BIOCONTROL TECHNOLOGY, INC.
1995 ANNUAL REPORT
Table of Contents Page
Description of Business 2
Market for Registrant's Common Equity
and Related Stockholder Matters 19
Selected Financial Data 20
Management's Discussion and Analysis of
Financial Condition and Results of Operations 21
Supplementary Financial Information 26
Management Information 26
Changes in and Disagreements with Accountants 27
Availability of Form 10-K 27
Audited Financial Statements
Report of Independent Auditors F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-8
<PAGE>
DESCRIPTION OF BUSINESS
General Development of Business
Biocontrol Technology, Inc. was incorporated in the Commonwealth
of Pennsylvania in 1972 as Coratomic, Inc. and is referred to
herein as "BICO" or the "Company". BICO's operations are located
at 300 Indian Springs Road, Indiana, Pennsylvania, 15701. BICO's
administrative offices are located at 2275 Swallow Hill Road,
Building 2500, 2nd Floor, Pittsburgh, Pennsylvania, 15220.
The Company's primary business from 1972 through 1986 was the
design, manufacture and sale of cardiac pacemakers and associated
accessories. In 1983, the Company purchased rights to three
heart valves which it manufactured and sold from 1983 through
1987.
Beginning in late 1986 and continuing through the date hereof,
the Company has been developing new medical devices which include
models of a noninvasive glucose sensor (the "Noninvasive Glucose
Sensor"), an implantable port for drug delivery and hemodialysis
use, a polyurethane heart valve, bioremediation products,
procedures relating to the use of whole-body extracorporeal
hyperthermia in the treatment of the human immunodeficiency virus
("HIV"), and a paint product which is designed to prevent the
buildup of certain substances on underwater surfaces. The
Company is currently manufacturing and selling functional
electrical stimulators.
In December 1995, BICO and Diasense announced that their
respective Boards of Directors had determined that it would be in
the best interest of both companies to combine them. Although
the Boards of Directors anticipated that such combination would
be accomplished via an exchange of all Diasense's outstanding
common stock for BICO common stock, the specific terms of the
transaction must be negotiated, and if a mutually-beneficial
agreement cannot be reached, the combination may not occur. The
combination is also subject to the approval of the shareholders
of the Companies. As of the date of this document, the Companies
were still functioning as two different corporations; such status
is reflected in the discussions set forth herein.
Development of the Noninvasive Glucose Sensor
BICO and its 52%-owned affiliate, Diasense, Inc. ("Diasense"),
are currently developing a Noninvasive Glucose Sensor, which
management believes will be able to measure the concentration of
glucose in human tissue without requiring the drawing of blood by
means of a finger prick. Currently available glucose sensors
require the drawing of blood by means of a finger prick. Where
applicable, BICO and Diasense will be referred to herein as "the
Companies".
BICO's initial research and development with insulin pumps led to
a theory by which blood glucose levels could be detected
noninvasively by correlating the spectral description of
reflected electromagnetic energy from the skin with blood glucose
levels in the 50 mg per deciliter to 500 mg per deciliter range
in the infrared region of the electromagnetic spectrum. The
method was studied in 1986 and 1987 by BICO and its consultants
at Battelle Memorial Institute in Columbus, Ohio, using
laboratory instruments. The results of the studies provided
information regarding the use of infrared light in the
noninvasive measurement of glucose. The information from the
studies, along with later affirmative work, led to a patent
application by BICO's research team in 1990. A patent covering
the method was granted to the research team and assigned to BICO
in December 1991. The rights of this patent have been purchased
by Diasense from BICO, pursuant to a Purchase Agreement. A
second patent application was filed by BICO in December 1992, and
was granted in January, 1995. This filing contained new claims
which extended the coverage of the patent based on additional
discoveries and data obtained since the original patent was
filed. BICO has assigned the rights to such patent to Diasense.
Additional concepts to improve the capability of the instrument
to recognize blood glucose were developed, and, in May 1993,
corresponding patent applications were filed. As of December,
1995, two of the four patents had been issued, and one had been
abandoned. In December 1993, a patent application relating to
noise reduction was filed, and was issued in December 1995 (See,
"Current Status of the Noninvasive Glucose Sensor"). BICO has
been granted the right to develop and manufacture sensors
pursuant to agreements with Diasense.
<PAGE>
In 1991, BICO's research team began development of a research
prototype utilizing different technology than previously studied
or developed. This device, the Beta 1 research prototype, was
initially tested on six human subjects, and was subsequently
tested on 110 human subjects in March 1992, during which
simultaneous spectral, blood and chemical data was recorded for
analysis in order to develop calibration data for the device.
The Beta 1 utilized a separate lap-top computer to perform
computational functions. The results of the March 1992 tests
were used to develop further refinements which led to the
development of the Beta 2A.
Although functionally equivalent in terms of performance with the
Beta 1, the next prototype, the Beta 2A, was smaller and had
fully integrated computational software and a liquid crystal
display which interacted with the operator. This model was
tested by BICO on 40 human subjects in July 1992. The spectral
and blood chemistry data obtained indicated that the Beta 2A did
not have a satisfactory signal-to-noise ratio to allow for the
calculation of algorithms of sufficient accuracy to be acceptable
to Diasense. The signal-to-noise ratio reflects the sensor's
ability to optimize the measurement by accepting the signal
desired (the glucose level) and rejecting the random
interference. A higher signal-to-noise ratio results in a more
accurate measurement.
Additional Beta prototypes evolved which addressed this problem.
Testing was performed with each prototype, culminating in
clinical trials at two hospitals with ten diabetic volunteers
each in Des Plaines, Illinois in May 1993 and in Indiana,
Pennsylvania in August 1993. These advanced systems embodying
improvements in the optics, electronics and detection subsystems
led to the design of the Beta 2D, Beta 2E, and Beta 2F
prototypes, designed and constructed to simulate production
models.
BICO initially obtained the approval of six Institutional Review
Boards ("IRBs") to conduct testing at their hospitals. Those
hospitals are Children's Hospital in Pittsburgh, Pennsylvania;
Rush North Shore in Skokie, Illinois; Westmoreland Hospital in
Greensburg, Pennsylvania; Lutheran General Hospital in Park
Ridge, Illinois; Holy Family Hospital in Des Plaines, Illinois;
and Indiana Hospital in Indiana, Pennsylvania. The Company
conducted initial testing at the Holy Family Hospital and Indiana
Hospital, and may conduct further studies on present and future
models at some or all of the other hospitals from which IRB
approval has been obtained.
On January 6, 1994, BICO submitted a 510(k) Notification to the
U.S. Food and Drug Administration (the "FDA") for approval to
market the production model, the Diasensor 1000(TM). The submission
was based on data obtained from the advanced Beta 2 prototypes,
since functionally, the production model will be identical to
these prototype models. BICO is claiming in its 510(k)
Notification that the product has substantial equivalence to home
market glucose monitoring devices presently in the marketplace
since its function is similar, although the device operates on a
different technological principle. BICO has provided information
in this 510(k) submission which it believes substantiates that
the device does not raise different questions of safety and
efficacy and is as safe and effective as the legally marketed
predicated devices. Such information is required by the FDA
before market approval can be granted.
The Diasensor 1000(TM) is a spectrophotometer capable of
illuminating a small area of skin on a patient's arm with
infrared light, and then making measurements from the infrared
light diffusely reflected back into the device, which it then
displays on a liquid crystal display on the face of the
instrument for the user to read. The Diasensor 1000(TM) uses
internal algorithms to calculate a glucose measurement.
Since the Diasensor 1000(TM) will be calibrated individually, each
instrument will be sold by prescription only and will be
calibrated in the physician's office or at a technical center
under a physician's direction. This feature may limit the
marketability of the Diasensor 1000(TM), and, if the device is
unable to qualify for third-party reimbursement, the Company's
ability to market the device could be adversely affected.
Current Status of the Noninvasive Glucose Sensor
In February 1994, BICO was notified by the FDA that its 510(k)
Notification had been accepted for review. This confirmation was
<PAGE> 3
significant because at the time the FDA had been rejecting
approximately thirty percent (30%) of all 510(k) Notifications
submitted. The application was assigned a file number and is
still being reviewed by the FDA. No assurance can be given that
the FDA will approve the request for marketing approval in a
timely manner, or that it will be approved without the
requirement to provide further information to the FDA with regard
to the Noninvasive Glucose Sensor. Although the data presented
to the FDA is from the Beta prototype, approval is being sought
for the Diasensor 1000(TM) by providing data showing that the
measuring capability and technical performance of the Diasensor
1000(TM) and the Beta prototype are the same. Although the Company
believes that they will be functionally equivalent, certain
modifications will be made to the Beta prototype to convert it
from a research prototype to a production unit to be marketed for
day-to-day practical applications by users.
In July 1994, the FDA requested more information from the
Companies in the form of eleven technical questions. In order to
fully respond to the FDA's request, BICO conducted additional
research on the Diasensor 1000(TM). Such additional research
involved clinical trials conducted at BICO's Indiana, PA clinical
testing lab, under the supervision of the IRB of Indiana
Hospital. The research also involved clinical trials conducted
under the IRB supervision of St. Elizabeth Hospital in Lafayette,
IN, and Mercy Hospital in Pittsburgh, PA. BICO has also
conducted expanded research at its 300 Indian Springs Road,
Indiana, PA facility. In December 1994, members of BICO's
management and key technology team met with the FDA regarding the
outstanding information. As a result of such meeting, BICO was
able to receive additional guidance regarding the information
still outstanding for the FDA, including the clinical trials. On
December 19, 1994, BICO responded to the FDA's July 1994 letter.
In a letter dated January 17, 1995, the FDA requested additional
information to which BICO responded on February 16, 1995.
As of July 1995, all clinical trials had been completed at the
Indiana, PA, Pittsburgh, PA, and Lafayette, IN sites, and the
resulting data had been submitted to the FDA. In October, the
Companies announced that the FDA would conduct a meeting in
connection with the 510(k) Notification on November 14, 1995.
The Companies disclosed that the meeting was positive; at that
time BICO was requested to provide answers to five additional
technical questions, which were answered by BICO within one week
of the meeting. At the time of this filing, the Companies were
still waiting for the FDA's response. Although the Company's
research and development team continues to meet with and work
closely with the FDA, due to the complex, technical nature of the
information being evaluated by the FDA, it is impossible for the
Company to estimate how much longer the FDA approval process will
take.
During 1994 and 1995, in addition to conducting continued
research and development on the Noninvasive Glucose Sensor, BICO
prepared its new manufacturing facility for the manufacture of
the Noninvasive Glucose Sensor. The facility, comprised of
22,500 square feet, has been reconfigured to BICO's
specifications, and the machinery and equipment necessary to
manufacture have been ordered. In addition, the Company has made
arrangements with Indiana County Commerce Park, the location of
the manufacturing facility, for an additional 45,500 square feet
of manufacturing space. BICO anticipates that the facility will
be ready for production in early 1996.
FDA approval is necessary to market the Diasensor 1000(TM) in the
United States. The Companies are continuing their efforts to
develop software with a more "universal" algorithm, which can be
used by a larger population. After introduction of the Diasensor
1000(TM), BICO plans to finalize the development of the Diasensor
2000(TM) which may contain more complex software, allowing glucose
measurements from many individuals to be performed with one
instrument. The Diasensor 2000(TM) may be subject to the same
regulatory testing and approval process as was required for the
Diasensor 1000(TM).
Pending the FDA approval process, the Company has focused
marketing efforts on the international market. Diasense has
opened an office in London, England, where orders are being taken
for the Diasensor 1000(TM). In addition, Diasense's marketing team
is negotiating with foreign entities regarding the marketing,
distribution and sale of the Diasensor 1000(TM) outside the United
States. In October 1995, the Companies announced that Diasense
had entered into a distribution contract with IMACO Gesellschaft
fur Non Invasive System, GmbH ("IMACO") to market and sell the
Diasensor 1000(TM) in Germany. IMACO's parent company, IMACO
Lubeck, is a biomedical equipment distributor which specializes
<PAGE> 4
in diabetic equipment. The agreement, which requires that
purchase orders be secured by irrevocable letters of credit,
provides IMACO exclusive distribution rights in Germany, and
requires the purchase of 5,100 machines in 1996. The three-year
contract term provides for anticipated gross revenues of $32.5
million in the first year, and may be terminated by either
company in the event that certain contingencies are not met. In
order to sell the Diasensor 1000(TM) in Germany, it will be
necessary to obtain foreign regulatory approval. Based upon
consultations with foreign counsel and consultants, the Companies
believe that such approval, which is significantly less difficult
to obtain than FDA approval, will be forthcoming upon the
submission of its working prototype.
Diasense is responsible for the marketing and sales of the
Noninvasive Glucose Sensor. Diasense plans to market the
Noninvasive Glucose Sensor directly to diabetics, mainly through
their doctors' orders, and is currently negotiating with domestic
and international distribution organizations to aid in the
marketing and distribution of the Noninvasive Glucose Sensor.
Although many factors may cause a change in management's current
estimate, the Company believes that the sales price of the
Diasensor 1000(TM) at this time will range from approximately $7950
to approximately $8500. Such price may be set at a level which
would limit its sales, absent third-party reimbursement. Due to
the current vicissitudes of the health-care insurance industry,
the Companies are unable to make any projections as to the
availability of, or procedures required in connection with, third-
party reimbursement. Although the Companies estimate, based on
1995 American Diabetes Association data, that there are nearly
16,000,000 diabetics in the United States, not all diabetics will
be suitable users of the Noninvasive Glucose Sensor. Those
diabetics who require and benefit from frequent glucose
monitoring comprise the potential market for the Noninvasive
Glucose Sensor. The Companies are unable to estimate the size of
that market at this time.
Bioremediation
BICO is also involved in the field of biological remedial
("bioremediation") development. Bioremediation technology
utilizes naturally occurring micro-organisms or bacteria to
convert various types of contamination to carbon dioxide and
water. This occurs through the dual processes of chemical and
microbiological reactions. The product, PRP(R), which stands for
petroleum remediation product, is designed as an environmental
microbial microcapsule which is utilized for the collection,
containment and separation of oil-type products in or from water.
The product's purpose is to convert the contaminant, with no
residual mass (separated or absorbed) in need of disposal. When
the PRP(R) comes in contact with the petroleum substances, the
contaminants are bound to the PRP(R), and they stay afloat.
Because the product contains the necessary nutrients and micro-
organisms, the bioremediation process begins immediately.
Eventually, the product will biodegrade both the petroleum and
itself.
Part of the Company's initial research and development involved
field testing supervised by the National Environmental Technology
Applications Corporation ("NETAC"), a group endorsed by the
Environmental Protection Agency (the "EPA"), to determine whether
the product is effective. As a result of such testing, NETAC
reported positive results regarding the effectiveness of the
product.
In connection with this project, BICO created a subsidiary,
Petrol Rem, Inc. ("Petrol Rem"). Petrol Rem's officers and
directors include Fred E. Cooper, Anthony J. Feola and David L.
Purdy, who are also directors and/or officers of BICO and its
other affiliates.
There is a patent pending on the encapsulating substance and
delivery system used in the creation and use of the product. In
1993, Petrol Rem changed the product name, WAPED, to "PRP" which
stands for Petroleum Remediation Product. A notice of allowance
for the trademark for the names PRP(R) and BIO-SOK(R) has been
received. Additional applications for trademark protection for ,
BIO-BOOM(TM) and Oil Buster(TM) have also been filed.
PRP(R) is now being manufactured and marketed for use in water and
on solid surfaces in the form of Petrol Rem's Oil Buster(TM)
product.. Additional testing is being conducted which will test
PRP(R)'s effectiveness in soil using various microbes and nutrients
for specific bioremediation applications. NETAC has conducted
soil testing and further analysis of PRP(R) products.
<PAGE> 5
The product system is listed on the EPA's National Contingency
Plan ("NCP") product schedule, and is available in free-flowing
powder or absorbent socks. In 1995, the EPA required that all
products previously listed on the NCP be submitted to additional
testing. Because PRP(R) successfully passed the Tier II efficacy
test conducted by NETAC, the product was requalified for listing
on the NCP. Management believes that this requalification
process will limit the number of products available for use in
clean-up projects.
Petrol Rem is manufacturing PRP(R) and is currently marketing the
product for use in water. In addition, PRP(R) combined with
absorbants is being manufactured and marketed for use in small
oil cleanups on hard surfaces such as the floors of manufacturing
facilities, garages and machine shops.
In April, 1993, Petrol Rem entered into a lease for a facility in
the Pittsburgh, Pennsylvania area which is used to manufacture
PRP(R). The lease has a three-year term, with monthly rental
payments of $2,839 plus utilities and applicable business
privilege taxes. Petrol Rem has also purchased equipment which
has the capability to produce PRP(R) in quantities of 2500 pounds
per day, and Petrol Rem has built an adequate inventory.
During 1995, Petrol Rem completed a BioResponse Action Plan,
which has been submitted to applicable regulatory agencies,
including the EPA, the Coast Guard, and various state agencies.
The Plan, which sets forth the available options and proper
responses to clean-up projects, was created in response to a
growing trend by the agencies to set up pre-approved plans to be
used in the event of an oil-spill emergency. These pre-approved
plans would direct the individuals on site as to which products
to use, and should help accelerate approval and response time.
Because two of Petrol Rem's largest target marketing regions are
Texas/Louisiana and Florida, Petrol Rem has begun warehousing
PRP(R) in those areas. Petrol Rem recently executed an agreement
with a U.S. oil-spill clean-up responder located in the Gulf
region, which now has Petrol-Rem's products and equipment on hand
for use in its clean-up projects. PRP(R) has been approved for
application in Texas, Louisiana, Florida, New Jersey, Delaware,
Maryland and New York. In New York, the product has successfully
completed the required toxicity testing, and management believes
that Petrol-Rem's next target market area will include New York,
New Jersey and eastern Pennsylvania. In addition, Petrol Rem
continues to work with federal agencies including the U.S. Coast
Guard and the EPA to gain market acceptance.
Petrol Rem has also completed development of a new applicator for
its products. The new applicator is a light-weight, portable
unit which provides a more continuous flow of product. The
lighter weight and smaller size will allow easier access to more
sites which were harder to reach with the previous applicator.
In addition to PRP(R), Petrol Rem is also developing other
products. In order to address water pollution issues at marinas,
Petrol Rem has introduced BIO-SOK(R), which is used to aid in the
cleaning of boat bilges. Bilges are commonly cleaned out with
detergents and emulsifiers, which cause the oil pumped out of the
bilge to sink to the bottom of the water, where it is harmful to
marine life, and becomes difficult to collect. In addition, it is
illegal to dump oil or fuel into the water. The BIO-SOK(R), when
placed in the bilge, absorbs and biodegrades the oil, which
significantly reduces or eliminates the pollution. BIO-SOK(R) has
been used in test markets, initial sales have occurred, and the
response has been favorable.
Petrol Rem has also developed Oil Buster(TM), which is a mixture of
PRP(R) and an absorbent material. Oil Buster(TM) is used to clean up
and remediate oil spills on hard surfaces.
Petrol Rem's BIO-BOOM(TM) product is used in water clean-up
projects. The product is a 3" x 10' fabric which is filled with
PRP(R), and is used to both contain and biodegrade contaminants in
water. BIO-BOOM(TM) is a superior product to most containment
products because, in addition to containing the oil or fuel
spill, or restricting the spread of an anticipated spill, it also
<PAGE> 6
biodegrades the contaminant, then biodegrades itself. These
features act to virtually eliminate secondary contaminants,
thereby reducing disposal and clean-up costs. Initial sales have
occurred, and marketing efforts are accelerating.
The Company believes that it has expended the necessary funds to
complete the development of its bioremediation products, and to
build up sufficient inventory pending additional orders. The
Company has spent approximately $5,253,000 on this project
through December 31, 1995.
Petrol Rem is marketing PRP(R) through trade shows, magazines,
direct mail advertising, and direct contacts with companies and
consultants specializing in petroleum clean-up, as well as
marketing directly to municipalities and corporations with needs
for the product. Initial sales of PRP(R) began in July, 1993, and
increased marketing efforts during 1995 have resulted in
additional sales. Although there can be no assurances that PRP(R)
will be successfully marketed, the Company believes, based on
their scientific determinations, the results of recent NETAC
testing, and the favorable response at the retail level, that
PRP(R) will be a viable product in the bioremediation marketplace.
Whole-Body Extracorporeal Hyperthermia
BICO is currently funding clinical trials for a project with
HemoCleanse, Inc. ("HemoCleanse"), an unaffiliated company
located in Lafayette, Indiana. In connection with this project,
BICO formed a wholly-owned subsidiary, IDT, Inc. IDT's executive
officers and directors include David L. Purdy, Fred E. Cooper,
Glenn Keeling, and Anthony J. Feola, who are also officers and/or
directors of BICO and its other affiliates.
IDT and HemoCleanse have entered into an exclusive License
Agreement dated as of July 21, 1993. Pursuant to the terms of
the License Agreement, IDT has the exclusive world-wide right to
commercialize the BioLogic-HT technology, which is described
below.
The project involves the delivery of whole-body extracorporeal
hyperthermia ("WBH") utilizing HemoCleanse's BioLogic-HT System
for treating the blood of patients with HIV and Acquired Immuno-
deficiency Syndrome ("AIDS"). Along with HemoCleanse, IDT has
conducted research and clinical trials which explore the use of
hyperthermia to treat blood by exposure to certain temperatures
in order to determine whether such exposures will aid in the
treatment of HIV and other viruses. HemoCleanse has produced the
equipment used in the procedures and assists IDT with its
research and clinical trials; where appropriate, IDT and
HemoCleanse are referred to herein as the "WBH Companies".
Whole-body hyperthermia achieved through extracorporeal blood
heating involves heating the patient's blood outside the body to
approximately 47 degrees centigrade and returning it back to the
body, thus raising the body's core temperature to up to 42
degrees centigrade. A blood pump moves the patient's blood
through the BioLogic-HT's sorbent-based dialysis system,
balancing the blood chemistries and removing toxins from the
blood. Historically, hyperthermia has been successfully used for
the treatment of the symptoms of certain types of cancer.
Although other entities have experimented with the use of WBH,
one significant problem has been the safe delivery of the
procedure. IDT and HemoCleanse believe that the improvements
inherent to their delivery system increase the safety of the
procedure. Through the use of the BioLogic-HT and sorbent
chemicals, the patient's blood chemicals are kept in balance and
toxins are removed. The delivery system also combines the use of
a tubular heat exchanger, various probes and catheters, heated
anterior and posterior blankets, and monitors. As a result, IDT
and HemoCleanse believe that they have taken a significant step
towards the creation of a safe delivery system. Although there
can be no assurances that the delivery system is safe for all
humans, clinical trials to date have confirmed that the humans
tested were able to safely tolerate one hour of whole-body
hyperthermia at a temperature of 40 to 42 degrees centigrade.
IDT has conducted a series of clinical trials to date using the
BioLogic-HT. Preliminary non-human trials were conducted both
<PAGE> 7
outside the United States and inside the United States at a
university-affiliated facility. Initial human trials were
conducted outside the United States in November, 1993.
In March, 1994, IDT, as sponsor, and HemoCleanse received
conditional approval of an investigational device exemption
("IDE") application from the FDA, which indicated that the
approval was based upon public health concerns and the urgency of
treating patients with AIDS. The IDE permitted the WBH Companies
to conduct a feasibility study for the treatment of six human
patients who were randomized into two treatment groups (the
control group was treated at 40 degrees centigrade, and the
tested group was treated at 42 degrees centigrade) for a single
treatment of each patient.
In July, 1994, IDT and HemoCleanse conducted the procedures
approved in connection with its IDE at St. Elizabeth Hospital
Medical Center in Lafayette, Indiana. Each AIDS patient involved
in the randomized study was the subject of a one-hour WBH
treatment; three were treated at 40 degrees centigrade (the
control group) and three were treated at 42 degrees centigrade
(the treated group). Although some of the patients were severely
immune suppressed and ranged in age from 27 years to 50 years,
all of the patients tolerated the procedure, which supports the
WBH Companies' contention that whole body extracorporeal
hyperthermia can be safely administered using the BioLogic-HT
system.
In August 1994, the WBH Companies received preliminary results
from its July trials, which indicated that the BioLogic-HT System
used in the trials was successful in delivering safe hyperthermia
treatments. Once the data was fully analyzed by HemoCleanse's
scientists, additional conclusions were reached. Not only did
the data indicate that the treatment could be delivered safely,
but also that preliminary data shows an initial effect on HIV
status as well as Kaposi's Sarcoma. The results of this
feasibility study will be published in the Journal of Acquired
Immune Deficiency Syndromes and Human Retrovirology in early
1996.
The results of the July, 1994 trials encouraged the WBH Companies
to request that the FDA continue and expand the IDE study. In
December, 1994, the WBH Companies received FDA approval to
conduct expanded clinical trials on thirty patients. The first
group of ten patients was treated at 42 degrees centigrade for
one hour, with an identical treatment four days later. The
second group of ten patients was treated at 40 degrees centigrade
for one hour, with an identical treatment four days later. The
third group of ten patients, the control group, received no WBH
treatment.
On February 15, 1995, the WBH Companies began the expanded
clinical trials on the first fifteen patients at St. Elizabeth
Hospital Medical Center in Lafayette, Indiana. The second group
of fifteen patients were the subjects of an identical set of
trials conducted in May, 1995. The results of the trials caused
the scientists to conclude that two successive high temperature
WBH treatments are generally safe in subjects with advanced HIV
disease, and result in positive changes in surrogate markers and
clinical status; however in order to establish statistical
significance, additional trials must be conducted. The results
of the 1995 tests are currently being submitted for publication.
Additional testing, which has been approved by the FDA, is
necessary in order to establish the clinical benefits of whole
body hyperthermia on HIV patients.
In October, 1994, IDT received notification that the patent
application for its specialized method for whole-body
extracorporeal hyperthermia (which has been assigned to IDT) had
been issued. In July, 1995, a Continuation in Part Patent, which
included the BioLogic-HT System, filed by IDT for the Specialized
Perfusion Protocol for WBH was allowed, and the patent was
granted on December 19, 1995.
During 1995, the Company added two members to its Medical and
Scientific Advisory Board: Dr. Moon H. Lee, Ph.D., a researcher
at Harbor-UCLA Medical Center who specializes in HIV-related
research; and Dr. Peter M. Schick, an oncologic surgeon and
founder of Westside Research Foundation, a California-based
foundation created to find treatments for HIV. Drs. Lee and
Schick join Drs. Steinhart, Yatvin and Ash, the original members
of the Advisory Board. Corklin R. Steinhart, M.D., Ph.D., is the
medical director of special immunology services at Mercy Hospital
in Miami, Florida; Milton B. Yatvin, Ph.D., is a professor in the
Radiation & Thermal Biology Division, Department of Radiation
<PAGE> 8
Oncology at Oregon Health Sciences University in Portland,
Oregon, and Stephen R. Ash, M.D., F.A.C.P., is the Chairman of
the Board and Director of Research and Development of
HemoCleanse.
In December, 1995, the FDA approved the expansion of the dual
treatment clinical trials to permit the treatment of an
additional sixty persons, with thirty non-hyperthermia control
patients and the other thirty patients treated at 42 degrees
centigrade for one hour, with a second treatment four days later
at 42 degrees centigrade for two hours. The WBH Companies have
already received IRB approval to conduct trials at St.
Elizabeth's Hospital in West Lafayette, Indiana, and plan to
apply to the IRBs of two other hospitals to conduct trials.
The Company has expensed approximately $5,328,000 on this project
through December, 1995, which includes the Company's acquisition
of approximately 8.2% of the common stock of HemoCleanse, as well
as convertible loans aggregating $1,050,000 in connection with
its research and development. There can be no assurances that
requisite governmental or regulatory approval will continue to be
obtained, that the program will be successful or that treatment
will be effective.
Functional Electrical Stimulators
In 1990, BICO began manufacturing functional electrical
stimulators, also referred to as implantable receiver stimulators
("IRS Devices") for Case Western Reserve University in Cleveland,
Ohio ("Case Western") pursuant to a $378,000 contract with the
Department of Veterans Affairs. The stimulators, which are
implanted under the skin, are used to assist individuals disabled
as a result of spinal cord injury, stroke, head injury, multiple
sclerosis and other neurological disorders by using low levels of
electrical stimulation to activate nerves and muscles to function
in a specific manner. The IRS Device manufactured by BICO is an
implantable device similar to a pacemaker, which is surgically
implanted in the chest or abdomen, and acts to replace a damaged
or severed nerve and stimulates muscles of the arm or leg to
restore hand grasping, arm movement, walking or standing. The
implanted device works in concert with a control stick and
transmitting coil which are worn on the torso, and an electronic
unit which is carried on the wheelchair.
Other contracts which aggregated an additional $904,000 were
received beginning in 1992 and continuing through 1994 from Case
Western, the Department of Veterans Affairs, and implanting
hospitals for devices which were being used in the university's
FDA-approved clinical studies.
In late 1994, NeuroControl Corporation in Cleveland, Ohio
("NeuroControl") acquired the rights to Case Western's IRS
Devices. In February, 1995, NeuroControl awarded BICO a $2.2
million contract to build IRS Devices which would be used during
the completion of clinical studies and into the commercialization
phase of the device. The new contract originally called for the
first installment of devices to be delivered over approximately a
two-year period beginning in October, 1995, with the remaining
devices to be delivered in accordance with a schedule to be
negotiated. Because of component supply problems, delivery on
the devices was delayed by approximately three months and
fabrication on the devices has just begun by BICO. The contract
also calls for good-faith negotiations to conclude a long-term
(ten-year) supply agreement for IRS Device implants by March 1,
1997. NeuroControl submitted a Pre-Market Approval ("PMA")
application in October 1995 to the FDA to market the IRS Devices.
The application was complete except for the manufacturing section
which is expected to be completed by March 1996. In addition to
the contract for the devices, NeuroControl has placed several
purchase orders with BICO for ancillary items and services.
When Case Western transitioned its rights to the IRS Devices,
scientists and engineers there began a new stimulator development
program for a device referred to as an Implantable Stimulator
Telemeter ("IST"). The device stimulates in a manner similar to
the IRS Device, but has built into it a wide range of other
capabilities. BICO has been awarded several small contracts for
development of components for this device and has been advised by
Case Western management personnel that BICO will be an important
contributor to this next generation of devices.
<PAGE> 9
OTHER PROJECTS
Implantable Technology
Through its subsidiary, Coraflex Inc. ("Coraflex"), BICO is
engaged in the development of a polyurethane heart valve which
management believes may not have the disadvantages of the
mechanical and bioprosthetic valves currently being marketed.
The Coraflex(R) valve, which resembles the human heart's aortic
valve, is made by means of a proprietary manufacturing process.
The polyurethane used in the construction of the heart valve is
believed by BICO to exhibit strength and fatigue resistance which
compare favorably with that of other materials used for
prosthetic valves. In vitro testing, some of which has been
performed through the Children's Hospital of Pittsburgh, of the
Coraflex(R) valve to date has demonstrated superior fatigue
resistance and flow characteristics relative to the currently
available bioprosthetic and mechanical devices, respectively.
Additional development and testing must be conducted by BICO,
including animal testing, prior to its making an application to
the FDA for approval to begin clinical testing in humans. BICO
will need additional financing to compete animal and clinical
testing of the valve and to begin production. No assurances can
be made that BICO will receive the necessary funding to complete
testing, will receive FDA-marketing approval, will be able to
produce and sell the valve, or that the valve will be
commercially viable.
The Company has completed development of a new vascular access
device and will submit a 510(k) Notification to the FDA in early
1996 for approval to market the new port. No assurances can be
given as to whether the device will receive approval from the FDA
and, if approved by the FDA, will be successfully marketed.
BICO also has developed technology for other implantable devices,
such as hemodialysis ports, implantable insulin dispensers and
rate-adaptive pacemakers. BICO received patents on its
hemodialysis port and rate-adaptive pacemaker in 1990. Because
BICO's management decided to focus most of the Company's
resources on the research and development of the Noninvasive
Glucose Sensor, little progress was made on these projects.
Consequently, some of these devices are in a very preliminary
stage of development, and it is unclear at this time whether
their development will be pursued or completed.
Barnacle Ban
In November, 1993, BICO acquired the rights to a specialized
paint, as well as the rights to the name Barnacle Ban(R) pursuant
to a patent and trademark license agreement with its inventor.
During 1994, the Company applied for trademark protection for the
product name PepperPaint(TM), and in 1995, the Company also applied
for trademark protection for the name HotBottom(TM) Paint, which
received approval for registration from the EPA in July, 1995.
Barnacle Ban's paint is designed to repel zebra mussels and other
related marine life from the surfaces of ships, pipelines and
other objects which function under water.
Because the accumulation of marine life on surfaces such as pipes
and ships have caused significant problems for entities such as
water authorities, utility companies, and naval operations, the
Company believes that there is a potential market for this
product. The Company is continuing the testing and enhancement
of the product; manufacturing of the product began in 1994, and
the Company's marketing efforts will accelerate during 1996.
The trademark and license agreement covers the patents, both
granted and pending, to the paint and its application. The
agreement sets forth terms which include the minimum payment, in
the form of royalties and fees, of $32,500 for the first year,
$30,000 for the second year, $42,000 for the third year, $54,000
for the fourth year and $66,000 for the fifth and each successive
year. These payments will be minimum royalty payments on six
percent (6%) of BICO's net sales of the product, plus thirty
percent (30%) of all payments received by BICO from any
sublicensees. In addition, the inventor will perform consulting
services for BICO at no additional cost. BICO has the option of
terminating the agreement in two years. The Company has spent
approximately $977,850 on this project through December 31, 1995.
<PAGE> 10
In connection with the development of this product, the Company
has formed a wholly-owned subsidiary, Barnacle Ban Corporation
("Barnacle Ban"). Barnacle Ban's officers and directors include
Fred E. Cooper and Anthony J. Feola, who are officers and
directors of BICO and its other affiliates. Barnacle Ban has
leased space in Robinson Township, Pennsylvania for its
operations.
Nu-Insulin, Inc.
In February 1994, Nu-Insulin, Inc. ("Nu-Insulin") was
incorporated in the Commonwealth of Pennsylvania as a subsidiary
of Diasense. The outstanding common stock of Nu-Insulin is owned
as follows: seventy percent (70%) by Diasense, and thirty percent
(30%) by A. Michael Albisser, Ph.D. Dr. Albisser is the inventor
of an insulin product which reduces the chances of hypoglycemia
in diabetics, for which a U.S. Patent was issued in September
1993. Nu-Insulin's officers and directors include David L.
Purdy, and Fred E. Cooper who are also officers and directors of
Diasense and its affiliates.
Nu-Insulin has entered into a joint research agreement with the
University of Pittsburgh in connection with the research and
development of the insulin product. Nu-Insulin holds an
exclusive license to commercialize the patent for the insulin
product.
The information set forth herein regarding BICO's projects is of
a summary nature, and the status of each project is subject to
constant change. There can be no assurances as to the completion
or success of any project.
INDUSTRY SEGMENTS
The Company operates in a single industry segment consisting of
the design, manufacture and sale of biological/biomedical
products and devices.
RESEARCH AND DEVELOPMENT
The Company continues to be actively engaged in the research and
development of new products. Its major emphasis has been the
development of a Noninvasive Glucose Sensor. In order to raise
funds for the research and development of new products, the
Company and Diasense have conducted sales of stock. (See,
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS").
PRODUCT IMPROVEMENT
The Company continues to develop its products, including its
Noninvasive Glucose Sensor, PRP(R), and HotBottom(TM) Paint.
The Company has phased out its pacemaker product line and does
not intend to expend any additional funds for improvements to any
products formerly marketed.
MARKETING AND DISTRIBUTION
Diasense has entered into a distribution agreement with a German-
based company to market and sell the Noninvasive Glucose Sensor
in Germany, which could generate $32.5 million in gross revenues
to the Company during the first of a three-year period, and is
continuing discussions with several prominent domestic and
international distribution organizations which have experience
selling medical products concerning arrangements for the
marketing and distribution of the Noninvasive Glucose Sensor, if
and when production commences. Diasense also contemplates that
it will employ a direct sales force focusing directly on
diabetics.
Petrol Rem began marketing of its bioremediation product, PRP(R),
in mid-1993, and accelerated its marketing efforts in 1995. In
<PAGE> 11
addition, the Barnacle Ban HotBottom(TM) Paint product is currently
being manufactured and marketed, with marketing efforts expected
to continue in 1996. These projections are based on management's
belief, as to which there can be no assurances, that the
development of those products will continue to proceed
successfully and on schedule.
PATENTS, TRADEMARKS AND LICENSES
The Company owns patents on certain of its products and files
applications to obtain patents on new inventions when practical.
Additionally, the Company endeavors to obtain licenses from
others as it deems necessary to conduct its business.
The Company also relies upon trade secret protection for its
confidential and proprietary information. Although BICO,
Diasense and their affiliates take all reasonable steps to
protect such information, including the use of Confidentiality
Agreements and similar provisions, there can be no assurance that
others will not independently develop substantially equivalent
proprietary information or techniques, otherwise gain access to
the Company's trade secrets, disclose such technology, or that
the Company can meaningfully protect its trade secrets.
Noninvasive Glucose Sensor
Diasense owns a patent entitled "Non-Invasive Determination of
Glucose Concentration in Body of Patients" (the "Patent") which
covers certain aspects of a process for measuring blood glucose
levels noninvasively. Such Patent was awarded to BICO's research
team in December 1991 and was sold to Diasense pursuant to a
Purchase Agreement dated November 18, 1991. The Patent will
expire, if all maintenance fees are paid, no earlier than the
year 2008. If marketing of a product made under the Patent is
delayed by clinical testing or regulatory review, an extension of
the term of the Patent may be obtained. Diasense's Patent
relates only to noninvasive sensing of glucose but not to other
blood constituents. Diasense has filed corresponding patent
applications in a number of foreign countries.
A second patent application was filed by BICO in December 1992,
which was assigned to Diasense. This second patent contained new
claims which extend the coverage based upon additional
discoveries and data obtained since the original patent was
filed. The patent application was amended in October 1993, and
was granted in January, 1995.
In May 1993, four additional patent applications were filed by
BICO's research teams related to the methods, measurement and
noninvasive determination of analyte concentrations in blood. As
of December, 1995, two of the four have been issued, and one was
abandoned. All issued patents have been assigned to Diasense.
An additional patent application relating to the use of frequency
compensation to reduce modulation noise was filed in December
1993, and was issued on December 5, 1995. Corresponding patent
applications have been filed in foreign countries where the
Company anticipates marketing the Noninvasive Glucose Sensor.
BICO's research team continues to file patent applications
reflecting the continued research and development and additional
refinements to the Noninvasive Glucose Sensor.
Diasense or BICO may file applications in the United States and
other countries, as appropriate, for additional patents directed
to other features of the Noninvasive Glucose Sensor and related
processes.
Those competitors known by BICO and Diasense to be currently
developing non-invasive glucose sensors own patents directed to
various devices and processes related to the non-invasive
monitoring of concentrations of glucose and other blood
constituents. It is possible that such patents may require BICO
or Diasense to alter any model of the Noninvasive Glucose Sensor
or the underlying processes relating to the Noninvasive Glucose
Sensor, to obtain licenses, or to cease certain activities.
<PAGE> 12
The Company also relies upon trade secret protection for its
confidential and proprietary information. Although BICO and
Diasense take all reasonable steps to protect such information,
including the use of Confidentiality Agreements and similar
provisions, there can be no assurance that others will not
independently develop substantially equivalent proprietary
information or techniques, otherwise gain access to the Company's
trade secrets, disclose such technology, or that the Company can
meaningfully protect its trade secrets.
The Company has filed for trademark protection for the term
"Diasensor 1000(TM)", which is intended for use in connection with
the Diasensor(TM) models; such filing will remain pending until the
first production unit is shipped. The Company intends to apply,
at the appropriate time, for registrations of other trademarks as
to any future products of the Company.
Nu-Insulin, Inc.
In addition to the patents filed which relate to the Noninvasive
Glucose Sensor, Diasense was granted an exclusive license to the
marketing rights to the technology represented in a patent which
was issued on September 7, 1993 to A. Michael Albisser, Ph.D.
relating to the treatment of Diabetes using phosphorated insulin
(See, "BUSINESS - Nu-Insulin, Inc.").
Whole-Body Hyperthermia
In September 1992, a research team funded by the Company applied
for a protocol and domestic patent in connection with the use of
hyperthermia and the treatment of blood in HIV-positive patients;
the patent has been assigned to IDT. The protocol was approved
in October 1992. In October, 1994, IDT received notification
that the patent application for its specialized method for whole-
body extracorporeal hyperthermia had been issued. A Continuation
in Part, which included the BioLogic-HT System was been filed by
IDT, was allowed in July, 1995 and issued in December, 1995. The
patent, entitled "Specialized Perfusion Protocol for Whole-Body
Hyperthermia", contains seventeen claims for the hyperthermia
procedure, including the method of heating all of the blood in
the extracorporeal blood circuit to raise the patient's core
temperature to approximately 42 degrees centigrade (See,
"BUSINESS - Whole-Body Extracorporeal Hyperthermia").
Bioremediation
In 1992 and 1993, Petrol Rem applied for patents in connection
with its bioremediation product, all of which are still pending.
The Company has received trademark authorization for the use of
the product names PRP(R) and BIO-SOK(R). In addition, Petrol Rem
has applied for trademark authorization for the product names BIO-
BOOM(TM) and Oil Buster(TM) (See, "BUSINESS - Bioremediation").
Barnacle Ban
In 1993, the Company acquired the rights to certain patents, both
issued and pending, in connection with its Barnacle Ban project.
A patent was issued on July 13, 1993 for a marine organism
repellant and its application. A Continuation-In-Part Patent
application is pending. The Company also filed patent
applications in various foreign countries in November, 1993, all
of which are pending. In addition, the Company acquired the
right to the name Barnacle Ban(R), for which a filing was made in
November, 1993. In addition, the Company has applied for
trademark authorization for the product names HotBottom(TM) Paint and
PepperPaint(TM). In July, 1995, the EPA approved the registration
of HotBottom(TM) Paint (See, "BUSINESS - Barnacle Ban").
Coraflex
During 1995, the Company renewed its U.S. trademark registration
for the name Coraflex(R), which was originally granted in 1988.
<PAGE> 13
WARRANTIES AND PRODUCT LIABILITY
Warranties on the Company's lithium-powered pacemakers range from
six to nine years from implantation, and the isotopic-powered
pacemakers carry warranties ranging from twenty years to the
patient's lifetime. Under the Company's warranty policy, any
purchaser whose pacemaker malfunctions due to a defect or whose
pacemaker proves to be defective within the applicable warranty
period will receive a replacement pacemaker, provided that
another of the Company's pacemakers is implanted and the
defective pacemaker is returned to the Company. The Company had
no warranty claims in 1993, 1994 or 1995 and believes that since
the Company's pacemakers are no longer considered to be
"state-of-the-art" technology, its pacemakers would not be
replaced by one of its devices. The Company's implant experience
in its laboratory tests indicates that the useful life of its
pacemakers should be in excess of their applicable warranty
periods, and the Company believes it has little exposure to
future warranty claims.
The Company's present product liability insurance coverage is
$500,000 in the aggregate, which management considers to be a
sufficient amount due to the Company's discontinuance of sales
and potential exposure to liability. In January 1993, the
Company was notified of a claim in connection with one of its
pacemakers, which is still pending.
SOURCE OF SUPPLY
Once the Company begins to manufacture the Noninvasive Glucose
Sensor, the Company will be dependent upon suppliers for some of
the components required for the devices fabrication. The Company
plans to assemble the devices, but will need to purchase
components, including some components which will be custom made
for the Company from certain suppliers. These components will
not be generally available, and the Company may become dependent
upon those suppliers which do provide such specialized products.
If the Company successfully develops other new products, and
receives the regulatory approvals to manufacture such products,
it may become dependent on certain suppliers for custom parts.
Petrol Rem currently obtains its supplies from various sources,
and does not anticipate that it will encounter difficulties in
obtaining the supplies and materials needed to manufacture PRP(R)
and PRP(R) products.
COMPETITION
With the rapid progress of technology, and in spite of continuing
research and development programs, the Company's products or
developmental products are always subject to the risk of
obsolescence through the introduction of new products or
techniques by others. Management is aware that other research
groups are developing noninvasive glucose sensors, but has
limited knowledge as to the technology used or stage of
development of these devices. There is a risk that those other
groups will complete the development of their devices before the
Company does. There is no other company currently producing or
marketing noninvasive sensors for the measure of blood glucose
similar to those being developed by the Company. However, some
of the Company's other products and proposed products compete
with those of a number of other domestic and foreign
manufacturers. Competitive success in the medical device field
is dependent upon product characteristics including performance,
reliability and design innovations.
Noninvasive Glucose Sensor
The Noninvasive Glucose Sensor will compete with existing
invasive glucose sensors. Although the Company believes that the
features of the Noninvasive Glucose Sensor, particularly its
convenience and the fact that no blood samples are required, will
compete favorably with existing invasive glucose sensors, there
can be no assurance that the Noninvasive Glucose Sensor will
<PAGE> 14
compete successfully. Most currently available invasive glucose
sensors yield accuracy levels of plus or minus 25% to 30%, range
in price from $80 to $200, not including monthly costs for
disposable supplies and accessories, and are produced and
marketed by eight to ten sizable companies. Those companies
include Miles Laboratories, Inc., Boehringer Mannheim
Diagnostics, and Lifescan (an affiliate of Johnson & Johnson).
Such companies have established marketing and sales forces, and
represent established entities in the industry. Certain of the
Company's competitors (including their corporate or joint venture
partners or affiliates) currently marketing invasive glucose
sensors have substantially greater financial, technical,
marketing and other resources and expertise than Diasense, and
may have other competitive advantages over Diasense (based on any
one or more competitive factors such as accuracy, convenience,
features, price or brand loyalty). Additionally, competitors
marketing existing invasive glucose sensors may from time to time
improve or refine their products (or otherwise make them more
price competitive) so as to enhance their marketing
competitiveness relative to the Company's Noninvasive Glucose
Sensor. Accordingly, there can be no assurance that the product,
or Diasense as marketer for the Noninvasive Glucose Sensor, will
be able to compete favorably with such competition.
In addition to the invasive glucose sensors discussed above,
there exist invasive sensors, such as the Yellow Springs Sensor
(the "Clinical Sensors") which the Company believes achieve
accuracy levels within 30 minutes which are within plus or minus
3% of actual glucose levels. The Company will also compete with
this technology, which is relatively non-portable and bears a
price of approximately $8,000. The Clinical Sensors are
presently used almost exclusively by hospitals and other
institutions, and, like all invasive sensors, still require
repeated blood samples. It is anticipated that the Company will
also face competition from the Clinical Sensors, at least in some
markets. For example, certain institutions that might otherwise
purchase Diasense's products may decide to continue to use the
Clinical Sensors, whether due to the superior accuracy levels of
that sensor or institutional or historical bias, despite what
Diasense believes will be the superior convenience and cost
factors of the Noninvasive Glucose Sensor.
At this time, the Company estimates that the anticipated selling
price of the Diasensor 1000(TM) will range from $7950 to $8500; such
estimate is subject to change as the FDA process continues. Such
price will be a factor in the Company's ability to compete with
other available technology.
The Company faces more direct competition from other companies
who are currently researching and developing noninvasive glucose
sensors. The Company has very limited knowledge as to the stage
of development of these sensors; however, should another company
successfully develop a noninvasive glucose sensor, achieve FDA
approval, and reach the market prior to the Company, it would
have an adverse effect upon the Company's ability to market its
sensor. To the best of the Company's knowledge, no other company
has filed for FDA approval to market a noninvasive glucose sensor
as of the date of this document.
The companies which are currently engaged in the research and/or
development of noninvasive glucose sensors include the following:
Sandia National Laboratories ("Sandia"), which is working with
the University of New Mexico, Futrex, Inc. ("Futrex"), Boston
Advanced Technologies, Inc. ("B.A.T."), and Cygnus, Inc.
("Cygnus"). Although the Company is not aware, there may be
other companies engaged in similar research and development. The
named companies, and others, may be further along in their
development than the Company is aware, and may have access to
capital and other resources which would give them a competitive
advantage over the Company. The following is a summary of the
Company's current knowledge regarding the companies listed.
Sandia, which is funded by the U.S. Department of Energy and
administered by AT&T, has publicly reported that it has developed
a noninvasive glucose sensor based on infrared spectroscopy and
using near-infrared light. In May 1993, Sandia disclosed that it
entered into agreements with Rio Grande Medical Technologies,
Inc. ("Rio Grande"), transferring certain rights and patents
relating to a noninvasive glucose sensor, and that Rio Grande was
seeking financing to develop the technology. In November 1994, a
representative of Sandia publicly stated that their research and
<PAGE> 15
development still required no less than two years to perfect the
device(1). The Company is not aware of Sandia's commencement of
clinical trials through IRBs which would satisfy FDA approval
requirements. Futrex, which has been granted four patents
relating to the noninvasive detection of glucose, conducted
unsuccessful clinical trials in 1991. Futrex conducted
additional clinical trials, and has disclosed in August 1995 IPO
filings with the SEC that it plans to file a 510(k) Notification
with the FDA for its device in the fourth quarter of 1995;
however, the Company believes that Futrex's IPO, along with its
FDA filings, have been delayed. B.A.T. was, in the past,
conducting research and development of a noninvasive sensor for
the analysis of blood constituents, including glucose, pursuant
to a contract with NASA, but the Company has no knowledge of
whether B.A.T. is presently pursuing the research. B.A.T. owns
one patent, but has not disclosed whether any prototype has been
developed or tested. Cygnus has disclosed that it is developing
a "GlucoWatch", which it claims periodically directs an
electrical current into the diabetic in order to monitor glucose
levels. Cygnus has not yet submitted its device for FDA
scrutiny, is still in search of a corporate partner, and must
complete additional clinical trials prior to applying for FDA
approval to market the device.
Certain organizations are also actively engaged in researching
and developing technologies that may regulate the use or
production of insulin or otherwise affect or cure the underlying
causes of diabetes. Diasense is not aware of any new or
anticipated technology that would effectively render the
Noninvasive Glucose Sensor obsolete or otherwise not marketable
as currently contemplated. However, there can be no assurance
that future technological developments or products will not make
the Noninvasive Glucose Sensor significantly less competitive or,
in the case of the discovery of a cure for diabetes, even
effectively obsolete.
GOVERNMENT REGULATIONS
Since most of the Company's products are "medical devices" as
defined by the Federal Food, Drug and Cosmetic Act, as amended
(the "Act"), they are subject to the regulatory authority of the
FDA. The FDA regulates the testing, marketing and registration
of new medical devices, in addition to regulating manufacturing
practices, labeling and record keeping procedures. The FDA can
subject the Company to inspections of its facilities and
operations and may also audit its record keeping procedures at
any time. The FDA's Good Manufacturing Practices for Medical
Devices specifies various requirements for BICO's manufacturing
processes and maintenance of certain records.
In March 1993, the FDA announced that it intends to take steps to
enhance its review and approval procedures and guidelines
relating to the testing of medical devices, including imposing a
higher standard of proof on medical devices that might pose
potential health risks. BICO is unable to determine at this time
whether such action may have a material adverse effect on the
approval by the FDA of the Noninvasive Glucose Sensor, the WBH
delivery system, any other product, or on BICO's business
generally. The extent of federal, state, local or foreign
governmental regulations that might result from any future
legislation or administrative action, and the impact of any such
action on BICO's products or business, cannot be accurately
determined.
Future sales of BICO's products may also be affected by the
Clinical Laboratory Improvement Amendments of 1988 ("CLIA"),
which are intended to assure the quality and reliability of all
medical testing in the United States, regardless of where the
testing is performed. Regulations to implement CLIA became
effective in 1992, and, accordingly, the current or future impact
of such regulations on Diasense's products cannot fully be
determined at this time. These regulations affect previously
unregulated testing markets, including physician office
laboratories and small volume test sites. These market segments
may be discouraged from initiating, continuing or expanding
patient testing as a result of CLIA. There can be no assurance
that the regulations will not have an effect on the potential
uses for the Noninvasive Glucose Sensor, the WBH delivery system,
or any other product, with a resulting impact on its potential
markets.
<PAGE> 16
Noninvasive Glucose Sensor
Because the Noninvasive Glucose Sensor is subject to regulation
by the FDA, the Company will be required to meet applicable FDA
requirements prior to marketing the device in the United States.
These requirements include clinical testing, which must be
supervised by the IRBs of chosen hospitals. Clinical testing
began on the Noninvasive Glucose Sensor in May 1993 (See,
"Current Status of the Noninvasive Glucose Sensor"). The
clinical trials have been conducted based on a determination by
the Company and the IRBs that the device is a "non-significant
risk" device, thus obviating the need for an Investigational
Device Exemption ("IDE") filing with the FDA. Should any of the
IRBs determine, and are successful in convincing the FDA, that
the device is a "significant risk" device, the Company would be
required to submit an IDE filing to the FDA. Such filing would
result in material delays and expenses for the Company, and a
resulting significant delay in the completion, marketing and sale
of the Noninvasive Glucose Sensor. To date, neither the IRBs nor
the FDA have informed the Company that they are of the opinion
that the device is a "significant risk" device.
Diasense may conclude clinical testing on any device at any point
at which it believes additional data is not necessary for
inclusion in the 510(k) Notification. Such notification will
include a detailed description of the prototype and data produced
during clinical trials. The 510(k) Notification review by the
FDA involves a substantial period of time, and requests for
additional information and clinical data will require additional
time. Although the Company does not anticipate extraordinary
problems, there can be no assurance that the 510(k) Notification
will ultimately be approved, or when it will be approved.
The 510(k) Notification filed by the Company for the Diasensor
1000(TM) indicated that the device is "substantially equivalent" to
similar existing devices, namely invasive glucose sensors. In
connection with its review of the Company's 510(k) Notification,
the FDA will determine whether the device is "substantially
equivalent" to a similar existing device based upon the following
factors: (i) whether the device has the same "intended use" as an
the existing device; and (ii) whether the device has the same
technological characteristics as the existing device, unless the
different technological characteristics do not adversely affect
its safety and effectiveness. Although the Company and the IRBs
believe that the Noninvasive Glucose Sensor satisfies those
requirements, thus qualifying for a 510(k) Notification, there
can be no assurance that the FDA will agree. Although its
correspondence with the Company appears to indicate that the FDA
believes that the 510(k) Notification is the appropriate filing
for the Diasensor 1000(TM), should the FDA determine that the device
is not "substantially equivalent" to an existing device, or
refuse to approve the 510(k) Notification for any reason, the
Company would be required to submit to the FDA's full pre-market
approval process, which would require additional testing, and
result in significant delays and increased expenses. The FDA's
pre-market approval process is more extensive, time-consuming and
will result in increased research and development expenses, while
delaying the time period in which BICO and Diasense could begin
manufacturing and marketing the product.
In November 1993, BICO announced that it had retained a
consulting firm, C.L. McIntosh & Associates, Inc. of Rockville,
Maryland, to assist BICO with its dealings with the FDA. BICO
continues to consult with C.L. McIntosh in connection with its
pending 510(k) Notification.
The time elapsed between the completion of clinical testing at
IRBs and the grant of marketing approval by the FDA is uncertain,
and no assurance can be given that approval to market the
Noninvasive Glucose Sensor will ultimately be obtained. In
addition, delays or rejections may be encountered based upon
changes in the FDA's regulatory policies during the period of
research and development and the FDA's review.
The Company may also be required to comply with the same
regulatory requirements prior to introducing the Diasensor 2000(TM),
or other models of the Noninvasive Glucose Sensor, to the market.
Any changes in FDA procedures or requirements will require
corresponding changes in the Company's obligations in order to
maintain compliance with FDA standards. Such changes may result
in additional delays or increased expenses.
<PAGE> 17
Whole-Body Extracorporeal Hyperthermia
HemoCleanse has received FDA approval of its Form 510(k)
Notification in connection with the use of the BioLogic-DT model,
which is used in drug detoxification procedures. However, the
510(k) Notification process, which is intended to be a shorter,
less complex FDA procedure as compared to a full Pre-Market
Approval process, may not be available for the BioLogic-HT model,
which is used in the hyperthermia project. The WBH Companies are
continuing to hold discussions with the FDA regarding the number
of patients which must be treated with the BioLogic-HT model
before the FDA will accept an application to market the delivery
system in the U.S., and the WBH Companies have retained a
biostatistician to assist them in making that determination. The
Company believes, based on the federal government's statements
regarding the priority treatment to be afforded to drugs and
procedures in connection with the treatment of HIV and AIDS, that
its FDA application, in whatever form, may receive expedited
review. If either a Pre-Market Approval application or a 510(k)
Notification is approved by the FDA, it would allow IDT, via the
License Agreement, to market the BioLogic-HT device.
In December, 1994, the FDA approved the WBH Companies' request to
expand the WBH studies. The FDA approved and recommended
additional trials of thirty to forty persons divided into three
to four groups of ten each: one group to be treated with 42
degrees WBH for one hour, with the same treatment four days
later; one group to be treated at 40 degrees WBH, with the same
treatment four days later; one control group, with no WBH
treatment; and, at the FDA's suggestion, one group to be treated
at 40 degrees WBH for one hour, to be followed by a second WBH
treatment at 42 degrees four days later. The WBH Companies
conducted those trials on thirty persons during 1995, and based
on the success of those trials, applied for FDA approval to
conduct additional trials. In December, 1995, the FDA approved
additional trials for sixty persons with one treatment at 42
degrees centigrade for one hour, with a second treatment four
days later at 42 degrees centigrade for two hours (See, "BUSINESS
Whole-Body Extracorporeal Hyperthermia").
The FDA's approval letter allows the new trials to begin once
HemoCleanse and IDT have obtained IRB approval from the hospitals
where the trials will be conducted. IRB approval has already
been received from St. Elizabeth's Hospital in West Lafayette,
Indiana, and may be sought from two additional hospitals.
Although the federal government has publicly stated that
experimental drugs and procedures in connection with the
treatment of HIV will receive priority treatment, there can be no
assurances that any future 510(k) Notifications, Pre-Market
Approval applications, or IDEs will obtain FDA approval. Without
FDA approval, the delivery system cannot be used or marketed in
the United States.
Bioremediation
The Company's bioremediation project will be supervised by NETAC,
a private group endorsed and supervised by the EPA and the
Pennsylvania Department of Environmental Resources. In addition,
each state in which the bioremediation products are used will
apply its own environmental regulations to the use and sale of
the products.
Pacemakers
The Company is subject to NRC regulations in connection with all
of its isotopically-powered pacemakers and the storage of nuclear
materials at its Indiana facility. The Company maintains a
renewable license to continue storing and handling such
pacemakers in order to satisfy warranty claims.
The FDA's Good Manufacturing Practices for Medical Devices
specifies various requirements for the Company's manufacturing
processes and maintenance of certain records. The Company
maintains quality assurance records for every pacemaker
manufactured as well as for all of its implanted pacemakers. The
Company also requires the return of all explanted units for
analysis by its quality control personnel. In some cases, such
<PAGE> 18
as the death of the bearer, a pacemaker may not be explanted or
returned to the Company.
HUMAN RESOURCES
As of December 31, 1995, the Company had 153 full-time employees
who were located primarily in either the Indiana or Pittsburgh
locations. The Company offers employee benefits which include
group life, health, and disability insurance, and the option to
participate in a 401(k) plan. The Company believes that its
relations with its employees are good.
The Company has employment contracts with some of its non-officer
employees, most of whom are scientists and engineers employed in
the Company's research and development operations. Such
contracts are typically for terms of five years and contain
confidentiality provisions. The Company also employs consultants
as needed; some of the consultants are employed pursuant to
consulting contracts which contain confidentiality provisions.
As of December 31, 1995, in addition to BICO's full-time
employees, its subsidiaries, Coraflex and IDT had no full-time
employees, Barnacle Ban had four full-time employees; Diasense
had seven full-time employees; and Petrol Rem had fourteen full-
time employees. No employees of any of the companies are
currently represented by a collective bargaining unit.
MARKET FOR THE COMPANY'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the NASDAQ Small-Cap
Market under the symbol "BICO" and is also reported under the
symbol "BIOCNTRL TEC". On January 26, 1996 the high and low
sales prices for the common stock of the Company as reported by
NASDAQ were $3.8125 and $3.375. Pursuant to current disclosure
guidelines, the following table sets forth the high and low sales
prices for the common stock of the Company during the calendar
periods indicated, through December 31, 1995, as reported by
NASDAQ:
Calendar Year and Quarter High Low
1993 First Quarter 3.750 2.125
Second Quarter 3.188 1.938
Third Quarter 2.938 1.750
Fourth Quarter 2.813 1.938
1994 First Quarter 4.500 2.563
Second Quarter 3.125 2.375
Third Quarter 2.969 2.125
Fourth Quarter 3.063 1.438
1995 First Quarter 2.719 1.500
Second Quarter 4.689 2.375
Third Quarter 4.125 3.000
Fourth Quarter 6.438 2.688
In December 1995, BICO and Diasense announced that their
respective Boards of Directors had determined that it would be in
the best interest of both companies to combine them. Although
the Boards of Directors anticipated that such combination would
be accomplished via an exchange of all Diasense's outstanding
common stock for BICO common stock, the specific terms of the
transaction must be negotiated, and if a mutually-beneficial
agreement cannot be reached, the combination may not occur. The
combination is also subject to the approval of the shareholders
of the Companies. In the event that Diasense is combined with
BICO, the existing characteristics of BICO's common stock might
<PAGE> 19
be changed, subject to the terms of the transaction, and to
shareholder approval.
As of December 31, 1995, the Company had approximately 22,000
holders of record, including those who hold in street name, for
its common stock and 13 holders of record for its preferred
stock.
DIVIDENDS
The Company has not paid cash dividends on its common stock or
preferred stock (with the exception of a cash dividend on its
preferred stock in 1983) since its inception and cash dividends
are not presently contemplated at any time in the foreseeable
future. The Company anticipates that any excess funds generated
from operations in the foreseeable future will be used for
working capital and for investment in research and new product
development. In accordance with the Company's Articles of
Incorporation, cash dividends are also restricted under certain
circumstances.
TRANSFER AGENT
The Company's Registrar and Transfer Agent for its common stock
is Chemical Mellon Shareholder Services, L.L.C., New York, New
York.
EMPLOYMENT AGREEMENT PROVISIONS RELATED TO CHANGES IN CONTROL
BICO has entered into agreements (the "Agreements") with Fred E.
Cooper, David L. Purdy, Anthony J. Feola, Glenn Keeling, and two
non-executive officer employees. The Agreements provide that in
the event of a "change of control" of BICO, BICO is required to
issue to Mr. Cooper and Mr. Purdy shares of common stock equal to
five percent (5%), to issue to Mr. Feola four percent (4%), to
issue Mr. Keeling three percent (3%), and to issue the two non-
executive officer employees two percent (2%) each of the
outstanding shares of common stock of the Company immediately
after the change in control. In general, a "change of control"
is deemed to occur for purposes of the Agreement: (i) when 20% or
more of BICO's outstanding voting stock is acquired by any
person, (ii) when one-third (1/3) or more of BICO's directors are
not Continuing Directors (as defined in the Agreements), or (iii)
when a controlling influence over the management or policies of
BICO is exercised by any person or by persons acting as a group
within the meaning of Section 13(d) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act").
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Net Sales $ 461,257 $ 184,507 $ 54,000 $ 199,620 $ 11,200
Gain on Sale of $ 0 $ 0 $ 0 $ 0 $ 225,000
Diasense Stock
Warrant $12,523,220 $ 0 $ 0 $ 0 $ 0
Extensions
TOTAL $ 755,991 $ 481,453 $ 134,329 $ 313,348 $ 261,468
REVENUES
<PAGE> 20
Benefit $ 0 $ 0 $ 0 $ 157,855 ($ 281,855)
(Provision)
Income Taxes
Net Loss ($29,420,345) ($11,672,123) ($7,855,998) ($3,068,048) ($1,051,426)
Total Assets $9,074,669 $6,375,778 $2,995,334 $2,920,277 $4,088,084
Long-Term $ 175,330 $ 163,201 $ 104,917 $ 0 $ 52,678
Obligations
Preferred Stock $ 37,900 $ 54,900 $ 54,900 $ 54,900 $ 82,500
Working Capital $3,188,246 $2,612,884 $1,112,541 $1,144,891 $2,290,951
Net Loss per ($ .84) ($ .43) ($ .45) ($ .23) ($ .08)
Common Share
Cash Dividends
per share:
Preferred $ 0 $ 0 $ 0 $ 0 $ 0
Common $ 0 $ 0 $ 0 $ 0 $ 0
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In December 1995, BICO and Diasense announced that their
respective Boards of Directors had determined that it would be in
the best interest of both companies to combine them. Although
the Boards of Directors anticipated that such combination would
be accomplished via an exchange of all Diasense's outstanding
common stock for BICO common stock, the specific terms of the
transaction must be negotiated, and if a mutually-beneficial
agreement cannot be reached, the combination may not occur. The
combination is also subject to the approval of the shareholders
of the Companies. As of the date of this document, the Companies
were still functioning as two different corporations; such status
is reflected in the discussions set forth herein; however, BICO's
financial statements, portions of which are discussed below,
continue to be consolidated, and therefore include Diasense as a
majority-owned subsidiary. BICO's financial statements have been
consolidated to include Diasense since Diasense's inception in
1989.
LIQUIDITY AND CAPITAL RESOURCES
The following is a summary of the more detailed information set
forth in the financial statements attached hereto.
Working capital was $3,188,246 at December 31, 1995, as compared
to $2,612,884 at December 31, 1994, and $1,112,541 at December
31, 1993. Working Capital was increased by sales of common stock
by the Company and its affiliate Diasense, which aggregated
approximately $19,275,000 in 1995; $14,910,000 in 1994; and
$7,142,000 in 1993.
<PAGE> 21
Cash decreased to $3,204,501 at December 31, 1995 from $3,315,846
at December 31, 1994 and $1,540,960 at December 31, 1993. This
decrease was attributable to the Company's sales of its common
stock less its ($16,891,242) net cash flow used by operations
during the twelve month period. These operating expenditures
consisted primarily of costs associated with research and
development projects, and related general and administrative
expenses. The Company also had net cash used by investing
activities of ($2,763,301). During the twelve months ended
December 31, 1995, cash of $16,436,913 was raised by BICO, and
cash of $3,111,400 was raised by Diasense.
In July, 1995, BICO purchased 1,200,000 shares of Diasense common
stock at a price of $3.50 per share.
During 1995, the Company loaned HemoCleanse, an Indiana
Corporation working with IDT on the Whole-Body Extracorporeal
Hyperthermia project, an aggregate of $1,050,000 in the form of
one-year notes accruing interest at prime rate as reported by the
Wall Street Journal. The notes are convertible, at the Company's
option, into shares of HemoCleanse common stock at $3.50 per
share. The Company loaned $62,500 to Anthony J. Feola, its
director and officer, at nine (9%) percent interest; such note
was paid in full, including accrued interest of $5,625, on
December 29, 1995. The Company also loaned $250,000 to Allegheny
Food Services in the form of a one-year note accruing interest
at prime rate as reported by the Wall Street Journal plus one
percent (1%). Joseph Kondisko, a former director of Diasense, is
a principal owner of Allegheny Food Services.
The Company continued to fund operations mostly from sales of its
common stock. During 1992 through 1994, the Company entered into
agreements with several entities which agreed to use their best
efforts to sell the Company's common stock to foreign investors
subject to the requirements set forth in Regulation S of the
Securities Act of 1933 ("Regulation S"). Such entities undertook
to ensure compliance with Regulation S, which among other things,
limits a foreign investor's ability to trade the Company's stock
in the United States. Beginning in 1992, and as of December 31,
1994, 10,463,909 shares of the Company's common stock had been
sold pursuant to the agreements, resulting in net proceeds to the
Company of $18,905,879. An aggregate of 6,317,860 shares with
net proceeds of $12,400,750 were sold during fiscal 1994.
Proceeds of the sales were used to continue to fund the Company's
research and development projects and to provide working capital
for the Company. No such sales were made during 1995.
In December 1992, the Company filed an S-1 Registration Statement
with the Securities and Exchange Commission (the "SEC"), which
became effective on February 10, 1993. The Registration was
subsequently amended on a Form S-3. The Registration, which is a
"Shelf Registration" registered shares of common stock held by
existing shareholders, and the shares of common stock underlying
all of the Company's outstanding warrants and options which were
outstanding at the time of the filing. As of its latest
amendment in March, 1995, the Registration includes the following
shares of common stock: 193,412 shares purchased pursuant to
private placements; and 2,640,982 shares underlying currently
exercisable warrants. The Registration will enable the "Selling
Shareholders" set forth in the Registration Statement to sell
their common stock, subject to applicable blue sky laws and other
requirements, without restriction.
In connection with the December, 1992 BICO Registration, all of
the officers and directors of the Company and its affiliates,
Diasense, Coraflex, Petrol Rem and IDT, as well as shareholders
who would, upon the exercise of warrants, own in excess of 5% of
the Company's stock, agreed to enter into a "Lock-In Agreement"
whereby they have agreed not to sell any of the common stock,
excluding stock acquired via private placements or on the open
market, at a price of less than $2.50 per share until March,
1998.
On February 15, 1993, BICO exercised its option with Joseph
Resnick to enter into an agreement regarding the acquisition of
developmental and marketing rights to the bioremediation product
PRP(R), and other biological remediation products and inventions.
BICO assigned the agreement to Petrol Rem, a subsidiary of BICO,
and originally issued 420,000 shares of nonvoting common stock,
or 42% of Petrol Rem, to Mr. Resnick. Due to a recapitalization
of Petrol Rem's common stock, Mr. Resnick now owns 5,000,000
shares of non-voting common stock, which represents 33% of Petrol
Rem. The agreement contains termination provisions and sets
<PAGE> 22
forth payments to be made to Mr. Resnick based upon sales and net
income levels. Such payments include a minimum $200,000 payment
to Mr. Resnick over two years and an $80,000 payment to a third
party over a two-year period beginning in 1993, even if the
agreement is terminated. Payments beginning the second year
(1994) aggregate a minimum of $120,000 per year through 1997.
Petrol Rem has also entered into an employment agreement with Mr.
Resnick, and pays him a salary of $85,000 per year pursuant to
such agreement.
In May, 1993, BICO initiated a private placement of its common
stock to accredited investors only, at $1.35 per share. The
offering was closed in June, 1993 after an aggregate of
$1,299,637 was raised pursuant to the offering.
On December 31, 1992, the Company's affiliate Diasense filed an
initial public offering with the SEC which became effective on
July 19, 1993. As of its last amendment in January, 1996, the
registration included 4,892,216 shares of common stock, 6,565,013
shares of common stock underlying currently exercisable warrants
and 2,992,062 shares of common stock held by existing Diasense
shareholders. As of December 31, 1995, exercisable warrants to
purchase 7,291,213 shares of Diasense common stock were
outstanding. To the extent that such warrants are exercised,
BICO's ownership in Diasense will be proportionately diluted
(See, Note H to the Financial Statements.)
In July 1993, the Company filed an S-1 Registration Statement
with the SEC, which became effective on August 16, 1993. The
Registration, which is a "Shelf Registration" registered new
shares of common stock to be offered by the Company, certain
common stock held by existing shareholders, and the shares of
common stock underlying certain outstanding warrants. As of its
latest amendment in April, 1995, the Registration includes the
following shares of common stock: 5,994,854 primary shares to be
offered by the Company, 53,519 shares purchased pursuant to
private placements; and 360,000 shares underlying currently
exercisable warrants. In addition to enabling the Company to
sell 5,994,854 shares of its common stock, the Registration will
enable the "Selling Shareholders" set forth in the Registration
Statement to sell their common stock, subject to applicable blue
sky laws and other requirements, without restriction. As of
December 31, 1995, 8,812,924 shares had been issued pursuant to
such registration, resulting in proceeds to the Company of
$18,816,135.
Due to the Company's current limited sources of revenue, the
Company plans to seek additional financing which will be used to
finance development of, and to proceed to manufacture, the
Noninvasive Glucose Sensor and to complete the development of its
other projects. No assurances are made as to the availability
of any such financing. Although the Company has partially
developed other products for biomedical use, and is developing a
bioremediation product, its primary emphasis during 1995 was the
continued development of the Noninvasive Glucose Sensor (See,
"BUSINESS").
The Company's products are at various stages of development and
will require additional funding for completion. This paragraph
summarizes the Company's estimates as to the aggregate amounts
needed to complete each project, assuming continued testing and
development is successful. The Company may choose to discontinue
any of its projects at any time if research and development
efforts indicate that continuation would be inadvisable. The
Diasensor 1000(TM) has been submitted to the FDA for marketing
approval and the Diasensor 2000(TM) is in the pre-clinical trial
stage of development. At this time, the Company estimates that
approximately $500,000 will be required to complete the FDA
approval process, although, due to the uncertainty of the FDA
approval process, the Company can make no assurances that such
estimate is accurate. In addition, the Company estimates that
approximately $2,600,000 will be required to complete the
renovations to the Company's expanded manufacturing facility in
order to manufacture the Noninvasive Glucose Sensor. Pending the
completion of such renovations, and the installation of the
necessary manufacturing equipment, the Company plans to use its
existing facility in Indiana, Pennsylvania, along with
subcontractors, to begin manufacturing. The Company anticipates
that an additional $12,200,000 will be used for inventory build-
up and work-in-progress. The Company estimates that
approximately $2,000,000 will be required to complete the heart
valve project and $2,000,000 will be required to complete the
hyperthermia project.
The Company currently has a commitment for capital leases on
certain of its capital equipment and future commitments for new
<PAGE> 23
capital expenditures will be required to continue the Company's
efforts in research and development, and to manufacture and
market its existing products and any other products it may
develop.
As of January, 1995, the Company estimates that its short-term
liquidity needs will be met from currently available funds. The
Company estimates that such funds will be sufficient to complete
the research and development stage of the Noninvasive Glucose
Sensor, to complete the FDA approval process, and to begin
marketing the device. The Company anticipates that it will
finance those expenses with existing funds, as well as funds
raised through the sales of its securities and from the other
sources of funds described herein. The Company has a history of
successful capital-raising efforts; since 1989, and through
December 1995, BICO and its affiliate Diasense have raised over
$59,000,000 in private and public offerings alone. Those funds
were supplemented by the Company's receipt of over $1,270,000 as
a result of the exercise of warrants and options from 1993-1995.
Management also expects to meet a portion of its short-term
working capital needs through development contracts with other
organizations and through manufacturing for other companies on a
contractual basis, as described herein. During 1993, 1994 and
1995, the Company was awarded contracts by the Department of
Veteran's Affairs Medical Center for Case Western Reserve
University, Shriners Hospital - Philadelphia Unit, and Austin
Hospital to manufacture FES products. Such contracts generated
revenues of $54,000, $177,259 and $149,448 in 1993, 1994 and
1995, respectively. In February, 1995, the Company was awarded
an additional contract for $2.2 million in connection with its
manufacturing project (See, "BUSINESS").
Pursuant to a Research and Development Agreement (the "R&D
Agreement") Diasense is obligated to pay BICO for its work to
develop the Noninvasive Glucose Sensor. During 1995, both
billings and payments pursuant to the R&D Agreement were
suspended pending the FDA's decision on the 510(k) Notification
for the Diasensor 1000(TM). In May, 1995, BICO agreed to accept
3,000,000 shares of Diasense common stock at an assigned value of
$3.50 per share in return for a reduction of $10,500,000 in
amounts due to BICO. As of December 31, 1995, all amounts due
to BICO by Diasense pursuant to the R&D Agreement had been paid.
During 1993 and 1994, Petrol Rem reimbursed BICO and Diasense for
the expenses of their employees who performed services for
Petrol Rem. Pursuant to an oral agreement, BICO and Diasense
were reimbursed for 100% of Anthony J. Feola's, Gary R. Keeling's
and C. Terry Adkin's time. Such reimbursement aggregated
approximately $578,092 through December 31, 1994.
In view of BICO's expenses resulting from its product development
projects, and other factors discussed herein, as compared to
BICO's contract revenues, currently available funds, and
established ability to raise capital in public and private
markets, BICO estimates that it will meet its liquidity needs for
a period of at least twelve months from December 31, 1995 from
currently available funds, including those expected to be raised
via additional sales of the Company's common stock. This
estimate is based, in part, upon the current absence of any
extraordinary technological, regulatory or legal problems.
Should such problems, which could include unanticipated delays
resulting from new developmental hurdles in product development,
FDA requirements, or the loss of a key employee, arise the
Company's estimates would require re-evaluation. There can be no
assurances that despite the Company's good-faith efforts, its
estimates will lead to accurate results.
The Company's long-term liquidity needs are expected to include
working capital to fund manufacturing expenses for its products
and continued research and development expenses for existing and
future projects. Such needs are expected to be met from
continued FES and IRS Device contract revenues, sales of its
bioremediation products and, once production begins, the
Noninvasive Glucose Sensor and other products. Delays in the
development of the Company's products will result in increased
needs for capital from other sources. The Company anticipates
that such other sources will include continued sales of common
stock, and investment partners such as venture capital funds and
private investment groups. There can be no assurances given that
adequate funds will be available. If the Company is unable to
raise the funds necessary to fund the long-term expenses
necessary to complete the development or manufacture of its
products, the Company will be unable to continue its operations.
<PAGE> 24
As described hereinabove, management believes the Company has
sufficient liquidity to meet its projected expenditures on a
short-term basis. Absent additional funding, the Company will
have limited liquidity on a long-term basis. Moreover, many
demands on liquidity, such as technological, regulatory or legal
problems, could cause the Company's liquidity to be inadequate.
At present, the Company does not have any additional sources of
liquidity, including bank lines of credit. Long-term working
capital needs are expected to be met through sales of the
Noninvasive Glucose Sensor, the PRP(R) bioremediation product, and
other new products. There can be no assurances that any such
products will be successfully marketed or commercially viable.
RESULTS OF OPERATIONS
The following is a summary of the more detailed information
contained in the financial statements attached hereto.
In 1995, the Company's net sales increased to $461,257 from
$184,507 in 1994 and from $54,000 in 1993. The increase was due
to an increase in the number of products produced pursuant to FES
and IRS Device contracts. Of the total net sales, the Company
had $149,448 in FES and IRS Device contractual revenues in 1995,
as compared to $177,259 in 1994 and $54,000 in 1993.
In 1995, 1994 and 1993, the Company received interest income in
the amount of $294,734, $284,938, and $53,001, respectively. The
increase was due to the investment of the Company's liquid assets
(which are composed primarily of funds raised via sales of
securities), the availability of such assets and applicable
interest rates.
In 1995, the Company's costs of products sold was $198,542 as
compared to $98,668 in 1994 and $27,446 in 1993. The increase
is primarily due to the Company's corresponding increases in
product sales, and products produced pursuant to FES and IRS
Device contracts.
The Company's research and development expenses were $7,649,678
in 1995, an increase from $5,214,386 in 1994, and $3,431,634 in
1993. The overall increase was due to the Company's receipt of
funds pursuant to sales of stock, which funds were used primarily
to finance the Company's accelerated efforts in the research and
development of the Noninvasive Glucose Sensor, as well as the
hyperthermia project.
In 1995, General and Administrative expenses were $11,117,107 as
compared to $7,460,602 in 1994 and $4,607,195 in 1993. The
increase was due to the Company's increase in payroll expenses,
primarily as a result of the recruitment and hiring of new
employees, primarily for the purpose of developing and promoting
the Noninvasive Glucose Sensor.
During Fiscal 1995, the Company extended 2,069,500 warrants
originally granted to certain officers, directors, employees and
consultants in 1990 and 1991, until 1998. Because the exercise
price of such warrants ($.25 and $.33) was lower than the market
price of the common stock at the time of the extensions
$7,228,220 was charged to operations during 1995, in addition to
a similar charge of $5,295,000 made by the Company's subsidiary,
Diasense during 1995.
Interest expense on the Company's outstanding indebtedness was
$17,048 in 1995, as compared to $9,766 in 1994, and $5,624 in
1993. The increase was due to an increase in capital leases on
certain Company equipment.
INCOME TAXES
Due to the Company's net operating loss carried forward from
previous years and its current year losses, no federal or state
income taxes were required to be paid for the years 1987 through
1995. As of December 31, 1995, the Company and its subsidiaries,
except for Diasense and Petrol Rem, had available net operating
loss carryforwards for federal income tax purposes of
approximately $33,000,000, which expire during the years 1995
through 2010. Due to the net loss reported in 1992, the
<PAGE> 25
Pennsylvania income tax was reduced to $122,000 and paid during
1993. (See, Note I to the Financial Statements).
SUPPLEMENTARY FINANCIAL INFORMATION
Subsequent to December 31, 1995, and through January 30, 1996,
the Company issued approximately 250,000 shares of its common
stock pursuant to its public offering. Such issuances resulted
in net proceeds to the Company of approximately $576,600.
In December 1995, the Boards of Directors of both Diasense and
BICO determined that it was in the best interest of both
companies to combine them (See, "Management's Discussion and
Analysis of Financial Condition and Results of Operations").
<TABLE>
<CAPTION>
MANAGEMENT INFORMATION
The directors and executive officers of the Company are as
follows:
Director
Name Age Since Position
<S> <C> <C> <C>
David L. Purdy 67 1972 President, Chairman of
the Board, Treasurer,Director
Fred E. Cooper 50 1989 Chief Executive
Officer, Executive
Vice President, Director
Anthony J. Feola 48 1990 Senior Vice President,
Director
Glenn Keeling 45 1991 Vice President, Director
Raymond F. Carr 69 1993 Director
______________________________
</TABLE>
DAVID L. PURDY, 67, is President, Chairman of the Board,
Treasurer and a director of the Company. Mr. Purdy has been a
director and Chairman of the Board since its organization in 1972
and is considered the organizer and founder of the Company; he
devotes 60% of his time to the business of the Company, and 40%
of his time to Diasense. He has also served as President of the
Company from 1972 through December 1990, with the exception of
five months in 1980, when he served as Chairman and full-time
Program Director of the Company's implantable medicine dispensing
device program with St. Jude Medical, Inc., and from October 1,
1987 through July 15, 1988, when he served as Chairman and
Director of Research and Development for the Company. Prior to
founding the Company, he was employed by various companies in the
medical technology field, including Arco Medical, Inc. Mr. Purdy
is also an officer and director of Diasense, Nu-Insulin and
Coraflex, and a director of Petrol Rem and IDT.
FRED E. COOPER, 50, is the Chief Executive Officer, Executive
Vice President and a director of the Company; he devotes
approximately 60% of his time to the business of the Company, and
40% to Diasense. Prior to joining the Company, Mr. Cooper
co-founded Equitable Financial Management, Inc. of Pittsburgh,
PA, a company in which he served as Executive Vice President
until his resignation and divestiture of ownership in August
1990. In 1972, Mr. Cooper founded Cooper Leasing Corp.,
Pittsburgh, Pennsylvania, a company specializing in equipment and
venture financing. Mr. Cooper was appointed Chief Executive
Officer in January 1990. He is also an officer and director of
<PAGE> 26
Diasense, Nu-Insulin and Barnacle Ban, and a director of Petrol
Rem, Coraflex and IDT.
ANTHONY J. FEOLA, 48, rejoined the Company as its Senior Vice
President in April, 1994, after serving as Diasense's Vice
President of Marketing and Sales from January, 1992 until April,
1994. Prior to January, 1992, he was the Company's Vice President
of Marketing and Sales. Prior to joining the Company in November
1989, Mr. Feola was Vice President and Chief Operating Officer
with Gateway Broadcasting in Pittsburgh in 1989, and National
Sales Manager for Westinghouse Corporation, also in Pittsburgh,
from 1980 until 1989. He was elected a director of the Company
in February 1990, and also serves as a director of Diasense,
Coraflex and Barnacle Ban. He is also the President, CEO and a
director of Petrol Rem, and the Secretary/Treasurer and a
director of IDT.
GLENN KEELING, 45, became a member of the Board of Directors in
April 1991. Mr. Keeling currently is a full-time employee of
BICO in the position of Vice President of Marketing; his primary
responsibilities during 1994 and 1995 have been the management
and operation of IDT's Whole-Body Extracorporeal Hyperthermia
project. From 1976 through 1991, he was a Vice President in
charge of new business development at Equitable Financial
Management, Inc., a regional equipment lessor specializing in
export leasing and leasing of income producing equipment. His
responsibilities included initial contacts with banks and
investment firms to open new lines of business referrals in
connection with financing large equipment transactions. He is
also President and a director of IDT.
RAYMOND F. CARR, 69, was appointed to the Company's Board of
Directors on April 19, 1993. Mr. Carr is a retired bank officer.
He was employed by various banks from 1951 to 1960 which merged
with PNC Bank and was an officer at Northside Deposit Bank from
1960 until his retirement in 1985.
Pursuant to the disclosure requirements of Item 405 of Regulation
S-K regarding timely filings required by Section 16(a) of the
Securities and Exchange Act, the Company represents the
following. Based solely on its review of copies of forms
received and written representations from certain reporting
persons, the Company believes that all of its officers, directors
and greater than ten percent beneficial owners complied with
applicable filing requirements.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Effective January 25, 1995, upon a determination by the Board of
Directors, the Company engaged Thompson Dugan as its independent
auditors and accountants to replace Grant Thornton LLP. Thompson
Dugan also serves as the independent auditors and accountants for
Diasense, replacing Grant Thornton LLP. Neither company had any
disagreements with Thompson Dugan or Grant Thornton LLP on any
matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure.
AVAILABILITY OF FORM 10-K
The Company will provide, upon written request, a copy of the
Company's Annual Report on Form 10-K, including the financial
statements and schedules thereto. Please contact the following
person to request a copy of the Company's most recent Form 10-K:
DIANE MCQUAIDE
INVESTOR RELATIONS DEPARTMENT
BIOCONTROL TECHNOLOGY, INC.
BUILDING 2500, 2ND FLOOR
2275 SWALLOW HILL ROAD
PITTSBURGH, PA 15220
_______________________________
1 Diabetes Forecast, November 1994, "Diabetes in the Media:
Good News or Bad News?"; quoting Ries Robinson.
<PAGE> 27
THOMPSON DUGAN
CERTIFIED PUBLIC ACCOUNTS
1150 Thorn Run Road
Moon Township, PA 15108
Report of Independent Certified Public Accountants
Board of Directors
Biocontrol Technology, Inc.
We have audited the accompanying consolidated balance
sheets of Biocontrol Technology, Inc. and its subsidiaries
as of December 31, 1995 and 1994, and the related
consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1995. These
financial statements are the responsibility of the
Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, such consolidated financial statements
present fairly, in all material respects, the consolidated
financial position of Biocontrol Technology, Inc. and its
subsidiaries as of December 31, 1995 and 1994, and the
consolidated results of their operations and their cash
flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been
prepared assuming that the Corporation will continue as a
going concern. As discussed in Note B to the financial
statements, the Corporation has incurred losses and negative
cash flows from operations in recent years through December
31, 1995 and these conditions are expected to continue
through 1996, raising substantial doubt about the
Corporation's ability to continue as a going concern.
Management's plans in regard to these matters are also
discussed in Note B. These financial statements do not
include any adjustments that might result from the outcome
of this uncertainty.
by /s/ Michael Thompson
THOMPSON DUGAN
Pittsburgh, Pennsylvania
January 30, 1996
<PAGE>
<TABLE>
Biocontrol Technology, Inc. and Subsidiaries
<CAPTION>
Consolidated Balance Sheets
Dec. 31, 1995 Dec. 31, 1994
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents (note A) $ 3,204,501 $ 3,315,846
Accounts receivable 202,526 32,721
Notes receivable - related parties (notes C and J) 250,000 -
Notes receivable - net of allowance for loan
losses (notes A and J) 12,000 -
Inventory - net of valuation allowance (notes A and D) 1,660,139 181,144
Prepaid expenses 148,526 187,460
--------- ---------
TOTAL CURRENT ASSETS 5,477,692 3,717,171
PROPERTY, PLANT AND EQUIPMENT (note A)
Building 234,863 233,818
Leasehold improvements 1,092,311 597,243
Furniture, fixtures & equipment 633,237 524,598
Machinery and equipment 3,558,964 2,695,888
--------- ---------
Subtotal 5,519,375 4,051,547
Less accumulated depreciation 2,087,032 1,631,586
--------- ---------
3,432,343 2,419,961
OTHER ASSETS
Notes receivable - related parties (notes C and J) 95,900 95,900
Interest receivable - related parties (note C) 42,237 32,445
Patents, net of amortization (note A) 15,429 19,761
Other assets 11,068 90,540
-------- -------
164,634 238,646
--------- ---------
TOTAL ASSETS $ 9,074,669 $ 6,375,778
=================== ===================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<TABLE>
Biocontrol Technology, Inc. and Subsidiaries
<CAPTION>
Consolidated Balance Sheets (CONTINUED)
Dec. 31, 1995 Dec. 31, 1994
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 1,838,408 $ 643,364
Current portion of long-term debt (note F) 28,404 14,412
Accrued liabilities (note E) 96,634 120,511
Deferred revenue on contract billings (note A) 326,000 326,000
--------- ---------
TOTAL CURRENT LIABILITIES 2,289,446 1,104,287
LONG-TERM LIABILITIES
Accrued liabilities (note E) 114,750 109,833
Long-term debt (note F) 60,580 53,368
UNRELATED INVESTORS' INTEREST IN SUBSIDIARY (note A) 2,562,543 -
STOCKHOLDERS' EQUITY (notes H and L)
Series 1 convertible preferred stock,
par value $10 per share, authorized
500,000 shares issuable in series -
shares issued and outstanding 3,790 at
Dec. 31, 1995 and 5,490 at Dec. 31, 1994 37,900 54,900
Common stock, par value $.10 per share,
authorized 40,000,000 shares, issued and
outstanding 37,021,118 at Dec. 31, 1995 and
29,311,079 at Dec. 31, 1994 3,702,112 2,931,108
Additional paid-in capital 59,849,875 38,922,294
Warrants 6,677,820 -
Accumulated deficit (66,220,357) (36,800,012)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 4,047,350 5,108,290
------------ ------------
TOTAL LIABILITIES
AND STOCKHOLDERS' EQUITY $ 9,074,669 $ 6,375,778
=================== ===================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<TABLE>
Biocontrol Technology, Inc. and Subsidiaries
<CAPTION>
Consolidated Statements of Operations
Year Ended December 31,
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Revenues
Net sales $ 461,257 $ 184,507 $ 54,000
Interest income 294,734 284,938 53,001
------- ------- -------
755,991 469,445 107,001
Costs and expenses
Cost of products sold 198,542 98,668 27,446
Research and development (notes A and I) 7,649,678 5,214,386 3,431,634
General and administrative 11,117,107 7,460,602 4,607,195
Warrant extensions (note H) 7,228,220 - -
Warrant extensions - Subsidiary (note H) 5,295,000 - -
Interest expense 17,048 9,766 5,624
---------- ---------- ---------
31,505,595 12,783,422 8,071,899
------------ ------------ -----------
Loss before unrelated
investors' interest (30,749,604) (12,313,977) (7,964,898)
Unrelated investors' interest in
net loss of subsidiary 1,329,259 641,854 108,900
------------ ------------ -----------
$ (29,420,345) $ (11,672,123) (7,855,998)
============ ============= ===========
$ (0.84) $ (0.43) $ (0.45)
============ ============= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<TABLE>
Biocontrol Technology, Inc. and Subsidiaries
<CAPTION>
Consolidated Statements of Stockholders' Equity
Additional
Preferred stock Common stock paid-in Accumulated
Shares Amount Shares Amount Warrants capital deficit Total
------ ------ ------ ------ -------- ---------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1992 5,490 $ 54,900 14,014,963 $1,401,497 $ - $17,805,315 $(17,271,891) $ 1,989,821
Proceeds from
stock offering - - 5,086,668 508,666 - 6,613,993 - 7,122,659
Additional paid-in
capital from
subsidiary stock
offering - - - - - 13,425 - 13,425
Additional paid-in
capital from
subsidiary warrants
exercised - - - - - 12,265 - 12,265
Warrants exercised - - 2,007,216 200,722 - 530,228 - 730,950
Waived salaries
by officer - - - - - 50,417 - 50,417
Net loss - - - - - - (7,855,998) (7,855,998)
------ ---------- ------------- ------------ ------------ ------------- -------------- -----------
Balance at
December 31, 1993 5,490 $ 54,900 21,108,847 $2,110,885 $ - $25,025,643 (25,127,889) 2,063,539
------ ---------- ------------- ------------ ------------ ------------- -------------- ----------
Proceeds from
stock offering - - 7,224,690 722,469 - 13,206,152 - 13,928,621
Additional paid-in
capital from subsidiary
stock offering - - - - - 507,370 - 507,370
Warrants exercised - - 977,542 97,754 - 183,129 - 280,883
Net loss - - - - - - (11,672,123) (11,672,123)
------ ---------- ------------ ------------- ------------ ------------- ------------- ------------
Balance at
December 31, 1994 5,490 $ 54,900 $29,311,079 $2,931,108 $ - $38,922,294 $(36,800,012) $ 5,108,290
------ ---------- ------------- ------------ ------------ ------------- ------------- ------------
Proceeds from
stock offering - - 6,892,325 689,233 - 15,580,180 - 16,269,413
Conversion of
preferred stock (1,700) (17,000) 17,000 1,700 - 15,300 - -
Additional paid-in
capital from
subsidiary stock
offering - - - - - 1,648,677 - 1,648,677
Warrant extensions - - - - 7,228,220 - - 7,228,220
Warrant extensions -
subsidiary - - - - - 4,984,755 - 4,984,755
Decrease in ownership
interest - subsidiary - - - - - (2,012,785) - (2,012,785)
Warrants exercised - - 800,714 80,071 (550,400) 711,454 - 241,125
Net loss - - - - - - (29,420,345) (29,420,345)
------ ---------- ------------- ------------ ------------ ------------- ------------- ------------
Balance at
December 31, 1995 3,790 $ 37,900 37,021,118 $3,702,112 $6,677,820 $59,849,875 $(66,220,357) $4,047,350
====== ========== ============= ============ ============ ============= ============= ============
</TABLE>
The accompanying notes are an integral part of the statements
<PAGE>
<TABLE>
Biocontrol Technology, Inc. and Subsidiaries
<CAPTION>
Consolidated Statements of Cash Flows
Year ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Net loss $ (29,420,345) $ (11,672,123) $ (7,855,998)
Adjustments to reconcile net loss to net
cash used by operating activities :
Depreciation and amortization 459,778 250,532 165,135
Stock issued in exchange for services 180,373 167,928 38,000
Provision for potential loss on notes receivable 1,050,000 - -
Waiver of salaries by officers - - 50,417
Minority interest in subsidiary net loss (1,329,259) (641,854) (108,900)
Warrant extensions 7,228,220 - -
Warrant extensions by subsidiary 5,295,000 - -
(Increase) decrease in accounts receivable (169,805) 79,652 (43,185)
(Increase) in inventories (2,379,694) (499,511) (107,974)
Increase in inventory valuation reserve 900,000 455,595 13,101
(Increase) decrease in prepaid expenses 38,934 (119,014) 32,453
(Increase) decrease in other assets 79,472 (59,163) 982
Increase (decrease) in accounts payable 1,195,044 199,651 (105,848)
(Decrease) in taxes payable - - (124,000)
Increase (decrease) in accrued liabilities (18,960) 43,762 115,606
Increase in partial billings on contract - 24,500 196,500
---------- ---------- ---------
Net cash flow used by operating activities (16,891,242) (11,770,045) (7,733,711)
Cash flows from investing activities:
Purchase of property, plant and equipment (1,441,509) (1,752,353) (290,852)
Making of notes receivable (1,312,000) - -
Collection of other notes receivable - 45,000 180,000
(Increase) decrease in interest receivable (9,792) 19,644 (17,602)
---------- ---------- ---------
Net cash used by investing activities (2,763,301) (1,687,709) (128,454)
Cash flows from financing activities:
Proceeds from sale by subsidiary of its common stock 3,079,200 1,124,096 57,600
Proceeds from stock offering 16,195,788 13,785,821 7,084,659
Proceeds from warrants exercised 273,325 280,883 730,950
Proceeds from issuance of term debt - 50,000 -
Repayment of term debt (5,115) (8,160) (5,172)
Payment under capital lease obligation - - 1,243
---------- ---------- ---------
Net cash provided by financing activities 19,543,198 15,232,640 7,869,280
---------- ---------- ---------
Net increase (decrease) in cash (111,345) 1,774,886 7,115
Cash and cash equivalents, beginning of year 3,315,846 1,540,960 1,533,845
--------- --------- ---------
Cash and cash equivalents, end of year $ 3,204,501 $ 3,315,846 $ 1,540,960
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<TABLE>
Biocontrol Technology, Inc. and Subsidiaries
<CAPTION>
Consolidated Statements of Cash Flows-(Continued)
Year ended December 31,
1995 1994 1993
------------ ------------- ------------
<S> <C> <C> <C>
Supplemental Information:
Interest paid $ 17,048 $ 9,766 $ 5,795
============= ============= ============
Supplemental schedule of non-cash
investing and financing activities:
Acquisition of equipment with note payable $ 47,282 $ 25,940 $ -
============= ============= =============
Conversion of preferred stock
for common stock:
Common stock $ 1,700 $ - $ -
Additional paid-in capital 15,300 - -
------------- ------------- -------------
$ 17,000 $ - $ -
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
Biocontrol Technology, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 and 1993
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
1. Organization
Biocontrol Technology, Inc. - BICO (the Company) and its
subsidiaries are engaged in the development,
manufacturing and marketing of biomedical products and
biological remediation products.
2. Principles of Consolidation
The consolidated financial statements include the
accounts of: Coraflex, Inc. an 89.9% owned subsidiary
as of December 31, 1995 and 1994; Diasense, Inc.
(Diasense) a 52% owned subsidiary as of December 31,
1995 and 43.5% owned as of December 31, 1994; Petrol
Rem, Inc., a 67% owned subsidiary as of December 31,
1995 and 1994; IDT, Inc., a 99.1% owned subsidiary as of
December 31, 1995 and 100% owned as of December 31,
1994; and Barnacle Ban Corporation, a 100% owned
subsidiary as of December 31, 1995 and 1994. All
significant intercompany accounts and transactions have
been eliminated. Subsidiary losses in excess of the
unrelated investors' interest are charged against the
Company's interest.
3. Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company
considers all highly liquid investments with a maturity
of three months or less at acquisition to be cash
equivalents.
4. Inventory
Inventory is valued at the lower of cost (first-in,
first-out method) or market. An inventory valuation
allowance is provided against finished goods and raw
materials for products for which a market has not yet
been established.
5. Property and Equipment
Property and equipment are accounted for at cost and
are depreciated over their estimated useful lives on a
straight-line basis.
6. Patents
Patents are amortized over their legal or useful lives,
whichever is less. Accumulated amortization on patents
was $81,512 and $77,180 at December 31, 1995 and 1994,
respectively.
<PAGE>
Biocontrol Technology, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 1995, 1994 and 1993
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - Continued
7. Deferred Revenue on Contract Billings
Revenue is recognized from sales when products are shipped
and/or services performed. Advance billings are recorded as
deferred revenue until shipment or performance.
8. Loss Per Common Share
Loss per common share is based upon the weighted average
number of common shares outstanding which amounted to
35,025,237 shares in 1995, 26,967,255 shares in 1994, and
17,317,194 shares in 1993. Shares issuable under stock
options and stock warrants are excluded from computations as
their effect is antidilutive.
9. Research and Development Costs
Research and development costs are charged to operations as
incurred. Machinery, equipment and other capital
expenditures which have alternative future use beyond
specific research and development activities are capitalized
and depreciated over their estimated useful lives.
10. Income Taxes
The Company previously adopted Statement of Financial
Accounting Standards No. 109 (FAS 109), Accounting for
Income Taxes, which requires the asset and liability method
of accounting for income taxes. Enacted statutory tax rates
are applied to temporary differences arising from the
differences in financial statement carrying amounts and the
tax bases of existing assets and liabilities. Due to the
uncertainty of the realization of income tax benefits, (Note
I), the adoption of FAS 109 had no effect on the financial
statements of the Company.
11. 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. As discussed in item 4
above and in Notes C and D following, the Company has
established allowances based upon management's evaluation of
inventories and notes receivable.
<PAGE>
Biocontrol Technology, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 1995, 1994 and 1993
NOTE B - OPERATIONS AND LIQUIDITY
The Company and its subsidiaries have incurred substantial losses
in 1995 and in prior years and have funded their operations and
product development primarily through the sale of stock. Until
such time that products can be successfully developed and
marketed, the Company and its subsidiaries will continue to need
to fulfill working capital requirements through the sale of
securities. The inability of the Company to continue its
operations as a going concern would impact the recoverability and
classification of recorded asset amounts.
The ability of the Company to continue in existence is dependent
on its having sufficient financial resources to complete the
research and development necessary to successfully bring
products to market and for marketplace acceptance. As a result
of its significant losses, negative cash flows from operations,
and significant accumulated deficits for each of the three years
ending December 31, 1995, 1994 and 1993 there is substantial
doubt about the Company's ability to continue as a going
concern.
Management believes that its currently available working
capital, anticipated contract revenues and subsequent sales of
stock will be sufficient to meet its projected expenditures for
a period of at least twelve months from December 31, 1995.
NOTE C - NOTES RECEIVABLE
Notes receivable due from various related and unrelated parties
consisted of the following at December 31,:
Related Parties
1995 1994
Note receivable from Fred E. Cooper,
Chief Executive Officer,
payable upon demand with 12% interest. $ 8,500 $ 8,500
Notes receivable from Fred E. Cooper,
Chief Executive Officer,
payable upon demand with 10% simple interest. 82,400 82,400
Note receivable from Glenn Keeling, Director,
payable upon demand with 10% simple interest. 5,000 5,000
Note receivable from Allegheny Food Services, Inc.
of which Joseph Kondisko, a former director,
is principal owner, payable 9/1/96 with
interest at prime plus 1% interest. 250,000 -
Unrelated Parties
Note receivable from an individual,
payable upon demand with 8.75% interest. 12,000 -
------- -------
357,900 95,900
Less current notes receivable 262,000 -
------- -------
Noncurrent $ 95,900 $ 95,900
========== ========
<PAGE>
Biocontrol Technology, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 1995, 1994 and 1993
NOTE C - NOTES RECEIVABLE - Continued
Accrued interest receivable on the related party notes as of
December 31, 1995 and 1994 was $42,237 and $32,445,
respectively.
During 1995, IDT, a subsidiary of BICO, continued to financially
support the research and development efforts of HemoCleanse,
Inc. an 8.2% owned, unaffiliated company, to assist the funding
of a feasibility study related to whole-body extracorporeal
hyperthermia through the extension of credit in the form of
loans. These loans which aggregated to $1,050,000 as of
December 31, 1995 are all due upon demand after one year from
the date they were made. The loans bear interest at the prime
rate and are convertible at the option of IDT into HemoCleanse
common stock. HemoCleanse which is still in a development stage
has not yet established profitable operations. On the basis of
HemoCleanse's developmental status and financial statements for
the year ended December 31, 1995 management of IDT has
established an allowance for uncollectibility for the entire
amount of principal, no interest has been accrued on these
loans.
NOTE D - INVENTORY
Inventories consisted of the following as of December 31,:
1995 1994
Raw materials $2,457,235 $ 106,654
Work-in-process 102,911 74,490
Finished goods 607,862 498,647
--------- ---------
3,168,008 679,791
Less valuation allowance (1,507,869) (498,647)
----------- ----------
$1,660,139 $181,144
NOTE E - ACCRUED LIABILITIES
Accrued liabilities consisted of the following as of December 31,:
Current: 1995 1994
Accrued payroll taxes $15,405 $ 21,754
Accrued vacation 43,728 29,682
Other accrued liabilities 37,501 69,075
------- --------
$96,634 $120,511
======= ========
Long - Term:
Accrued rent $114,750 $ 76,500
Other accrued liabilities - 33,333
-------- ---------
$114,750 $ 109,833
<PAGE>
Biocontrol Technology, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 1995, 1994 and 1993
NOTE F - LONG TERM DEBT
Long term debt consisted of the following as of December 31,:
1995 1994
Notes Payable to a bank in
monthly payments of $999 including
interest at a rate of 7.35%.
Collateralized by cash on deposit. $33,423 $43,279
Note Payable in monthly payments of $495
including interest at a rate of 8.48%.
Collateralized by equipment. 19,986 24,501
Lease Payable in monthly payments of $851
including interest at a rate of 10.11%.
Collateralized by equipment . 18,418 -
Note Payable to a bank in
monthly payments of $433 including
interest at a rate of 8.75%.
Collateralized by equipment . 17,157 -
------- -------
88,984 67,780
Current portion of long-term debt 28,404 14,412
Long-term debt ------- -------
$60,580 $53,368
======= =======
NOTE G - LEASES
Operating Leases
The Company is committed under a noncancelable operating lease
for its research and product development facility. The lease
between the Company and a group of investors (lessor) which
includes four of the Company's Executive Officers and/or
Directors is for a period of 240 months beginning September 1,
1990. Monthly rental under the terms of the lease is $8,810 for
a period of 119 months to August 1, 2000 when the monthly rental
payments shall be fixed at an amount equal to the fair rental
value of the property as determined by mutual agreement of
lessor and the Company for the balance of the lease. Total rent
expense was $105,720 in each of the years 1995, 1994 and 1993.
Future minimum lease payments as of December 31, 1995 are
$105,720 per year for each of the next five succeeding years and
subsequent commitment of $61,670 through August 1, 2000, on
which date the rental payments shall be renegotiated.
The Company and its related subsidiaries also lease other office
facilities, various equipment and automobiles expiring in
various years through 2002. Total lease expense related to
these leases was $216,143, $188,701 and $94,528 in 1995, 1994
and 1993, respectively.
<PAGE>
Biocontrol Technology, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 1995, 1994 and 1993
NOTE G - LEASES Continued
Operating Leases - Continued
Minimum future lease payments to related and unrelated parties
are as follows:
Related Unrelated
Parties Parties Total
--------- --------- --------
1996 $105,720 $184,290 $290,010
1997 105,720 166,923 272,643
1998 105,720 125,652 231,372
1999 105,720 93,809 199,529
2000 61,670 90,000 151,670
Thereafter - 225,000 225,000
-------- -------- ----------
Future minimum lease payments $484,550 $885,674 $1,370,224
======== ======== ==========
NOTE H - STOCKHOLDERS' EQUITY
Preferred Stock
The Series 1 preferred stock (nonvoting and nondividend) is
convertible at any time into ten shares of common stock.
Additionally, the preferred stock is redeemable at the option of
the Company at a redemption price of $10.00 per share and also
has a liquidation preference of $10.00 per share.
The Board of Directors of the Company may issue preferred stock
in series which would have rights as determined by the Board.
Common Stock Warrants
During the twelve months ended December 31, 1995 warrants
ranging from $1.69 to $4.03 per share to purchase 21,000 shares
of common stock were granted at exercise prices which were equal
to or above the current quoted market price of the stock on the
date issued. Warrants to purchase 2,415,982 shares of common
stock were exercisable at December 31, 1995.
<PAGE>
Biocontrol Technology, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 1995, 1994 and 1993
NOTE H - STOCKHOLDERS' EQUITY - Continued
Common Stock Warrants - Continued
The per share exercise prices of these warrants are as follows:
Shares Exercise Price
1,479,500 $.25
180,000 $.33
350,000 $.50
139,000 $2.125
267,482 $.28 - $3.50
---------
Total 2,415,982
The fiscal year in which common stock warrants were granted and
the various expiration dates by fiscal year are as follows:
Fiscal Warrants Warrants Expire During Fiscal Year
Year Granted Granted 1996 1997 1998 1999 2000
1990 559,500 - - 559,500 - -
1991 1,471,482 371,482 - 1,100,000 - -
1992 25,000 - 25,000 - - -
1993 209,000 - - 209,000 - -
1994 130,000 - - - 130,000 -
1995 21,000 - - - - 21,000
--------- ------- ------ --------- ------- ------
2,415,982 371,482 25,000 1,868,500 130,000 21,000
========= ======= ====== ========= ======= ======
Common stock reserve
At December 31, 1995 the Company has reserved unissued common
stock as follows:
Warrants 2,415,982
Convertible preferred stock 37,900
---------
Total 2,453,882
=========
<PAGE>
Biocontrol Technology, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 1995, 1994 and 1993
NOTE H - STOCKHOLDERS' EQUITY - Continued
Warrant extensions
During 1995, the Company extended the exercise date of warrants
to purchase 2,069,500 shares of common stock to certain
officers, directors, employees and consultants. The warrant
shares were originally granted at an exercise price ranging from
$.25 to $.33, and were extended at the original grant price.
The Company recorded a $7,228,220 expense for the difference
between the fair market values on the date the warrants were
extended and the warrants' exercise prices.
Diasense Common Stock
At December 31, 1995, warrants to purchase 7,291,213 shares of
Diasense common stock were exercisable. The per share exercise
price for 4,169,000 shares is $.50, for 2,396,013 shares is $1.00
and for 726,200 shares is $3.50. The warrants expire at various
dates through 2000. To the extent that all the warrants are
exercised, the Company's proportionate ownership would be diluted
from 52% at December 31, 1995 to 39.49%.
Diasense Warrant extensions
During 1995, Diasense extended the exercise date of warrants to
purchase 1,765,000 shares of common stock to certain officers,
directors, employees and consultants. The warrant shares were
originally granted at an exercise price of $.50, and extended at
the same price. Diasense recorded a $5,295,000 expense for the
difference between the fair market values on the date the
warrants were extended and the warrants' exercise prices.
Petrol Rem Common Stock
At December 31, 1995 warrants to purchase 1,450,000 shares of
Petrol Rem common stock were exercisable. The per share exercise
price for 1,450,000 shares is $.10. The warrants expire at
various dates through 2000. To the extent that if all the
warrants were exercised, the Company's proportionate ownership
would be diluted from 67.1% at December 31, 1995 to 61.3%.
IDT Common Stock
At December 31, 1995 warrants to purchase 1,520,000 shares of IDT
common stock were exercisable. The per share exercise price for
1,500,000 shares is $.10 and for 20,000 shares is $2.00. The
warrants expire at various dates through 2000. To the extent that
if all the warrants were exercised, the Company's proportionate
ownership would be diluted from 99.1% at December 31, 1995 to
86.2%.
<PAGE>
Biocontrol Technology, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 1995, 1994 and 1993
NOTE I - INCOME TAXES
At December 31, 1995, the Company and its subsidiaries, except
Diasense and Petrol Rem, have available net operating loss
carryforwards for federal income tax and financial reporting
purposes of approximately $33,000,000 which expire during the
years 1995 through 2010. If there are certain changes in the
Company's ownership, there could be an annual limitation on the
amount of the carryforward which can be utilized. The Company
also has research and development credit carryforwards for
federal income tax purposes of approximately $400,000.
As of September 30, 1995, the end of its fiscal year, Diasense
had available approximately $19,450,000 of net operating loss
carryforwards for federal income tax purposes. These
carryforwards which expire during the years 2005 through 2010
are available, subject to limitations, to offset future taxable
income. The Company also has research and development credit
carryforwards available for federal income tax purposes of
approximately $670,000 subject to the limitations, expiring in
the years 2005 through 2010.
As of December 31, 1995, Petrol Rem, Inc. had available
approximately $5,100,000 of net operating loss carryforwards for
federal income tax purposes. These carryforwards which expire
during the years 2008 through 2010 are available, subject to
limitations, to offset future taxable income. The Company also
has research and development credit carryforwards available for
federal income tax purposes of approximately $75,000.
Certain items of income and expense are recognized in different
periods for financial and income tax reporting purposes. In the
year ended December 31, 1993, a warrant exercise adjustment of
$1,584,264 was reported for tax purposes which resulted in
additional deductions for tax purposes of this amount. For the
year ended December 31, 1994, a warrant exercise adjustment of
$321,736 was reported for tax purposes. For the year ended
December 31, 1995, a warrant exercise adjustment of $1,309,060
was reported for tax purposes.
NOTE J - RELATED PARTY TRANSACTIONS
Research and Development Activities
The Company is currently performing research and development
activities related to the non-invasive glucose sensor (the
Sensor) under a Research and Development Agreement with
Diasense. If successfully developed, the Sensor will enable
users to measure blood glucose levels without taking blood
samples. Diasense acquired the rights to one United States
patent from BICO for $2,000,000 on November 18, 1991 which
covers the process of measuring
<PAGE>
Biocontrol Technology, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 1995, 1994 and 1993
NOTE J - RELATED PARTY TRANSACTIONS - Continued
Research and Development Activities - Continued
blood glucose levels non-invasively. Approval to market the
Sensor is subject to federal regulations including the Food and
Drug Administration (FDA). The Sensor is subject to clinical
testing and regulatory approvals by the FDA. BICO is
responsible for substantially all activities in connection with
the development, clinical testing, FDA approval and
manufacturing of the Sensor. BICO finances its operations from
the sales of stock and was reimbursed for costs incurred under
the terms and conditions of the Research and Development
Agreement for the research and development of the Sensor by
Diasense. If BICO is unable to perform under the Research and
Development or Manufacturing Agreements, Diasense would need to
rely on other arrangements to develop and manufacture the Sensor
or perform these efforts itself.
BICO and Diasense have entered into a series of agreements
related to the development, manufacturing and marketing of the
Sensor. BICO is to develop the Sensor and carry out all steps
necessary to bring the Sensor to market including 1) developing
and fabricating the prototypes necessary for clinical testing;
2) performing the clinical investigations leading to FDA
approval for marketing; 3) submitting all applications to the
FDA for marketing approval; and 4) developing a manufacturable
and marketable product. Diasense is to conduct the marketing of
the Sensor. The following is a brief description of the
agreements:
Manufacturing Agreement
The manufacturing agreement between BICO and Diasense was
entered into on January 20, 1992. BICO is to act as the
exclusive manufacturer of production units of the Sensor upon
the completion of the Research and Development Agreement and
sell the units to Diasense at a price determined by the
agreement. The term of the agreement is fifteen years.
Research and Development Agreement
Under a January 1992 agreement between BICO and Diasense,
beginning in April 1992, BICO received $100,000 per month, plus
all direct costs for the research and development activities of
the Sensor. This agreement replaced a previous agreement dated
May 14, 1991. The term of the new agreement is fifteen years.
Under the terms of this agreement, the Company billed Diasense
$2,955,863 in research and development and general and
administrative expenses for the year ending December 31, 1995.
In July 1995, BICO and Diasense agreed to suspend billings,
accruals of amounts due and payments pursuant to the research
and development agreement pending the FDA's review of the 510(k)
Notification.
<PAGE>
Biocontrol Technology, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 1995, 1994 and 1993
NOTE J - RELATED PARTY TRANSACTIONS - Continued
Purchase Agreement
In November 1991, BICO entered into a Purchase Agreement with
Diasense under which Diasense acquired BICO's rights to the Sensor
for a cash payment of $2,000,000. This agreement permits BICO to
use Sensor technology for the manufacture and sale by BICO of a
proposed implantable closed loop system. BICO will pay Diasense a
royalty equal to five percent of the net sales of such implantable
closed loop system.
Real Estate Activities
Four of the Company's Executives and/or Directors are members of
an eight-member partnership which in July 1990 purchased the
Company's real estate in Indiana, Pennsylvania, and each has
personally guaranteed the payment of lease obligations to the bank
providing the funding. For their personal guarantees, the four
individuals each received warrants to purchase 100,000 shares of
the Company's common stock at an exercise price of $.33 per share
until June 29, 1998.
Company Loans to Officers
At December 31, 1995 and 1994, Mr. Cooper owed the Company $8,500
related to a 12 percent simple interest demand loan. At December
31, 1995 and 1994, Mr. Cooper owed the Company $82,400, related to
10 percent simple interest demand loans. The accrued interest
owed by Mr. Cooper on all demand notes at December 31, 1995 and
1994 was $40,197 and $30,937, respectively.
At December 31, 1995 and 1994, the Company had a demand loan of
$5,000 with 10 percent simple interest with Glenn Keeling, a
Director. The accrued interest on this loan at December 31, 1995
and 1994 was $2,008 and $1,508, respectively.
At December 31, 1995, the Company had a one year judgment note
of $250,000, with an interest rate of prime plus one percent,
with Joseph Kondisko, Allegheny Food Services, Inc. of which
Joseph Kondisko, a former director, is principal owner. As of
December 31, 1995 there was no accrued interest owed.
<PAGE>
Biocontrol Technology, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
DECEMBER 31, 1995, 1994 and 1993
NOTE J - RELATED PARTY TRANSACTIONS - Continued
Employment Contracts
The Company's employment contracts with four officers and two
employees commenced November 1, 1994 and end October 31, 1999.
The original employment contracts set forth annual basic
salaries aggregating $1,025,000 in 1995 and expiring in periods
beginning October 1999 through 2002, which are subject to
review and adjustment. The contracts may be extended for two to
three - year periods. In the event of change in control in the
Company and termination of employment, continuation of annual
salaries at 100% decreasing to 25% are payable in addition to
the issuing of shares of common stock as defined in the
contracts. The contracts also provide for severance, disability
benefits and issuances of BICO common stock under certain
circumstances.
License Agreement
Under terms of a license agreement with a shareholder of Petrol
Rem for the marketing rights with respect to certain inventions
Petrol Rem is to make royalty payments beginning in 1994 and for
each year through 1997. Minimum royalty payments for 1996 and
1997 are $120,000 per year.
NOTE K - EMPLOYEE BENEFIT PLAN
The Company has a defined contribution plan with 401k provisions
which covers all employees meeting certain age and period of
service requirements. Employer contributions are discretionary
as determined by the Board of Directors. There have been no
employer contributions to the plan through December 31, 1995.
NOTE L - SUBSEQUENT EVENTS
Subsequent to December 31, 1995, and through January 29, 1996,
the Company issued approximately 250,000 shares of its common
stock pursuant to its public offering. Such issuances resulted
in proceeds to the Company of approximately $576,563.
