BIOCONTROL TECHNOLOGY, INC.
REPORT TO SHAREHOLDERS AS OF 9/30/96
Table of Contents Page
Description of Business. . . . . . . . . . . . . . . . . . . . . . . . . .1
Market for Registrant's Common Equity
and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . 18
Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . 19
Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . 21
Supplementary Financial Information. . . . . . . . . . . . . . . . . . . 28
Management Information . . . . . . . . . . . . . . . . . . . . . . . . . 28
Changes in and Disagreements with Accountants. . . . . . . . . . . . . . 29
Availability of Form 10-K. . . . . . . . . . . . . . . . . . . . . . . . 30
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
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.
The Company is developing the Noninvasive Glucose Sensor with Diasense, Inc.,
its 52% owed subsidiary. Where applicable, BICO and Diasense will be referred
to herein as the "Companies".
Forward-Looking Statements
From time to time, the Company may publish forward-looking statements relating
to such matters as anticipated financial performance, business prospects,
technological developments, new products, research and development activities,
the regulatory approval process, specifically in connection with the FDA
marketing approval process, and similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. In order to comply with the terms of the safe harbor, the Company
notes that a variety of factors could cause the Company's actual results to
differ materially from the anticipated results or other expectations expressed
in the C ompany's forward-looking statements. The risks and uncertainties that
may affect the operations, performance, research and development and results of
the Company's business include the following: additional delays in the
research, development and FDA marketing approval of the Noninvasive Glucose
Sensor; delays in the manufacture or marketing of the Company's other products
and medical devices; the Company's future capital needs and the uncertainty of
additional funding; BICO's uncertainty of additional funding; competition and
the risk that the Noninvasive Glucose Sensor or its other products may become
obsolete; the Company's continued operating losses, negative net worth and
uncertainty of future profitability; potential conflicts of interest; the
status and risk to the Company's patents, trademarks and licenses; the
uncertainty of third-party payor reimbursement for the Sensor and other medical
devices and the general uncertainty of the health care industry; the Company's
limited sales, marketing and manufacturing experience; the amount of time or
funds required to complete or continue any of the Company's various products or
projects; the attraction and retention of key employees; the risk of product
liability; the uncertain outcome and consequences of the lawsuits pending
against the Company; and the dilution of the Company's common stock.
Development of the Noninvasive Glucose Sensor
BICO and Diasense are currently developing a Noninvasive Glucose Sensor, which
management believes will be able to measure the concentration of glucose in
human tissue without requiring the drawing of blood. Currently available
glucose sensors require the drawing of blood by means of a finger prick.
BICO's initial research and development with insulin pumps led to a theory by
which blood glucose levels could be detected noninvasively by correlating the
spectral description of reflected electromagnetic energy from the skin with
blood glucose levels in the 50 mg per deciliter to 500 mg per deciliter range
in the infrared region of the electromagnetic spectrum. The method was studied
in 1986 and 1987 by BICO and its consultants at Battelle Memorial Institute in
Columbus, Ohio, using laboratory instruments. The results of the studies
provided information regarding the use of infrared light in the noninvasive
measurement of glucose. The information from the studies, along with later
affirmative work, led to a patent application by BICO's research team in 1990.
A patent covering the method was granted to the research team and assigned to
BICO in December 1991. The rights of this patent have been purchased by
Diasense from BICO, pursuant to a Purchase Agreement (See, "Intercompany
Agreements"). A second patent application was filed by BICO in December 1992,
and was granted in January 1995. This filing contained new claims which
extended the coverage of the patent based on additional discoveries and data
obtained since the original patent was filed. BICO has assigned the rights to
such patent to Diasense. Additional concepts to improve the capability of the
instrument to recognize blood glucose were developed, and, in May 1993,
corresponding patent applications were filed. As of October 1996, a total of
five patents have been issued, with additional patent applications pending
(See, "Current Status of the Noninvasive Glucose Sensor" and "Patents,
Trademarks and Licenses"). BICO has been granted the right to develop and
manufacture sensors pursuant to agreements with Diasense (See, "Intercompany
Agreements").
In 1991, BICO's research team began development of a research prototype
utilizing different technology than previously studied or developed. This
device, the Beta 1 research prototype, was initially tested on six human
subjects, and was subsequently tested on 110 human subjects in March 1992,
during which simultaneous spectral, blood and chemical data was recorded for
analysis in order to develop calibration data for the device. The Beta 1
utilized a separate lap-top computer to perform computational functions. The
results of the March 1992 tests were used to develop further refinements which
led to the development of the Beta 2A.
Although functionally equivalent in terms of performance with the Beta 1, the
next prototype, the Beta 2A, was smaller and had fully integrated computational
software and a liquid crystal display which interacted with the operator. This
model was tested by BICO on 40 human subjects in July 1992. The spectral and
blood chemistry data obtained indicated that the Beta 2A did not have a
satisfactory signal-to-noise ratio to allow for the calculation of algorithms
of sufficient accuracy to be acceptable to Diasense. The signal-to-noise ratio
reflects the sensor's ability to optimize the measurement by accepting the
signal desired (the glucose level) and rejecting the random interference. A
higher signal-to-noise ratio results in a more accurate measurement.
Additional Beta prototypes evolved which addressed this problem. Testing was
performed with each prototype, culminating in clinical trials at two hospitals
with ten diabetic volunteers each in Des Plaines, Illinois in May 1993 and in
Indiana, Pennsylvania in August 1993. These advanced systems embodying
improvements in the optics, electronics and detection subsystems led to the
design of the Beta 2D, Beta 2E, and Beta 2F prototypes, designed and
constructed to simulate production models.
BICO initially obtained the approval of six Institutional Review Boards
("IRBs") to conduct testing at their hospitals. Those hospitals are Children's
Hospital in Pittsburgh, Pennsylvania; Rush North Shore in Skokie, Illinois;
Westmoreland Hospital in Greensburg, Pennsylvania; Lutheran General Hospital in
Park Ridge, Illinois; Holy Family Hospital in Des Plaines, Illinois; and
Indiana Hospital in Indiana, Pennsylvania. The Company conducted initial
testing at the Holy Family Hospital and Indiana Hospital, and may conduct
further studies on present and future models at some or all of the other
hospitals from which IRB approval has been obtained.
On January 6, 1994, BICO submitted its initial 510(k) Notification to the U.S.
Food and Drug Administration (the "FDA") for approval to market the production
model, the Diasensor 1000 . The submission was based on data obtained from the
advanced Beta 2 prototypes, since functionally, the production model will be
identical to these prototype models. BICO's 510(k) Notification claims that
the product has substantial equivalence to home market glucose monitoring
devices presently in the marketplace since its function is similar, although
the device operates on a different technological principle. BICO provided
information in this 510(k) submission which it believes substantiates that the
device does not raise different questions of safety and efficacy and is as safe
and effective as the legally marketed predicated devices. Such information is
required by the FDA before market approval can be granted. In February 1996,
the FDA convened a panel of advisors to make a recommendation regarding BICO's
510(k) Notification. The majority of the panel members recommended that BICO
conduct additional testing and clinical trials prior to marketing the Diasensor
1000(TM). BICO and Diasense announced that they remained committed to bringing
the Diasensor 1000 to diabetics, and that additional research, development and
testing would continue (See, "Current Status of the Noninvasive Glucose
Sensor").
The Diasensor 1000 is a spectrophotometer capable of illuminating a small area
of skin on a patient's arm with infrared light, and then making measurements
from the infrared light diffusely reflected back into the device, which it then
displays on a liquid crystal display on the face of the instrument for the user
to read. The Diasensor 1000 uses internal algorithms to calculate a glucose
measurement.
Since the Diasensor 1000 will be calibrated individually, each instrument will
be sold by prescription only and will be calibrated in a calibration center
under a physician's direction. This feature may limit the marketability of the
Diasensor 1000 , and, if the device is unable to qualify for third-party
reimbursement, Diasense's ability to market the device could be adversely
effected.
Current Status of the Noninvasive Glucose Sensor
After the FDA's panel review in February 1996, the Companies made additional
improvements to the prototypes, and produced 34 production models of the
Diasensor 1000 . The data obtained from the improved prototypes was submitted
in a revised 501(k) Notification filed with and accepted by the FDA in October
1996. In November 1996, the Companies' research and development team met with
the FDA, and agreed to conduct in-home studies of the Diasensor 1000 . The FDA
has deemed the 1996 510(k) to be withdrawn because of the additional studies;
the Companies will resubmit a 510(k) Notification when the in-home studies have
been completed and the data has been analyzed. As with all other FDA-related
activities, the Companies cannot provide any assurances as to the date upon
which the studies will be completed, the next 510(k) Notification will be
submitted, or when the FDA will complete its review of such Notification.
In 1996, the Companies retained Mr. Jeff Nesbit, a former FDA Associate
Commissioner for Public Affairs, as a consultant to guide them through the FDA
approval process and to assist BICO with its ongoing overall relationship with
the FDA.
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, 1995 and 1996, 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 68,000 square feet, has been reconfigured to BICO's
specifications, and the machinery and equipment necessary to manufacture have
been ordered.
Pilot production of the devices is planned for early 1997, and parts will
continue to be purchased based on the most recent design, including its latest
improvements. Manufacturing will occur with full production release documents
which signify that production is underway, and that such production meets with
FDA Good Manufacturing Practices ("GMP"s). Subject to continued availability
of parts and properly-operating equipment, production will then build at a
steady pace throughout 1997.
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 , 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 may be subject to the same regulatory testing and approval
process as was required for the Diasensor 1000 .
Diasense is responsible for the marketing and sales of the Noninvasive Glucose
Sensor. Diasense plans to market the Noninvasive Glucose Sensor directly to
diabetics, through their doctors' orders, and is currently negotiating with
domestic and international distribution organizations to aid in the marketing
and distribution of the Noninvasive Glucose Sensor. Although many factors may
cause a change in management's current estimate, the Company believes that the
sales price of the Diasensor 1000 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 , which stands for petroleum
remediation product, is designed as an environmental microbial microcapsule
which is utilized for the collection, containment and separation of oil-type
products in or from water. The product's purpose is to convert the contaminant,
with no residual mass (separated or absorbed) in need of disposal. When the
PRP comes in contact with the petroleum substances, the contaminants are bound
to the PRP , and they stay afloat. Because the product contains the necessary
nutrients and micro-organisms, the bioremediation process begins immediately,
which limits secondary contamination of the air or surrounding wildlife.
Eventually, the product will biodegrade both the petroleum and itself.
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(Registered) and
BIO-SOK(Registered) has been received. Additional applications for trademark
protection for , BIO-BOOM(TM) and Oil Buster(TM) have also been filed.
PRP is now being manufactured and marketed for use in water and on solid
surfaces in the form of Petrol Rem's Oil Buster product. Additional testing is
being conducted which will test PRP 's effectiveness in soil using various
microbes and nutrients for specific bioremediation applications. NETAC has
conducted soil testing and further analysis of PRP products.
The product system is listed on the EPA's National Contingency Plan ("NCP")
product schedule, and is available in free-flowing powder or absorbent socks.
In 1995, the EPA required that all products previously listed on the NCP be
submitted to additional testing. Because PRP successfully passed the Tier II
efficacy test conducted by NETAC, the product was requalified for listing on
the NCP. Management believes that this requalification process will limit the
number of products available for use in clean-up projects.
Petrol Rem is manufacturing PRP and is currently marketing the product for use
in water. In addition, PRP 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 . 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 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 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 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 , Petrol Rem is also developing other products. In order to
address water pollution issues at marinas, Petrol Rem has introduced BIO-SOK ,
which is PRP contained in a 10" fabric sock, is designed and used to aid in
the cleaning of boat bilges. Bilges are commonly cleaned out with detergents
and emulsifiers, which cause the oil pumped out of the bilge to sink to the
bottom of the water, where it is harmful to marine life, and becomes difficult
to collect. In addition, it is illegal to dump oil or fuel into the water. The
BIO-SOK , when placed in the bilge, absorbs and biodegrades the oil or fuel on
contact, which significantly reduces or eliminates the pollution; then the
product biodegrades itself. As a result, BIO-SOK helps to keep marina waters
clear as well as helping to eliminate the chore of bilge cleanup, with its
possible fines to marinas and boaters for pumping oil and fuel into the
waterways.
In July 1996, the Company's PRP and BIO-SOK products were selected by the
National Aeronautics and Space Administration ("NASA") to be featured as
spinoff technology under its technology transfer program, which seeks to
recognize unique civilian adaptations of NASA technology. The products will be
a part of NASA displays at major trade shows.
In October 1996, the Company announced that its BIO-SOK Bilge Maintenance
System had won a 1996 Innovation Award at the International Marine Trades
Exhibit and Convention ("IMTEC"), which is held by the National Marine
Manufacturers Association (the "NMMA"). The award was conferred by a panel of
experts which evaluated a field of approximately fifty seven entrants in the
"Accessories and Trailers" category. The NMMA cited the BIO-SOK 's simplicity
of use and commended the product as on the "frontier of technology".
BIO-SOK is guaranteed, lasts for an entire boating season, and is available
from quality marine supply stores in the coastal areas of the United States,
Canada, Europe and South East Asia, and is recommended by the Canadian Coast
Guard.
Petrol Rem has also developed Oil Buster , which is a mixture of PRP and an
absorbent material. Oil Buster is used to clean up and remediate oil spills on
hard surfaces.
Petrol Rem's BIO-BOOM product is used in water clean-up projects. The product
is a 3" x 10' fabric which is filled with PRP , and is used to both contain and
biodegrade contaminants in water. BIO-BOOM is a superior product to most
containment products because, in addition to containing the oil or fuel spill,
or restricting the spread of an anticipated spill, it also biodegrades the
contaminant, then biodegrades itself. These features act to virtually
eliminate secondary contaminants, thereby reducing disposal and clean-up costs.
Initial sales have occurred, and marketing efforts are accelerating.
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
$6,687,000 on this project through September 30, 1996.
Petrol Rem is marketing PRP through trade shows, magazines, direct mail
advertising, and direct contacts with companies and consultants specializing in
petroleum clean-up, as well as marketing directly to municipalities and
corporations with needs for the product. Initial sales of PRP began in July
1993, and increased marketing efforts during 1995 have resulted in additional
sales. Although there can be no assurances that PRP will be successfully
marketed, the Company believes, based on their scientific determinations, the
results of recent NETAC testing, and the favorable response at the retail
level, that PRP will be a viable product in the bioremediation marketplace.
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 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 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.
In February 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.
During June and July of 1996, with FDA approval, the WBH Companies treated a
non-randomized group of HIV patients who participated in the 1995 Phase II
Study as either control patients or those who received WBH treatments with the
BioLogic-HT System . The follow-up on this six-month study will conclude in
January 1997.
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 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.
IDT is continuing to pursue its marketing efforts for the BioLogic-HT System 's
use in Europe in the treatment of both HIV and cancer.
The Company has expensed approximately $6,662,000 on this project through
September 30, 1996, 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 initial installment of devices was delayed until
March 1996. 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 being submitted in December 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 is currently fabricating IST
devices for clinical trials being conducted by Case Western.
OTHER PROJECTS
Implantable Technology
In April 1996, BICO was granted FDA approval to market its theraPORT(TM)
Vascular Access System ("VAS"). The approval was in connection with the
Company's 510(k) Notification filed in January 1996. The device, which is
implanted beneath the skin with a catheter inserted in a vein between it and
the heart, provides a delivery system for patients who require continual
injections. Because such repeated injections can cause veins to shut down and
collapse, the theraPORT offers an improved delivery system by eliminating that
vascular trauma. If necessary to accommodate multiple drug therapy with
incompatible drugs, dual ports can be implanted. Such devices are frequently
used in cancer drug therapy. BICO anticipates that the device will bear a cost
of approximately $375 per unit, and marketing is planned for the first quarter
of 1997.
Through its subsidiary, Coraflex Inc. ("Coraflex"), BICO is engaged in the
development of a polyurethane heart valve which management believes may not
have the disadvantages of the mechanical and bioprosthetic valves currently
being marketed. The Coraflex valve, which resembles the human heart's aortic
valve, is made by means of a proprietary manufacturing process. The
polyurethane used in the construction of the heart valve is believed by BICO to
exhibit strength and fatigue resistance which compare favorably with that of
other materials used for prosthetic valves. In vitro testing, some of which
has been performed through the Children's Hospital of Pittsburgh, of the
Coraflex valve to date has demonstrated superior fatigue resistance and flow
characteristics relative to the currently available bioprosthetic and
mechanical devices, respectively. Additional development and testing must be
conducted by BICO, 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.
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 pursuant to a patent and trademark license
agreement with its inventor. During 1994, the Company applied for trademark
protection for the product name PepperPaint , and in 1995, the Company also
applied for trademark protection for the name HotBottom Paint, a barrier coat
primer and antifouling paint which received approval for registration from the
EPA in July 1995. Barnacle Ban's paint is designed to repel zebra mussels and
other related marine life from the surfaces of ships, pipelines and other
objects which function under water.
Because the accumulation of marine life on surfaces such as pipes and ships
have caused significant problems for entities such as water authorities,
utility companies, and naval operations, the Company believes that there is a
potential market for this product. The Company is continuing the testing and
enhancement of the product; manufacturing of the product began in 1994.
Marketing efforts on the Company's paint products have continued, and the
Company is marketing the products from its Pittsburgh, PA and Gaithersburg, MD
offices. In July 1996, the Company announced that it had entered into a
five-year exclusive distribution agreement with Pleasure Cove Marina for
Maryland, Virginia, Delaware and the District of Columbia; the agreement
contains an agreed-upon minimum purchase requirement.
The trademark and license agreement covers the patents, both granted and
pending, to the paint and its application. The agreement sets forth terms which
include the minimum payment, in the form of royalties and fees, of $32,500 for
the first year, $30,000 for the second year, $42,000 for the third year,
$54,000 for the fourth year and $66,000 for the fifth and each successive year.
These payments will be minimum royalty payments on six percent (6%) of BICO's
net sales of the product, plus thirty percent (30%) of all payments received by
BICO from any sublicensees. The Company has spent approximately $1,470,000 on
this project through September 30, 1996.
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.
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 biomedical/biological 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 , and HotBottom 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
Petrol Rem began marketing of its bioremediation product, PRP , in mid-1993,
and is now sold in quality marine supply stores in the coastal areas of the
United States, Canada, Europe and South East Asia. In addition, the Barnacle
Ban HotBottom Paint product is currently being manufactured and marketed.
These projections are based on management's belief, as to which there can be no
assurances, that the development and manufacture of those products will
continue to proceed successfully and on schedule.
PATENTS, TRADEMARKS AND LICENSES
The Company owns patents on certain of its products and files applications to
obtain patents on new inventions when practical. Additionally, the Company
endeavors to obtain licenses from others as it deems necessary to conduct its
business.
The Company also relies upon trade secret protection for its confidential and
proprietary information. Although BICO, Diasense and their affiliates take all
reasonable steps to protect such information, including the use of
Confidentiality Agreements and similar provisions, there can be no assurance
that others will not independently develop substantially equivalent proprietary
information or techniques, otherwise gain access to the Company's trade
secrets, disclose such technology, or that the Company can meaningfully protect
its trade secrets.
Noninvasive Glucose Sensor
Diasense owns a patent entitled "Non-Invasive Determination of Glucose
Concentration in Body of Patients" (the "Patent") which covers certain aspects
of a process for measuring blood glucose levels noninvasively. Such Patent was
awarded to BICO's research team in December 1991 and was sold to Diasense
pursuant to a Purchase Agreement dated November 18, 1991 (See, "Intercompany
Agreements"). The Patent will expire, if all maintenance fees are paid, no
earlier than the year 2008. If marketing of a product made under the Patent is
delayed by clinical testing or regulatory review, an extension of the term of
the Patent may be obtained. Diasense's Patent relates only to noninvasive
sensing of glucose but not to other blood constituents. Diasense has filed
corresponding patent applications in a number of foreign countries.
A second patent application was filed by BICO in December 1992, which was
assigned to Diasense. This second patent contained new claims which extend the
coverage based upon additional discoveries and data obtained since the original
patent was filed. The patent application was amended in October 1993, and was
granted in January 1995. In May 1993, four additional patent applications were
filed by BICO's research teams related to the methods, measurement and
noninvasive determination of analyte concentrations in blood.
As of October 1996, a total of five patents have been issued, all of which have
been assigned to Diasense. Corresponding patent applications have been filed in
foreign countries where the Company anticipates marketing the Noninvasive
Glucose Sensor.
BICO's research team continues to file patent applications, provisional patent
applications, some of which are being converted into "PCTs" (Patent Cooperative
Treaty) which reflect the continued research and development and additional
refinements to the Noninvasive Glucose Sensor.
Diasense or BICO may file applications in the United States and other
countries, as appropriate, for additional patents directed to other features of
the Noninvasive Glucose Sensor and related processes.
Those competitors known by 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 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.
The Company also relies upon trade secret protection for its confidential and
proprietary information. Although Diasense and BICO take all reasonable steps
to protect such information, including the use of Confidentiality Agreements
and similar provisions, there can be no assurance that others will not
independently develop substantially equivalent proprietary information or
techniques, otherwise gain access to the Company's trade secrets, disclose such
technology, or that the Company can meaningfully protect its trade secrets.
The Company has filed for trademark protection for the term "Diasensor 1000 ",
which is intended for use in connection with the Diasensor models; such filing
will remain pending until the first production unit is shipped. The Company
intends to apply, at the appropriate time, for registrations of other
trademarks as to any future products of the Company.
Whole-Body Hyperthermia
In September 1992, a research team funded by the Company applied for a 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 filed by IDT, and the patent
was issued in December 1995. The patent, which is also the subject of foreign
filings, is 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").
Implantable Technology
During 1995, the Company renewed its U.S. trademark registration for the name
Coraflex , which was originally granted in 1988. The Company has also filed
for trademark authorization for the name theraPORT (See, "BUSINESS -
Implantable Technology).
Bioremediation
In 1992 and 1993, Petrol Rem applied for patents in connection with its
bioremediation product, all of which are still pending. The Company has
received trademark authorization for the use of the product names PRP ,
BIO-SOK , BIO-BOOM , and Oil Buster (See, "BUSINESS - Bioremediation").
Marine Anti-Fouling Paint
In 1993, the Company acquired the rights to certain patents, both issued and
pending, in connection with its Barnacle Ban project. A patent was issued on
July 13, 1993 for a marine organism repellant and its application. A
Continuation-In-Part Patent application is pending. The Company also filed
patent applications in various foreign countries in November 1993, all of which
are pending. The Company has filed for trademark authorization for the
product names Barnacle Ban and HotBottom for the anti-fouling paint. In July
1995, the EPA approved the registration of HotBottom Paint (See, "BUSINESS -
Barnacle Ban").
WARRANTIES AND PRODUCT LIABILITY
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 $1,000,000 in the
aggregate, which management considers to be a sufficient amount due to the
Company's discontinuance of sales and potential exposure to liability.
SOURCE OF SUPPLY
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.
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 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 will range from $7950 to $8500, depending upon the country in
which it is sold and other factors; 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.
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 development still required no
less than two years to perfect the device. 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, media reports
indicate that Futrex and its founder are now the subject of a federal court
suit initiated by the SEC, which could have a significant negative impact on
Futrex's future. 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, which is now being funded by Abbott
Laboratories, a major pharmaceutical company, has not yet submitted its device
for FDA scrutiny and, to the best of the Companies' knowledge, must complete
additional clinical trials prior to applying for FDA approval to market the
device.
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.
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 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 , should the FDA determine
that the device is not "substantially equivalent" to an existing device, or
refuse to approve the 510(k) Notification for any reason, the Company would be
required to submit to the FDA's full pre- market approval process, which would
require additional testing, and result in significant delays and increased
expenses. The FDA's pre-market approval process is more extensive,
time-consuming and will result in increased research and development expenses,
while delaying the time period in which BICO and Diasense could begin
manufacturing and marketing the product.
The time elapsed between the completion of clinical testing at IRBs and the
grant of marketing approval by the FDA is uncertain, and no assurance can be
given that approval to market the Noninvasive Glucose Sensor will ultimately be
obtained. In addition, delays or rejections may be encountered based upon
changes in the FDA's regulatory policies during the period of research and
development and the FDA's review.
The Company may also be required to comply with the same regulatory
requirements prior to introducing the Diasensor 2000 , or other models of the
Noninvasive Glucose Sensor, to the market. Any changes in FDA procedures or
requirements will require corresponding changes in the Company's obligations in
order to maintain compliance with FDA standards. Such changes may result in
additional delays or increased expenses.
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. Diasense is unable to
determine at this time whether such action may have a material adverse effect
on the approval of the Noninvasive Glucose Sensor by the FDA or on Diasense'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 Diasense's products
or business, cannot be accurately determined.
Diasense's products may also be subject to foreign regulatory approval prior to
any sales.
The FDA's Good Manufacturing Practices for Medical Devices specifies various
requirements for BICO's manufacturing processes and maintenance of certain
records.
Future sales of Diasense'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, with a resulting impact on its potential markets.
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.
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 as the death of the bearer, a
pacemaker may not be explanted or returned to the Company.
HUMAN RESOURCES
As of September 30, 1996, the Company had 158 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 IDT had three full-time employees; Barnacle Ban had eight
full-time employees; Diasense had three full-time employees; and Petrol Rem
had fifteen 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
3, 1997 the high and low sales prices for the common stock of the Company as
reported by NASDAQ were *$______ and *$_____. 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
September 30, 1996, 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
1996 First Quarter 3.9375 1.500
Second Quarter 3.0625 1.406
Third Quarter 2.969 1.625
As of December 31, 1996 the Company had approximately _______ holders of
record, including those who hold in street name, for its common stock and __
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 Chase Mellon
Shareholder Services, 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").
SELECTED FINANCIAL DATA
The Selected Financial Data provided below is a summary of information set
forth in the Company's unaudited statements for the nine-month period ended
September 30, 1995 and the Company's audited financial statements for the years
ended December 31, 1991 through 1996, and the nine months ended September 30,
1996. There have been no material events or transactions which arose
subsequent to the date of the latest balance sheet included in this Report to
Shareholders that would materially effect the Company's financial condition and
results of operations.
Nine Months Ended Nine Months Ended
September 30, 1996 September 30, 1995
(Unaudited)
Total Assets $13,326,389 $12,570,102
Long-Term Obligations $ 2,712,060 $ 166,461
Working Capital $ 3,402,904 $ 8,482,606
Preferred Stock $ 200,000 $ 54,900
Net Sales $ 460,333 $ 445,043
TOTAL REVENUES $ 594,636 $ 708,425
Warrant Extensions $ 7,001,701 $11,878,220
Net Loss ($16,093,431) ($22,760,153)
Net Loss per Common Share ($ .39) ($ .67)
Cash Dividends per share:
Preferred $ 0 $ 0
Common $ 0 $ 0
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31st
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Total Asset $ 9,074,669 $ 6,375,778 $ 2,995,334 $ 2,920,277 $ 4,088,084
Long-Term Obligations $ 175,330 $ 163,201 $ 104,917 $ 0 $ 52,678
Working Capital $ 3,188,246 $ 2,612,884 $ 1,112,541 $ 1,144,891 $ 2,290,951
Preferred Stock $ 37,900 $ 54,900 $ 54,900 $ 54,900 $ 82,500
Net Sales $ 461,257 $ 184,507 $ 54,000 $ 199,620 $ 11,200
Gain on Sale of Diasense Stock $ 0 $ 0 $ 0 $ 0 $ 225,000
TOTAL REVENUES $ 755,991 $ 481,453 $ 134,329 $ 313,348 $ 261,468
Warrant Extensions $12,523,220 $ 0 $ 0 $ 0 $ 0
Benefit (Provision) for Income Taxes $ 0 $ 0 $ 0 $ 157,855 ($ 281,855)
Net Loss ($29,420,345)($11,672,123)($ 7,855,998)($ 3,068,048) ($ 1,051,426)
Net Loss per Common Shar ($ .84) ($ .43) ($ .45) ($ .23) ($ .08)
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
The following is a summary of the more detailed information set forth in the
financial statements attached hereto. Data from all year-end periods, as well
as the nine month period ended September 30, 1996 are from the Company's
Audited Financial Statements. Other data is from the Company's unaudited
financial statements.
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 transaction is subject to
the approval of the shareholders of the Companies, and the terms have not been
finalized. 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.
Forward-Looking Statements
In addition to other sections of this Report to Shareholders, the Management's
Discussion and Analysis section also contains the type of forward-looking
statements discussed on page 2 herein. Please refer to such discussion in
connection with the information presented here.
LIQUIDITY AND CAPITAL RESOURCES
Nine Months Ended September 30, 1996
Working capital increased from $3,188,246 at December 31, 1995 to $3,402,904 at
September 30, 1996. Working Capital was increased by sales of common and
preferred stock by the Company and its affiliate Diasense, which aggregated
approximately $19,275,000 in 1995; and $13,605,000 during the nine months ended
September 30, 1996, as well as an increase in inventory from $1,660,139 as of
December 31, 1995 to $3,148,635 as of September 30, 1996. Net cash used by
operating activities from $16,891,242 as of December 31, 1995 to $15,114,975 as
of September 30, 1996.
Cash decreased to $2,918,584 at September 30, 1996 from $3,204,501 at December
31, 1995. This decrease was attributable to the following factors. The
Company's sales of its securities, including stock sales by its subsidiaries,
raised funds aggregating $13,605,414 during the nine months ended September 30,
1996 and $19,274,988 in the twelve months ended December 31, 1995. During
those periods, the Company's cash flows used by operating activities aggregated
$15,114,975 and $16,891,242, respectively. During the nine months ended
September 30, 1996, such operating activities included a $1.5 million increase
in inventory, and a $1.06 million increase in accounts payable, which consisted
primarily of costs incurred for the research and manufacturing build-up of the
non-invasive glucose sensor. In addition, the Company recorded a $7 million
charge against operations due to warrant extensions by the Company and its
subsidiary, a charge which was not incurred in 1994 or 1993 (See, Note I to the
Financial Statements). During the nine months ended September 30, 1996, the
Company also incurred a $111,200 decrease in deferred revenue, which was not
incurred in 1995, but did not incur the $1,050,000 provision for potential loss
on notes receivable which was incurred in 1995. The Company's cash flows used
by investing activities aggregated $783,960 during the nine months ended
September 30, 1996 and $2,763,301 in 1995. In 1995, those activities consisted
of plant improvements and equipment purchases totalling $1.4 million; during
the nine months ended September, such purchases aggregated $750,752.
The decrease in accounts receivable from $202,526 as of December 31, 1995 to
$105,604 as of September 30, 1996 was primarily due to an allowance of $195,840
for doubtful accounts as of September 30, 1996, which was not taken in 1995.
The increase in inventory from $1,660,139 as of December 31, 1995 to $3,148,635
was due to the continued build-up of inventory for the manufacture of the
Diasensor 1000 . The increase in building, land and construction in progress
from an aggregate of $234,863 as of December 31, 1995 to an aggregate of
$2,901,078 was due to the Company's lease of two buildings pursuant to capital
leases, which are being used in connection with the manufacture of the
Diasensor 1000 (See, Note G to the Financial Statements). The increase in
machinery and equipment from $3,558,964 as of December 31, 1995 to $4,240,478
was primarily due to computer and other equipment purchases used in connection
with the development of the Noninvasive Glucose Sensor.
As of September 30, 1996, the aggregate amount payable per year pursuant to the
Company's employment agreements with four officers and two employees was
$1,258,000.
The Company's accounts payable decreased from $1,838,408 as of December 31,
1995 to $773,765 as of September 30, 1996. The Company issued $2,000,000 in
subordinated convertible debentures as part of its capital-raising efforts
(See, Note H to the Financial Statements).
During the nine months ended September 30, 1996, the Company incurred
$2,665,016 in capital leases in connection with the lease of two buildings used
for the manufacture of the Diasensor 1000 , the current portion of which was
$42,437 as of September 30, 1996 (See, Note G to the Financial Statements).
The Company continued to fund operations mostly from sales of its securities.
During the nine months ended September 30, 1996, the Company sold 20,000 shares
of its Series A Preferred Stock, with net proceeds of $1,840,000; 6,219,500
shares of its common stock with net proceeds of $11,867,729; and issued
$2,000,000 in 6% convertible subordinated debentures. Both the preferred stock
and the debentures are convertible into common stock.
Year Ended December 31, 1995
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.
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 following factors. The Company's sales of its securities, including
stock sales by its subsidiaries, raised funds aggregating $19,548,313 in 1995;
$15,190,750 in 1994; and $7,873,209 in 1993. During those years, the Company's
cash flows used by operating activities aggregated $16,891,242 in 1995;
$11,770,045 in 1994 and $7,733,711 in 1993. In 1995, such operating activities
included a $2.4 million increase in inventory, and a $1.2 million increase in
accounts payable, which consisted primarily of costs incurred for the research
and manufacturing build-up of the non-invasive glucose sensor. In addition,
the Company recorded a $12.5 million charge against operations due to warrant
extensions by the Company and its subsidiary, a charge which was not incurred
in 1994 or 1993 (See, Note I to the Financial Statements). The Company's cash
flows used by investing activities aggregated $2,763,301 in 1995; $1,687,709 in
1994 and $128,454 in 1993. In 1995, those activities consisted of plant
improvements and equipment purchases totalling $1.4 million.
The increase in accounts receivable from $32,721 as of December 31, 1994 to
$202,526 as of December 31, 1995 was primarily due to sales of products by the
Company's subsidiary, Petrol Rem. The increase in leasehold improvements from
$597,243 as of December 31, 1994 to $1,092,311 as of December 31, 1995 was
primarily due to improvements to the Indiana, PA manufacturing plant in
anticipation of manufacturing the Diasensor 1000 . The increase in machinery
and equipment from $2,695,888 as of December 31, 1994 to $3,558,964 as of
December 31, 1995 was primarily due to computer purchases. The decrease in
other assets from $90,540 as of December 31, 1994 to $11,068 as of December 31,
1995 was primarily due to the write-off of the Company's investment in
HemoCleanse, Inc. as the result of HemoCleanse's disclosure of negative equity.
Please see Note C to the financial statements for the explanation of the loan
and immediate write down of the loan to HemoCleanse.
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's policy is to make loans to related parties only for bona fide
business purposes. The Company's loan to Allegheny Food Services was extended
because the loan contains an option to purchase certain assets as set forth in
the loan agreement. The loans to Mssrs. Cooper and Keeling were made during a
period when those individuals were drawing low salaries from the Company, and
in lieu of incurring Company expenses in the form of higher salaries, they
agreed to accept a loan, and to repay the funds to the Company. The loan to
Mr. Feola was extended to allow him to exercise warrants to purchase the
Company's common stock.
BICO has entered into employment agreements (the "Agreements") with four
officers and two employees. The original Agreements set forth annual salaries
aggregating $1,025,000 in 1995 and expiring in periods beginning in October
1999 through 2002, which are subject to review and adjustment. The Agreements
may be extended for two- to-three year periods. In the event of a change in
control of the Company, as defined in the Agreements, and termination of
employment, continuation of annual salaries at 100%, which decreases to 25%
over time, are payable in addition to the issuance of shares set forth in the
Agreements. The Agreements also provide for severance, disability benefits and
issuances of BICO common stock under certain circumstances (See, Proxy
Statement - "EXECUTIVE COMPENSATION" - Employment Agreements").
Pursuant to the terms of a license agreement with a non-voting shareholder of
Petrol Rem, for the marketing rights to certain inventions, Petrol Rem is
obligated to make royalty payments beginning in 1994 and through 1997. Minimum
royalty payments for 1995-1997 are $120,000 per year.
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 included the following shares of common stock: 193,412 shares
purchased pursuant to private placements; and 2,640,982 shares underlying
currently exercisable warrants.
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 , 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 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 I 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 last amendment
in April 1995, the Registration included 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 enabled 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 has been
submitted to the FDA for marketing approval and the Diasensor 2000 is in the
pre- clinical trial stage of development. As of December 31, 1995, the Company
estimated that approximately $500,000 would 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 would 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. In addition
to inventory already on hand, the Company anticipated that an additional
$12,200,000 would be used for inventory build-up and work-in- progress. The
Company estimated that approximately $2,000,000 would be required to complete
the heart valve project and $2,000,000 would 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 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 . 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.
As described herein, management believes the Company has sufficient liquidity
to meet its projected expenditures on a short-term basis. Absent additional
funding, the Company will have limited liquidity on a long-term basis.
Moreover, many demands on liquidity, such as technological, regulatory or legal
problems, could cause the Company's liquidity to be inadequate. At present,
the Company does not have any additional sources of liquidity, including bank
lines of credit. Long-term working capital needs are expected to be met
through sales of the Noninvasive Glucose Sensor, the PRP bioremediation
product, and other new products. There can be no assurances that any such
products will be successfully marketed or commercially viable.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1996
During the nine months ended September 30, 1996, the Company's net sales were
$460,333 as compared to $445,043 as of September 30, 1995. The sales were
primarily of products produced pursuant to FES and IRS Device contracts.
The Company received interest income in the amount of $131,646 during the nine
months ended September 30, 1996, as compared to $255,315 for the same period in
1995. The decrease was due to the amount of the Company's liquid assets (which
are composed primarily of funds raised via sales of securities) available for
investment, the availability of such assets and applicable interest rates.
In the nine months ended September 30, 1996, the Company's costs of products
sold was $232,742 as compared to $190, 851 for those nine months in 1995. The
increase is primarily due to the Company's corresponding increases in product
sales, and products produced pursuant to FES and IRS Device contracts.
The Company's research and development expenses were $6,754,378 for the nine
months ended September 30, 1996, as compared to $4,964,869 for the nine months
ended September 30, 1995. The increase was due to the Company's increased
efforts and corresponding expenses in the research and development of the
Noninvasive Glucose Sensor.
During the nine months ended September 30, 1996, General and Administrative
expenses decreased to $6,432,168 as compared to $7,271,201 for the nine months
ended September 30, 1995. The decrease was due to the reorganization of some
manufacturing personnel to assist with the research and development of the
Noninvasive Glucose Sensor.
The Company extended a warrant to purchase 1,482 shares of its common stock at
an exercise price of $.45 per share which was scheduled to expire in September
1996 during the nine months ended September 30, 1996, and recorded a
corresponding expense of $2,668 to reflect the difference between the market
price at the time of extension and the exercise price.
Interest expense on the Company's outstanding indebtedness was $52,637 during
the nine months ended September 30, 1996 as compared to $13,470 for the same
period in 1995. The increase was due to an increase in capital leases.
Year Ended December 31, 1995
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
Year Ended December 31, 1995
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 Pennsylvania income tax was reduced to $122,000 and
paid during 1993. (See, Note I to the Financial Statements).
SUPPLEMENTARY FINANCIAL INFORMATION
Subsequent to September 30, 1996, and through November 30, 1996, the Company
sold 4% Subordinated Convertible Debentures pursuant to Regulation S, with net
proceeds of approximately $3,700,000.
MANAGEMENT INFORMATION
The directors and executive officers of the Company are as follows:
Director
Name Age Since Position
David L. Purdy 68 1972 President, Chairman of the
Board, Treasurer, Director
Fred E. Cooper 51 1989 Chief Executive Officer,
Executive Vice President, Director
Anthony J. Feola 49 1990 Senior Vice President, Director
Glenn Keeling 46 1991 Vice President, Director
______________________________
DAVID L. PURDY, 68 is President, Chairman of the Board, Treasurer and a
director of the Company. Mr. Purdy has been a director and Chairman of the
Board since its organization in 1972 and is considered the organizer and
founder of the Company; he devotes 60% of his time to the business of the
Company, and 40% of his time to Diasense. He has also served as President of
the Company from 1972 through December 1990, with the exception of five months
in 1980, when he served as Chairman and full-time Program Director of the
Company's implantable medicine dispensing device program with St. Jude Medical,
Inc., and from October 1, 1987 through July 15, 1988, when he served as
Chairman and Director of Research and Development for the Company. Prior to
founding the Company, he was employed by various companies in the medical
technology field, including Arco Medical, Inc. Mr. Purdy is also an officer and
director of Diasense and Coraflex, and a director of Petrol Rem and IDT.
FRED E. COOPER, 51, is the Chief Executive Officer, Executive Vice President
and a director of the Company; he devotes approximately 60% of his time to the
business of the Company, and 40% to Diasense. Prior to joining the Company,
Mr. Cooper co-founded Equitable Financial Management, Inc. of Pittsburgh, PA, a
company in which he served as Executive Vice President until his resignation
and divestiture of ownership in August 1990. In 1972, Mr. Cooper founded
Cooper Leasing Corp., Pittsburgh, Pennsylvania, a company specializing in
equipment and venture financing. Mr. Cooper was appointed Chief Executive
Officer in January 1990. He is also an officer and director of Diasense and
Barnacle Ban, and a director of Petrol Rem, Coraflex and IDT.
ANTHONY J. FEOLA, 49, 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, 46, 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.
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, P.C. as its independent auditors and
accountants to replace Grant Thornton LLP. Thompson Dugan, P.C. also serves as
the independent auditors and accountants for Diasense, replacing Grant Thornton
LLP. Neither company had any disagreements with Thompson Dugan, P.C. 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
<PAGE>
THOMPSON DUGAN
CERTIFIED PUBLIC ACCOUNTANTS
________________________
Pinebridge Commons
1580 McLaughlin Run Rd.
Pittsburgh, PA 15241
Report of Independent Certified Public Accountants
Board of Directors
Biocontrol Technology, Inc.
We have audited the accompanying consolidated balance sheets of Biocontrol
Technology, Inc. and its subsidiaries as of September 30, 1996, December 31,
1995 and December 31, 1994, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for the nine months
ended September 30, 1996 and 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 September 30, 1996, December 31,
1995 and December 31, 1994, and the consolidated results of their operations
and their cash flows for the nine months ended September 30, 1996 and 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 September 30, 1996 and these
conditions are expected to continue through 1997, raising substantial doubt
about the Corporation's ability to continue as a going concern. Management's
plan in regard to these matters are also discussed in Note B. These financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
Pittsburgh, Pennsylvania December 10, 1996
<PAGE>
<TABLE>
Biocontrol Technology, Inc. and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
Sep. 30, 1996 Dec. 31, 1995 Dec. 31, 1994
_____________ _____________ _____________
<S> <C> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 2,918,584 $ 3,204,501 $ 3,315,846
Accounts receivable - net of allowance for doubtful accounts
of $195,840 at Sept. 30, 1996 and $0 at Dec. 31, 1995 and 1994 105,604 202,526 32,721
Notes receivable - related parties 275,000 250,000 -
Notes receivable - net of allowance for loan losses 12,000 12,000 -
Inventory - net of valuation allowance 3,148,635 1,660,139 181,144
Prepaid expenses 165,892 148,526 187,460
___________ ___________ ____________
TOTAL CURRENT ASSETS 6,625,715 5,477,692 3,717,171
PROPERTY, PLANT AND EQUIPMENT
Building 1,442,423 234,863 233,818
Land 246,250 - -
Construction in progress 1,212,405 - -
Leasehold improvements 1,148,897 1,092,311 597,243
Furniture, fixtures & equipment 699,956 633,237 524,598
Machinery and equipment 4,240,478 3,558,964 2,695,888
Subtotal 8,990,409 5,519,375 4,051,547
_________ _________ _________
Less accumulated depreciation 2,461,773 2,087,032 1,631,586
_________ _________ _________
6,528,636 3,432,343 2,419,961
OTHER ASSETS
Notes receivable - related parties 95,900 95,900 95,900
Interest receivable - related parties 49,600 42,237 32,445
Patents, net of amortization 12,180 15,429 19,761
Other assets 14,358 11,068 90,540
_________ _________ ________
172,038 164,634 238,646
TOTAL ASSETS $ 13,326,389 $ 9,074,669 $ 6,375,778
========== ========= =========
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
Biocontrol Technology, Inc. and Subsidiaries
Consolidated Balance Sheets
(Continued)
<CAPTION>
Sep. 30, 1996 Dec. 31, 1995 Dec. 31, 1994
_____________ _____________ _____________
<S> <C> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 773,765 $ 1,838,408 $ 643,364
Current portion of long-term debt 29,773 28,404 14,412
Current portion of capital lease obligatins 42,437 - -
Debenture payable 2,000,000 - -
Accrued liabilities 158,736 96,634 120,511
Escrow payable 3,300 - -
Deferred revenue on contract billings 214,800 326,000 326,000
_____________ _____________ _____________
TOTAL CURRENT LIABILITIES 3,222,811 2,289,446 1,104,287
LONG-TERM LIABILITIES
Accrued liabilities - 114,750 109,833
Capital lease obligations 2,665,016 - -
Long-term debt 47,044 60,580 53,368
_____________ _____________ _____________
2,712,060 175,330 163,201
COMMITMENTS AND CONTIGENCIES
UNRELATED INVESTORS'INTEREST
IN SUBSIDIARY 2,058,591 2,562,543 -
STOCKHOLDERS' EQUITY
Convertible preferred stock, par value $10 per share
authorized, 500,000 shares issuable in series
Series 1 outstanding 0 at Sep. 30 1996 and 3,790 at - 37,900 54,900
Dec. 31, 1995 and 5,490 at Dec. 31, 1994
Series A outstanding 20,000 at Sep. 30, 1996 and 200,000 - -
0 at Dec. 31, 1995 and Dec. 31, 1994
Common stock, par value $.10 per share, authorized
60,000,000 shares, issued and outstanding 43,387,918
at Sep. 30, 1996 and 37,021,118 at Dec. 31, 1995 and 4,338,792 3,702,112 2,931,108
29,311,079 at Dec. 31, 1994
Additional paid-in capital 76,802,435 59,849,875 38,922,294
Warrants 6,305,488 6,677,820 -
Accumulated deficit (82,313,788) (66,220,357) (36,800,012)
____________ ____________ ____________
TOTAL STOCKHOLDERS' EQUITY 5,332,927 4,047,350 5,108,290
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 13,326,389 $ 9,074,669 $ 6,375,778
============ ============ ============
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
BIOCONTROL TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
For the nine months ended For the years ended
Sep. 30, Sep. 30, Dec. 31, Dec. 31, Dec. 31,
1996 1995 1995 1994 1993
(Unaudited)
_____________ _____________ _____________ _____________ _____________
<S> <C> <C> <C> <C> <C>
Revenues
Sales $ 460,333 $ 445,043 $ 461,257 $ 184,507 $ 54,000
Interest income 131,646 255,315 294,734 284,938 53,001
Other income 2,657 8,067 - - -
_____________ _____________ _____________ _____________ _____________
594,636 708,425 755,991 469,445 107,001
Costs and expenses
Cost of products sold 232,742 190,851 198,542 98,668 27,446
Research and development 6,754,378 4,964,869 7,649,678 5,214,386 3,431,634
General and administrative 6,432,168 7,271,201 11,117,107 7,460,602 4,607,195
Warrant extensions 2,668 7,228,220 7,228,220 - -
Warrant extensions-Subsidiary 6,999,033 4,650,000 5,295,000 - -
Interest expense 52,637 13,470 17,048 9,766 5,624
_____________ _____________ _____________ _____________ _____________
20,473,626 24,318,611 31,505,595 12,783,422 8,071,899
_____________ _____________ _____________ _____________ _____________
Loss before unrelated investors' interest (19,878,990) (23,610,186) (30,749,604) (12,313,977) (7,964,898)
Unrelated investors' interest in net loss of
subsidiary 3,785,559 850,033 1,329,259 641,854 108,900
_____________ _____________ _____________ _____________ _____________
Net loss ($16,093,431) ($22,760,153) ($29,420,345) ($11,672,123) ($7,855,998)
============== ============== ============== ============== ==============
Loss per common share ($0.39) ($0.67) ($0.84) ($0.43) ($0.45)
============== ============== ============== ============== ==============
The accompanying notes are an integral part of these statements
</TABLE>
<PAGE>
<TABLE>
Biocontrol Technology, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<CAPTION>
For the nine months ended, For the years ended
Sep. 30, Sep. 30, Dec. 31, Dec. 31, Dec. 31,
1996 1995 1995 1994 1993
(Unaudited)
_____________ _____________ _____________ _____________ _____________
<S> <C> <C> <C> <C> <C>
Cash flows used by operating activities:
Net loss ($16,093,431) ($22,760,153) ($29,420,345) ($11,672,123) ($7,855,998)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 377,990 322,226 459,778 250,532 165,135
Unrelated investors' interest in susidiary (3,785,559) (850,033) (1,329,259) (641,854) (108,900)
Stock issued in exchange for services 17,200 73,623 180,373 167,928 38,000
Stock issued in exchange for services by subsidiary 7,000 61,250 - - -
Provision for potential loss on notes receivable - 1,050,000 1,050,000 - -
Waiver of salaries by officers - - - - 50,417
Warrant extensions 2,668 7,228,220 7,228,220 - -
Warrant extensions by subsidiary 6,999,033 4,650,000 5,295,000 - -
Provision for losses on accounts receivable 195,840 - - - -
(Increase) decrease in accounts receivable (98,918) (202,501) (169,805) 79,652 (43,185)
(Increase) in inventories (1,488,496) (485,902) (2,379,694) (499,511) (107,974)
Increase in inventory valuation reserve - - 900,000 455,595 13,101
(Increase) decrease in prepaid expenses (17,366) 123,499 38,934 (119,014) 32,453
(Increase) decrease in other assets (2,445) 82,721 79,472 (59,163) 982
(Decrease) increase in accounts payable (1,064,643) (271,836) 1,195,044 199,651 (105,848)
(Decrease) in taxes payable - - - - (124,000)
(Decrease) increase in other liabilities (52,648) (29,667) (18,960) 43,762 115,606
(Decrease) increase in deferred revenue (111,200) - - 24,500 196,500
____________ ____________ ____________ ____________ ___________
Net cash used by operating activities (15,114,975) (11,008,553) (16,891,242) (11,770,045) (7,733,711)
____________ ____________ ____________ ____________ ___________
Cash flows from investing activities:
Purchase of property, plant and equipment (750,752) (965,228) (1,441,509) (1,752,353) (290,852)
(Increase) in notes receivable (25,000) (55,450) (1,312,000) - -
Collection of other notes receivable - - - 45,000 180,000
(Increase) in interest receivable (8,208) (34,961) (9,792) 19,644 (17,602)
____________ ___________ ___________ ___________ _________
Net cash used by investing activites (783,960) (1,055,639) (2,763,301) (1,687,709) (128,454)
____________ ___________ ___________ ___________ _________
Cash flows from financing activities:
Proceeds from sale by subsidiaries of
its common stock (77,815) 1,636,232 3,079,200 1,124,096 57,600
Proceeds from stock offering 11,850,529 16,220,789 16,195,788 13,785,821 7,084,659
Proceeds from warrants exercised 30,600 200,725 273,325 280,883 730,950
Proceeds from warrants exercised-subsidiary 2,000 6,200 - - -
Proceeds from sale of Preferred stock-Series A 1,840,000 - - - -
Cash redemption at par - Preferred stock (7,300) - - - -
Proceeds from notes payable - - - 50,000 -
Payments on notes payable (12,167) (3,836) (5,115) (8,160) (5,172)
Increase in debenture payable 2,000,000 - - - -
Payments on capital lease obligations (12,829) - - - 1,243
____________ ____________ ____________ ____________ __________
Net cash provided by financing activities 15,613,018 18,060,110 19,543,198 15,232,640 7,869,280
Net increase (decrease) in cash and equivalents (285,917) 5,995,918 (111,345) 1,774,886 7,115
____________ ____________ ____________ ____________ __________
Cash and equivalents, beginning of period 3,204,501 3,315,846 3,315,846 1,540,960 1,533,845
____________ ____________ ____________ ____________ __________
Cash and equivalents, end of period $2,918,584 $9,311,764 $3,204,501 $3,315,846 $1,540,960
============ ============ ============ ============ ==========
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
Biocontrol Technology, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Continued)
<CAPTION>
For the nine months ended For the years ended
Sep. 30, Sep. 30, Dec. 31, Dec. 31, Dec. 31,
1996 1995 1995 1994 1993
(Unaudited)
_____________ _____________ ______________ ______________ ______________
<S> <C> <C> <C> <C> <C>
Supplemental Information:
Interest paid $ 52,637 $ 13,470 $ 17,048 $ 9,766 $ 5,795
============= ============= ============== ============== ==============
Supplemental schedule of non-cash
investing and financing activities:
Acquisition of equipment with note payable $ 130,772 $ 47,282 $ 47,282 $ 25,940 $ -
============= ============= ============== ============== ==============
Acquisition of property under a capital lease:
Building $ 1,205,760 $ - $ - $ - $ -
Land 246,250 - - - -
Construction in progress 1,137,500 - - - -
_____________ _____________ ______________ ______________ ______________
$ 2,589,510 $ - $ - $ - $ -
============= ============= ============== ============== ==============
Conversion of preferred stock for common stock:
Common stock $ 2,730 $ - $ 1,700 $ - $ -
Additional paid-in capital 24,570 - 15,300 - -
_____________ _____________ ______________ ______________ ______________
$ 27,300 $ - $ 17,000 $ - $ -
============= ============= ============== ============== ==============
Redemption of preferred stock held in escrow $ 3,300 $ - $ - $ - $ -
============= ============= ============== ============== ==============
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
Biocontrol Technology, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
<CAPTION>
Preferred Stock Common Stock Additional
_______________ ____________________ 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
______ _______ __________ _________ _________ __________ ____________ __________
Proceeds from stock offering - - 6,219,500 621,950 - 11,245,779 - 11,867,729
Conversion of preferred stock (2,730) (27,300) 27,300 2,730 - 24,570 0
Cash redemption at par - preferred stock (730) (7,300) (7,300)
Redemption account - preferred stock (330) (3,300) (3,300)
Proceeds from sale of preferred stock-Series A 20,000 200,000 1,640,000 1,840,000
Warrant extensions - - - - 2,668 - - 2,668
Warrant extensions - subsidiary - - - - - 3,622,250 - 3,622,250
Increase in ownership interest - subsidiary - - - - - 26,361 - 26,361
Warrants exercised - - 120,000 12,000 (375,000) 393,600 - 30,600
Net loss - - - - - - (16,093,431)(16,093,431)
______ _______ __________ _________ _________ __________ ____________ ___________
Balance at September 30, 1996 20,000 $200,000 43,387,918$4,338,792$6,305,488$76,802,435$(82,313,788) $5,332,927
====== ======= ========== ========= ========= ========== ============ ===========
</TABLE>
<PAGE>
Biocontrol Technology, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
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 September
30, 1996 and 1995, December 31, 1995 and 1994; Diasense, Inc.
(Diasense) a 52% owned subsidiary as of September 30, 1996,
53% owned as of September 30, 1995, 52% owned as of December
31, 1995 and 43.5% owned as of December 31, 1994; Petrol Rem,
Inc., a 67% owned subsidiary as of September 30, 1996 and
1995, December 31, 1995 and 1994; IDT, Inc., a 99.1% owned
subsidiary as of September 30, 1996 and 1995, December 31,
1995 and 100% owned as of December 31, 1994; and Barnacle Ban
Corporation, a 100% owned subsidiary as of September 30, 1996
and 1995, 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.
The Company places temporary cash deposits in financial
institutions, and such deposits may be in excess of the FDIC
insurance limit.
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.
<PAGE> F-8
Biocontrol Technology, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Cont.
6. Patents
Patents are amortized over their legal or useful lives,
whichever is less. Accumulated amortization on patents was
$84,761, $81,512 and $77,180 at September 30, 1996, December 31,
1995 and 1994, respectively.
7. Deferred Revenue on Contract Billings
Revenue is recognized from sales when products are shipped and/or
services performed. Advance billings are recorded as deferred
revenue until shipment or performance.
8. Loss Per Common Share
Loss per common share is based upon the weighted average number
of common shares outstanding which amounted to 41,131,277,
34,178,335, 35,025,237, 26,967,255 and 17,317,194 for the nine
month period ended September 30, 1996 and 1995 (unaudited), and
for the years ended December 31, 1995, 1994 and 1993,
respectively. Shares issuable under stock options, stock
warrants, convertible debentures and convertible preferred stock
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 J), the adoption of FAS 109 had no effect on
the financial statements of the Company.
<PAGE>F-9
Biocontrol Technology, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES - Continued
11. Interest
The Company follows the policy of capitalizing interest as a
component of the cost of property, plant and equipment
constructed for its own use. In the nine months ended September
30, 1996, total interest incurred was $127,542 of which $52,637
was charged to operations. Total interest for the periods
September 30, 1995 (unaudited), December 31, 1995, 1994 and 1993
was $13,470, $17,048, $9,766, and $5,624 respectively, all of
which was charged to operations.
12. Estimates and Assumptions
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. The
Company has established allowances based upon management's
evaluation of inventories, accounts receivable and notes
receivable.
13. Common Stock Warrants
The Company recognizes cost, if any, on warrants granted based
upon the excess of the market price of the underlying shares of
common stock as of the warrant grant date over the warrant
exercise price. Had the Company adopted the fair value based
accounting method for recognizing stock-based compensation (as
permitted by Financial Accounting Standard No. 123) its reported
net losses (utilizing the Black-Scholes method of valuation)
would have been approximately $17,524,000 for the nine months
ended September 30, 1996, and approximately $29,911,000 for the
year ended December 31, 1995. Net loss per share under the fair
value based accounting method would have been approximately $.42
for the nine months ended September 30, 1996, and approximately
$.85 for the year ended December 31, 1995.
NOTE B - OPERATIONS AND LIQUIDITY
The Company and its subsidiaries have incurred substantial losses
in the nine months ended September 30, 1996 and in prior years
and have funded their operations and product development
primarily through the sale of stock and issuance of debt
instruments. Until such time that products can be successfully
developed and marketed, the Company and its subsidiaries will
continue to need to fulfill working capital requirements through
the sale of stock and issuance of debt. The inability of the
Company to continue its operations as a going concern would
impact the recoverability and classification of recorded asset
amounts.
<PAGE>F-10
Biocontrol Technology, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
NOTE B - OPERATIONS AND LIQUIDITY - Continued
The ability of the Company to continue in existence is dependent
on its having sufficient financial resources to complete the
research and development necessary to successfully bring
products to market and for marketplace acceptance. As a result
of its significant losses, negative cash flows from operations,
and significant accumulated deficits for each of the periods
ending September 30, 1996 and 1995, 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, subsequent sales of
stock and future debt issuance will be sufficient to meet its
projected expenditures for a period of at least twelve months
from September 30, 1996.
NOTE C - NOTES RECEIVABLE
<TABLE>
Notes receivable due from various related and unrelated parties
consisted of:
<CAPTION>
Sep. 30, Dec. 31, Dec. 31,
1996 1995 1994
________ ________ ________
<S> <C> <C> <C>
Related Parties
_______________
Note receivable from Fred E. Cooper, Chief Executive
Officer, payable upon demand with 12% interest. $ 8,500 $ 8,500 $ 8,500
Notes receivable from Fred E. Cooper, Chief Executive
Officer, payable upon demand with 10% simple interest. 82,400 82,400 82,400
Notes receivable from Fred E. Cooper, Chief Executive
Officer, payable upon demand with 8.25% interest. 25,000 0 0
(Paid off on December 4, 1996)
Note receivable from Glenn Keeling, Director,
payable upon demand with 10% simple interest. 5,000 5,000 5,000
Note receivable from Allegheny Food Services, Inc. of
which Joseph Kondisko, a former director, is principal
owner, payable 9/1/97 with interest at prime plus 1%
interest. 250,000 250,000 0
Unrelated Parties
Note receivable from an individual, payable upon
demand with 8.75% interest. 12,000 12,000 0
______________________________
382,900 357,900 95,900
Less current notes receivable 287,000 262,000 0
______________________________
Noncurrent $ 95,900 $ 95,900 $ 95,900
==============================
</TABLE>
<PAGE>F-11
Biocontrol Technology, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
NOTE C - NOTES RECEIVABLE - Continued
Accrued interest receivable on the related party notes as of
September 30, 1996, December 31, 1995 and 1994 was $49,600,
$42,237 and $32,445, respectively.
During 1995, IDT, a subsidiary of BICO, financially supported
the research and development efforts of HemoCleanse, Inc.,
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 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, 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:
Sep. 30, 1996 Dec. 31, 1995 Dec. 31, 1994
_____________ _____________ _____________
Raw materials $3,659,408 $2,457,235 $ 106,654
Work-in-process 277,333 102,911 74,490
Finished goods 719,765 607,862 498,647
_____________ _____________ _____________
4,656,506 3,168,008 679,791
Less valuation allowance (1,507,871) (1,507,869) (498,647)
_____________ _____________ ______________
$3,148,635 $1,660,139 $181,144
============= ============= ==============
NOTE E - ACCRUED LIABILITIES
Accrued liabilities consisted of the following as of:
Current: Sep. 30, 1996 Dec. 31, 1995 Dec 31, 1994
________ _____________ _____________ ____________
Accrued payroll taxes $ 16,557 $ 15,405 $ 21,754
Accrued vacation 104,830 43,728 29,682
Other accrued liabilities 37,349 37,501 69,075
_____________ _____________ ____________
$158,736 $ 96,634 $ 120,511
============= ============= ============
Long - Term:
____________
Accrued rent $ 0 $ 114,750 $ 76,500
Other accrued liabilities 0 0 33,333
____________ _____________ _________
$ 0 $ 114,750 $ 109,833
============ ============= =========
<PAGE>F-12
Biocontrol Technology, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
NOTE F - LONG TERM DEBT
<TABLE>
Long term debt consisted of the following as of:
<CAPTION>
Sep. 30, Dec. 31, Dec. 31,
1996 1995 1994
________ ________ ________
<S> <C> <C> <C>
Notes Payable to a bank in monthly payments of $999 including
interest at a rate of 7.35%. Collateralized by cash on deposit. $ 26,114 $ 33,423 $ 43,279
Note Payable in monthly payments of $495 including
interest at a rate of 8.48%. Collateralized by equipment. 16,354 19,986 24,501
Note Payable in monthly payments of $374 including
interest at a rate of 18.00%. Collateralized by equipment 8,793 0 0
Note Payable in monthly payments of $851 including
interest at a rate of 10.11%. Collateralized by equipment. 11,945 18,418 0
Note Payable to a bank in monthly payments of $433 including
interest at a rate of 8.75%. Collateralized by equipment. 13,611 17,157 0
________ ________ _______
76,817 88,984 67,780
Current portion of long-term debt 29,773 28,404 14,412
________ ________ ________
Long-term debt $ 47,044 $ 60,580 $ 53,368
======== ======== ========
</TABLE>
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 $79,290 and $79,290 in the nine month periods ended
September 30, 1996 and 1995, and $105,720 in each of the years
1995, 1994 and 1993. Future minimum lease payments as of
September 30, 1996 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.
<PAGE>F-13
Biocontrol Technology, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
NOTE G - LEASES Continued
Operating Leases - Continued
The Company and its related subsidiaries also lease other office
facilities, various equipment and automobiles under operating
leases expiring in various years through 2002. Total lease
expense related to these leases was $127,142, $162,107,
$216,143, $188,701 and $94,528 in the nine month periods ended
September 30, 1996 and 1995, and in the years ended December 31,
1995 1994 and 1993, respectively.
Capital Leases
During 1996, the Company leased two manufacturing buildings
under capital leases expiring in various years through 2011.
The assets and liabilities under capital leases are recorded at
the lower of the present value of the minimum lease payments or
the fair value of the asset. The assets are depreciated over
the lower of their related lease terms or their estimated
productive lives. Depreciation of assets under capital leases
is included in depreciation expense for the nine month period
September 30, 1996.
The following is a summary of property held under capital
leases:
Sep. 30, 1996 Dec. 31, 1995 Dec. 31, 1994
------------- ------------- -------------
Building $ 1,205,760 $ 0 $ 0
Construction in Progress 1,126,405 0 0
Land 246,250 0 0
Equipment 157,520 0 0
_____________ _____________ _____________
Sub Total 2,735,935 0 0
Less: Acc. Dep. 8,728 0 0
_____________ _____________ _____________
Total Property under
Capital Leases $ 2,727,207 $ 0 $ 0
============= ============= =============
Minimum future lease payments to related and unrelated parties are
as follows:
Related Unrelated
Parties Parties Total
_________ ___________ __________
1996 (three months) $ 26,430 $ 127,142 $ 153,572
1997 105,720 481,214 586,934
1998 105,720 417,544 523,264
1999 105,720 348,759 454,479
2000 61,670 325,790 387,460
2001 0 371,688 371,688
Thereafter 0 3,470,814 3,470,814
________ ___________ __________
Future minimum lease payments $405,260 $ 5,542,951 $5,948,211
======== =========== ==========
<PAGE>F-14
Biocontrol Technology, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
NOTE H - SUBORDINATED CONVERTIBLE DEBENTURE
In August 1996, the Company issued a subordinated convertible
debenture having a principal amount of $2,000,000 and bearing
interest at a rate of 6% per annum (payable in stock or cash).
The debenture is convertible at specified contract terms any
time after November 29, 1996 with mandatory conversion by
February 28, 1997. The Company may redeem all or part of the
outstanding debenture beginning December 29, 1996 via mandatory
conversion at the conversion price (as defined) or by repaying
the principal and interest in cash.
NOTE I - 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.
During the nine months ended September 30, 1996, 2,730 shares of
the Series I preferred stock were converted to common stock,
730 shares were redeemed for cash and an escrow payable of
$3,300 was established for the redemption of the remaining 330
shares.
The Series A preferred stock (voting) is convertible at anytime
into shares of common stock at defined terms. The holders of
record of the Series A preferred stock are entitled to receive
when, as, and if declared, cumulative dividends at a rate of 6%
per annum. In the event of liquidation, the preferred
stockholders are entitled to receive in preference to any
distribution to the holders of the Company's equity securities,
an amount per share equal to the sum of $100.00 and any accrued
and unpaid dividends.
During the nine months ended September 30, 1996, 20,000 shares
of the Series A convertible preferred stock were sold.
The Board of Directors of the Company may issue preferred stock
in series which would have rights as determined by the Board.
<PAGE>F-15
Biocontrol Technology, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
NOTE I - STOCKHOLDERS' EQUITY - Continued
Common Stock Warrants - Continued
During the nine months ended September 30, 1996 warrants ranging
from $1.48 to $2.41 per share to purchase 509,480 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 2,805,462 shares of common
stock were exercisable at September 30, 1996.
The per share exercise prices of these warrants are as follows:
Shares Exercise Price
_________ ______________
1,379,500 $.25
180,000 $.33
350,000 $.50
139,000 $2.125
756,962 $.28 - $3.50
_________
Total 2,805,462
=========
<TABLE>
The fiscal year in which common stock warrants were granted and
the various expiration dates by fiscal year are as follows:
<CAPTION>
Warrants Expire During Fiscal Year
Fiscal Warrants __________________________________
Year Granted Granted 1996 1997 1998 1999 2000 2001
____________ _________ _______ ______ _________ _______ ______ _______
<S> <C> <C> <C> <C> <C> <C> <C>
1990 559,500 - - 559,500 - - -
1991 1,351,482 350,000 - 1,000,000 1,482 - -
1992 25,000 - 25,000 - - - -
1993 209,000 - - 209,000 - - -
1994 130,000 - - - 130,000
1995 21,000 21,000
1996 509,480 509,480
_________ _______ ______ _________ _______ ______ _______
2,805,462 350,000 25,000 1,768,500 131,482 21,000 509,480
</TABLE>
<PAGE>F-16
Biocontrol Technology, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
NOTE I - STOCKHOLDERS' EQUITY - Continued
Common Stock Warrants - Continued
The following is a summary of warrant transactions during the
nine month period ended September 30, 1996:
Outstanding beginning of period: 2,415,982
Granted during the nine month period: 509,480
Canceled during the nine month period: -0-
Exercised during the nine month period
at $.25 and $.28 per share: (120,000)
__________
Outstanding, and eligible for exercise: 2,805,462
==========
Common Stock Reserve
At September 30, 1996 the Company has reserved unissued common
stock as follows:
Warrants 2,805,462
Convertible preferred stock 2,439,025
Convertible debenture stock 1,744,681
_________
Total 7,135,509
=========
Warrant Extensions
During 1996, the Company extended the exercise date of a warrant
to purchase 1,482 shares of common stock to a consultant. The
warrant shares were originally granted at an exercise price of
$.45, and were extended at the original grant price. The
Company recorded a $2,668 expense for the difference between the
fair market value on the date the warrant was extended and the
warrant exercise price.
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.
<PAGE>F-17
Biocontrol Technology, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
NOTE I - STOCKHOLDERS' EQUITY - Continued
Diasense Common Stock
At September 30, 1996, warrants to purchase 7,533,263 shares of
Diasense common stock were exercisable. The per share exercise
price for 4,055,000 shares is $.50, for 2,376,013 shares is $1.00
and for 1,102,250 shares is $3.50. The warrants expire at various
dates through 2001. To the extent that all the warrants are
exercised, the Company's proportionate ownership would be diluted
from 52% at September 30, 1996 to 39.49%.
Diasense Warrant Extensions
During 1996, Diasense extended the exercise date of warrants to
purchase 2,341,213 shares of common stock to certain officers,
directors, employees and consultants. The warrant shares were
originally granted at an exercise price ranging from $.50 to
$1.00, and extended at the same price. Diasense recorded a
$6,999,033 expense for the difference between the estimated fair
market value on the date the warrants were extended and the
warrants' exercise prices.
During 1995, Diasense extended the exercise date of warrants to
purchase 1,765,000 shares of common stock to certain officers,
directors, employees and consultants. The warrant shares were
originally granted at 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 September 30, 1996 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 September 30, 1996 to 61.3%.
IDT Common Stock
At September 30, 1996 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 September 30, 1996 to
86.2%.
<PAGE>F-18
Biocontrol Technology, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
NOTE J - INCOME TAXES
As of September 30, 1996, the company and its subsidiaries,
except Diasense and Petrol Rem, have available approximately
$41,300,000 of net operating loss carryforwards for federal
income tax purposes. These carryforwards are available, subject
to limitations, to offset future taxable income, and expire in
tax years 1996 through 2011. The Company also has research and
development credit carryforwards available to offset federal
income taxes of approximately $520,000 subject to limitations,
expiring in tax years 2005 through 2011.
As of September 30, 1996, the end of its fiscal year, Diasense
had available approximately $20,700,000 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. Diasense also has research and development credit
carryforwards available for federal income tax purposes of
approximately $700,000, subject to limitations, expiring in the
years 2005 through 2010.
As of September 30, 1996, Petrol Rem had available approximately
$6,500,000 of net operating loss carryforwards for federal
income tax purposes. These carryforwards, which expire during
the years 2008 through 2013, are available, subject to
limitations, offset future taxable income. Petrol Rem also has
research and development credit carryforwards available for
federal income tax purposes of approximately $75,000.
Certain items of income and expense are recognized in different
periods for financial and income tax reporting purposes. In the
year ended December 31, 1995 and 1994, warrant exercise
adjustments of $1,309,060 and $321,736 were reported for tax
purposes. The fair market value of warrant extensions have
been recorded and expensed for financial statement purposes in
the amount of $2,668, $7,595,655 and $7228,220 for the nine
months ended September 30, 1996 and 1995 and for the year ended
December 31, 1995.
The Company has not reflected any future income tax benefits for
these temporary differences or for net operating loss and credit
carryforwards because of the uncertainty as to realization.
Accordingly, the adoption of FAS 109 had no effect on the
financial statements of the Company.
<PAGE>F-19
Biocontrol Technology, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
NOTE J - INCOME TAXES-Continued
The following is a summary of the composition of the Company's
deferred tax asset and associated valuation allowance:
Sep. 30,1996 Dec. 31, 1995 Dec. 31,1994
____________ _____________ ____________
Net Operating Loss $ 14,496,485 $ 10,959,420 $ 6,631,440
Warrant Expense 2,530,811 2,529,877 -
Tax Credit Carryforward 520,000 400,000 280,000
____________ _____________ ____________
17,547,296 13,889,297 6,911,440
Valuation Allowance (17,547,296) (13,889,297) (6,911,440)
____________ _____________ ____________
Net Deferred Tax Asset $ 0 $ 0 $ 0
============ ============= ============
The deferred tax benefit and the associated increase in the
valuation allowance are summarized in the following schedule:
Increase in
Deferred Valuation
Tax Benefit Allowance Net
_____________ ____________ ______
Period ended Sept. 30, 1996 $( 3,657,999) $ 3,657,999 $ 0
Year-ended December 31, 1995 $( 6,977,857) $ 6,977,857 $ 0
Year-ended December 31, 1994 $( 1,569,335) $ 1,569,335 $ 0
From March 20, 1972 (inception)
through September 30, 1996 $(17,547,296) $17,547,296 $ 0
NOTE K - RELATED PARTY TRANSACTIONS
Research and Development Activities
The Company is currently performing research and development
activities related to the non-invasive glucose sensor (the
Sensor) under a Research and Development Agreement with
Diasense. If successfully developed, the Sensor will enable
users to measure blood glucose levels without taking blood
samples. Diasense acquired the rights to the Sensor, including
one United States patent from BICO for $2,000,000 on November
18, 1991. Such patent covers the process of measuring blood
glucose levels non-invasively. Approval to market the Sensor is
subject to federal regulations including the Food and Drug
Administration (FDA).
<PAGE>F-20
Biocontrol Technology, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
NOTE K - RELATED PARTY TRANSACTIONS - Continued
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>F-21
Biocontrol Technology, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
NOTE K - 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 September 30, 1996, December 31, 1995 and 1994, Mr. Cooper owed
the Company $8,500 related to a 12 percent simple interest demand
loan. At September 30, 1996, December 31, 1995 and 1994, Mr.
Cooper owed the Company $82,400, related to 10 percent simple
interest demand loans at September 30, 1996. Mr. Cooper owed the
Company $25,000, related to 8.25 percent simple interest demand
loan. This loan was repaid by Mr. Cooper on December 4, 1996.
The accrued interest owed by Mr. Cooper on all demand notes at
September 30, 1996, December 31, 1995 and 1994 was $47,216,
$40,197 and $30,937, respectively.
At September 30, 1996, 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
September 30, 1996, December 31, 1995 and 1994 was $2,384, $2,008
and $1,508, respectively.
At September 30, 1996 and 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 September 30, 1996 and December 31, 1995
there was no accrued interest owed.
<PAGE>F-22
Biocontrol Technology, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
NOTE K - RELATED PARTY TRANSACTIONS - Continued
Advances to Officers
During 1996, the Company and its subsidiaries made advances to
Mr. Cooper. At September 30, 1996, these advances accumulated
to $60,536, of which $28,000 had been repaid by Mr. Cooper as of
December 4, 1996.
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.
NOTE L - COMMITMENTS AND CONTINGENCIES
Litigation
In May 1996, the Company, along with BICO and BICO's individual
directors, was served with a federal class action lawsuit based
on alleged violations of federal securities laws. The Companies
have filed a Motion to dismiss the suit and are aggressively
defending against it. No determinations as to possible
liability or exposure are possible at this time, although the
Company does not believe that any violations of the securities
laws have occurred.
Pennsylvania Securities Commission
In April, 1996, the Pennsylvania Securities Commission commenced
an informal investigation into Diasense's sales of its common
stock pursuant to its public offering in an effort to determine
whether sales were made improperly to Pennsylvania residents.
Diasense has been cooperating fully with the state and has
provided all of the information requested. To date, no
determinations have been made.
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 are $120,000
per year.
<PAGE>F-23
Biocontrol Technology, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
NOTE M - 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 September 30, 1996.
NOTE N - SALES AND COST OF GOODS SOLD
<TABLE>
The following is a schedule that details Sales and Cost of Goods
Sold by segment:
<CAPTION>
Sep. 30, 1996 Sep.30, 1995 Dec. 31, 1995 Dec. 31, 1994 Dec. 31, 1993
_____________ ____________ _____________ _____________ _____________
<S> <C> <C> <C> <C> <C>
Sales
FES $406,396 $163,636 $168,461 $177,259 $54,000
Petrol Rem 33,567 204,272 215,211 4,432 0
Barnacle Ban 20,370 77,135 77,585 2,816 0
_____________ ____________ _____________ _____________ _____________
460,333 445,043 461,257 184,507 54,000
CGS
FES 213,898 88,964 91,859 97,687 27,446
Petrol Rem 9,819 49,200 53,813 981 0
Barnacle Ban 9,025 52,687 52,870 0 0
_____________ ____________ _____________ _____________ _____________
232,742 190,851 198,542 98,668 27,446
Gross Profit $227,591 $254,192 $262,715 $ 85,839 $26,554
============= ============ ============= ============= =============
</TABLE>
NOTE O - SUBSEQUENT EVENTS
Subsequent to September 30, 1996, and through November 15, 1996,
the Company raised proceeds from Regulation S sale of
debentures totaling approximately $2,484,000.
<PAGE>F-24
