecore is a company in
Toronto working with other research institutions to develop a new
insulin to treat diabetes. We initially invested $500,784 in
Diabecore and received a 15.9% ownership interest. We invested a
total of $500,784 in Diabecore during fiscal 2000, and we plan to
invest approximately an additional $1 million during fiscal 2001.
This project is also in the research and development phase. We
made these investments because our management believes that these
diabetes research organizations and the institutions they
affiliate with will bring strength and support to our own
diabetes research and development projects.
In July 1995, BICO and Diasensor.com agreed to suspend billings,
accruals and payments due under the Research and Development
Agreement pending the FDA's review of the Diasensor 1000. The
suspension continued during fiscal 2000, so no amounts are due or
being accrued based on the R&D Agreement.
During fiscal 1998, we made allowances for doubtful accounts,
including amounts owed to us from BICO. During fiscal 1999 and
2000 we reduced the allowance for doubtful accounts to reflect
repayments made by BICO. These allowances were recorded based
upon the current financial position of BICO. BICO repaid all
advances as of September 30, 2000.
We entered into employment agreements with Fred E. Cooper and
David L. Purdy effective November 1, 1994. As of the end of
fiscal 2000, their annual salaries were $497,000 and $450,000,
respectively; however, due to our cash flow problems, they
weren't paid in full during fiscal 1998. At September 30, 1999
and 2000, there was $45,000 and $29,000 included in accrued
payroll for Mr. Cooper and Mr. Purdy, respectively.
Because we still don't have any revenue sources, we will have to
find additional financing that we'll use to finance development
of, and to proceed to manufacture, our noninvasive glucose
sensor. Currently, we're dependent upon BICO to support all
sensor-related activity, and we can't assure you that BICO will
be able to continue to support us.
Our noninvasive glucose sensor models are at various stages of
development and we'll need more money to complete them. We may
decide to discontinue any of our projects at any time if research
and development efforts dictate that's the best thing to do.
Our financial statements contain a going concern opinion from our
auditors. Our auditors issued that opinion because we have a
history of losses and no revenue to support our operations. In
the past, we got money to fund our operations by selling
securities - but we haven't been able to continue because there
is no market for our common stock. Since 1997, we've become
dependent on BICO to sell stock to raise money to support us, and
we don't know if BICO will be able to continue to raise enough
money that way. Because we're not sure - and our auditors are
not sure - how long we can continue, our financial statements
include the auditor's opinion that we may not be able to continue
operating as a going concern.
Given our expenses and the other factors we discussed, as
compared to our sources of funds, we estimate that we will be
able to meet our funding needs for at least a year from September
30, 2000. We make that estimate based in part because we are not
aware of any extraordinary technological, regulatory or legal
problems. If any of those problems, which could include
unanticipated delays resulting from new developmental hurdles in
product development, FDA requirements, or the loss of a key
employee, arise, we would have to re-evaluate our position. We
can't assure you that, despite our good-faith efforts, our
estimates will be correct.
We think that our long-term liquidity needs will include working
capital to fund the marketing and manufacture of our noninvasive
glucose sensor, along with continued research and development
expenses for existing and future models. If our projects are
delayed, we will need more money. We believe BICO will be able
to continue selling its stock and other securities in order to
raise funds for the noninvasive glucose sensor project, but we
can't assure you BICO will be successful. If BICO can't raise
enough money to fund our projects and operations, we will not be
able to continue. We don't have any other sources of funds, such
as bank lines of credit. We believe that, at some point, we will
be able to sell our products to generate revenue, but we can't
assure you when, or if, that will happen.
Based on our available cash, BICO's ability to raise capital, our
rate of monthly expenditures and the deferrals agreed upon by
Diasensor.com and BICO, we believe that we will be able to
continue our current activities for a limited time. If we or
BICO are not able to obtain additional financing or if that
additional financing is insufficient, we will be required to
cease operations and the development of the noninvasive glucose
sensor altogether.
Results of Operations
During fiscal 2000, 1999 and 1998, research and development
expenses were zero due to the agreed-upon suspension of charges
and billings by Diasensor.com and BICO under the Research and
Development Agreement.
General and administrative expenses totaled $2,110,922 during
fiscal 2000, as compared to $1,354,066 during fiscal 1999, and
$669,764 during fiscal 1998. The lower total in fiscal 1998 was
due primarily to the suspension of billings under the R&D
Agreement, and the reduction in personnel due to our cash flow
problems. In addition, our executive officers were not paid
their full salaries in fiscal 1998. The increase in fiscal 1999
occurred when salaries were returned to full levels, with an
increase in salaries paid of $232,528 over fiscal 1998. In
fiscal 2000, payments for salaries increased $546,763. Fees for
outside consultants and marketing fees increased by $271,440 from
fiscal 1998 to fiscal 1999, and increased by $15,386 from fiscal
1999 to fiscal 2000 - those increases were primarily in
connection with our efforts to market the sensor in Europe. In
addition, we issued warrants for services aggregating $230,178,
$228,528 and $0 in fiscal 2000, 1999 and 1998, respectively.
Other income aggregated $62,100 in fiscal 2000, as compared to
$48,973 in fiscal 1999, and $62,914 in fiscal 1998. General and
administrative expenses also include a $154,246 amortization of
goodwill in fiscal 2000 in connection with our investments in
Diabecore and MicroIslet. We had no similar amortization in
fiscal 1998 or fiscal 1999, since our investments in those
companies began in fiscal 2000.
Our other income is made up of interest income and rental income.
During fiscal 2000, the entire $62,100 was from rental income,
all of which is charged to BICO and its subsidiaries for their
share of our 2275 Swallow Hill Road office space. In fiscal 1999
and 1998, rental income was $42,528 for each of the two years,
and the balance of $6,445 and $20,386, respectively, was from
interest earned on deposits of liquid assets.
During fiscal 2000 and 1999, we recognized $1,458,809 and
$823,670 in recovery of doubtful accounts when BICO repaid
amounts due. Those amounts had been part of the fiscal 1998
charge of $2,282,479 to a provision for doubtful accounts,
because BICO's financial position at that time indicated we might
not receive the money back from BICO.
During fiscal 1999 and 1998, we extended 2,561,213 and 10,000
warrants, respectively. The warrants were originally granted to
certain officers, directors, employees and consultants in 1993
through 1995, with expiration dates during 1998 through 2000,
respectively. Rather than letting them expire, we extended them.
Because the exercise price of some of the warrants - $1.00 or
$.50 per share - was lower than the market price of our common
stock at the time of the extensions - which is assumed to be $.50
per share, although there is currently no public trading market
for our common stock - $272,078 was charged against operations
in fiscal 1999; and $25,000 was charged to operations in fiscal
1998. In fiscal 2000, we extended warrants to purchase 2,202,050
shares with exercise prices between $1.00 and $3.50 per share.
Because those exercise prices exceeded the assumed market price
for our common stock, we didn't have any amount charged to
operations as a result.
We had a loss from our unconsolidated subsidiaries, Diabecore
Medical and MicroIslet, during fiscal 2000. We had no similar
loss in previous years because we just started investing in those
two companies during fiscal 2000. The $105,425 loss in fiscal
2000 resulted because we absorbed part of the losses incurred by
Diabecore and MicroIslet. Our share of the loss is determined by
applying our ownership percentage to the total loss incurred, and
we get to deduct the portion of the loss allocated to the
unrelated investors from our total net loss.
Income Taxes
As of September 30, 2000, we had approximately $25,495,000 in net
operating losses available for federal tax purposes. Subject to
certain limitations, these losses will be available as carry
forwards to offset future taxable income through the years 2004-
2015. We also have federal research and development credit carry
forwards available to offset federal income taxes of
approximately $700,000, subject to limitations and expiring in
the years 2005 through 2013.
Supplemental Financial Information (unaudited)
In November 2000 we made additional investments in MicroIslet and
Diabecore Medical. We invested an additional $100,000 in
MicroIslet, bringing our ownership interest to 15%, and we
invested an additional $193,000 in Diabecore Medical, bringing
our ownership interest to 21%.
Item 8. Financial Statements and Supplementary Data.
Our consolidated financial statements appear on pages F-1 through
F-21.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Effective November 8, 2000, upon a determination by the board of
directors, we engaged Goff Backa Alfera & Company, LLC as our
independent auditors and accountants to replace Thompson Dugan,
P.C. Goff Backa Alfera & Company, LLC also serves as the
independent auditors and accountants for BICO, replacing Thompson
Dugan, P.C. Neither company had any disagreements with Thompson
Dugan, P.C. or Goff Backa Alfera & Company, LLC on any matter of
accounting principles or practices, financial statement
disclosure or auditing scope or procedure.
PART III
Item 10. Directors and Executive Officers
As of September 30, 2000, our directors and executive officers
were as follows:
Name Age Director Positions Held
Since
David L. Purdy* 72 1989 Chairman of the
Board, Chief Scientist,
Director
Fred E. Cooper 55 1989 President, CEO, Director
Anthony J. Feola 53 1991 Director
Patrick H. O'Neill* 85 1999 Director
*Mssrs. Purdy and O'Neill resigned in November 2000.
DAVID L. PURDY, 72, was the chairman of the board and chief
scientist. Mr. Purdy was a director since our inception and
became chairman of the board in October 1992. Mr. Purdy acted as
our treasurer until October 1992, when he became our chief
scientist. He was employed primarily as the president of BICO
from 1972 until June 2000, when he resigned as a BICO officer and
director to become the president of BICO's new division,
Biocontrol Technology, Inc., in order to focus on the noninvasive
glucose sensor project. In November 2000, Mr. Purdy resigned
from both Diasensor.com and Biocontrol Technology, Inc., a
subsidiary of BICO, Inc.
FRED E. COOPER, 55, has been the president and a director since
our inception. Prior to joining us, 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. He is
the chief executive officer and a director of BICO.
ANTHONY J. FEOLA, 53, has been a director since February 1991.
In addition, Mr. Feola served as our chief operating officer
until April 1994, when he rejoined BICO as its senior vice
president. At that time, BICO assumed Mr. Feola's employment
contract with Diasensor.com. Prior to joining BICO in November
1989, Mr. Feola was vice president and chief operating officer of
Gateway Broadcasting in Pittsburgh, PA and a national sales
manager for Westinghouse Corporation, also in Pittsburgh, PA. He
also serves as a director of BICO.
PATRICK H. O'NEILL, 85, was appointed to the board in 1999. Mr.
O'Neill is a former chairman of the board of Joslin Diabetes
Center in Boston, Mass. He obtained his engineering degree from
the University of Alaska, which has subsequently honored him as
both a distinguished alumni and an outstanding alumnus of the
School of Mineral Industry. His career began with a job as a
miner in Alaskan open cut gold mines, where he worked his way
through college. Other than four years of military service, his
career was spent in the mining industry. He progressed to chief
engineer and ultimately the president of International Mining
Corporation and several of its subsidiaries. Since 1982, he has
worked as an international consultant to the gold mining
industry, and serves as a director of Zemex Corporation in
Toronto, the American Geographical Society in New York and the
Ireland U.S. Council for Commerce and Industry. On November 9,
2000, Mr. O'Neill resigned from our board of directors.
Based on the requirements of Item 405 of Regulation S-K regarding
timely filings required by Section 16(a) of the Securities and
Exchange Act, we represent the following. Based solely on our
review of copies of forms received and written representations
from certain reporting persons, we believe that all of our
executive 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 for the
Fiscal Years ended September 30, 2000, 1999 and 1998 of those
persons who were, at September 30, 2000: (i) the Chief Executive
Officer, and (ii) the other most highly compensated executive
officers whose remuneration exceeded $100,000. These individuals
are referred to as the Named Executives.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term All Other
Compension (1) Compensation
($) (2)
- -----------------------------------------------------------------------------------------------
Name and Year Salary ($) Bonus ($) (2)Other Awards
Principal ($) Warrants
Position (number of
shares) (#)
- -----------------------------------------------------------------------------------------------
Fred E. 2000 $ 465,750 $ 0 $ 0 713,500(3)(4) $ 0
Cooper, 1999 $ 288,792 $ 0 $ 0 678,545(3)(4) $ 0
CEO (5) 1998 $ 173,875 $ 0 $ 0 0 $ 0
- -----------------------------------------------------------------------------------------------
David L. 2000 $ 418,750 $ 0 $ 0 506,250(3)(4) $ 0
Purdy 1999 $ 202,083 $ 0 $ 0 800,000(3)(4) $ 0
Chief Scientist* 1998 $ 91,667 $ 0 $ 0 0 $ 0
(6)
- -----------------------------------------------------------------------------------------------
*In November 2000, Mr. Purdy resigned.
(1) We do not currently have a Long-Term Incentive Plan or
LTIP, and no payouts were made under any LTIP during the
years 2000, 1999 or 1998. Except as noted in Note (3)
below, the Named Executives were awarded warrants to
purchase the number of shares of our common stock set forth
in the table above in each of the years noted. We have no
retirement, pension or profit-sharing programs for the
benefit of our directors, officers or other employees.
(2) During the years ended September 30, 2000, 1999 or 1998,
the Named Executives received medical benefits under our
group insurance policy.
(3) During Fiscal 2000, we granted warrants to the Named
Executives as follows: Fred E. Cooper and David L. Purdy
each received warrants to purchase 500,000 shares of our
common stock at $.50 per share until April 4, 2005. During
Fiscal 1999, we granted warrants to the Named Executives as
follows: Fred E. Cooper and David L. Purdy each received
warrants to purchase 200,000 shares of our common stock at
$.50 per share until January 27, 2004. No warrants were
granted to the Named Executives during Fiscal 1998.
(4) During Fiscal 2000 and 1999, we 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.
However, the extended warrants do not appear in the
"Option/Warrant Grant" Table, since, at the time of the
extension, the exercise price of the warrants, which
remained unchanged at $1.00 per share for the warrants
extended in Fiscal 2000, and $.50 per share for the
warrants extended in Fiscal 1999, was greater than or equal
to the designated "market price" of the common stock,
assumed to be $.50 per share, although there is currently
no public trading market for the common stock. During
Fiscal 2000, Fred E. Cooper's warrants to purchase 213,500
shares of our common stock at $.100 per share were extended
until January 27, 2003, and David L. Purdy's warrants to
purchase 6,250 shares of our common stock at $1.00 per
share were extended until April 15, 2003. During Fiscal
1999 both Fred E. Cooper's and David L. Purdy's warrants to
purchase 300,000 shares of our common stock at $.50 per
share were extended until March 25, 2004; and warrants to
purchase 178,545 and 300,000 shares were extended to May 7,
2004 for Fred E. Cooper and David L. Purdy, respectively.
(5) Due to our cash flow problems, Mr. Cooper's full salary was
not paid during Fiscal 1998. Mr. Cooper will be, or was,
paid salary and bonuses aggregating approximately $642,000,
$660,000, and $383,000 by BICO and its other subsidiaries
during calendar years 2000, 1999 and 1998, respectively.
(6) Due our cash flow problems, Mr. Purdy's full salary was not
paid during Fiscal 1998. Mr. Purdy will be, or was, paid
salary and bonuses aggregating approximately $424,000,
$183,000, and $75,000 by BICO during calendar years 2000,
1999 and 1998, respectively.
Option/Warrant/SAR Grants in Last Fiscal Year
POTENTIAL REALIZED
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK
INDIVIDUAL GRANTS (1) PRICE APPRECIATION
FOR
OPTION TERM (3)
Percent
of
Number Total
of Options/
Securities SARs Exercise Expiration
Name Underlying Granted or Date 5% ($) 10%($) 0%($)
Options/ to Base
SARs Employee Price
Granted in ($/Sh)
(#) Fiscal
Year(2)
Fred E.
Cooper 500,000 24.0% $ .50 04/04/05 $75,000 $155,000 $0
David L.
Purdy 500,000 24.0% $ .50 04/04/05 $75,000 $155,000 $0
__________________________________________
(1) During Fiscal 2000 certain warrants previously granted to
the Named Executives in 1995 were extended. These
warrants, which aggregate 6,250 and 213,500 for Mssrs.
Purdy and Cooper, respectively, are not included in this
Table, since the $1.00 per share exercise price of the
warrants was greater than the designated "market price" of
$.50 per share at the time of the extension.
(2) For purposes of calculating these percentages, the total
number of warrants granted during Fiscal 2000 was
2,085,000.
(3) Potential realizable values reflect the difference between
the warrant exercise price at the end of Fiscal 2000 and
the fair value of our common stock price from the date of
the grant or extension until the expiration of the warrant.
The 5% and 10% appreciation rates, compounded annually, are
assumed based on SEC rules and do not reflect actual
historical or projected rates of appreciation of the common
stock. Assuming such appreciation, the following
illustrates the per share value on the dates set forth,
which are the expiration dates for the warrants, assuming
the values set forth ($.50 per share, which is the price we
designated; there is currently no trading market for the
common stock):
STOCK PRICE ON DATE EXPIRATION
OF GRANT DATE 5% 10%
4/04/00: $.50 4/04/05 $.65 $.81
The foregoing values do not reflect appreciation actually
realized by the Named Executives (See, "Option/Warrant/SAR
Exercises in Last Fiscal Year and Fiscal Year-End
Option/Warrant/SAR Value" Table, Below).
AGGREGATED OPTION/WARRANT/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/WARRANT/SAR VALUE TABLE
Number of Value of
Securities Unexercised
Underlying In-the-
Unexercised Money
Options/SARs Options/SARs
at FY-End(#) at FY-End($)
Name Shares Value Exercisable/ Exercisable/
Acquired Realized Unexercisable Unexercisable
on Exercise ($)(3) (4) (5)
(#)(1)(2)
Fred E. Cooper -0- -0- 1,680,045(6) $ 0
David L. Purdy -0- -0- 1,556,250(7) $ 0
__________________
(1) This figure represents the number of shares of common stock
acquired by each Named Executive upon the exercise of
warrants.
(2) During the fiscal year ended September 30, 2000, none of
the Named Executives exercised any warrants to purchase
common stock.
(3) The value realized of the warrants exercised would be
computed by determining the spread between the market value
of the underlying securities at the time of exercise minus
the exercise price of the option or warrant.
(4) All warrants held by the Named Executives are currently
exercisable.
(5) The value of unexercised warrants is computed by
subtracting the exercise price of the outstanding warrants
from $.50 per share, the price per share in our last public
offering, although there is currently no market for our
common stock. Because none of the Named Executive's
warrants were granted at exercise prices less than $.50 per
share, none of the warrants are "in-the-money" for purposes
of this table.
(6) Includes warrants to purchase: 138,000 shares of common
stock at $.50 per share until April 24, 1995 (extended
until April 24, 2001); 300,000 shares of common stock at
$.50 per share until March 25, 1996 (extended until March
25, 2004); 178,545 shares of common stock at $.50 until May
7, 1996 (extended until May 7, 2004); 150,000 shares of
common stock at $1.00 per share until October 25, 1996
(extended until October 25, 2002); 213,500 shares of common
stock at $1.00 per share until January 27, 1997 (extended
until January 27, 2003); 200,000 shares of common stock at
$.50 per share until January 27, 2004; and 500,000 shares
of common stock at $.50 per share until April 4, 2005.
(7) Includes warrants to purchase: 250,000 shares of common
stock at $.50 per share until April 24, 1995 (extended
until April 24, 2001); 300,000 shares of common stock at
$.50 per share until March 25, 1996 (extended until March
25, 2004); 6,250 shares of common stock at $1.00 per share
until April 15, 1997 (extended until April 15, 2003);
300,000 shares of common stock at $.50 per share until May
7, 1996 (extended until May 7, 2004); 200,000 shares of
common stock at $.50 per share until January 27, 2004; and
500,000 shares of common stock at $.50 per share until
April 4, 2005.
Employment Agreements
We entered into employment agreements with Fred E. Cooper and
David L. Purdy effective November 1, 1994, under which they were
originally entitled to receive annual salaries of $100,000 and
$50,000 respectively, which are subject to review and adjustment
annually. As of the end of Fiscal 2000, their annual salaries
had been increased to $497,000, and $450,000, respectively,
although, due to our cash flow problems, full payment was not
made during Fiscal 1998. The initial term of the agreements
expired on October 31, 1999, they were renewed for an additional
three-year term; those renewals will occur automatically unless
any of the parties give proper notice of non-renewal. In
November 2000, Mr. Purdy resigned. The agreements also provide
that in the event of a change of control, we are required to
issue to Messrs. Cooper and Purdy shares of common stock equal to
5% of the outstanding shares of our common stock immediately
after the change in control. In general, a change of control is
deemed to occur for purposes of the agreements: when 20% or more
of our outstanding voting stock is acquired by any person: when
one-third or more of our directors are not continuing directors,
as defined in the agreement; or when a controlling influence over
our management or policies 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.
In addition, in the event of a change in control within the term
of the agreements or within one year thereafter, Messrs. Cooper,
and Purdy 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. We are also required to
continue medical insurance coverage for Messrs. Cooper and Purdy
and their families during those periods. The severance payments
will terminate in the event of the employee's death.
In the event that either Mr. Cooper or Mr. Purdy becomes
disabled, as defined in the agreements, they will be entitled to
the following payments, in lieu of salary, such payments to be
reduced by any amount paid directly to them under a disability
insurance policy provided by us or our affiliates: 100% of their
most recent annual salary for the first three years; and 70% of
their most recent salary for the next two years.
The agreements also generally restrict the disclosure of certain
confidential information obtained by Messrs. Cooper and Purdy
during the term of the agreements and restrict them from
competing with us for a period of one year in specified states
following the expiration or termination of the agreements.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Percent of
Amount & Nature Ownership with Class with
Name and Address of Beneficial Percent of Warrants and Warrants and
of Beneficial Owner Ownership(1) Class (2) Options(3) Options (4)
Bico, Inc. 11,975,000 52.1% 11,975,000 52.1%
Building 2500, 2nd Floor
2275 Swallow Hill Rd.
Pittsburgh, PA 15220
David L. Purdy (5) 32,000 * 1,588,250(6) 6.5%
300 Indian Springs Road
Indiana, PA 15701
Fred E. Cooper 22,000 * 1,702,045(7) 6.9%
Building 2500, 2nd Floor
2275 Swallow Hill Rd.
Pittsburgh, PA 15220
Anthony J. Feola 20,000 * 1,020,000(8) 4.2%
Building 2500, 2nd Floor
2275 Swallow Hill Rd.
Pittsburgh, PA 15220
All directors and 74,000 * 4,315,295(9) 15.8%
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 September 30,
2000, which was 22,980,051.
(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 or options, 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 or options 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 September 30, 2000. For individual computation
purposes, the total number of shares of common stock
outstanding as of September 30, 2000 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 solely by Mr. Purdy's adult
children. Mr. Purdy disclaims any beneficial interest to
shares held by members of his family. Mr. Purdy resigned
from our board of directors in November 2000.
(6) Includes currently exercisable warrants to purchase the
following: 250,000 shares of common stock at $.50 per share
until April 24, 1995 (extended until April 24, 2001);
300,000 shares of common stock at $.50 per share until
March 25, 1996 (extended until March 25, 2004); 6,250
shares of common stock at $1.00 per share until April 15,
1997 (extended until April 15, 2003); 300,000 shares of
common stock at $.50 per share until May 7, 1996 (extended
until May 7, 2004); 200,000 shares of common stock at $.50
per share until January 27, 2004; and 500,000 shares of
common stock at $.50 per share until April 4, 2005.
(7) Includes currently exercisable warrants to purchase the
following: 138,000 shares of common stock at $.50 per
share until April 24, 1995 (extended until April 24, 2001);
300,000 shares of common stock at $.50 per share until
March 25, 1996 (extended until March 25, 2004); 178,545
shares of common stock at $.50 until May 7, 1996 (extended
until May 7, 2004); 150,000 shares of common stock at $1.00
per share until October 25, 1996 (extended until October
25, 2002); 213,500 shares of common stock at $1.00 per
share until January 27, 1997 (extended until January 27,
2003); 200,000 shares of common stock at $.50 per share
until January 27, 2004; and 500,000 shares of common stock
at $.50 per share until April 4, 2005.
(8) Includes currently exercisable warrants to purchase the
following: 100,000 shares of common stock at $.50 per
share until April 24, 1995 (extended until April 24, 2001);
100,000 shares of common stock at $.50 per share until
October 23, 1995 (extended until October 23, 2003); 300,000
shares at $.50 per share until March 25, 1996 (extended
until March 25, 2004); 300,000 shares at $.50 per share
until May 7, 1996 (extended until May 7, 2004); and 200,000
shares of common stock at $.50 per share until April 4,
2005.
(9) 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
We share common officers and directors with BICO. In addition,
we have entered into several intercompany agreements with BICO,
which are summarized below. Our management believes that it was
in our best interest to enter into these agreements and that the
transactions were based on terms as fair as those which may have
been available in comparable transactions with third parties.
However, no unaffiliated third party was retained to
independently determine the fairness of the transactions. Our
policy concerning related party transactions requires the
approval of a majority of the disinterested directors.
Employment Relationships
Our board of directors approved employment agreements effective
November 1, 1994 for our officers and directors Fred E. Cooper
and David L. Purdy.
David L. Purdy, our chairman of the board, chief scientist and a
director, resigned in November 2000. Fred E. Cooper, our
president and a director, is a director on the BICO, Coraflex,
and Petrol Rem boards. He is also the CEO of BICO. Anthony J.
Feola, our director, is also a director on the BICO, Coraflex,
and Petrol Rem boards. He is also the senior vice president of
BICO.
Leases and Property
We rent an office condominium at 2275 Swallow Hill Road in
Pittsburgh, PA. BICO and its other subsidiaries have their
Pittsburgh offices in the same office condominium and pay us rent
in the amount of $5,175 per month plus one-half of the utilities.
Three of our current executive officers and/or directors and
three of our former directors are members of the eight-member 300
Indian Springs Road Real Estate Partnership which in July 1990,
purchased BICO's real estate in Indiana, PA, and each has
personally guaranteed the payment of lease obligations to the
bank providing the funding. In 1999, after all our Indiana, PA
operations were moved out of 300 Indian Springs Road location to
Kolter Drive, the property was put up for sale. The property was
sold in October 2000 for $475,000, and each of the partners
received $12,698. In 1990, the cost of the property to BICO was
$1,084,852. The property was sold to the Partnership subject to
the leaseback provision and outstanding liens for approximately
$800,000; BICO received approximately $403,000 in cash as a
result of the sale-leaseback. First West Virginia Bank
determined the sale price. Each member of the Partnership
received warrants in consideration of his or her personal
guarantees. The six members of the Partnership who are also our
current or former officers and/or directors, David L. Purdy, Fred
E. Cooper, Gary R. Keeling, Jack H. Onorato, Richard M. Erenberg
and C. Terry Adkins, each received warrants to purchase 100,000
shares of BICO's common stock at an exercise price of $.33 per
share until June 29, 1995 (which were extended until June 29,
2000), and warrants to purchase 100,000 shares of our common
stock at an exercise price of $.50 per share until June 29, 1995,
all of which expired unexercised. The warrant exercise prices
were equal to the market prices of the common stock at the time
of issuance. Mr. Keeling, who was not a director at the time
of the transaction, joined the board in October 1991, became a
vice president in October 1992, and resigned from both positions
in August 1997. Mr. Adkins, who was not a director at the time
of the transaction, joined the board in March 1992 and became a
vice president in October 1992; Mr. Adkins resigned as an officer
and director during fiscal 1998. Mr. Onorato, who was not a
director at the time of the transaction, was a director until
September 1992 when he became a director of BICO until April
1994. Mr. Erenberg, who was not a director at the time of the
transaction, was a director until April 1993. Mr. Purdy, a
director since our inception, resigned in November 2000.
Intercompany Agreements
License and Marketing Agreement. We 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 our common stock. That agreement was
canceled with a cancellation agreement dated November 18, 1991,
and superseded by a purchase agreement dated November 18, 1991.
The cancellation agreement provides that BICO retain the
8,000,000 shares of our common stock, which BICO received under
the license and marketing agreement.
Purchase Agreement. We entered into a purchase agreement with
BICO dated November 18, 1991. BICO conveyed to us its entire
right, title and interest in the noninvasive glucose sensor and
its development, including its extensive knowledge, technology
and proprietary information. The conveyance includes BICO's
patent received in December 1991.
In consideration of the conveyance of its entire right in the
noninvasive glucose sensor and its development, BICO received
$2,000,000. In addition, we may endeavor, at our own expense, to
obtain patents on other inventions relating to the noninvasive
glucose sensor. We also guaranteed BICO the right to use the
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, we, along with BICO, 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
requires BICO to pay us a royalty connection with any sales by
BICO of its proposed closed-loop system.
Research and Development Agreement. We entered into an agreement
with BICO dated January 20, 1992 in connection with the research
and development of the noninvasive glucose sensor. Under that
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 us
for sale. Upon the delivery of the completed models, the
research and development phase of the noninvasive glucose sensor
will be deemed complete.
We 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 we agreed to suspend billings, accruals of amounts due
and payments under the research and development agreement pending
the FDA's review of the sensor.
Manufacturing Agreement. We entered into an agreement with BICO
dated January 20, 1992, whereby BICO will act as the exclusive
manufacturer of the noninvasive glucose sensor and other related
products. We 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 that was
amended in July 1994, and is now 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 our
sales price of each sensor. Our sales price of each sensor is
defined as the price paid by any purchaser, whether retail or
wholesale, directly to us for each sensor. Subject to certain
restrictions, BICO may assign its manufacturing rights to a
subcontractor with our written approval. The term of the
agreement is fifteen years.
Warrants
During Fiscal 1998 through Fiscal 2000, we issued the following
warrants to our officers and directors:
On January 27, 1999, we issued warrants to purchase our common
stock at $.50 per share until January 27, 2004 to: Fred Cooper:
200,000 shares; and David Purdy: 200,000 shares.
On September 8, 1999, we issued warrants to purchase 100,000
shares of our common stock at $.50 per share until September 8,
2004 to Patrick H. O'Neill.
On April 4, 2000, we issued warrants to purchase our common stock
at $.50 per share until April 4, 2005 to: Fred Cooper: 500,000
shares; David Purdy: 500,000 shares; Anthony J. Feola: 200,000
shares; and Patrick O'Neill: 25,000 shares.
PART IV
Item 14. Exhibits, Financial Statements and Reports on Form 8-K
1. Consolidated Financial Statements
The consolidated financial statements, together with the report
thereon of the Company's independent accountants, are included in
this report on the pages listed below.
(a) Consolidated Financial Statements Page
Report of Independent Accountants Goff Backa Alfera &
Company, LLC.......................................... F-1
Consolidated Balance Sheets as of September 30, 2000;
September 30, 1999................................... F-3
Consolidated Statements of Operations For the Fiscal
Years Ended September 30, 2000, 1999, 1998, 1997, 1996;
and July 5, 1989 (inception) through September 30, 2000 F-4
Consolidated Statements of Changes in Stockholders'
Equity for the Fiscal Years Ended September 30, 2000,
1999, 1998, 1997, 1996, 1995, 1994; 1993; 1992; the 12
months ended December 31, 1991, 1990, and from July 5,
1989 (inception) through December 31, 1989. . . . . . . F-5
Consolidated Statements of Cash Flows for the Fiscal
Years Ended September 30, 2000, 1999, 1998, 1997, 1996;
and July 5, 1989 (inception) through September 30, 2000. F-6
Notes to Consolidated Financial Statements for the Fiscal
Year Ended September 30, 2000........................... F-7
2. Exhibits
(a) Reports on Form 8-K
The Company filed a Form 8-K on November 14, 2000 for the
event dated November 9, 2000
The Company filed a Form 8-K on November 14, 2000 for the
event dated November 13, 2000
The Company filed a Form 8-K on November 14, 2000 for the
event dated November 13, 2000
The Company filed a Form 8-K on November 15, 2000 for the
event dated November 8, 2000
The Company filed a Form 8-K on November 27, 2000 for the
event dated November 22, 2000
The Company filed a Form 8-K/A on December 12, 2000 to amend
the Form 8-K filed November 15, 2000
(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 #33-56574) filed December
31, 1992 or from exhibits to Form 10-K filings subsequent to
that date.
3.1 Articles of Incorporation of Diasensor.com, Inc.,
as amended
3.2 Amended and Restated Bylaws of Diasensor.com, Inc.
4.1 Form of Specimen Common Stock Certificate of
Diasensor.com, Inc.
10.1 Purchase Agreement dated as of November 18, 1991
between Diasensor.com, Inc. and Biocontrol Technology, Inc.
10.2 Manufacturing Agreement dated as of January 20, 1992,
between Diasensor.com, Inc. and Biocontrol Technology, Inc.
10.3 Research and Development Agreement dated as of
January 20, 1992 between Diasensor.com, Inc. and
Biocontrol Technology, Inc.
10.4 Lease dated as of May 1, 1992 between
Diasensor.com, Inc. and Biocontrol Technology, Inc.
10.5 First Amendment to Purchase Agreement dated as of
December 8, 1992 between Diasensor.com, Inc. and
Biocontrol Technology, Inc.
10.6(1) Amendment to Manufacturing Agreement dated as of
June 7, 1994 between Diasensor.com, Inc. and Biocontrol
Technology, Inc.
10.7(1) Deferral Agreement, dated as of July 1, 1994,
between Diasensor.com, Inc. and Biocontrol Technology, Inc.
10.8 Deferral Agreement dated as of September 30, 1994
between Diasensor.com, Inc. and Biocontrol Technology, Inc.
10.9 Employment Agreement dated as of November 1, 1994
between Diasensor.com, Inc. and Fred E. Cooper
10.10 Employment Agreement dated as of November 1, 1994
between Diasensor.com, Inc. and David L. Purdy
10.11(2) Letter of Resignation of director C. Terry Adkins
10.12(3) Letter of Resignation of director Patrick H. O'Neill
10.13(4) Letter of Resignation of director David L. Purdy
(1) Incorporated by reference from Exhibit with this title filed
with the Company's Form S-1 filed August 17, 1994 at 33-
82796.
(2) Incorporated by reference from Exhibit with this title filed
with the Company's Form 8-K dated August 29, 1997.
(3) Incorporated by reference from Exhibit with this title filed
with the Company's Form 8-K dated November 14, 2000.
(4) Incorporated by reference from Exhibit with this title filed
with the Company's Form 8-K dated November 14, 2000.
SIGNATURES
Based on 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 22nd day of December 2000.
DIASENSOR.COM, INC.
By: /s/ Fred E. Cooper
Fred E. Cooper, President,
Director, principal
executive officer,
principal financial
officer and principal
accounting officer
Based on 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/ Anthony J. Feola Director December 22, 2000
Anthony J. Feola
_______________________________
1 American Diabetes Association, Diabetes Facts and Figures,
www.diabetes.org
2 American Diabetes Association, Diabetes Facts and Figures,
www.diabetes.org
3 American Diabetes Association, Diabetes Facts and Figures,
www.diabetes.org
Goff, Backa, Alfera & Company, LLC
CERTIFIED PUBLIC ACCOUNTANTS
----------------------------
3325 Saw Mill Run Blvd.
Pittsburgh, PA 15227-2736
Report of Independent Certified Public Accountants
Independent Auditors' Report
Board of Directors
Diasensor.com, Inc.
We have audited the accompanying consolidated balance sheets
of Diasensor.com, Inc. (a development stage company) as of
September 30, 2000 and 1999, and the related statements of
operations, changes in stockholders' equity and cash flows for
each of the three years in the period ended September 30, 2000,
and for the period from July 5, 1989 (inception) through
September 30, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on
our audits. The financial statements of Diasensor.com, Inc. (a
development stage company) as of September 30, 1997, and for the
period from July 5, 1989 (inception) through September 30, 1997,
were audited by other auditors whose report dated December 30,
1997, expressed an unqualified opinion on these statements.
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 financial statements present fairly, in
all material respects, the consolidated financial position of
Diasensor.com, Inc. as of September 30, 2000 and 1999, and the
results of its operations and its cash flows for each of the
three years in the period ended September 30, 2000, and for the
period from July 5, 1989 (inception) through September 30, 2000,
in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in note B to the financial statements, the
Company is in the development stage and has incurred losses from
operations and negative cash flows from operations for each of
the three years in the period ended September 30, 2000 and from
July 5, 1989 (inception) through September 30, 2000 raising
substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also
described in note B. The financial statements do not include any
adjustments that might result from the outcome of this
uncertainty, including adjustments relating to the recoverability
and classification of recorded assets that might be necessary in
the event the Company cannot continue to meet its financing
requirements and achieve productive operations.
In addition, as discussed in notes B and F, the Company is
dependent upon its parent, BICO, Inc. to continue to perform and
fund contractual arrangements related to research, development
and manufacturing activities of products for the Company. There
has been and continues to be substantial doubt about BICO's
ability to continue as a going concern due to their recurring
losses from operations and negative cash flow. These financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.
/s/ Goff Backa Alfera & Company, LLC
Pittsburgh, Pennsylvania
December 9, 2000
1
Diasensor.com, Inc.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
September 30, September 30,
ASSETS 2000 1999
------------ ------------
Current assets
Cash and cash equivalents (note A) $ 113,098 $ 6,525
Prepaid expenses - 130
----------- -----------
Total current assets 113,098 6,655
Property and equipment-at cost(note A)
Furniture and fixtures 42,750 42,750
----------- -----------
42,750 42,750
Less accumulated depreciation 34,438 28,331
----------- -----------
8,312 14,419
----------- -----------
Other assets
Due from BICO(notes A and G) - 1,458,809
Due from Subsidiaries of BICO (notes A and G) 19,838 -
Investment in unconsolidated subsidiaries(note C) 1,141,112 -
Allowance for doubtful account(note G) - (1,458,809)
Security deosit (note D) 17,250 17,250
----------- -----------
1,178,200 17,250
----------- -----------
TOTAL ASSETS $ 1,299,610 $ 38,324
=========== ===========
LIABILITIES and STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities
Due to BICO (notes A and G) $ 1,725,920 $ -
Accrued payroll and withholdings(note G) 91,840 91,214
----------- -----------
Total current liabilities 1,817,760 91,214
Commitments and Contingencies (notes B and H)
Stockholders' equity (deficiency) (note I)
Preferred stock, 1,000,000 shares authorized, none issued
Common stock, 40,000,000 shares of $.01 par value
authorized; issued and outstanding
22,980,051 at Sep. 30, 2000 and
Sep. 30, 1999 229,801 229,801
Additional paid-in capital 26,892,071 26,892,071
Warrants 18,684,017 18,453,839
Deficit accumulated during the
development stage (46,324,039) (45,628,601)
----------- -----------
(518,150) (52,890)
TOTAL LIABILITIES AND ----------- -----------
STOCKHOLDERS' EQUITY (DEFICIENCY) $ 1,299,610 $ 38,324
=========== ===========
[FN]
The accompanying notes are an integral part of this statement.
3
Diasensor.com, Inc.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF OPERATIONS
From July 5, 1989
For the year ended For the year ended For the year ended (inception) thru
September 30, 2000 September 30,1999 September 30, 1998 September 30, 2000
------------------ ------------------ ------------------ ------------------
Research and development expenses
(notes A, G, and H) $ - $ - $ - $ 10,556,405
General and administrative expenses 2,110,922 1,354,066 669,764 15,383,053
Provision for (recovery of) doubtful
accounts(note G) (1,458,809) (823,670) 2,282,479 -
Warrant extensions (note I) - 272,078 25,000 18,184,986
Technology and patent rights acquired (note G) - - - 2,650,000
Interest expense - - - 10,529
Other income - (note E) (62,100) (48,973) (62,914) (633,764)
Loss on unconsolidated subsidiaries (note C) 105,425 - - 105,425
Other expense - - - 37,405
-------------- -------------- -------------- ---------------
Net loss $ (695,438) $ (753,501) $ (2,914,329) $ (46,294,039)
============== ============== ============== ===============
Net loss per common share (note A) $ (0.03) $ (0.03) $ (0.13) $ (2.41)
============== ============== ============== ===============
The accompanying notes are an integral part of this statement.
4
Diasensor.com, Inc.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (Note I)
For the period July 5, 1989 (inception) through September 30, 2000
Deficit Total
Accumulated Stock-
Common Additional During the Holders'
Common Stock Stock Paid-in Development equity
Shares Amount Subscribed Capital Warrants Stage (Deficit)
---------- --------- ---------- ---------- ----------- ------------ -----------
July 10,1989 Issuance of stock to BICO in connection with
obtaining License and Marketing Agreement 8,000,000 $ 80,000 $ - $ - $ - $ - $ 80,000
Aug. 21 through Dec. 31, 1989 (various dates)
First Private Placement 656,000 6,560 - 321,440 - - 328,000
Sep. 29, 1989 - Issuance of stk in connection
with patent rights acquired by BICO 1,040,000 10,400 - 509,600 - - 520,000
Net loss - - - - - (80,000) (80,000)
---------- --------- ---------- ---------- ----------- ------------ -----------
Balances at December 31, 1989 9,696,000 96,960 - 831,040 - (80,000) 848,000
Jan. 1 to Dec. 31, 1990 (various dates)
First private Placement 1,240,000 12,400 - 607,600 - - 620,000
May 1, 1990 through Aug. 31, 1990 (various dates)
First Private Placement
Exchange of debt for shares of stock 136,000 1,360 - 66,640 - - 68,000
Warrants issued - to BICO - - - - 27,500 - 27,500
Net loss - - - - - (497,628) (497,628)
---------- --------- ---------- ---------- ----------- ------------ -----------
Balances at December 31, 1990 11,072,000 110,720 - 1,505,280 27,500 (577,628) 1,065,872
Jan. 1 to Dec. 31, 1991 (various dates)
First Private Placement 768,000 7,680 - 376,320 - - 384,000
Second Private Placement 3,948,250 39,482 - 3,896,468 - - 3,935,950
December 31, 1991 - common stock subscribed
62,500 shares at $ 1 - - 625 61,875 - - 62,500
Warrants issued - to BICO - - - - 19,085 - 19,085
Net loss - - - - - (3,650,203) (3,650,203)
---------- --------- ---------- ---------- ---------- ------------ -----------
Balances at December 31, 1991 15,788,250 157,882 625 5,839,943 46,585 (4,227,831) 1,817,204
Jan. 1 to Sep. 30, 1992 (various dates)
Second Private Placement 986,750 9,868 - 976,883 - - 986,751
Third Private Placement 7,212 72 - 25,170 - - 25,242
Fourth Private Placement 120,000 1,200 - 418,800 - - 420,000
Jan. 1992 - Exchange of debt for share of stk 235,000 2,350 - 232,650 - - 235,000
Jan. 1992 - Common stk subscriptions recieved 62,500 625 (625) - - - 0
Net loss - - - - - (2,846,584) (2,846,584)
---------- --------- ---------- ---------- ---------- ------------ -----------
Balances at September 30, 1992 17,199,712 171,997 - 7,493,446 46,585 (7,074,415) 637,613
Sep. 30, 1992 to Oct. 31,1992(various dates)
Fourth Private Placement 180,000 1,800 - 628,200 - - 630,000
June 1993 thru July 1993 warrants exercised 25,000 250 - 28,520 (3,770) - 25,000
Net loss - - - - - (3,763,101) (3,763,101)
---------- --------- ---------- ---------- ---------- ------------ -----------
Balances at September 30, 1993 17,404,712 174,047 - 8,150,166 42,815 (10,837,516) (2,470,488)
Oct. 1, 1993 to Sep. 30, 1994(various dates)
Registered Stock 230,961 2,309 - 783,936 - - 786,245
Consulting service in exchange for stock 7,200 72 - 25,128 - - 25,200
Treasury Stock purchase (10,000) (100) - (4,900) - (30,000) (35,000)
Treasury Stock sale 10,000 100 - 34,900 - - 35,000
Nov. 1993 thru Aug. 1994 warrants exercised 105,000 1,050 - 38,950 (2,500) - 37,500
June 1994 Private Placement subject to Reg. S 91,667 917 - 287,834 - - 288,751
Net Loss - - - - - (5,145,081) (5,145,081)
---------- --------- ---------- ---------- ---------- ------------ -----------
Balances at September 30, 1994 17,839,540 178,395 - 9,316,014 40,315 (16,012,597) (6,477,873)
Consulting service in exchange for stock 17,500 175 - 61,075 - - 61,250
May 1995 Exchange of debt for shrs of stk 3,000,000 30,000 - 10,470,000 - - 10,500,000
Oct. 1994 thru Sep. 1995 warrants exercised 29,512 295 - 9,771 - - 10,066
Warrant extensions - - - - 4,650,000 - 4,650,000
Oct. 1, 1994 to Sep. 30, 1995(various dates)
Registered Stock 437,768 4,378 - 1,497,114 - - 1,501,492
July 12, 1995 unregistered stock to BICO 1,200,000 12,000 - 4,188,000 - - 4,200,000
Net Loss - - - - - (10,361,514) (10,361,514)
---------- --------- ---------- ---------- ---------- ------------ -----------
Balances at September 30, 1995 22,524,320 225,243 - 25,541,974 4,690,315 (26,374,111) 4,083,421
Consulting service in exchange for stock:Reg. 10,000 100 - 34,900 - - 35,000
Consulting service in exchange for stock:Unreg. 5,000 50 - 17,450 - - 17,500
Oct. 1995 thru Sep. 1996 warrants exercised 56,000 560 - 27,440 - - 28,000
Warrant extensions - - - - 7,644,033 - 7,644,033
Oct. 1, 1995 to Sep. 30, 1996(various dates)
Registered Stock 410,731 4,108 - 1,361,047 - - 1,365,155
Net Loss - - - - - (9,021,823) (9,021,823)
---------- --------- ---------- ---------- ---------- ------------ -----------
Balances at September 30, 1996 23,006,051 230,061 - 26,982,811 12,334,348 (35,395,934) 4,151,286
Warrant extensions - - - - 5,593,875 - 5,593,875
Oct. 1, 1996 to Sep. 30, 1997(various dates)
Registered Stock (27,000) (270) - (94,230) - - (94,500)
Net Loss - - - - - (6,564,837) (6,564,837)
---------- --------- ---------- ---------- ---------- ------------ -----------
Balances at September 30, 1997 22,979,051 229,791 - 26,888,581 17,928,223 (41,960,771) 3,085,824
Warrant extensions - - - - 25,000 - 25,000
Oct. 1, 1997 to Sep. 30, 1998(various dates)
Registered Stock 1,000 10 - 3,490 - - 3,500
Net Loss - - - - - (2,914,329) (2,914,329)
---------- --------- ---------- ---------- ---------- ---------- -----------
Balances at September 30, 1998 22,980,051 229,801 - 26,892,071 17,953,223 (44,875,100) 199,995
Warrants issued for services - - - - 228,538 - 228,538
Warrant extensions - - - - 272,078 - 272,078
Net Loss - - - - - (753,501) (753,501)
---------- --------- ---------- ---------- ---------- ----------- ----------
Balances at September 30, 1999 22,980,051 $229,801 - 26,892,071 18,453,839 (45,628,601) (52,890)
Warrants issued for services - - - - - - -
Warrant extensions - - - - 230,178 - 230,178
Net Loss - - - - - (695,438) (695,438)
---------- --------- ---------- ---------- ---------- ----------- ----------
Balances at September 30, 2000 22,980,051 $229,801 $ -$26,892,071 $18,684,017 $(46,324,039) $ (518,150)
========== ========= ========== ========== ========== =========== ===========
The accompanying notes are an integral part of this statement.
5
Diasensor.com, Inc.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CASH FLOWS (Note J)
From July 5, 1989
For the year ended For the year ended For the year ended (inception) thru
September 30, 2000 September 30, 1999 September 30, 1998 September 30, 2000
------------------ ------------------ ------------------ ------------------
Cash flows from operating activities:
Net loss $ (695,438) $ (753,501) $ (2,914,329) $ (46,294,039)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation 6,107 6,074 13,615 81,734
Amortization 154,247 - - 154,247
Provision for (recovery of)doubtful
accounts (1,458,809) (823,670) 2,282,479 -
Impairment loss - - 14,367 14,367
Loss on unconsolidated subsidiaries 105,425 - - 105,425
Stock issued in exchange for services - - - 138,950
Stk issued for License & Marketing Agreement - - - 80,000
Warrants issued for services 230,178 228,538 - 458,716
Warrant extensions - 272,078 25,000 18,184,986
Inventory deposit - BICO - - - (1,000,000)
(Increase) decrease in prepaid expenses 130 5,662 7,906 -
Increase in payable due to BICO 1,763,314 - - 12,263,314
(Increase)decrease in rec. due from BICO Sub. (19,838) - - (19,838)
Increase (decrease) in accounts payable - (23,606) 14,173 -
Increase in accrued payroll and withholdings 626 22,493 55,735 91,840
Increase in other assets - (17,250) - (17,250)
------------- ------------- ------------- -------------
Net cash used in operating activities 85,942 (1,083,182) (501,054) (15,757,548)
Cash flows from investing activities:
Disposal of property and equipment - 175,000 - 175,000
Purchase of property and equipment - - - (279,413)
Investment - MicroIslet (900,000) - - (900,000)
Investment - Diabecore (500,784) - - (500,784)
(Increase)in notes rec-related parties - - (125,000) (125,000)
(Increase)in interest rec-related parties - (4,266) (9,272) (13,538)
------------- ------------- ------------- -------------
Net cash used in investing activities (1,400,784) 170,734 (134,272) (1,643,735)
Cash flows from financing activities:
Advances to BICO (437,405) (97,438) (2,853,665) (7,498,369)
Repayment of advances to BICO 1,858,820 974,600 1,656,232 9,166,099
Proceeds from issuance of common stock - - 3,500 10,971,834
Proceeds from issuance of common stk to BICO - - - 4,200,000
Proceeds from warrants exercised - - - 118,066
Purchase from treasury stock - - - (35,000)
Proceeds from Regulation S - - - 288,751
Proceeds from issuance of notes payable - - - 303,000
------------- -------------- ------------ --------------
Net cash provided (used)by fin. activities 1,421,415 877,162 (1,193,933) 17,514,381
------------- -------------- ------------ --------------
Net increase(decrease)in cash and cash equiv. 106,573 (35,286) (1,829,259) 113,098
Cash and cash equivalents at beg of period 6,525 41,811 1,871,070 -
------------- --------------- ------------ --------------
Cash and cash equivalents at end of period $ 113,098 $ 6,525 $ 41,811 $ 113,098
============ ============== ============ ==============
The accompanying notes are an integral part of this statement.
DIASENSOR.COM, INC.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. ORGANIZATION
Diasensor.com, Inc. (the Company) was incorporated in the
Commonwealth of Pennsylvania on July 5, 1989 as a wholly owned
subsidiary of BICO, Inc. (BICO). BICO owned approximately 52% of
the stock of the Company at September 30, 2000. The Company and
BICO are currently developing a Noninvasive Glucose Sensor (the
Sensor), which management believes will be able to measure the
concentration of glucose in human tissue without requiring the
drawing of blood. The Company plans to market the Sensor to
diabetics through their doctors and is currently negotiating with
domestic and international distribution organizations.
The consolidated financial statements include the accounts of
Diasensor.com UK LTD., a 100% owned subsidiary of Diasensor.com,
Inc. as of September 30, 2000. All significant intercompany
accounts and transactions have been eliminated.
2. CASH AND CASH EQUIVALENTS
For purposes of the consolidated statement of cash flows, the
Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. The
Company places temporary cash deposits in financial institutions
and such deposits may be in excess of the FDIC insurance limit.
3. PROPERTY AND EQUIPMENT
Property and equipment are accounted for at cost and are
depreciated over their estimated useful lives (37 years for
property and 10 years for equipment) on a straight-line basis.
The carrying value of property and equipment are reduced for
impairment losses determined by management.
4. INCOME TAXES
The Company previously adopted Financial Accounting Standards
Board Statement 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 basis of existing assets
and liabilities. Due to the uncertainty of the realization of
income tax benefits (Note F), the adoption of FAS 109 had no
effect on the financial statements of the Company.
5. 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.
6. NET LOSS PER COMMON SHARE
Net loss per common share is based on the weighted average
number of common shares outstanding which amounted to
22,980,051 for the years ended September 30, 2000 and
September 30, 1999 and 22,979,884 for the year ended
September 30, 1998. The loss per share does not include common
stock equivalents since the effect would be anti-dilutive.
For the period from July 5, 1989 (inception) to September 30,
2000, net loss per common share is based on the weighted
average number of common shares outstanding and the number of
common shares issuable on the exercise of 1,708,000 warrants
issued in 1992; reduced by 488,000 common shares that were
assumed to have been purchased with the proceeds from the
exercise of the warrants at an assumed price of $3.50 per
share. The inclusion of the warrants in the loss per share
calculation is required by the rules of the Securities and
Exchange Commission relative to the initial registration
statement which included the Company's financial statements
through the period ended March 31, 1993. The registration
statement became effective July 19, 1993. The weighted
average number of common shares including the effect of the
conversion of the warrants for the period from July 5, 1989
(inception) to September 30, 2000 amounted to 19,656,059.
7. RESEARCH AND DEVELOPMENT
All research and development costs incurred by the Company, or
by BICO on its behalf, are charged to operations as incurred.
Patent and technology rights acquired from BICO (Note G) have
also been written off as a charge to operations.
8. TREASURY STOCK
The Company records treasury stock transactions using the par
value method.
9. INTERCOMPANY ACTIVITY
Certain expenses are allocated by management between the Company,
BICO and BICO's subsidiaries. These expenses are reimbursed to
the paying entity through the use of intercompany accounts, which
accounts are also used to account for non-interest bearing cash
advances between the companies.
10. COMMON STOCK WARRANTS
The Company recognizes cost on warrants granted or extended based
upon the minimum value method. There is currently no trading
market for the Company's warrants or common stock. Under this
method, the warrants are valued by reducing the exercise price of
the underlying stock by the present value of the exercise price
discounted at an estimated risk-free interest rate of 5% and
assuming no dividends.
11. COMPREHENSIVE INCOME
The Company's consolidated net income (loss) is substantially the
same as comprehensive income required to be disclosed by
Financial Accounting Standards Board Statement No. 130.
12. CONCENTRATION OF CREDIT RISK
At September 30, 2000, financial instruments which potentially
subjected the Company to significant concentrations of credit
risk consisted principally of investments in unconsolidated
subsidiaries. In 1999, the Company was potentially subject to
significant concentrations of credit risk related to receivables
from BICO. All receivables from BICO were repaid as of September
30, 2000.
NOTE B - OPERATIONS
The Company is developing the Sensor and has not, as yet,
achieved a commercially marketable product. The ability of the
Company to continue in existence is dependent on its having
sufficient financial resources to maintain operations, to
complete the research and development necessary to successfully
bring the Sensor to market, and for marketplace acceptance. The
Company has no other commercial products and is dependent on the
successful development of the Sensor technology. The Company has
had no sales of its common stock over the last two fiscal years.
An intercompany receivable from BICO of $1,458,809 was collected
during the year ended September 30, 2000 and the proceeds were
used to finance the Company's operations. In addition, an
increase of $1,725,920 in the amount payable to BICO was
recognized during the year and this increase represents amounts
provided by BICO to fund the Company's operations.
The Company is in the development stage, and accordingly, it has
presented cumulative information on results of operations, cash
flows, and changes in stockholders' equity since inception.
The Company has incurred significant losses and negative cash
flows from operations from inception through September 30, 2000
and has a significant accumulated deficit as of September 30,
2000, raising substantial doubt about its ability to continue as
a going concern. The Company has financed its losses and its
research and development program, the billing on which is
temporarily suspended, primarily from the sale of the Company's
common stock through private placements. Management believes
that its available cash resources, including funds to be raised
by the Company or its affiliates will be sufficient to fund its
operations through the year ending September 30, 2001.
As a result of agreements with BICO relating to development and
manufacture of the Noninvasive Glucose Sensor, the Company is
dependent on BICO for substantially all of its activities in
connection with the development and manufacture of the Sensor, other
than its marketing efforts. Pursuant to the Research and
Development Agreement, BICO has undertaken the development of the
Sensor and has assumed certain other obligations. In July 1995, the
Company and BICO agreed to suspend billings, accruals of amounts due
and payments pursuant to the R&D Agreement pending FDA review of the
Sensor. No amounts are due pursuant to the R&D Agreement which have
not been recorded, and no adjustments will be made retroactively or
cumulatively if and when billings resume. Management believes that
billings may resume, based on negotiations between both companies,
if and when the Diasensor 2000 is approved for marketing. Pursuant
to a manufacturing agreement between BICO and the Company, BICO will
manufacture the Sensor once development is completed. In the
absence of such agreements with BICO, the research, development and
manufacture of the Sensor could not continue as currently
contemplated. BICO's ability to successfully complete the
development of the Sensor, to obtain FDA approval in a timely
fashion and to manufacture production units of the Sensor without
significant delays or defects will directly affect the Company's
business and ability to achieve profitable operations. BICO has
experienced, and continues to experience, substantial losses and
financial difficulties. The consolidated financial statements for
BICO for the year ended December 31, 1999 included disclosures which
referred to the existence of substantial doubt about BICO's ability
to continue as a going concern. BICO has a net loss for the nine
month period ended September 30, 2000 of $25,611,501 (unaudited)
and for the fiscal year ended December 31, 1999 of $38,072,578,
compared to a net loss for the fiscal year ended December 31, 1998
of $22,402,644. As of December 31, 1999, and September 30, 2000,
BICO's accumulated deficit was $181,174,458 and $206,785,959
(unaudited) respectively.
In the past, BICO has financed its own operations from proceeds
generated from private and public sales of its securities, the
issuance of debt in the form of convertible debentures, from
funds paid by the Company to BICO for research and development of
the Noninvasive Glucose Sensor and from intercompany advances
from the Company and other BICO subsidiaries. The failure of
BICO to continue to exist as a going concern would have a
material adverse effect on the Company's business and ability to
continue operations.
If BICO does not continue as a going concern, the Company would
need to rely on other arrangements to develop and manufacture the
Sensor or to perform that work itself. There can be no assurance
that the Company would be able to find acceptable alternatives,
negotiate acceptable collaborative arrangements with any
alternative organizations, or to perform the work itself.
NOTE C - INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES
In January 2000, the Company acquired a ten percent (10%)
interest in MicroIslet, Inc. for an investment of $500,000. The
Company made additional investments of $400,000 during the year
bringing its total interest in MicroIslet to 14%. The Company
has an option to purchase an additional 6% interest in MicroIslet
and it is management's intention to exercise this option. The
Company is represented on the board of directors of MicroIslet.
MicroIslet is a California company, which has licensed several
diabetes research technologies from Duke University with a
specific focus on optimizing microencapsulated islets for
transplantation.
In March 2000, the Company acquired an equity interest in
Diabecore Medical, Inc., a Toronto-based company working to
develop a new insulin for the treatment of diabetes, for
$500,784. With this initial investment, the Company owns
15.9% of Diabecore. The Company also owns warrants to
purchase additional shares of Diabecore, which, if exercised,
will increase the Company's ownership to 35%. It is
management's intention to exercise these warrants. The
Company is represented on the board of directors of Diabecore.
These investments are being reported on the equity basis and
differences between the investment and the underlying net assets
of the unconsolidated subsidiaries are being amortized as
goodwill over a 5-year period. The Company's investments in the
underlying assets and the unamortized goodwill of each
unconsolidated subsidiary as of September 30, 2000 are as
follows:
Investment
Unconsolidated in Unamortized
Subsidiary Underlying Goodwill Total
Net Assets
MicroIslet, Inc. 89,657 635,409 725,066
Diabecore Medical,Inc. 37,003 379,043 416,046
------- --------- ---------
Total $126,660 $1,014,452 $1,141,112
======= ========= =========
NOTE D - LEASE
In December 1998 the Company sold its building and leased it back
under an agreement which requires monthly rent of $5,750 for five
years beginning on January 1, 1999. Future minimum rental
payments under this lease are $69,000 for each of the fiscal
years ending on September 30, 2001 through 2003 and $17,250 for
the final three months of the lease concluding December 31, 2003.
The Company paid a security deposit of $17,250 upon entering into
this lease agreement.
NOTE E - OTHER INCOME
Other income for the years ending September 30, 2000, 1999 and
1998 consists of $ 0, $6,445 and $20,386 of interest income and $
62,100, $42,528 and $42,528 of rental income for their respective
periods. The total rental income for the years ended September
30, 2000, 1999 and 1998, was from BICO and its subsidiaries for
office space.
NOTE F - INCOME TAXES
As of September 30, 2000, the Company has available approximately
$25,495,000 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
the tax years 2004 through 2015. The Company also has research
and development credit carryforwards available to offset federal
income taxes of approximately $700,000 subject to limitations,
expiring in the years 2005 through 2013.
The Company has temporary differences arising from different
methods of accounting for the costs of patent and technology
rights for financial statement and tax purposes. For financial
statement purposes, these costs have been charged to operations.
For tax purposes, the costs of approximately $2,650,000 have been
capitalized and are being amortized over seventeen years. Also,
warrant extensions have been recorded and expensed for financial
statement purposes in the amount of $18,642,598 as of September
30, 2000. For tax purposes, warrants are not recorded until the
warrants are exercised. Bad debt allowance recorded against
intercompany receivables in the amount of $2,282,479 at September
30, 1998 was expensed for financial statement purposes but not
for tax purposes. Reductions in the allowance account of
$823,670 at September 30, 1999 and $1,458,809 as of September 30,
2000 are also reflected in the financial statements but are not
included in the tax return.
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 their 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
September 30, 2000 and 1999:
2000 1999
Net Operating Loss $8,667,240 $8,049,126
Warrant Expense 6,336,783 6,258,898
Patent Amortization 435,896 488,174
Allowance for Bad Debts 0 443,400
Tax Credit Carry Forward 700,000 700,000
---------- ----------
16,139,919 15,939,598
Valuation Allowance (16,139,919) (15,939,598)
---------- ----------
Net Deferred Tax Asset $ 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 September 30,2000 $ (200,321) $ 200,321 $0
Year Ended September 30,1999 $ (203,637) $ 203,637 $0
Year Ended September 30,1998 $ (846,487) $ 846,487 $0
Year Ended September 30,1997 $ (2,326,496) $ 2,326,496 $0
Year Ended September 30,1996 $ (3,000,971) $ 3,000,971 $0
Year Ended September 30,1995 $ (3,877,527) $ 3,877,527 $0
From July 5,1989 (inception)
through September 30, 2000 $(16,139,919) $16,139,919 $0
NOTE G - RELATED PARTY TRANSACTIONS
1. SENSOR RELATED AGREEMENTS
The Company has a development agreement with BICO for the Sensor.
If successfully developed, the Sensor will enable users to
measure blood glucose levels without taking blood samples. On
November 18, 1991, the Company acquired for $2,000,000 the right
from BICO to one United States patent, which 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). Each model of the Sensor is
subject to clinical testing and regulatory approvals by the FDA.
The Company and BICO have entered into a series of agreements
related to the development, manufacture and marketing of the
Sensor. Under such agreements, BICO is required to 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. Following is a brief description of the
agreements:
Manufacturing Agreement
The manufacturing agreement between the Company and BICO was
entered into on January 20, 1992. Under such agreement, BICO is
to act as the exclusive manufacturer of production units of the
Sensor and to sell the units to the Company at a price determined
by the agreement. The term of the agreement is fifteen years.
Research and Development Agreement
Under a January 1992 agreement effective April 1992, the Company
is to pay BICO $100,000 for indirect costs per month, plus all
direct costs for the research and development of the Sensor. This
agreement replaced a previous agreement dated May 14, 1991 under
which Diasensor.com, Inc. had been paying BICO $50,000 for
indirect costs per month, plus all direct costs for the design
and development activities. The term of the agreement expires in
2007. In July 1995, the Company and BICO agreed to suspend
billings, accruals of amounts due and payments pursuant to the
R&D Agreement, pending FDA review of the Sensor.
The monthly charges from BICO for indirect costs are reflected as
general and administrative expenses and direct costs for the
research and development of the Sensor incurred by BICO are
reflected as R&D expenses in the statement of operations.
Purchase Agreement
In November 1991, the Company entered into a Purchase Agreement
with BICO under which the Company acquired all of BICO's rights
to the Sensor for a cash payment of $2,000,000 which was charged
to operations.
Sublicensing Agreement
In 1989, BICO acquired rights to certain concepts and patents
related to the Sensor from outside parties. The purchase price
was $650,000, and was paid by the conveyance of stock in BICO and
1,040,000 shares of Diasensor.com, Inc. common stock. The
$520,000 value of the Diasensor.com, Inc. stock issued was
charged to the receivable due from BICO. On May 14, 1991,
Diasensor.com, Inc. and BICO entered into a sublicense agreement
under which Diasensor.com, Inc. acquired these rights from BICO
for a cash payment of $650,000 which was charged to operations.
License and Marketing Agreement
In August 1989, BICO granted Diasensor.com, Inc. the exclusive
right to represent BICO and to market the Sensor and related
products worldwide. In exchange for these rights, Diasensor.com,
Inc. conveyed 8,000,000 shares of its common stock to BICO. The
assigned value of these shares was $80,000 which was charged to
operations. In November 1991, this agreement was superseded when
the Company purchased all rights to the Sensor technology.
2. INTERCOMPANY ACTIVITY
For the fiscal year ended September 30, 2000 net intercompany
charges from BICO and its subsidiaries to the Company were
$1,743,476. For the fiscal years ended September 30, 1999 and
1998, net intercompany charges by the Company to BICO and its
subsidiaries were $81,261 and $160,433, respectively.
3. RECEIVABLES FROM OFFICERS AND DIRECTORS
During the fiscal year ended September 30, 1998 the Company made
loans to certain officers and directors totaling $125,000. The
loans were due upon demand with interest at a rate of 8.25%.
Total amounts due, including accrued interest, on these loans at
September 30, 1998, were $80,599 from Fred E. Cooper and $53,673
from Anthony J. Feola. During the fiscal year ended September
30, 1999, the Company (by agreement with BICO) assigned the above
$134,272 of notes receivable and accrued interest, plus an
additional $4,266 accrued interest, to BICO by an increase in the
intercompany due from BICO account.
4. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Due to the financial condition of BICO, as discussed in Note B,
management had established an allowance for doubtful accounts
covering amounts due from BICO. During the fiscal year ended
September 30, 2000, the Company reduced the allowance for
doubtful accounts from $1,458,809 to zero to reflect the
repayment of all amounts due from BICO.
5. ACCRUED PAYROLL
Included in accrued payroll and withholdings at September 30,
2000, is $45,208 and $29,167 for unpaid wages from fiscal years
1997 through 1999 of Fred E. Cooper and David L. Purdy,
respectively, which were earned but voluntarily deferred by these
two directors.
NOTE H - COMMITMENTS AND CONTINGENCIES
1. RESEARCH AND DEVELOPMENT
Under terms of a Research and Development Agreement with BICO,
the Company is to pay BICO $100,000 for indirect costs per month,
plus direct costs associated with the research and development
through January, 2007. In July 1995, the Company and BICO agreed
to suspend billings, accruals of amounts due and payments
pursuant to the R&D Agreement, pending FDA review of the Sensor.
2. EMPLOYMENT AGREEMENTS
Diasensor.com, Inc. has entered into agreements with Fred E.
Cooper and David L. Purdy pursuant to which they receive annual
salaries (as adjusted through September 30, 2000) of $497,000 and
$450,000, respectively, from Diasensor.com, Inc. both of which
are subject to review and adjustment annually. The initial term
of the agreements with Mr. Cooper and Mr. Purdy expired on
October 31, 1999, but were automatically renewed for an
additional three-year period; such renewals will continue unless
either party gives proper notice of non-renewal. In November,
2000, Mr. Purdy resigned effective February 2001. The agreements
also provide that in the event of a "change of control" of
Diasensor.com, Inc., Diasensor.com, Inc. is required to issue to
Mr. Cooper and Mr. Purdy shares of common stock equal to five
percent (5%) of the outstanding shares of common stock of the
Company immediately after the change in control.
3. LITIGATION
Several class action lawsuits were filed against the Company
along with BICO and certain of their directors, all of which were
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 BICO between April 25,
1995 and February 26, 1996, at which time the value of BICO'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 BICO. Without agreeing
to the alleged charges or acknowledging any liability or
wrongdoing, the Company and BICO agreed to settle the lawsuit for
a total amount of $3,450,000. As of September 30, 2000,
$2,150,000 has been paid toward the settlement by BICO. An
additional $1,300,000 will be paid in June 2001 by BICO.
Although it is not known whether the class action plaintiffs have
been formally notified of the settlement, or if they have
accepted its terms, the company believes that the existing
settlement will end this matter.
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.
4. PENNSYLVANIA SECURITIES COMMISSION
The Pennsylvania Securities Commission initiated a private
investigation of the Company and BICO in connection with the sale
of securities in 1996. 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 and the Company has not been
advised of any finding or order in connection with the
investigation, there can be no estimate or evaluation of the
likelihood of an unfavorable outcome in this matter or the range
of possible loss, if any.
NOTE I - STOCKHOLDERS' EQUITY
Common Stock
The Company sold 2,800,000 shares of common stock at $0.50 per
share, from August 1989 to May 1991 in connection with a joint
private offering with BICO. The aggregate amount raised was
$1,400,000, on which no commissions were paid to any third party.
The Company sold 4,997,500 shares of common stock, at $1.00 per
share, in a private offering from May 1991 to January 1992. The
aggregate amount raised was $4,985,201, on which no commissions
were paid to any third party.
The Company sold, in July 1992, 7,212 shares of common stock,
at $3.50 per share, in a private offering to one accredited
investor. The aggregate amount raised was $25,242, on which no
commissions were paid to any third party.
The Company sold 300,000 shares of common stock, at $3.50 per
share, in a private offering from July 1992 through November
1992. The aggregate amount raised was $1,050,000, on which no
commissions were paid to any third party.
In December 1991, the Company issued 235,000 shares of common
stock in exchange for the cancellation of outstanding
promissory notes for $235,000.
In June 1994, the Company sold 91,667 shares of its common
stock pursuant to the requirements set forth in Regulation S of
the Securities Act of 1933 ("Regulation S"). In connection
with such sale, the purchasers and any entity which facilitated
such sale undertook to ensure compliance with Regulation S,
which among other things, limits a foreign investor's ability
to trade the Company's stock in the United States. The Company
received net proceeds in the amount of $288,751 pursuant to
such sales.
During 1995, the Company issued the following shares of its
common stock to BICO: 3,000,000 shares at an assigned price of
$3.50 per share in return for a corresponding reduction in the
amount due from Diasensor.com, Inc. to BICO pursuant to the R&D
Agreement of $10,500,000; and 1,200,000 shares of its common
stock at a price of $3.50 per share.
In July, 1993, the Company commenced a public offering. As of
September 30, 1998, an aggregate of 1,063,460 shares had been
issued with proceeds to the Company of $3,561,892. Of that
total, 230,961 shares with net proceeds of $786,245 were issued
in fiscal 1994; 437,768 shares with net proceeds of $1,501,492
were issued in fiscal 1995; 410,731 shares with net proceeds of
$1,365,155 were sold in fiscal 1996; 1,000 shares were issued
in fiscal 1998 at $3.50 per share; 10,000 shares were issued
for consulting services at a charge to operations of $35,000 in
fiscal 1996; and 27,000 shares were reimbursed with net
repayment of $94,500 in fiscal 1997.
The Company issued unregistered common stock in exchange for
consulting services of 7,200 shares in fiscal 1994, 17,500 shares
in fiscal 1995, 5,000 shares in fiscal 1996 and none in fiscal
1997, 1998 or 1999. The associated consulting service expense
was recognized at a rate of $3.50 per share, which is the price
at which the common stock was being sold in the Company's public
offering.
Common Stock Warrants
At September 30, 2000, the Company has reserved 10,463,013 shares
of the Company's unissued common stock for warrants which were
outstanding and exercisable. Of these, warrants for 7,509,550
shares were issued to directors, officers, and employees for
meritorious service, employment contracts and personal guarantees
on Company indebtedness. Also, warrants for 2,553,463 shares
were issued to consultants and medical advisers and for 400,000
shares to individuals for personal guarantees on Company loans.
The per share exercise price for 7,380,000 shares is $.50, for
2,170,463 shares is $1.00 and for 912,550 shares is $3.50. The
fiscal years in which warrants expire are as follows:
Warrant Expiration Fiscal Year Number of Shares
2001 1,475,750
2002 117,213
2003 2,283,050
2004 4,502,000
2005 2,085,000
----------
10,463,013
==========
The following is a summary of warrant transactions during fiscal
years ended September 30,
2000 1999 1998 1997 1996
Outstanding beginning 8,644,113 6,676,513 7,476,513 7,533,263 7,077,213
of year
Granted during the year 2,085,000 2,070,000 0 59,000 743,250
Canceled during the year (266,100) (102,400) (800,000) (115,750) (231,200)
Exercised during the
years at prices ranging
from $.1875 to $1.00 per
share 0 0 0 0 (56,000)
--------- --------- --------- --------- ---------
Outstanding, and 10,463,013 8,644,113 6,676,513 7,476,513 7,533,263
eligible for exercise. ========= ========= ========= ========= =========
During the period October 1, 1999 through September 30, 2000, the
Company extended the exercise date of warrants to purchase
2,202,050 shares of common stock to certain officers, directors,
employees and consultants. Warrants for 2,120,250 shares were
originally granted at an exercise price of $1.00 and warrants for
81,800 shares were originally granted at an exercise price of
$3.50 and were extended at the same price. No expense was
recognized in connection with the extension of these warrants
because the present value of the exercise price is greater than
the estimated fair value of the underlying shares. In addition,
during the year ended September 30, 1999, the Company granted
warrants to purchase 2,085,000 shares of common stock to
employees and consultants at an exercise price of $.50 per share.
These warrants were granted for services rendered which were
recognized in general and administrative expenses for a total of
$230,178.
During the period October 1, 1998 through September 30, 1999, the
Company extended the exercise date of warrants to purchase
2,561,213 shares of common stock to certain officers, directors,
employees and consultants. Warrants for 2,477,000 were
originally granted at an exercise price of $.50 per share,
warrants for 29,213 shares were origainally granted at an
exercise price of $1.00 and warrants for 55,000 shares were
originally granted at an exercise price of $3.50 and were
extended at the same price. In connection with the extension of
these warrants the Company recorded a charge of $272,078 against
operations. In addition, during the year ended September 30,
1999, the Company granted warrants to purchase 2,070,000 shares
of common stock to employees and consultants at an exercise price
of $.50 per share. These warrants were granted for services
rendered which were recognized in general and administrative
expenses for a total of $228,538.
During the period October 1, 1997 through September 30, 1998, the
Company extended the exercise date of warrants to purchase
2,236,550 shares of common stock to certain officers, directors,
employees and consultants. Warrants for 748,000 were originally
granted at an exercise price of $.50 per share and warrants for
10,000 shares were originally granted at an exercise price of
$1.00 and were extended at the same price. The Company recorded
$25,000 against operations in connection with the extension of
these warrants.
During the period October 1, 1996 through September 30, 1997, the
Company extended the exercise date of warrants to purchase
2,236,550 shares of common stock to certain officers, directors,
employees and consultants. Warrants for 2,236,550 were
originally granted at an exercise price of $1.00 per share and
were extended at the same price. The Company recorded $5,593,875
against operations in connection with the extension of these
warrants.
During the period October 1, 1995 through September 30, 1996, the
Company extended the exercise date of warrants to purchase
2,556,213 shares of common stock to certain officers, directors,
employees and consultants. Warrants for 49,213 and 2,507,000
shares were originally granted at an exercise price of $1.00 and
$.50 per share, resepectively, and were extended at the same
price. The Company recorded $7,644,033 against operations in
connection with the extensions of these warrants.
During the period October 1, 1994 through September 30, 1995, the
Company extended the exercise date of warrants to purchase
1,550,000 shares of common stock to certain officers, directors,
employees and consultants. The warrants were originally granted
at an exercise price of $.50 per share and were extended at the
same price. The assumed value of the stock when the extensions
were granted was $3.50. The Company recorded $4,650,000 against
operations in connection with the extensions of these warrants.
In 1990, the Company granted warrants to purchase 800,000 shares
of common stock at an exercise price of $.50 per share to eight
current or former directors or officers of the Company or BICO
who personally guaranteed the payment of a lease obligation to
the bank for the premises occupied by BICO at the 300 Indian
Springs Road location. The Company also granted warrants to
purchase 100,000 shares of common stock each to an individual and
his company at an exercise price of $.50
per share for personally guaranteeing the payment of an
obligation related to the purchase of equipment by BICO. In
addition, the Company granted warrants to purchase 100,000 shares
of
common stock for services performed by consultants at an exercise
price of $.50. The Company recorded an estimated value of these
warrants at $27,500 which was charged to operations.
NOTE J- SUPPLEMENT CASH FLOW INFORMATION
The Company's financing activities included the following noncash
transactions.
During 1992 and 1990, notes payable aggregating $303,000 were
canceled and exchanged for 371,000 shares of the Company's
common stock.
On March 31, 1995, the Company issued 3,000,000 shares of its
unregistered stock to BICO in payment of $10,500,000 due to
BICO.
During the Fiscal year ended September 30, 1999, the Company
(by agreement with BICO) converted
$125,000 of related party notes receivable and $13,538 of
associated interest receivable to due from BICO.
Cash paid for interest and income taxes were as follows:
From July 5, 1989
(inception)
September September September through September
30,2000 30,1999 30,1998 30,2000
Interest Paid $ 0 $ 0 $ 0 $10,529
====== ====== ======= =======
Income Taxes Paid $ 0 $ 0 $ 0 $ 0
====== ====== ======= =======
NOTE K - SUBSEQUENT EVENT
In November 2000, the Company made additional investments of
$100,000 in MicroIslet and $192,736 in Diabecore Medical, Inc.
These additional investments increased the Company's ownership
percentages to approximately 15% and 21% in MicroIslet and
Diabecore, respectively.