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 09/30/2001
Commission File Number 0-26504
Diasense, Inc.
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1605848
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) 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, 2001:
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, 2001, 22,980,051 shares of Common Stock, par
value $.01 per share were outstanding. As of November 30, 2001,
no shares of Preferred Stock were outstanding.
Exhibit index is located on page 38.
PART I
Item 1. Business
General Development of Business
Diasense, Inc. was incorporated in the Commonwealth of
Pennsylvania on July 5, 1989 as Diasense, Inc., a wholly owned
subsidiary of BICO Inc. BICO currently owns 52% of Diasense.
The focus of our business is our noninvasive glucose sensor for
use by diabetics. We've also developed a telemedicine system
called DataCONN, which is a monitoring system that allows
diabetics to transmit glucose readings via phone or the internet,
allowing both a central monitoring department and the diabetic's
own physician to monitor glucose levels and assist in glucose
control. Joslin Diabetes Center, an affiliate of Harvard
Medical School and an international leader in diabetes treatment,
began conducting FDA- approved clinical trials on the Diasensor
in the U.S. in October 2000. The trials are continuing under
Joslin's oversight at nine sites in the U.S. Based on several
agreements between us and BICO, we own the patent, marketing and
distribution rights to the noninvasive glucose 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.
During 2001, we made investments in two different diabetes-
related companies: MicroIslet, Inc., a California company working
with Duke University to develop encapsulated insulin for human
use; and Diabecore Medical, Inc., a Canadian company working on a
new type of insulin.
Financial Information About Industry Segments
We operate 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:
delays or complications in our ongoing clinical trials,
additional delays in obtaining FDA marketing approval of our
sensor; our difficulty in raising funds to continue our projects;
delays in the manufacture or marketing of our other products and
medical devices; our substantial reliance on BICO and BICO's
uncertainty of obtaining additional funding; competition and the
risk that our 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
inability to establish a trading market for our common stock; and
the dilution of our common stock.
Description of Business
History and Development of the Noninvasive Glucose Sensor
Since we began, we've been working with BICO, to develop a
noninvasive glucose sensor for diabetics that is able to measure
glucose without having to draw blood. Most 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 Diasense 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 2001, a total of 14 U.S. patents and two foreign patents
have been issued, with additional patent applications pending.
BICO has the right to develop and manufacture sensors based on
contracts with us.
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 Diasensor1000. 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, although we have discontinued our
marketing efforts 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
In August 1999, we hired Joslin Diabetes Center to help us with
our FDA submission. 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 FDA approved Joslin's protocol for the clinical study
in August 2000. 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 are being paid as the clinical trials continue.
In February 1999 we submitted a PMA shell to the FDA for the
Diasensor. The PMA shell is part of a revised 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. We'll make the final
PMA submission when our clinical trials are completed, and that
submission will include human clinical results and a summary of
safety and effectiveness data.
Clinical trials began in October 2000 at Joslin Diabetes Center
in Boston. The trials are designed for a total of 200 diabetics,
all of whom will participate for nine months. Trials will also be
conducted at eight other sites: St. Luke's-Roosevelt Hospital
Center in New York City; SUNY Health Science Center in Syracuse,
New York; Hershey Medical Center in Hershey, Pennsylvania; Dr.
David Huffman in Chattanooga, Tennessee; New Britain General
Hospital in New Britain, Connecticut; Tulane Medical Center in
New Orleans, Louisiana; and University of North Carolina in
Chapel Hill, North Carolina; and the University of Maryland in
Baltimore, Maryland. We are also working with Amarex, LLC, an
independent research organization headquartered in Washington,
D.C., which has experience in conducting clinical trials, to
monitor our clinical trials. Amarex is collecting data, and
providing training, data and site management, including
statistics and report writing, at all nine sites. Working with
Joslin and Amarex, we plan to submit data to the FDA when the
trials are completed. As of November 2001, we have over 100
patients involved in the trials, and the trials are continuing.
We can't report on our progress in the trials until they're
completed, so we can't tell you how well they are going, or when
we expect that they will be completed. We also plan to 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 that can be used
with our DataCONN service to store and group the patient's
glucose measurements over time.
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've
discontinued our European marketing efforts.
Based on contracts between BICO and Diasense, Inc., BICO has the
exclusive right to manufacture the noninvasive glucose sensor.
Diasense, Inc. will pay BICO for manufacturing, and that's how
BICO will make money if we ever successfully market and sell the
noninvasive glucose sensor.
We are 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. We may set our 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, the majority of diabetics measure their blood glucose
levels by using invasive glucose sensors that use two different
methods. The simplest method for monitoring blood glucose levels
requires the user to prick a finger or arm, 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 or arm 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 Diasense U.K.
Limited.
DataCONN
In March 2001, we launched our DataCONN service. We've been
developing service as our telemedicine system to be used in
combination with our Diasensor, but it can also be used currently
by diabetics who monitor their blood glucose levels using an
invasive device. Doctors and other professional caregivers can
also have access to the information to make treatment decisions
for their diabetic patients.
The DataCONN service is available to anyone who has a touchtone
telephone or access to the internet for a yearly subscription of
$59. The patient enters blood glucose levels and the service
includes 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
and his or her 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.
Diabecore Medical, Inc.
During fiscal 2000 and 2001, 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 have invested a total of
approximately $987,500 in Diabecore, and own approximately 24% of
Diabecore's stock. We currently have no plans to make further
investments in Diabecore.
MicroIslet, Inc.
During fiscal 2000 and 2001, 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 one year 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 is
replicating the testing on 3 more primates to obtain additional
data to support a planned request to the FDA to conduct human
trials. We have invested a total of approximately $1.6 million
in MicroIslet and own approximately 20.2% of MicroIslet's stock.
We currently have no plans to make further investments in
MicroIslet.
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. We
discontinued the use of the consultants in fiscal 2001 because we
don't believe they performed successfully enough.
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 Diasense, Inc.
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, continued our
production and inventory buildup of the Diasensor 2000. 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 Diasense, Inc.'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 Diasense, Inc. 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
Diasense, Inc.'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. 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 DataCONN
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 Diasense, Inc. 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.
As of November 2001, a total of 14 U.S. and two foreign patents
have been issued, all of which have been assigned to Diasense,
Inc., 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.
Diasense, Inc. 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 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 have developed noninvasive
glucose sensors, and that others are still in the research &
development phase, but we have limited knowledge about the actual
technology or the stage of development for most of our
competitors. We face the risk that some other group will
complete the development of their device and penetrate the market
before we do. If that happens, there is a significant chance
that even if we receive FDA approval, our sensor will not be
successful because our marketing efforts started too late. We
don't believe there is any other company currently producing or
marketing noninvasive sensors for the measurement of blood
glucose that use the same technology as we do. 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. In addition,
Abbott Laboratories introduced a new test in 2001 that allows
diabetics to draw blood from areas other than their fingers, such
as from their arms. Abbott's Sof-Tac test is part of their
MediSense product line.
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.
During 2001, Cygnus of Redwood, California received various FDA
approvals, including for assembly and manufacturing for its
GlucoWatch Biographer system 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 to set and use the device. The
device is being sold in the U.K., and Cygnus plans to launch
their device in the U.S. in early 2002. We believe that the
device does not work for everyone, especially those who perspire,
and produces side effects including skin rashes that make regular
use difficult for some patients. 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. At this
point, we can't determine what effect, if any, the GlucoWatch
Biographer will have on our marketing or sales potential, because
we don't know how successful it will be.
Among the companies investigating infrared technology to measure
blood glucose levels noninvasively is CME Telemetrix in Waterloo,
Ontario, Canada. CME is reportedly conducting tests with a
device called a GlucoNIR via funding from Motorola, Inc. that
uses one type of infrared wavelengths. CME Telemetrix recently
reported that they were working to achieve acceptable accuracy
levels before beginning human trials. OptiScan Biomedical in
Alameda, California is developing a device that uses another type
of infrared wavelengths; they are still in clinical trials and
have not yet made an FDA submission. Johnson & Johnson's LifeScan
division has an agreement with InLight Solutions, an Albuquerque
company working on a device that uses near-infrared light to
measure blood glucose. In November 2001, Johnson & Johnson
also acquired diabetes technology from Inverness Medical
Technology. Inverness is selling an electro-chemical glucose
meter and is also in the test strip business. Rio Grande
Medical Technologies of Albuquerque, New Mexico is designing a
photo-based device. We believe Rio Grande is still being 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. SpectRx is also using the device to
do optical scans. 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.
In addition, SpectRx recently received additional funding from
Abbott Laboratories and a third grant from the U.S. Centers for
Disease Control to focus on research to use the device for
children and the elderly. Last year, SpectRx reported that they
had received expedited review status from the FDA for a three-
module premarket approval filing for their diabetes detection
device; and that 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. In November 2000, MiniMed also announced that
it had started human clinical trials of a long-term implantable
glucose sensor developed by a company called MRG. In August
2001, Medtronic bought MiniMed and changed its name to Medtronic
MiniMed.
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 will not be
making another FDA submission until our clinical trials are
finished, and we don't know how much longer that will take.
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 to EN46001 for medical devices, and on June 23, 1998,
BICO 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 1000 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. Although we are not currently marketing our
device in Europe, we will maintain our ISO certification status
because we believe it provides a positive message regarding our
facility and operations and in case we decide to market outside
the U.S. in the future.
Any changes in FDA or European procedures or requirements will
require corresponding changes in our obligations in order to
maintain compliance with 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. 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, Diasense U.K. Limited, in order to facilitate the
opening of our office in London, England. We have discontinued
marketing our device in Europe, but are retaining our London
subsidiary for future use. We must wait for FDA approval before
we can apply for marketing approval 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.
We believe that our existing facilities will be sufficient to
meet our needs through Fiscal 2002. 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 $3,250,000 toward the settlement to
date. During the fourth quarter of fiscal 2001, the parties
agreed to extend the payments on the remaining balance. A
balance of $425,000 is due in the first quarter of fiscal 2002,
including $225,000 for extending the due dates. 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
Diasense, Inc. 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, 2001,
22,980,051 shares of common stock were outstanding. No shares of
preferred stock are outstanding. As of November 30, 2001, there
were currently exercisable warrants outstanding to purchase
10,635,013 shares of our common stock at exercise prices ranging
from $.50 to $3.50 per share. The warrants have various
expiration dates through April 23, 2006.
As of November 30, 2001, 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 Diasense, Inc. 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, 2001 there were outstanding warrants, all of
which are currently exercisable, to purchase 10,635,013 shares of
our common stock at exercise prices ranging from $0.50 to $3.50
per share and having expiration dates ranging from July 29, 2002
to April 23, 2006. During Fiscal 2001, 500,000 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 2001, 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 and
due to his resignation, full payment was not made to Mr. Purdy in
Fiscal 2001. In December 2001, we amended our agreement with Mr.
Cooper and he agreed to waive his salary for the calendar year 2002.
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 and his resignation was
effective February 11, 2001. At that time, he released us from our
obligations under his employment contract as part of the consideration
for a payment of $912,727. Mr. Cooper's agreement also provides that
in the event of a change of control, we are required to issue him 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,
2001, 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
2001 2000 1999 1998 1997
Total $1,727,940 $1,299,610 $ 38,324 $ 292,322 $3,108,243
Assets
Total
Liabilities $3,946,454 $1,817,760 $ 91,214 $ 92,327 $ 22,419
Working
Capital
(Deficit) ($3,945,204)($1,704,662) ($ 84,559)($ 44,724) $2,862,349
Total
Revenues $ 0 $ 0 $ 0 $ 0 $ 0
General and
Administrative
Expenses $1,195,550 $1,956,676 $1,352,567 $ 669,764 $1,023,961
Warrant
Extensions $ 0 $ 0 $ 6,333 $ 25,000 $5,593,875
Benefit
(Provision)
for Income
Taxes $ 0 $ 0 $ 0 $ 0 $ 0
Net Loss ($1,755,563)($ 695,438) ($ 487,756)($2,914,329) ($6,564,837)
Net Loss
per Common
Share:
Basic ($.08) ($.03) ($.02) ($.13) ($.29)
Diluted ($.08) ($.03) ($.02) ($.13) ($.29)
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, 2000 through September 30, 2001 is referred to as
fiscal 2001.
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
During the year ended September 30, 2001 funds were transferred
to Diasense from BICO to provide working capital. These funds
were used in operating activities and for investments in
unconsolidated subsidiaries. In January 2001, BICO adopted a
centralized cash management policy whereby funds are transferred
to Diasense on a daily basis to meet Diasense's actual cash
needs. As a result of this change in policy, Diasense had a cash
balance of zero at September 30, 2001. The net effect of these
transactions was to decrease cash from $113,098 at September 30,
2000, to zero at September 30, 2001.
In fiscal 2001, 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. At September 30, 2000, the
subsidiaries' portion of the rent was shown as $19,838 due from
subsidiaries of BICO on our balance sheet. We did not have any
similar amounts due in fiscal 2001 because all amounts owed for
rent were paid by the subsidiaries of BICO as of September 30,
2001.
During fiscal 2001, we made additional investments in
unconsolidated subsidiaries. We invested an additional $700,000
in MicroIslet, Inc.; a company working with Duke University on
diabetes research technologies that focus on optimizing
microencapsulated islets for transplantation. The project is in
the research and development phase. As of September 30, 2001, we
had invested $1,600,000 in Microislet and owned approximately
20.2% of this company. We also increased our investment in
Diabecore Medical, Inc. Diabecore is a company in Toronto
working with other research institutions to develop a new insulin
to treat diabetes. In fiscal 2001, we invested $486,684
increasing the total amount invested to $987,468 and our
ownership in this company to approximately 24%. This project is
also in the research and development phase. We increased these
investments because 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 Diasense, Inc. 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 2001, 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 financial position of BICO in fiscal 1998. 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. In November 2000 Mr.
Purdy resigned from Diasense and BICO effective as of February
2001. As of the end of fiscal 2001, Mr. Cooper's annual salary
was $497,000. However, in December 2001, Mr. Cooper agreed to
waie his salary from January 1, 2002 through December 31, 2002.
Due to our cash flow problems during fiscal 1998, Mr. Cooper and
Mr. Purdy were not paid their full salaries in that year. At
September 30, 2000 and 2001, there was $45,000 included in accrued
payroll for Mr. Cooper and at September 30, 2000 there was $29,000
included in accrued payroll for Mr. Purdy. All accrued amounts were
paid to Mr. Purdy upon his resignation in fiscal 2001.
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 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 estimate that we will remain dependent upon BICO to meet our
funding needs for at least a year from September 30, 2001. We
estimate that our cash needs will be approximately $100,000 for
the twelve months ended December 31, 2002. However,we don't know
if BICO will be able to continue to raise enough money to support
us.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.
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
Diasense 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 2001, 2000 and 1999, research and development
expenses were zero due to the agreed-upon suspension of charges
and billings by Diasense, Inc. and BICO under the Research and
Development Agreement.
General and administrative expenses totaled $1,195,550 during
fiscal 2001, as compared to $1,956,676 during fiscal 2000, and
$1,352,567 during fiscal 1999. The decrease from fiscal 2000 to
fiscal 2001 is primarily due to decreased personnel costs of
$294,134, $256,635 of which was due to Mr. Purdy's departure. We
also decreased professional fees by $280,232 and decreased
expenses recognized for warrants issued for services by $173,875.
The increase from fiscal 1999 to fiscal 2000 was primarily due to
an increase in salaries of $546,763.
Our other income is made up of interest income and rental income.
During fiscal 2001 and 2000, other income of $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, rental income was $42,528 and interest
earned on deposits of liquid assets was $6,445.
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 2000 and 2001, we extended 2,428,050 and 1,147,750
warrants, respectively. The warrants were originally granted to
certain officers, directors, employees and consultants in 1990
through 1996, with expiration dates from 1995 through 2001, and
exercise prices between $.50 and $3.50 per share. Rather than
letting the warrants expire, we extended them. Because there was
no increase in the value of the warrants over the value recorded
at the time the warrants were originally granted, no expense was
recognized for the warrant extensions. In fiscal 1999, we
extended warrants to purchase 2,346,213 shares with exercise
prices between $.50 and $3.50 per share. The warrants were
originally granted to officers, directors, employees and
consultants during 1991 through 1994, with expiration dates from
1996 through 1999. Because the value of some of the warrants at
the time they were extended exceeded their value when they were
originally granted, $6,333 was charged against operations in
fiscal 1999.
We had losses from our unconsolidated subsidiaries, Diabecore
Medical and MicroIslet, during fiscal 2001 and 2000. We had no
similar loss in 1999 because we just started investing in those
two companies during fiscal 2000. The losses of $240,166 in
fiscal 2001 and $105,425 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, 2001, we had approximately $26,737,000 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 2005-
2021. 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)
N/A
Item 8. Financial Statements and Supplementary Data.
Our consolidated financial statements appear on pages F-1 through
F-22.
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, 2001, our directors and executive officers
were as follows:
Name Age Director Positions Held
Since
Fred E. Cooper 56 1989 President,CEO,
Director
Michael P. 51 Chief Financial
Thompson Officer
Anthony J. Feola 54 1991 Secretary,Director
John F. Steel, IV 43 2000 Director
Anthony DelVicario 52 2001 Director
FRED E. COOPER, 56, 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.
MICHAEL P. THOMPSON, 51, joined us and BICO as our interim chief
financial officer in August 2000, and was elected chief financial
officer by our board of directors and BICO's board of directors
in January 2001. Prior to joining us, he was a partner in
Thompson Dugan, P.C., the CPA firm that served as our outside
auditors until August 2000, when Mr. Thompson joined us as
interim CFO. He has been a CPA for over 25 years.
ANTHONY J. FEOLA, 54, 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 Diasense. 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.
JOHN F. STEEL, IV 43, is the president of MicroIslet, Inc., a
California company working with Duke University to develop
encapsulated insulin from pigs to be used for human implantation.
ANTHONY DELVICARIO, 52, is the president of American-
Intermetallics, Inc., a Rhode Island company that is developing a
coating product that enhances rocket propulsion capabilities.
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, 2001, 2000, and 1999 of those
persons who were, at September 30, 2001: (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. 2001 $ 497,000 $ 0 $ 0 138,000(4) $ 0
Cooper, 2000 $ 465,750 $ 0 $ 0 713,500(3)(4) $ 0
CEO (5) 1999 $ 288,792 $ 0 $ 0 678,545(3)(4) $ 0
- -----------------------------------------------------------------------------------------------
Anthony J. 2001 $ 225,000 $ 0 $ 0 100,000(4) $ 0
Feola (6) 2000 $ 193,750 $ 0 $ 0 200,000(3) $ 0
1999 $ 50,000 $ 0 $ 0 0 $ 0
- -----------------------------------------------------------------------------------------------
David L. 2001 $ 162,115 $ 0 $ 0 250,000(4) $ 0
Purdy 2000 $ 418,750 $ 0 $ 0 506,250(3)(4) $ 0
Chief Scientist* 1999 $ 202,083 $ 0 $ 0 800,000(3)(4) $ 0
(7)
- -----------------------------------------------------------------------------------------------
*Effective February 2001, 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 2001, 2000 or 1999. 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, 2001, 2000 and 1999,
the Named Executives received medical benefits under our
group insurance policy.
(3) We did not grant any warrants to the named executives during
Fiscal 2001. 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, and
Anthony J. Feola received warrants to purchase 200,000
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.
(4) During Fiscal 2001, 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 2001 and 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 2001, Fred E. Cooper's warrants to
purchase 138,000 shares of our common stock at $.50 per
share were extended until April 24, 2004; Anthony J.
Feola's warrants to purchase 100,000 shares of our common
stock at $.50 per share were extended until April 24, 2004;
and David L. Purdy's warrants to purchase 250,000 shares of
our common stock at $.50 per share were extended until
April 24, 2004. During Fiscal 2000, Fred E. Cooper's
warrants to purchase 213,500 shares of our common stock at
$1.00 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) In addition, Mr. Cooper will be, or was, paid salary and
bonuses aggregating approximately $692,000, $642,000 and
$660,000 by BICO and its other subsidiaries during calendar
years 2001, 2000 and 1999, respectively.
(6) In addition, Mr. Feola will be, or was, paid salary and
bonuses aggregating approximately $558,850; $408,850 and
$425,886 by BICO during calendar years 2001, 2000 and 1999,
respectively.
(7) In addition, Mr. Purdy was, paid salary and bonuses
aggregating approximately $913,000, $424,000 and $183,000
by BICO during calendar years 2001, 2000 and 1999,
respectively. Mr. Purdy resigned from us and BICO.
Option/Warrant/SAR Grants in Last Fiscal Year
We did not grant any options, warrants or SARs to any of the
named executives during Fiscal 2001.
AGGREGATED OPTION/WARRANT/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/WARRANT/SAR VALUE TABLE
Number of Value of
Securities Unexercised
Underlying In-the-
Unexercised Money
Options/SARs Options/SARs
at FY-End(#) at FY-End($)
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
Anthony J. Feola -0- -0- 1,000,000(7) $ 0
David L. Purdy -0- -0- 1,556,250(8) $ 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, 2001, 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, 2004; 300,000
shares of common stock at $.50 per share until March 25,
2004; 178,545 shares of common stock at $.50 until May 7,
2004; 150,000 shares of common stock at $1.00 per share
until October 25, 2002; 213,500 shares of common stock at
$1.00 per share 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: 100,000 shares of common
stock at $.50 per share until April 24, 2004; 100,000
shares at $.50 per share until October 23, 2003; 300,000
shares at $.50 per share until March 25, 2004; 300,000
shares at $.50 per share until May 7, 2004; and 200,000 shares
at $.50 per share until April 4, 2005.
(8) Includes warrants to purchase: 250,000 shares of common
stock at $.50 per share until April 24, 2004; 300,000
shares of common stock at $.50 per share until March 25,
2004; 6,250 shares of common stock at $1.00 per share until
April 15, 2003; 300,000 shares of common stock at $.50 per
share 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 2001,
their annual salaries had been increased to $497,000, and
$450,000, respectively. 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 effective February 2001. In
December 2001, we amended our agreement with Mr. Cooper and he agreed
to waive his salary from January 1, 2002 through December 31, 2002.
In the event of a change in control within the term of the
agreements or within one year thereafter, Mr. Cooper is entitled
to receive shares of our common stock equal to 5% of our total
outstanding. He is also entitled to receive severance payments
in amounts equal to: 100% of his most recent annual salary for
the first three years following termination; 50% of his most
recent annual salary for the next two years; and 25% of his most
recent salary for the next five years. We are also required to
continue medical insurance coverage for Mr. Cooper and his family
during those periods. The severance payments will terminate in
the event of Mr. Cooper's death.
In the event that Mr. Cooper becomes disabled, as defined in his
agreement, he will be entitled to the following payments, in lieu
of salary, such payments to be reduced by any amount paid
directly to him under a disability insurance policy provided by
us or our affiliates: 100% of his recent annual salary for
the first three years; and 70% of his most recent salary for the
next two years.
The agreement also generally restricts the disclosure of certain
confidential information obtained by Mr. Cooper during the term
of the agreement and restricts him from competing with us for a
period of one year in specified states following the expiration
or termination of the agreement.
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
Fred E. Cooper 22,000 * 1,702,045(5) 6.9%
Building 2500, 2nd Floor
2275 Swallow Hill Rd.
Pittsburgh, PA 15220
Anthony J. Feola 20,000 * 1,020,000(6) 4.2%
Building 2500, 2nd Floor
2275 Swallow Hill Rd.
Pittsburgh, PA 15220
Michael P. Thompson 0 * 200,000(7) *
Building 2500, 2nd Floor
2275 Swallow Hill Rd.
Pittsburgh, PA 15220
All directors and 42,000 * 2,922,045(8) 11.3%
executive officers
as a group (3 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, 2001. For individual computation
purposes, the total number of shares of common stock
outstanding as of September 30, 2001 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) Includes currently exercisable warrants to purchase the
following: 138,000 shares of common stock at $.50 per
share until April 24, 2004; 300,000 shares of common stock
at $.50 per share until March 25, 2004; 178,545 shares of
common stock at $.50 per share until May 7, 2004; 150,000 shares
of common stock at $1.00 per share until October 25, 2002;
213,500 shares of common stock at $1.00 per share 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.
(6) Includes currently exercisable warrants to purchase the
following: 100,000 shares of common stock at $.50 per
share until April 24, 2004; 100,000 shares of common stock
at $.50 per share until October 23, 2003; 300,000 shares at
$.50 per share until March 25, 2004; 300,000 shares at $.50
per share until May 7, 2004; and 200,000 shares of common
stock at $.50 per share until April 4, 2005.
(7) Includes currently exercisable warrants to purchase 200,000
shares of common stock at $.50 per share until April 23,
2001.
(8) 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
We currently have an employment agreement with Fred E. Cooper
that was originally approved by our board of directors on
November 1, 1994.
David L. Purdy, our former 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 secretary and a director, is also a director on the
BICO, Coraflex, and Petrol Rem boards. He is also the senior
vice president of BICO. Michael P. Thompson, our chief
financial officer, is also the CFO for BICO and Petrol Rem, and
he serves on ViaCirq's board of directors.
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.
Two of our current executive officers and/or directors and four
former directors were members of the nine-member 300 Indian
Springs Road Real Estate Partnership that in July 1990 purchased
BICO's real estate in Indiana, Pennsylvania. Each member of the
partnership personally guaranteed the payment of lease
obligations to the bank providing the funding. The six members
of the partnership who are also current or former officers and/or
directors of BICO, David L. Purdy, Fred E. Cooper, Gary Keeling,
Jack H. Onorato, Richard M. Erenberg and C. Terry Adkins, each
received warrants on June 29, 1990 to purchase 100,000 shares of
our common stock at an exercise price of $.33 per share until
June 29, 1995, all of which expired unexercised. 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. BICO sold the property in October 2000 for
$475,000, and each of the partners received $12,698, after the
mortgage was paid.
Like all our warrants, the warrants issued to the members of 300
Indian Springs Road Real Estate Partnership had exercise prices
equal to or above the current quoted market price of our common
stock on the date of issuance.
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 1999 through Fiscal 2001, 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.
On April 23, 2001, we issued warrants to Michael Thompson to
purchase 200,000 shares of our common stock at $.50 per share
until April 23, 2006.
Investments and Loans
Beginning in 2000 and through fiscal 2001, we invested a total of
$1.6 million in MicroIslet, Inc. One of our directors, John
Steel, is the president of MicroIslet.
Beginning in 2000 and through 2001, BICO invested a total of $1
million in American Inter-Metallics. One of our directors,
Anthony DelVicario, is the president of American Inter-Metallics.
In addition, BICO loaned Mr. DelVicario money that was converted
into an $114,000 loan. The loan is secured by American Inter-
Metallics' assets and is due in December 2001.
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, 2001;
September 30, 2000....................................... F-3
Consolidated Statements of Operations For the Fiscal Years
Ended September 30, 2001, 2000, 1999; and July 5, 1989
(inception) through September 30, 2001................... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the Fiscal Years Ended September 30, 2001, 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, 2001, 2000, 1999; and July 5,
1989 (inception) through September 30, 2001.............. F-6
Notes to Consolidated Financial Statements for the Fiscal
Year Ended September 30, 2001........................... F-7
2. Exhibits
(a) Reports on Form 8-K
The Company filed a Form 8-K on March 13, 2001 for the event
dated March 13, 2001
(b) 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 Diasense, Inc., as amended
3.2 Amended and Restated Bylaws of Diasense, Inc.
4.1 Form of Specimen Common Stock Certificate of Diasense, Inc.
10.1 Purchase Agreement dated as of November 18, 1991
between Diasense, Inc. and Biocontrol Technology, Inc.
10.2 Manufacturing Agreement dated as of January 20,
1992, between Diasense, Inc. and Biocontrol Technology, Inc.
10.3 Research and Development Agreement dated as of January 20, 1992
between Diasense, Inc. and Biocontrol Technology, Inc.
10.4 Lease dated as of May 1, 1992 between Diasense, Inc. and
Biocontrol Technology, Inc.
10.5 First Amendment to Purchase Agreement dated as of
December 8, 1992 between Diasense, Inc. and Biocontrol
Technology, Inc.
10.6(1) Amendment to Manufacturing Agreement dated as of
June 7, 1994 between Diasense, Inc. and Biocontrol
Technology, Inc.
10.7(1) Deferral Agreement, dated as of July 1, 1994,
between Diasense, Inc. and Biocontrol Technology, Inc.
10.8 Deferral Agreement dated as of September 30, 1994
between Diasense, Inc. and Biocontrol Technology, Inc.
10.9 Employment Agreement dated as of November 1, 1994
between Diasense, Inc. and Fred E. Cooper
10.10 Employment Agreement dated as of November 1, 1994
between Diasense, 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
10.14 Amendment to Employment Agreement between Diasense, Inc.
and Fred E. Cooper
(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 28th day of December 2001.
DIASENSE, INC.
By: /s/ Fred E. Cooper
Fred E. Cooper, President,
Director, principal
executive 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 28, 2001
Anthony J. Feola
/s/John F. Steel,IV Director December 28, 2001
John F. Steel, IV
/s/Anthony DelVicario* Director December 28, 2001
Anthony DelVicario
/s/Michael P. Thompson Principal financial officer, December 28, 2001
Michael P. Thompson principal accounting officer
*Depending upon loan outcome
_______________________________
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
Report of Independent Certified Public Accountants
Independent Auditors' Report
Board of Directors
Diasense, Inc.
We have audited the accompanying consolidated balance sheets
of Diasense, Inc. (a development stage company) as of September
30, 2001 and 2000, 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, 2001, and for the
period from July 5, 1989 (inception) through September 30, 2001.
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 Diasense, 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 U.S. 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
misstatements. 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
Diasense, Inc. as of September 30, 2001 and 2000, and the results
of its operations and its cash flows for each of the three years
in the period ended September 30, 2001, and for the period from
July 5, 1989 (inception) through September 30, 2001, in
conformity with U.S. 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, 2001 and from
July 5, 1989 (inception) through September 30, 2001 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 G, 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.
As discussed in note K to the consolidated financial
statements, certain restatements have been made to financial
statements, which were previously issued by the Company.
/s/ Goff, Backa, Alfera & Company, LLC
Goff, Backa, Alfera & Company, LLC
Pittsburgh, Pennsylvania
December 27, 2001
1
Diasense, Inc.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
September 30, September 30,
ASSETS 2001 2000
------------ ------------
Current assets
Cash and cash equivalents (note A) $ - $ 113,098
Prepaid expenses 1,250 -
----------- -----------
Total current assets 1,250 113,098
Property and equipment-at cost(note A)
Furniture and fixtures 42,750 42,750
----------- -----------
42,750 42,750
Less accumulated depreciation 40,130 34,438
----------- -----------
2,620 8,312
----------- -----------
Other assets
Due from Subsidiaries of BICO (notes A and G) - 19,838
Investment in unconsolidated subsidiaries(note C) 1,706,820 1,141,112
Security deposit (note D) 17,250 17,250
----------- -----------
1,724,070 1,178,200
----------- -----------
TOTAL ASSETS $ 1,727,940 $ 1,299,610
=========== ===========
LIABILITIES and STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities
Accounts payable $ 8,762 $ -
Due to BICO (notes A and G) 3,891,921 1,725,920
Accrued payroll and withholdings(note G) 45,771 91,840
----------- -----------
Total current liabilities 3,946,454 1,817,760
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, 2001 and
Sep. 30, 2000 229,801 229,801
Additional paid-in capital 29,960,946 29,960,946
Warrants 15,376,031 15,320,832
Deficit accumulated during the
development stage (47,785,292) (46,029,729)
----------- -----------
(2,218,514) (518,150)
TOTAL LIABILITIES AND ----------- -----------
STOCKHOLDERS' EQUITY (DEFICIENCY) $ 1,727,940 $ 1,299,610
=========== ===========
The accompanying notes are an integral part of this statement.
F-3
Diasense, 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, 2001 September 30, 2000 September 30, 1999 September 30, 2001
------------------ ------------------ ------------------ ------------------
Research and development expenses
(notes A, G, and H) $ - $ - $ - $ 10,556,405
General and administrative expenses 1,195,550 1,956,675 1,352,567 16,424,356
Provision for (recovery of) doubtful
accounts(note G) - (1,458,809) (823,670) -
Warrant extensions (note I) - - 6,333 17,890,676
Technology and patent rights acquired (note G) - - - 2,650,000
Interest expense 1,196 - 1,499 11,725
Loss on unconsolidated subsidiaries (note C) 240,166 105,425 - 345,591
Amortization of Goodwill 380,810 154,247 - 535,057
Other income - (note E) (62,159) (62,100) (48,973) (695,923)
Other expense - - - 37,405
-------------- -------------- -------------- ---------------
Net loss $ (1,755,563) $ (695,438) $ (487,756) $ (47,755,292)
============== ============== ============== ===============
Net loss per common share (note A) $ (0.08) $ (0.03) $ (0.02) $ (2.49)
============== ============== ============== ===============
The accompanying notes are an integral part of this statement.
F-4
Diasense, 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, 2001
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 - - - - 4,625,000 - 4,625,000
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 - - - - - (10,336,514) (10,336,514)
---------- --------- ---------- ---------- ---------- ------------ -----------
Balances at September 30, 1995 22,524,320 225,243 - 25,541,974 4,665,315 (26,349,111) 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 - - - - 7,640,468 - 7,640,468
Oct. 1, 1995 to Sep. 30, 1996(various dates)
Registered Stock 410,731 4,108 - 1,361,047 - - 1,365,155
Net Loss - - - - - (9,018,258) (9,018,258)
---------- --------- ---------- ---------- ---------- ------------ -----------
Balances at September 30, 1996 23,006,051 230,061 - 26,982,811 12,305,783 (35,367,369) 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 17,899,658 (41,932,206) 3,085,824
Warrant extensions - - - - 25,000 - 25,000
Warrants expired - - - 2,400,000 (2,400,000) - -
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 - 26,292,071 15,524,658 (44,846,535) 199,995
Warrants issued for services - - - - 228,538 - 228,538
Warrant extensions - - - - 6,333 - 6,333
Warrants expired - - - 377,625 (377,625) - -
Net Loss - - - - - (487,756) (487,756)
---------- --------- ---------- ---------- ---------- --------- ----------
Balances at September 30, 1999 22,980,051 $229,801 - 29,669,696 15,381,904 (45,334,291) (52,890)
Warrants issued for services - - - - - - -
Warrant extensions - - - - 230,178 - 230,178
Warrant expired - - - 291,250 (291,250) - -
Net Loss - - - - - (695,438) (695,438)
---------- --------- ---------- ---------- ---------- ----------- ----------
Balances at September 30, 2000 22,980,051 $229,801 $ -$29,960,946 $15,320,832 $(46,029,729) $ (518,150)
Warrants issued for services - - - - 55,199 - 55,199
Warrant extensions - - - - - - -
Warrant expired - - - - - - -
Net Loss - - - - - (1,755,563) (1,755,563)
---------- --------- ---------- ---------- ---------- ----------- ----------
Balances at September 30, 2001 22,980,051 $229,801 $ -$29,960,946 $15,376,031 $(47,785,292) $(2,218,514)
========== ========= ========== ========== ========== =========== ===========
The accompanying notes are an integral part of this statement.
F-5
Diasense, 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, 2001 September 30, 2000 September 30, 1999 September 30, 2001
------------------ ------------------ ------------------ ------------------
Cash flows from operating activities:
Net loss $ (1,755,563) $ (695,438) $ (487,756) $ (47,755,292)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation 5,692 6,107 6,074 87,426
Amortization 380,810 154,247 - 535,057
Provision for (recovery of)doubtful
accounts - (1,458,809) (823,670) -
Impairment loss - - - 14,367
Loss on unconsolidated subsidiaries 240,166 105,425 - 345,591
Stock issued in exchange for services - - - 138,950
Stk issued for License & Marketing Agreement - - - 80,000
Warrants issued for services 55,199 230,178 228,538 513,915
Warrant extensions - - 6,333 17,890,676
Inventory deposit - BICO - - - (1,000,000)
(Increase) decrease in prepaid expenses (1,250) 130 5,662 (1,250)
(Increase)decrease in rec. due from BICO Sub. 19,838 (19,838) - -
Increase (decrease) in accounts payable 8,762 - (23,606) 8,762
Increase (decrease) in accrued payroll
and withholdings (46,069) 626 22,493 45,771
Increase in other assets - - (17,250) (17,250)
------------- ------------- ------------- -------------
Net cash used in operating activities (1,092,415) (1,677,372) (1,083,182) (29,113,277)
Cash flows from investing activities:
Disposal of property and equipment - - 175,000 175,000
Purchase of property and equipment - - - (279,413)
Investment - MicroIslet (700,000) (900,000) - (1,600,000)
Investment - Diabecore (486,684) (500,784) - (987,468)
(Increase)in notes rec-related parties - - - (125,000)
(Increase)in interest rec-related parties - - (4,266) (13,538)
------------- ------------- ------------- -------------
Net cash provided by (used in) investing
activities (1,186,684) (1,400,784) 170,734 (2,830,419)
Cash flows from financing activities:
Advances to BICO - (437,405) (97,438) (7,498,369)
Repayment of advances to BICO - 1,933,608 974,600 9,203,493
Advances from BICO 2,166,001 1,688,526 - 14,391,921
Proceeds from issuance of common stock - - - 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 by fin. activities 2,166,001 3,184,729 877,162 31,943,696
------------- -------------- ------------ -------------
Net increase(decrease)in cash and cash equiv. (113,098) 106,573 (35,286) -
Cash and cash equivalents at beg of period 113,098 6,525 41,811 -
------------- -------------- ------------ -------------
Cash and cash equivalents at end of period $ - $ 113,098 $ 6,525 $ -
============= ============== ============ =============
The accompanying notes are an integral part of this statement.
F-6
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
1. ORGANIZATION
Diasense, Inc. (Diasense) 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 Diasense at September 30, 2001. Diasense is
currently developing a noninvasive glucose sensor (the Sensor). The Sensor
would use electromagnetic technology to measure the concentration of glucose in
human tissue without requiring the user to take a blood sample.
The consolidated financial statements include the accounts of Diasense UK LTD.,
a 100% owned subsidiary of Diasense, Inc. as of September 30, 2001. All
significant intercompany accounts and transactions have been eliminated.
2. CASH AND CASH EQUIVALENTS
For purposes of the consolidated statement of cash flows, Diasense considers
all highly liquid investments with original maturities of three months or less
to be cash equivalents. Diasense 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
Diasense 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
Diasense.
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, 2001 and September 30, 2000 and September 30, 1999. 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, 2001, 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 Diasense'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, 2001
amounted to 20,029,695.
7. RESEARCH AND DEVELOPMENT
All research and development costs incurred by Diasense, 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
Diasense records treasury stock transactions using the par value method.
9. INTERCOMPANY ACTIVITY
Certain expenses are allocated by management between Diasense, 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
Diasense recognizes cost on warrants granted or extended based upon the minimum
value method. There is currently no trading market for Diasense's warrants or
common stock. Under this method, the warrants are valued by reducing the
assumed current market price of the underlying shares by the present value of
the exercise price discounted at an estimated risk-free interest rate of 5% and
assuming no dividends. The value of the warrants is recalculated when warrants
are extended and any increase in value over the value recorded at the time the
warrants were granted is recognized at the time the warrant is extended.
11. COMPREHENSIVE INCOME
Diasense'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, 2001 and 2000, financial instruments which potentially
subjected Diasense to significant concentrations of credit risk consisted
principally of investments in unconsolidated subsidiaries. In 1999, Diasense
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.
13. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
SFAS 142 supersedes APB Opinion No. 17 and addresses financial accounting and
reporting for acquired goodwill and other intangible assets. Under this
provision, goodwill and certain intangible assets will no longer be amortized.
These assets will be evaluated on a periodic basis to determine if an impairment
loss needs to be recorded. The provisions of this statement will be effective
for the Company's fiscal year ending September 30, 2002. The Company is in the
process of assessing the impact of this pronouncement on its financial
statements.
NOTE B - OPERATIONS
Diasense is developing the Sensor and has not, as yet, achieved a commercially
marketable product. The ability of Diasense 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. Diasense has no other
commercial products and is dependent on the successful development of the
Sensor technology. Diasense has had no sales of its common stock over the last
three fiscal years. An increase of $2,166,001 in the amount payable to BICO
was recognized during the year and this increase represents amounts provided by
BICO to fund Diasense's operations.
Diasense 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.
Diasense has incurred significant losses and negative cash flows from
operations from inception through September 30, 2001 and has a significant
accumulated deficit as of September 30, 2001, raising substantial doubt about
its ability to continue as a going concern. Diasense initially financed its
operations and its research and development program, the billing on which is
temporarily suspended, primarily from the sale of Diasense's common stock
through private placements. Since 1997, Diasense has been financially dependent
upon BICO and therefore BICO's ability to raise money through its stock sales
to support its operations. Manangement believes that Diasense will remain
dependent upon BICO to fund its operations through the year ending September
30, 2002. If BICO is not able to raise enough money, Diasense may not be able
to continue as a going concern.
Effective January 1, 2002, Fred E. Cooper, CEO and Anthony J. Feola, our Chief
Operating Officer, agreed to waive any rights to compensation through December
31, 2002. this reduction in employment costs will reduce cash outflows for the
nine months ended September 30, 2002, by approximately $500,000.
As a result of agreements with BICO relating to development and manufacture of
the Noninvasive Glucose Sensor, Diasense 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, Diasense 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 Diasense, 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 Diasense'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, 2000 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, 2001 of $25,581,120 (unaudited) and for the fiscal year ended December 31,
2000 of $42,546,303, compared to a net loss for the fiscal year ended December
31, 1999 of $38,072,578. As of December 31, 2000, and September 30, 2001,
BICO's accumulated deficit was $223,720,761 and $249,301,881 (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 Diasense to BICO for research and
development of the Noninvasive Glucose Sensor and from intercompany advances
from Diasense and other BICO subsidiaries. The failure of BICO to continue to
exist as a going concern would have a material adverse effect on Diasense's
business and ability to continue operations.
If BICO does not continue as a going concern, Diasense 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 Diasense 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
During the year ended September 30, 2001, Diasense invested an additional
$700,000 in MicroIslet, Inc., an unconsolidated subsidiary interest initially
acquired during 2000. With this additional investment, the Company has
invested $1,600,000 in MicroIslet and its ownership is approximately 20.2%.
Diasense holds a seat on the board of directors of this unconsolidated
subsidiary. 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.
During the year ended September 30, 2001, Diasense invested an additional
$486,688 in Diabecore Medical, Inc., an unconsolidated subsidiary interest
initially acquired during fiscal year 2000. With this additional investment,
Diasense has invested $987,468 in Diabecore and owns approximately 24% of this
unconsolidated subsidiary. Diasense holds a seat on the board of directors of
Diabecore. Diabecore is a Toronto-based company working to develop a new
insulin for the treatment of diabetes.
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. Diasense's
investments in the underlying assets and the unamortized goodwill of each
unconsolidated subsidiary as of September 30, 2001 and September 30, 2000 are
as follows:
Investment
Unconsolidated in Unamortized
Subsidiary Underlying Goodwill Total
Net Assets
--------------- ---------------- ------------------- ------------------
Sept.30, Sept.30, Sept.30, Sept.30, Sept.30, Sept.30,
2001 2000 2001 2000 2001 2000
---- ---- ---- ---- ---- ----
MicroIslet, Inc. 11,335 89,657 966,238 635,409 977,573 725,066
Diabecore
Medical,Inc. 172,695 37,003 556,552 379,043 729,247 416,046
------- ------- ------- --------- --------- ---------
Total $184,030 $126,660 $1,522,790 $1,014,452 $1,706,820 $1,141,112
======= ======= ========= ========= ========= =========
NOTE D - LEASE
In December 1998 Diasense 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, 2002 and 2003 and $17,250
for the final three months of the lease concluding December 31, 2003. Diasense
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, 2001, 2000 and 1999 consists of
$ 0, $0 and $6,445 of interest income and $ 62,100, $62,100 and $42,528 of
rental income for their respective periods. The total rental income for the
years ended September 30, 2001, 2000 and 1999, was from BICO and its
subsidiaries for office space.
NOTE F - INCOME TAXES
As of September 30, 2001, Diasense has available approximately $26,737,000 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 2005 through 2021. Diasense 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.
Diasense 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, the fair
market value of warrant extensions have been recorded and expensed for
financial statement purposes in the amount of $17,945,875 as of September 30,
2001, and $17,890,676 as of September 30, 2000 and September 30, 1999. For tax
purposes, warrants are not recorded until the warrants are exercised.
Reductions in the allowance for bad debts account of $1,458,809 at September
30, 2000 and $823,670 at September 30, 1999 are also reflected in the financial
statements but are not included in the tax return.
Diasense 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 Diasense.
The following is a summary of the composition of Diasense's deferred tax asset
and associated valuation allowance at September 30, 2001 and 2000:
2001 2000
Net Operating Loss $9,090,580 $8,667,240
Warrant Expense 6,111,310 6,092,542
Patent Amortization 383,618 435,896
Tax Credit Carry Forward 700,000 700,000
---------- ----------
16,285,508 15,895,678
Valuation Allowance (16,285,508) (15,895,678)
---------- ----------
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 30,2001 $ (389,830) $ 389,830 $0
Year Ended September 30,2000 $ (122,436) $ 122,436 $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
From July 5,1989 (inception)
through September 30, 2001 $(16,285,508) $16,285,508 $0
NOTE G - RELATED PARTY TRANSACTIONS
1. SENSOR RELATED AGREEMENTS
Diasense 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, Diasense 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.
Diasense 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. Diasense, Inc. is
to conduct the marketing of the Sensor. Following is a brief description of the
agreements:
Manufacturing Agreement
The manufacturing agreement between Diasense 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
Diasense at a price determined by the agreement. The term of the agreement is
fifteen years.
Research and Development Agreement
Under a January 1992 agreement effective April 1992, Diasense 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 Diasense, 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, Diasense
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, Diasense entered into a Purchase Agreement with BICO under
which Diasense 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 Diasense, Inc. common
stock. The $520,000 value of the Diasense, Inc. stock issued was charged to the
receivable due from BICO. On May 14, 1991, Diasense, Inc. and BICO entered
into a sublicense agreement under which Diasense, 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 Diasense, Inc. the exclusive right to represent
BICO and to market the Sensor and related products worldwide. In exchange for
these rights, Diasense, 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 Diasense
purchased all rights to the Sensor technology.
2. INTERCOMPANY ACTIVITY
For the fiscal years ended September 30, 2001 and 2000, net
intercompany charges from BICO and its subsidiaries to Diasense were $2,219,476
and $1,743,476, respectively. For the fiscal year ended September 30, 1999,
net intercompany charges by Diasense to BICO and its subsidiaries were $81,261.
3. TRANSACTIONS WITH OFFICERS AND DIRECTORS
During the fiscal year ended September 30, 1998 Diasense 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,
Diasense (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.
Beginning in 2000 and through 2001, BICO invested a total of $1 million in
American Inter-Metallics. One of our directors, Anthony DelVicario, is the
president of American Inter-Metallics. In addition, BICO loaned Mr. DelVicario
money that was converted into a $114,000 loan. The loan is secured by American
Inter-Metallics' assets and is due in December 2001.
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, Diasense 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. All accrued wages for Mr. Purdy were paid to
him in fiscal year 2001 in connection with his resignation. The accrued wages
of $45,208 for Mr. Cooper remained unpaid at September 30, 2001.
NOTE H - COMMITMENTS AND CONTINGENCIES
1. RESEARCH AND DEVELOPMENT
Under terms of a Research and Development Agreement with BICO, Diasense 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, Diasense
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
Diasense, 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, 2001) of $497,000 and $450,000, respectively, from Diasense,Inc.,
although those salaries 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 gave notice that he would resign and
his resignation was effective February 11, 2001. At that time, Mr. Purdy
released the Company from its obligations under his employment agreement as
part of the consideration for a payment of $912,727. Mr. Cooper's agreement
also provide that in the event of a "change of control" of Diasense, Inc.,
Diasense, Inc. is required to issue him shares of common stock equal to five
percent (5%) of the outstanding shares of common stock of Diasense immediately
after the change in control.
3. LITIGATION
Several class action lawsuits were filed against Diasense 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 Diasense, Inc. and manufactured by BICO. Without
agreeing to the alleged charges or acknowledging any liability or wrongdoing,
Diasense and BICO agreed to settle the lawsuit for a total amount of
$3,450,000. BICO has paid an aggregate of $3,250,000 toward the settlement to
date. During the fourth quarter of fiscal 2001, the parties agreed to extend
the payments on the remaining balance. A balance of $425,000 is due in the
first quarter of fiscal 2002, including $225,000 for extending the due dates.
Although it is not known whether the class action plaintiffs have been formally
notified of the settlement, or if they have accepted its terms, Diasense
believes that the existing settlement will end this matter.
During April 1998, Diasense 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 Diasense has provided documents in
response to such requests.
4. PENNSYLVANIA SECURITIES COMMISSION
The Pennsylvania Securities Commission initiated a private investigation of
Diasense 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 Diasense 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
Diasense 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. Diasense 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.
Diasense 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.
Diasense 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, Diasense issued 235,000 shares of common stock in
exchange for the cancellation of outstanding promissory notes for $235,000.
In June 1994, Diasense 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
Diasense's stock in the United States. Diasense received net proceeds in the
amount of $288,751 pursuant to such sales.
During 1995, Diasense 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 Diasense, 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, Diasense commenced a public offering. As of September 30, 1998,
an aggregate of 1,063,460 shares had been issued with proceeds to Diasense 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.
Diasense 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 Diasense's public offering.
Common Stock Warrants
At September 30, 2001, Diasense has reserved 10,635,013 shares of Diasense's
unissued common stock for warrants which were outstanding and exercisable. Of
these, warrants for 7,681,550 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
7,780,000 shares is $.50 per share, for 2,160,463 shares is $1.00 per share
and for 694,550 shares is $3.50 per share. The fiscal years in which warrants
expire are as follows:
Warrant Expiration Fiscal Year Number of Shares
2001 58,000
2002 683,213
2003 2,144,050
2004 5,174,750
2005 2,075,000
2006 500,000
----------
10,635,013
==========
The following is a summary of warrant transactions during fiscal years ended
September 30,
2001 2000 1999 1998 1997 1996
Outstanding beginning 10,463,013 8,644,113 6,676,513 7,476,513 7,533,263 7,077,213
of year
Granted during the year 500,000 2,085,000 2,070,000 0 59,000 743,250
Canceled during the year (328,000) (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 0 (56,000)
--------- --------- --------- --------- --------- ---------
Outstanding, and 10,635,013 10,463,013 8,644,113 6,676,513 7,476,513 7,533,263
eligible for exercise. ========= ========= ========= ========= ========= =========
During the period October 1, 2000 through September 30, 2001, Diasense extended
the exercise date of warrants to purchase 1,147,750 shares of common stock to
certain officers, directors, employees and consultants. Warrants for 648,000
shares were originally granted at an exercise price of $.05 per share and
warrants for 499,750 shares were originally granted at an exercise price of
$3.50 per share and were extended at the same price. No expense was recognized
in connection with the extension of these warrants because there was no increase
in the value of the warrants over the value recorded at the time the warrants
were originally granted. In addition, during the year ended September 30, 2001,
Diasense granted warrants to purchase 500,000 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 $55,199.
During the period October 1, 1999 through September 30, 2000, Diasense extended
the exercise date of warrants to purchase 2,428,050 shares of common stock to
certain officers, directors, employees and consultants. Warrants for 215,000
shares were originally granted at an exercise price of $.50 per share, warrants
for 2,131,250 shares were originally granted at an exercise price of $1.00 per
share and warrants for 81,800 shares were originally granted at an exercise
price of $3.50 per share and were extended at the same price. No expense was
recognized in connection with the extension of these warrants because there was
no increase in the value of the warrants over the value recorded at the time the
warrants were originally granted. In addition, during the year ended September
30, 2000, Diasense 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, Diasense extended
the exercise date of warrants to purchase 2,346,213 shares of common stock to
certain officers, directors, employees and consultants. Warrants for 2,262,000
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 per share
and warrants for 55,000 shares were originally granted at an exercise price of
$3.50 per share and were extended at the same price. In connection with the
extension of these warrants Diasense recorded a charge of $6,333 against
operations. In addition, during the year ended September 30, 1999, Diasense
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, Diasense extended
the exercise date of warrants to purchase 758,000 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 per share
and were extended at the same price. Diasense recorded $25,000 against
operations in connection with the extension of these warrants.
During the period October 1, 1996 through September 30, 1997, Diasense 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. Diasense recorded $5,593,875 against operations in
connection with the extension of these warrants. In addition, during the year
ended September 30, 1997, Diasense granted warrants to purchase 59,000 shares
of common stock to employees and consultants at an exercise price of $1.00 per
share and $3.50 per share. These warrants were granted for services rendered
which were recognized in general and administrative expenses for a total of
$2,500.
During the period October 1, 1995 through September 30, 1996, Diasense 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 per
share and $.50 per share, resepectively, and were extended at the same price.
Diasense recorded $7,640,468 against operations in connection with the
extensions of these warrants.
During the period October 1, 1994 through September 30, 1995, Diasense 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 per share. Diasense recorded $4,625,000 against operations in
connection with the extensions of these warrants.
In 1990, Diasense 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 Diasense 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. Diasense 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, Diasense
granted warrants to purchase 100,000 shares of common stock for services
performed by consultants at an exercise price of $.50 per share. Diasense
recorded an estimated value of these warrants at $27,500 which was charged to
operations.
NOTE J- SUPPLEMENT CASH FLOW INFORMATION
Diasense'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 Diasense's common stock.
On March 31, 1995, Diasense 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, Diasense (by agreement with
BICO) converted $125,000 of related party notes receivable and $13,538 of
associated interest receivable due from BICO.
Cash paid for interest and income taxes were as follows:
From July 5, 1989
(inception)
September September September through September
30,2001 30,2000 30,1999 30,2001
Interest Paid $ 0 $ 0 $ 0 $11,725
====== ====== ======= =======
Income Taxes Paid $ 0 $ 0 $ 0 $ 0
====== ====== ======= =======
NOTE K - RESTATEMENT
The accompanying financial statements include the effect of adjustments that
were made to financial statements previously issued by Diasense.
Subsequent to the issuance of its consolidated financial statements for the
year ended September 2000, Diasense determined that the expense recognized for
warrant extensions had been overstated by $23,737 in 1999 and understated by
$23,737 in 1998. The expenses reflected in the accompanying financial
statements for these periods have been adjusted. Corresponding adjustments
were recognized in warrants within Shareholders' Equity. There was no net
effect to total stockholders' equity as a result of these adjustments.
Certain reclassifications have been made to prior year amounts to conform with
current year presentation.