SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3 TO FORM 10-K\A
FILED JANUARY 4, 1999
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended 12/31/97 Commission File Number 0-10822
Biocontrol Technology, Inc.
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1229323
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
300 Indian Springs Road, Indiana, Pennsylvania 15701
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (412) 349-1811
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 par value
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
and (2) has been subject to such filing requirements for the past
90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K, or any amendment to
this Form 10-K. [ ]
The aggregate market value of the voting stock held by
nonaffiliates of the registrant as of March 20, 1998:
Common Stock, $.10 par value -- $ 22,562,581
As of December 31, 1997, 138,583,978 shares of common stock, par
value $.10 per share, were outstanding.
As of December 31, 1997, no shares of preferred stock, par value
$10 per share, were outstanding.
Exhibit index is located on pages 34 to 37.
Item 1. Business
General Development of Business
Biocontrol Technology, Inc. was incorporated in the Commonwealth
of Pennsylvania in 1972 as Coratomic, Inc. and is referred to
herein as "BICO" or the "Company". BICO's operations are located
at 300 Indian Springs Road, Indiana, PA, and its administrative
offices are located at 2275 Swallow Hill Road, Bldg. 2500,
Pittsburgh, PA. The Company is developing the Noninvasive
Glucose Sensor with Diasense, Inc., its 52% owed subsidiary.
Where applicable, BICO and Diasense will be referred to herein as
the "Companies".
The primary business of the Company is the development of new
devices which include models of a noninvasive glucose sensor (the
"Noninvasive Glucose Sensor"), an implantable port for drug
delivery and hemodialysis use, a polyurethane heart valve,
procedures relating to the use of whole-body extracorporeal
hyperthermia in the treatment of cancer and the human
immunodeficiency virus ("HIV"), bioremediation products, and a
paint product which is designed to prevent the buildup of certain
substances on underwater surfaces. In addition, the Company is
currently manufacturing and selling functional electrical
stimulators. In early 1998, the Company acquired a majority
interest in a company which manufactures and sells metal coating
products.
Forward-Looking Statements
From time to time, the Company may publish forward-looking
statements relating to such matters as anticipated financial
performance, business prospects, technological developments, new
products, research and development activities, the regulatory
approval process, specifically in connection with the FDA
marketing approval process, and similar matters. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements. In order to comply with the
terms of the safe harbor, the Company notes that a variety of
factors could cause the Company's actual results to differ
materially from the anticipated results or other expectations
expressed in the Company's forward-looking statements. The risks
and uncertainties that may affect the operations, performance,
research and development and results of the Company's business
include the following: additional delays in the research,
development and FDA marketing approval of the Noninvasive Glucose
Sensor; delays in the manufacture or marketing of the Company's
other products and medical devices; the Company's future capital
needs and the uncertainty of additional funding; BICO's
uncertainty of additional funding; competition and the risk that
the Noninvasive Glucose Sensor or its other products may become
obsolete; the Company's continued operating losses, negative net
worth and uncertainty of future profitability; potential
conflicts of interest; the status and risk to the Company's
patents, trademarks and licenses; the uncertainty of third-party
payor reimbursement for the Sensor and other medical devices and
the general uncertainty of the health care industry; the
Company's limited sales, marketing and manufacturing experience;
the amount of time or funds required to complete or continue any
of the Company's various products or projects; the attraction and
retention of key employees; the risk of product liability; the
uncertain outcome and consequences of the lawsuits pending
against the Company; the ability of the Company to maintain a
national listing for its common stock; and the dilution of the
Company's common stock.
Industry Segments
The Company operates in a single industry segment consisting of
the design, manufacture and sale of biological/biomedical
products and devices. Although some of the Company's
subsidiaries are engaged in other activities, such activities are
immaterial at this time for industry segment purposes.
Description of Business
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 March 1998, a total of five U.S.
and six foreign 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. 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 in the U.S. and will
be calibrated in the patient's home. This feature may limit the
marketability of the Diasensor_ 1000, and, if the device is
unable to qualify for third-party reimbursement, the Company's
ability to market the device could be adversely effected.
Current Status of the Noninvasive Glucose Sensor
Due to continued delays of the FDA approval process, which are
summarized below, and while continuing to work with the FDA and
conduct its mandated testing, the Companies have also focused
their efforts on obtaining approval to market the Diasensor_ 1000
overseas. The Companies are in the process of obtaining a "CE"
mark, which will facilitate sales in Europe. As discussed below,
in connection with obtaining a CE mark, BICO has been awarded ISO
9001 certification, and continues to work with its European
consultants to expedite the process as much as possible.
BICO, as designer and manufacturer of the device, was recently
audited for ISO certification by TUV Rheinland, a company
authorized to conduct such audits, which was contracted to
perform a "conformity assessment" of BICO's quality system. BICO
has received certification to ISO 9001, a standard defined by the
International Organization for Standardization ("ISO"),
evidencing that BICO has in place a total quality system for the
design, development and manufacture of its products. The
certificate formalizing the ISO 9001 certification was received
by BICO on January 14, 1998. In February and March, 1998, BICO
submitted its technical file on the Diasensor_ to TUV in order
to satisfy requirements of the European Medical Device Directive.
Once satisfied, BICO will receive approval to apply a CE mark to
the device. Much like an Underwriters Laboratory "UL" mark, the
CE mark is provided by the regulatory bodies of the European
Community, or by authorized private bodies, such as TUV
Rheinland, to indicate that the device adheres to "quality
systems" of the ISO and the European Committee for
Standardization. The CE mark will permit the Companies to sell
the Diasensor_ and other medical products in Europe.
With regard to marketing the device within the United States, the
Companies continue to work with the FDA to obtain approval. A
revised 510(k) Notification was submitted in October, 1996, and
was followed by continued discussions with the FDA. During 1997,
the Company continued to meet with the FDA, and established a
protocol for in-home testing of the Diasensor_ 1000, which
commenced in early 1997. The Companies plan to resubmit a 510(k)
Notification after it obtains the CE mark and all 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 next 510(k) Notification will be submitted, or when the FDA
will complete its review of such Notification.
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.
FDA approval is necessary to market the Diasensor_ 1000 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 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. 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
1997 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.
In connection with this project, BICO created a subsidiary,
Petrol Rem, Inc. ("Petrol Rem"). Petrol Rem's officers and
directors include Anthony J. Feola and Fred E. Cooper, who are
also directors and/or officers of BICO and its other affiliates.
Part of Petrol Rem's initial research and development involved
field testing supervised by the National Environmental Technology
Applications Corporation ("NETAC"), a group endorsed by the
Environmental Protection Agency (the "EPA"), to determine whether
the product is effective. As a result of such testing, NETAC
reported positive results regarding the effectiveness of the
product.
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, which is used for small oil cleanups on hard surfaces
such as the floors of manufacturing facilities, garages and
machine shops.
The product system is listed on the EPA's National Contingency
Plan ("NCP") Product Schedule, and is available in free-flowing
powder or absorbent socks. In 1995, the EPA required that all
products previously listed on the NCP be submitted to additional
testing. Because 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. As illustrative evidence, management notes
that only thirteen of the original fifty-three products in the
bioremediation agents category remain listed.
In April 1993, Petrol Rem entered into a lease for a facility in
the Pittsburgh, Pennsylvania area which is used to manufacture
PRP_. The current lease has a renewable three-year term, with
monthly rental payments of $2,888 plus utilities and applicable
business privilege taxes. Petrol Rem has also purchased
equipment which has the capability to produce PRP_ in quantities
of 2,500 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 been warehousing PRP_
in those areas.
Petrol Rem has also completed development of a new spray
applicator for its PRP_ product. 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 remote sites which were impossible to reach with the
previous applicator.
In addition to PRP_, Petrol Rem has also developed 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 tube, is designed and used to aid in the cleaning of
boat bilges. Bilges are commonly cleaned out with detergents and
emulsifiers, which cause the oil pumped out of the bilge to sink
to the bottom of the water, where it is harmful to marine life,
and becomes difficult to collect. In addition, it is illegal to
dump oil or fuel into the water. The BIO-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
waters clear. In addition, BIO-SOK_ helps to eliminate the
chore of bilge cleanup, and helps users such as boaters and
marinas to avoid fines for pumping oil and fuel into the
waterways, which is prohibited.
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 were 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".
In December 1996, Petrol Rem announced that the BIO-SOK_ had been
chosen by Boating, one of the largest pleasure boating magazines
in the world, for use in all of the boats tested for its
magazine. Boating, which tests over 100 boats each year, called
the BIO-SOK_ "one impressive new product". In February 1997,
BIO-SOK_ was given a 1997 Innovation Award by the well-known
trade magazine Motorboating and Sailing.
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 tube 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.
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. 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.
As a result of marketing efforts in Abu Dhabi, UAE from December
1997, Petrol Rem was invited to demonstrate the efficacy of PRP_.
A recent spill in Umm Al Qaiwain afforded Petrol Rem a field
application in a mangrove site and beach front property. These
applications were made in February of 1998 and are presently
being evaluated. Future presentations/applications are scheduled
with ADNOC (Abu Dhabi National Oil Company).
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 $8,499,000 on this project
through December 31, 1997.
Whole-Body Extracorporeal Hyperthermia
BICO is currently funding 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 Glenn Keeling, who is also an officer and
director of BICO.
IDT and HemoCleanse are currently engaged in a project which
involves the experimental use of a delivery system, the
ThermoChem System , for perfusion-induced systemic hyperthermia
("PISH") to treat persons with certain types of cancer and
HIV/AIDS. HemoCleanse is an Indiana corporation with offices
located at 2700 Kent Avenue, West Lafayette, Indiana 47906.
HemoCleanse designs, manufactures and markets products that treat
blood outside the body to remove toxins and simultaneously
balance blood chemistries. HemoCleanse believes that its systems
are unique in being able to selectively remove both small,
intermediate and protein-bound toxins, and to provide
extracorporeal hyperthermia to selectively kill infected or
rapidly dividing cells without the risk of electrolyte
imbalances.
HemoCleanse has developed two models of the device. The BioLogic-
DT is designed for use as a detoxifier for the treatment of drug
overdose and was approved for marketing in the United States by
the FDA in September 1994. The ThermoChem System , which
incorporates this technology, is designed for use in the
hyperthermia procedure. The ThermoChem System is used in IDT's
clinical trials.
Perfusion-induced systemic hyperthermia, a form of whole-body
hyperthermia, achieved through extracorporeal blood heating
("PISH") involves heating the patient's blood outside the body to
approximately 48 degrees centigrade and returning it back to the
body, thus raising the body's core temperature to the desired
treatment temperature up to a maximum of 42.5 degrees centigrade.
Blood passes a roller pump which sends it onward to the heat
exchanger where indirect heating of the blood occurs, raising the
outside blood temperature to approximately 48 degrees centigrade.
A portion of the blood passes through a T-connection to the
ThermoChem-SB, located between the roller pump and the heat
exchanger, where it is chemically balanced on a real-time basis
and then returned to the blood flow path before it reaches the
heat exchanger. Continually circulating blood is returned to the
patient at 46 degrees centigrade, gradually raising the patient's
core body temperature to the desired treatment temperature, which
is measured by various temperature probes throughout the body.
Experimentation outside the United States to date, to the best
knowledge of the Company, has been somewhat limited and not well-
documented. IDT, and IDT's Scientific and Medical Advisory Board
believe that once a safe delivery system is established, serious,
extensive and well-documented testing will determine whether PISH
can be used as an effective treatment for persons with clinical
cancer or HIV.
Although other entities have experimented with the use of PISH,
one significant problem has been the safe delivery of the
procedure. IDT believes that the improvements inherent to their
ThermoChem System increase the safety of the procedure. The
ThermoChem System incorporates a single access device, utilizing
a parallel plate, cellulosic membrane dialyzer and a unique
sorbent suspension which can effectively remove a wide range of
chemicals and toxins from the blood, while maintaining a balance
of electrolytes and important nutrients. The system is also
comprised of several specially integrated devices that perform
blood propulsion, water heating and cooling to control
extracorporeal blood temperature, air embolism detection,
auxiliary unit roller pump occlusion detection, catheter access
occlusion, and monitoring and recording of cardiac output and
patient temperatures.
As a result, IDT believes that they have taken a significant step
towards the creation of a safe delivery system. Although there
can be no assurances that the ThermoChem System is safe for all
humans, clinical trials to date have confirmed that the humans
tested were able to safely tolerate PISH at a core temperature of
42 degrees centigrade for two hours. Based in part upon the
results of its initial clinical trials, the FDA has approved
additional clinical trials.
The ThermoChem System is a combination of three system
components: 1) the ThermoChem-HT, which circulates and heats
blood extracorporeally up to approximately 48 C and monitors the
patient's core temperature, which provides constant up to the
minute access information on the status of the patient; 2) the
ThermoChem-SB, which can effectively remove a wide range of
chemicals and toxins from the blood, while maintaining a balance
of electrolytes and important nutrients; and 3) the Disposable
Kit, which contains the patented sorbent suspension, as well as
temperature probes, catheters, and tubing set, etc. .
The ThermoChem System's specifications include an extracorporeal
continuous blood circuit, a blood flow rate of 2000 ml/minute
maximum, an integrated device which heats blood outside the body
to approximately 48 degrees centigrade and core temperature to a
maximum of 42.5 degrees centigrade, and a sorbent suspension
system where optimum chemical transfer between the blood and
sorbent is attained, which balances critical blood chemistries.
Pre-clinical trials were conducted on six swine to assure safety
at an increased flow rate and maintenance of a higher core
temperature of 43 degrees centigrade for a period of two hours.
This study concluded that blood chemistries were normalized with
the use of the ThermoChem System . In November 1996, the
Companies submitted an IDE application to the FDA for a study
utilizing the ThermoChem System for PISH for metastatic non-
small cell lung cancer. This protocol was developed by the
University of Texas in Galveston. The FDA responded in December
1996 with an approval to conduct a Phase I trial. The University
of Texas' Institutional Review Board (IRB) granted approval of
this study in May 1997.
On September 11, 1997, IDT entered into an agreement with the
University of Texas Medical Branch at Galveston (UTMB) to begin a
human clinical trial in October 1997. The trial will utilize the
ThermoChem System and disposables to deliver perfusion-induced
systemic hyperthermia to treat patients with metastatic non-small
cell lung cancer.
One of the objectives of this Phase I trial is to evaluate the
ThermoChem System for the use in the treatment of metastatic non-
small cell lung cancer with regard to patient selection, tumor
response, patient performance status, and patient survival. The
follow-up of the patients is patterned after the Southwest
Oncology Group protocols, which are considered state-of-the-art
studies to follow response of cancer to the therapy.
The study is being conducted at the General Clinical Research
Center (GCRC) at UTMB, which is supported by the National
Institute of Health (NIH). This is the only PISH study for
metastatic non-small cell lung cancer approved by the FDA.
The ThermoChem-HT , a component of the ThermoChem System , which
circulates and heats blood extracorporeally up to approximately
48 C and monitors the patient's core temperature, through various
temperature probes, and also provides constant up to the minute
access information on the patient can be used independently from
the ThermoChem System for regional hyperthermia. Regional
hyperthermia is utilized where a systemic treatment is not
necessary, and isolated limb perfusion, a form of regional
hyperthermia, which was developed 40 years ago to treat patients
with melanoma and sarcoma of the limb. Preclinical trials are
also being conducted for a Phase I trial to involve isolated limb
perfusion for melanomas and sarcomas of the limbs.
Pre-clinical trials are being conducted at M.D. Anderson Cancer
Center in preparation for a Phase I/II trials to involve
thermochemotherapy hemi-perfusion of patients with pelvic or
lower extremity recurrences of different types of cancer. These
pre-clinical studies are being used to develop the surgical
techniques necessary for a clinical trial on humans and to train
and familiarize the center's staff in the use of the system.
The Cancer Center Protocol Committee of Bowman Gray School of
Medicine has approved a protocol concept to conduct a pilot study
investigating the safety of the ThermoChem-HT for
intraperitoneal hyperthermic chemotherapy (IPHC) in the treatment
of advanced gastrointestinal and ovarian cancers.
The technique of IPHC has been done at Bowman Gray since 1992
utilizing a non-standardized perfusion setup. The ThermoChem-HT
can possibly make the technique more efficient with better
temperature monitoring and control. An IDE is being submitted to
the FDA to conduct this human trial.
IDT's Medical and Scientific Advisory Board consists of the three
following professionals. Currently, none of the board members
receive a fee for serving on the board, but are reimbursed for
expenses incurred.
Corklin R. Steinhart, M.D., Ph.D., is the medical director of
special immunology services at Mercy Hospital in Miami, Florida.
Milton B. Yatvin, Ph.D., is a professor in the Radiation &
Thermal Biology Division, Department of Radiation Oncology at
Oregon Health Sciences University in Portland, Oregon.
Stephen R. Ash, M.D., F.A.C.P., is the Chairman of the Board and
Director of Research and Development of HemoCleanse, a
corporation located in West Lafayette, Indiana.
The Company has expensed approximately$8,402,000 on this project
through December 31, 1997, which includes the Company's
acquisition of HemoCleanse common stock, via a purchase of common
stock and the conversion of a loan into common stock.
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, 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.
In late 1994, NeuroControl Corporation in Cleveland, Ohio
("NeuroControl") acquired the rights to Case Western's IRS
Devices for hand functions. 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. 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 was submitted in
December 1996. In August, 1997, NeuroControl received approval
from the FDA to market the IRS Device.
BICO expects to complete delivery of the devices on the initial
order in the first quarter of 1998. In November 1997,
NeuroControl placed a second contract for 400 devices to be
delivered in 1998 after the first contract is complete. The
value of that contract is $2.146 million. In addition to the
contracts for the devices, NeuroControl has placed several
purchase orders 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_ Vascular Access System ("VAS"). The approval was in
connection with the Company's 510(k) Notification filed in
January 1996. The device is comprised of a reservoir which is
implanted beneath the skin in the chest region with a catheter
inserted in a vein and provides a delivery system for patients
who require continual injections. Because such repeated
injections can cause veins to shut down and collapse, the
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
began selling the standard ports during the second quarter of
1997. A second device with a low profile has been developed for
pediatric use, and a 510(k) was submitted to the FDA in November
1997 for marketing approval. In early February, 1998, BICO
submitted a supplement to the FDA in response to a request for
additional information. The Company is currently developing a
dual port device and plans to submit another 510(k) for that
device in the near future.
Through its subsidiary, Coraflex Inc. ("Coraflex"), BICO is
engaged in the development of a polyurethane heart valve which
management believes may not have the disadvantages of the
mechanical and bioprosthetic valves currently being marketed.
The 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
prior to its making an application to the FDA for approval to
begin clinical testing in humans. BICO will need additional
financing to complete clinical testing of the valve and to begin
production. No assurances can be made that BICO will receive the
necessary funding to complete testing, will receive FDA-marketing
approval, will be able to produce and sell the valve, or that the
valve will be commercially viable.
BICO also has developed technology for other implantable devices,
such as hemodialysis ports, implantable insulin dispensers and
rate-adaptive pacemakers. Because BICO's management decided to
focus most of the Company's resources on the research and
development of the Noninvasive Glucose Sensor, little progress
was made on these projects. Consequently, some of these devices
are in a very preliminary stage of development, and it is unclear
at this time whether their development will be pursued or
completed.
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.
In 1995, the Company 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.
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.
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, which is
located in Maryland, 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 net sales of the product, plus thirty percent
(30%) of all payments received from any sublicensees. The
Company has spent approximately $2,525,000 on this project
through December 31, 1997.
The information set forth herein regarding BICO's projects is of
a summary nature, and the status of each project is subject to
constant change. There can be no assurances as to the completion
or success of any project.
RESEARCH AND DEVELOPMENT
The Company continues to be actively engaged in the research and
development of new products. Its major emphasis has been the
development of a Noninvasive Glucose Sensor. In order to raise
funds for the research and development of new products, the
Company and Diasense have conducted sales of stock. (See,
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS").
MARKETING AND DISTRIBUTION
Petrol Rem began marketing of its bioremediation product, 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 March, 1998, a total of five U.S. and six foreign patents
have been issued, all of which have been assigned to Diasense,
and additional patents are pending. 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 BICO to be currently developing non-
invasive glucose sensors own patents directed to various devices
and processes related to the non-invasive monitoring of
concentrations of glucose and other blood constituents. It is
possible that such patents may require the Companies to alter
any model of the Noninvasive Glucose Sensor or the underlying
processes relating to the Noninvasive Glucose Sensor, to obtain
licenses, or to cease certain activities.
The Company also relies upon trade secret protection for its
confidential and proprietary information. Although BICO and
Diasense take all reasonable steps to protect such information,
including the use of Confidentiality Agreements and similar
provisions, there can be no assurance that others will not
independently develop substantially equivalent proprietary
information or techniques, otherwise gain access to the Company's
trade secrets, disclose such technology, or that the Company can
meaningfully protect its trade secrets.
The Company has filed for trademark protection for the term
"Diasensor_ 1000", 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 domestic patent in connection with the use of PISH and the
treatment of HIV-positive patients; the patent has been assigned
to IDT. In October 1994, IDT received notification that the
patent application for its specialized method for whole-body
extracorporeal hyperthermia had been issued. A Continuation in
Part, which included the ThermoChem System was filed by IDT,
was allowed in July 1995 and issued in December 1995.
The patent, entitled "Specialized Perfusion Protocol for Whole-
Body Hyperthermia", contains seventeen claims for the
hyperthermia procedure, including the method of heating all of
the blood in the extracorporeal blood circuit to raise the
patient's core temperature to approximately 42 degrees
centigrade. A Continuation in Part, which was filed by IDT and
included the ThermoChem System , was allowed in July 1995 and was
issued in December 1995.
Implantable Technology
During 1995, the Company renewed its U.S. trademark registration
for the name Coraflex_, which was originally granted in 1988.
The Company has also obtained trademark registration for the name
theraPORT_ (See, "BUSINESS - Implantable Technology).
In October, 1996, a patent was issued for the Company's heart
valve product.
Bioremediation
In 1992 and 1993, Petrol Rem applied for patents in connection
with its bioremediation product, all of which are still pending.
The Company has received trademark authorization for the use of
the product names 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
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
In connection with the manufacture the Noninvasive Glucose
Sensor, the Company will be dependent upon suppliers for some of
the components required for the devices fabrication. The Company
plans to assemble the devices, but will need to purchase
components, including some components which will be custom made
for the Company from certain suppliers. These components will
not be generally available, and the Company may become dependent
upon those suppliers which do provide such specialized products.
If the Company successfully develops other new products, and
receives the regulatory approvals to manufacture such products,
it may become dependent on certain suppliers for custom parts.
COMPETITION
Noninvasive Glucose Sensor
With the rapid progress of medical technology, and in spite of
continuing research and development programs, the Company's
developmental products are always subject to the risk of
obsolescence through the introduction by others of new products
or techniques. Management is aware that other research groups
are developing noninvasive glucose sensors, but has limited
knowledge as to the technology used or stage of development of
these devices. There is a risk that those other groups will
complete the development of their devices before the Company
does. To the best knowledge of the Companies, there is no other
company currently producing or marketing noninvasive sensors for
the measurement of blood glucose similar to those being developed
by the Company.
The Noninvasive Glucose Sensor will compete with existing
invasive glucose sensors. Although the Company believes that the
features of the Noninvasive Glucose Sensor, particularly its
convenience and the fact that no blood samples are required, will
compete favorably with existing invasive glucose sensors, there
can be no assurance that the Noninvasive Glucose Sensor will
compete successfully. Most currently available invasive glucose
sensors yield accuracy levels of plus or minus 25% to 30%, range
in price from $80 to $200, not including monthly costs for
disposable supplies and accessories, and are produced and
marketed by eight to ten sizable companies. Those companies
include Miles Laboratories, Inc., Boehringer Mannheim
Diagnostics, and Lifescan (an affiliate of Johnson & Johnson).
Such companies have established marketing and sales forces, and
represent established entities in the industry. Certain of the
Company's competitors (including their corporate or joint venture
partners or affiliates) currently marketing invasive glucose
sensors have substantially greater financial, technical,
marketing and other resources and expertise than 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.
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:
Rio Grande Medical Technology ("Rio Grande"), which is working
with the University of New Mexico, CME Telemetrix, Inc. ("CME"),
Cygnus, Inc. ("Cygnus"), Technical Chemicals and Products, Inc.
("TCPI"); Samsung Fine Chemicals ("SFC") and SpectRX. 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.
Rio Grande, formerly associated with Sandia, is affiliated with
the University of New Mexico, continues to develop its
noninvasive glucose sensor based on infrared spectroscopy and
using near-infrared light. To the best knowledge of the Company,
no submission have been made to the FDA in connection with this
device. CME, a Canadian company is developing a device which
claims to measure glucose noninvasively via a finger receptacle.
Testing has been conducted in Canada and the U.S.; however, no
approval has been received to sell the device in Canada, and no
FDA submission has been made to date. Cygnus has disclosed that
it is developing a "GlucoWatch", which it claims periodically
directs an electrical current into the diabetic in order to
monitor glucose levels. Cygnus, has not yet submitted its
device for FDA scrutiny and, to the best of the Companies'
knowledge, must complete additional clinical trials prior to
applying for FDA approval to market the device. Cygnus' latest
reports indicate that its plans make a submission for FDA
approval have been further delayed until late 1998. TCPI
recently announced that it began clinical studies of its system
to correlate interstitial glucose fluid data with various blood
glucose; although TCPI claims that its technology is noninvasive,
it utilizes electronic charges to penetrate the skin and draw
fluid from the body. SFC, a Korean company, announced in
February that it had developed a hand-held device which the
company claims measures glucose using an electromagnetic radiant
ray (which management believes is a laser similar to the TCPI
technology) to measure glucose. SFC's announcement stated that
marketing would be limited to Korea and other parts of Asia, and
would begin in mid-1988 pending government approvals. SpectRX,
which is funded by Abbott Laboratories, also uses lasers to
penetrate the skin and measure interstitial fluids; like the TCPI
and SFC devices, it claims to be noninvasive; however, body
fluids are drawn from the body via lasers.
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.
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.
BICO 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. 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
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.
BICO's products may also be subject to foreign regulatory
approval prior to any sales.
The FDA's Good Manufacturing Practices for Medical Devices
specifies various requirements for BICO's manufacturing processes
and maintenance of certain records.
Whole-Body Extracorporeal Hyperthermia
HemoCleanse has received FDA approval of its Form 510(k)
Notification in connection with the use of the BioLogic-DT model,
which is used in drug detoxification procedures. However, the
510(k) Notification process, which is intended to be a shorter,
less complex FDA procedure as compared to a full Pre-Market
Approval process, may not be available for the ThermoChem System
model which is used in the hyperthermia project. IDT and
HemoCleanse continuing to hold discussions with the FDA regarding
the number of patients which must be treated with the ThermoChem
System before the FDA will accept an application to market the
delivery system in the U.S., and the such companies have retained
a biostatistician to assist them in making that determination.
The Company believes, based on the federal government's
statements regarding the priority treatment to be afforded to
drugs and procedures in connection with the treatment of HIV and
AIDS, that its FDA application, in whatever form, may receive
expedited review. If either a Pre-Market Approval application or
a 510(k) Notification is approved by the FDA, it would allow IDT
to market the device.
Although the federal government has publicly stated that
experimental drugs and procedures in connection with the
treatment of HIV will receive priority treatment, there can be no
assurances that any future 510(k) Notifications, Pre-Market
Approval applications, or IDEs will obtain FDA approval. Without
FDA approval, the delivery system cannot be used or marketed in
the United States.
Bioremediation
The Company's bioremediation project will be supervised by NETAC,
a private group endorsed and supervised by the EPA and the
Pennsylvania Department of Environmental Resources. In addition,
each state in which the bioremediation products are used will
apply its own environmental regulations to the use and sale of
the products.
HUMAN RESOURCES
As of December 31, 1997, the Company had 147 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, 1997, in addition to BICO's full-time
employees, its subsidiaries IDT had three full-time employees;
Barnacle Ban had eleven full-time employees; Diasense had three
full-time employees; and Petrol Rem had ten full-time employees.
No employees of any of the companies are currently represented by
a collective bargaining unit.
Item 2. Properties
The Company's research and development operations are located in
a 20,000 square foot one-story building at 300 Indian Springs
Road, Indiana, Pennsylvania. This facility contains sufficient
additional space to accommodate the Company's projected
operations through 1998, except for its manufacturing space which
is described below. The building is leased by the Company from
the 300 Indian Springs Road Real Estate Partnership (the
"Partnership"). The lease period is 20 years and runs
concurrently for ten years with a mortgage arranged by the
Partnership at a stated amount of rent. At the end of ten years,
the amount of rent paid by the Company is subject to
renegotiation, based on refinancing of a balloon payment due on
the mortgage, unless the mortgage has been satisfied by the
Partnership. In addition to rent, the Company pays all taxes,
utilities, insurance, and other expenses related to its
operations at that location (See, "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS").
In September 1992, BICO entered into a ten-year lease agreement
with the Indiana County Board of Commissioners for 22,500 square
feet of space which BICO plans to use for the manufacture of the
Noninvasive Glucose Sensor, once developed. The facility,
comprised of 22,500 square feet, has been reconfigured to BICO's
specifications, and the machinery and equipment necessary to
manufacture have been ordered. In addition, the Company has made
arrangements with Indiana County Commerce Park, the location of
the manufacturing facility, for an additional 32,250 square feet
of manufacturing space.
BICO also leases office space at various locations in
Pennsylvania and Maryland for its administrative and sales
offices, as well as manufacturing space for such operations.
Item 3. Legal Proceedings
In May 1996, BICO and Diasense, along with 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.
The Pennsylvania Securities Commission is conducting a private
investigation of BICO and Diasense in connection with sales of
securities. Both companies have cooperated with the
investigation. To the best knowledge of the Companies, no
findings have been made and no orders have been issued.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
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 March 20, 1998 the closing price for
the common stock of the Company as reported by NASDAQ was $.125.
Pursuant to current disclosure guidelines, the following table
sets forth the high and low sales prices for the common stock of
the Company during the calendar periods indicated, through
December 31, 1997, as reported by NASDAQ:
Calendar Year and Quarter High Low
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
Fourth Quarter 2.4375 .656
1997 First Quarter 1.500 .625
Second Quarter 1.000 .3125
Third Quarter .719 .3125
Fourth Quarter .406 .0937
As of December 31, 1997 the Company had approximately 29,000
holders, including those who hold in street name, for its common
stock and no holders of record for its preferred stock.
Nasdaq has revised its requirements for companies listed on its
Small-Cap market. Such requirements, which include a minimum
trading price of $1.00, will limit the Company's option to
continue to trade on Nasdaq.
Employment Agreement Provisions Related to Changes in Control
BICO has entered into agreements (the "Agreements") with Fred E.
Cooper, David L. Purdy, Anthony J. Feola, Glenn Keeling, and two
non-executive officer employees. The Agreements provide that in
the event of a "change of control" of BICO, BICO is required to
issue the following shares of common stock, represented by a
percentage of the outstanding shares of common stock of the
Company immediately after the change in control: five percent
(5%) to Mr. Cooper and Mr. Purdy; four percent (4%) to Mr.
Feola; three percent (3%) to Mr. Keeling; and two percent (2%)
each to the two non-executive officer employees. In general, a
"change of control" is deemed to occur for purposes of the
Agreement: (i) when 20% or more of BICO's outstanding voting
stock is acquired by any person, (ii) when one-third (1/3) or
more of BICO's directors are not Continuing Directors (as defined
in the Agreements), or (iii) when a controlling influence over
the management or policies of BICO is exercised by any person or
by persons acting as a group within the meaning of Section 13(d)
of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") (See, "MANAGEMENT - Employment Agreements").
Item 6. Selected Financial Data
YEARS ENDED DECEMBER 31st
1997 1996 1995 1994 1993
Total Assets $12,981,300 $14,543,991 $9,074,669 $6,375,778 $2,995,334
Long-Term
Obligations $ 2,697,099 $ 2,669,727 $ 175,330 $ 163,201 $ 104,917
Working Capital $ 888,082 $ 1,785,576 $3,188,246 $2,612,884 $1,112,541
Preferred Stock $ 0 $ 0 $ 37,900 $ 54,900 $ 54,900
Net Sales $ 1,155,907 $ 597,592 $ 461,257 $ 184,507 $ 54,000
TOTAL $ 1,426,134 $ 776,727 $ 755,991 $ 481,453 $ 134,329
REVENUES
Warrant $ 4,046,875 $ 9,175,375 $12,523,220 $ 0 $ 0
Extensions
Benefit $ 0 $ 0 $ 0 $ 0 $ 0
(Provision)for
Income Taxes
Net Loss ($30,433,177)($24,045,702)($29,420,345)($11,672,123)($ 7,855,998)
Net Loss per ($ .43)($ .57)($ .84)($ .43)($ .45)
Common Share
Cash Dividends
per share:
Preferred $ 0 $ 0 $ 0 $ 0 $ 0
Common $ 0 $ 0 $ 0 $ 0 $ 0
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following is a summary of the more detailed information set
forth in the financial statements attached hereto. Data from all
year-end periods are from the Company's Audited Financial
Statements.
Forward-Looking Statements
In addition to other sections of this report, the Management's
Discussion and Analysis section also contains the type of forward-
looking statements discussed on page 2 herein. Please refer to
such discussion in connection with the information presented
here.
Liquidity and Capital Resources
Working capital was $888,082 at December 31, 1997, as compared to
$1,785,576 at December 31, 1996, and to $3,188,246 at December
31, 1995. Working Capital fluctuations are due primarily to the
varied capital-raising efforts of the Company and its affiliate
Diasense, which aggregated approximately $22,300,000 in 1997;
$21,600,000 in 1996; and $19,275,000 in 1995, as well as a
decrease in net inventory from $3,340,120 as of December 31,
1996 to $1,834,018 as of December 31, 1997.
Cash decreased from $3,802,874 at December 31, 1996 to $2,759,067
at December 31, 1997, as compared to $3,204,501 at December 31,
1995. These changes were attributable to the following factors.
The Company's sales of its securities raised funds aggregating
$22,600,000 during 1997 ; $21,600,000 during 1996 and
$19,275,000 during 1995. During those periods, the Company's
cash flows used by operating activities aggregated $19,121,752;
$19,972,000 and $16,891,000, respectively. During 1997, such
activities included a $2.1 million increase in inventory
reserves. In addition, the Company recorded a $4 million charge
against operations due to warrant extensions by the Company and
its subsidiary in 1997, with similar charges of approximately $9
million in 1996 and $12.5 million charge in 1995. (See, Note J to
the Financial Statements). The Company's cash flows used by
investing activities aggregated $1.4 million in 1997 as compared
to $1 million in 1996, and $2.7 million in 1995. The primary
difference in such activities was the absence of over $1 million
in notes receivable which was recorded in 1995, but not 1996 or
1997. The Company's other assets increased by $816,000 from 1996
to 1997; such increase was due in large part to an increase in
notes receivable from related parties (See, Note C to the
Financial Statements) and a $300,000 deposit on equipment during
1997.
The Company's current liabilities decreased by $1,635,000 from
1996 to 1997; the decrease was due to the Company's decreased
issuance of convertible debentures as part of its capital-
raising efforts, $3.3 million of which were outstanding as of
December 31, 1997, as compared to $4.6 million of which were
outstanding as of December 31, 1996.
During 1996, the Company incurred $2.6 million 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 $110,000 at 1997 year end (See, Note H to the Financial
Statements).
The Company continued to fund operations mostly from sales of its
securities. During 1997, the Company sold 22,000 shares of its
Series B convertible preferred stock; and issued $20.2 million
in subordinated convertible debentures. All convertible
securities contain mandatory conversion provisions which expire
at various dates during 1998 and require minimum holding periods
prior to conversion.
As of December 31, 1997 and 1996, the conversion price of the debentures
would have been approximately $.146 and $.686 per share, respectively,
based upon a formula which applies a discount to the average market
price for the previous week and determined by the length of the
holding period. As of December 31, 1997 and 1996, the number of
shares issued upon conversion of all outstanding debentures was
approximately 23.9 million and 6.7 million shares, respectively,
which would have reflected discounts of approximately 18% and 17%,
respectively.
Due to the Company's current limited sources of revenue, the
Company plans to seek additional financing which will be used to
finance development of, and to proceed to manufacture, the
Noninvasive Glucose Sensor and to complete the development of its
other projects. No assurances are made as to the availability
of any such financing (See, "BUSINESS").
The Company's products are at various stages of development and
will require additional funding for completion. This paragraph
summarizes the Company's estimates as to the aggregate amounts
needed to complete each project, assuming continued testing and
development is successful. The Company may choose to discontinue
any of its projects at any time if research and development
efforts indicate that continuation would be inadvisable. The
Diasensor_ 1000 has been submitted to the FDA for marketing
approval and the Diasensor_ 2000 is in the pre-clinical trial
stage of development.
The Company currently has a commitment for capital leases on
certain of its capital equipment and future commitments for new
capital expenditures will be required to continue the Company's
efforts in research and development, and to manufacture and
market its existing products and any other products it may
develop.
As of March, 1998, 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 CE mark 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 1997,
BICO and its affiliate Diasense have raised over $100,000,000 in
private and public offerings alone.
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 1995, 1996 and
1997, 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 $168,461, $508,561 and $880,919 1995, 1996 and 1997,
respectively (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. 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.
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, 1997 from
currently available funds, including those expected to be raised
via additional sales of the Company's securities. This estimate
is based, in part, upon the current absence of any extraordinary
technological, regulatory or legal problems. Should such
problems, which could include unanticipated delays resulting from
new developmental hurdles in product development, FDA
requirements, or the loss of a key employee, arise, the Company's
estimates would require re-evaluation. There can be no
assurances that despite the Company's good-faith efforts, its
estimates will lead to accurate results.
The Company's long-term liquidity needs are expected to include
working capital to fund manufacturing expenses for its products
and continued research and development expenses for existing and
future projects. Such needs are expected to be met from
continued FES and IRS Device contract revenues, sales of its
bioremediation products, HotBottom paint, 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 hereinabove, management believes the Company has
sufficient liquidity to meet its projected expenditures on a
short-term basis. Absent additional funding, the Company will
have limited liquidity on a long-term basis. Moreover, many
demands on liquidity, such as technological, regulatory or legal
problems, could cause the Company's liquidity to be inadequate.
At present, the Company does not have any additional sources of
liquidity, including bank lines of credit. Long-term working
capital needs are expected to be met through sales of the
Noninvasive Glucose Sensor, the PRP_ bioremediation product,
HotBottom paint, and other new products. There can be no
assurances that any such products will be successfully marketed
or commercially viable.
Results of Operations
The following seven paragraphs discuss the Results of Operations
of the entire Company based on its consolidated financial
statements. A discussion of the business segments follows.
In 1997, the Company's net sales increased to $1,155,907 from
$597,592 in 1996 and $461,257 in 1995. The increase was due to
an increase in all product sales, including its Petrol Rem and
Barnacle Ban products (See, Note F to the Financial Statements)
Of the total net sales, the Company had $880,919 in implantable
device revenues in 1997 as compared to $508,561 in 1996 and
$168,461 in 1995.
In 1997, 1996 and 1995, the Company received interest income in
the amount of $165,977; $176,478; and $294,734, respectively.
The fluctuation was due to the investment of the Company's liquid
assets (which are composed primarily of funds raised via sales
of securities), the availability of such assets and applicable
interest rates. The Company's other income increased to $104,250
in 1997 from $2,657 in 1996 and $0 in 1995; the increase was due
primarily to amounts due from directors in connection with the
settlement of certain lawsuits.
In 1997, the Company's costs of products sold was $641,331 as
compared to $325,414 in 1996 and $198,542 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 $6,977,590
in 1997, a decrease from $8,742,922 in 1996, and $7,649,678 in
1995. The overall decrease was due to the Company's realignment
of personnel and resources in an effort to obtain a CE Mark for
sale of the Noninvasive Glucose Sensor outside the U.S. (See,
"Business of the Company - Current Status of the Noninvasive
Glucose Sensor").
In 1997, General and Administrative expenses were $12,704,146, an
increase from $8,963,693 in 1996 and $11,117,107 in 1995. The
increase was due, in part, to the allocation of funds to outside
consultants and other advisors to assist the Company in its
efforts to obtain a CE Mark.
During 1997, the Company extended 177,800 warrants originally
granted to certain officers, directors, employees and consultants
in 1992, as compared to similar extension of 351,482 warrants in
1996, and 2,069,500 warrants in 1995. Because the exercise price
of some such warrants ($.25 to $3.50) was lower than the market
price of the common stock at the time of the extensions $604,342
was charged to operations during 1996, as compared to $7,228,220
in 1995. During 1997, no expense was charged to operations since
the market price was lower than of the original warrant exercise
price. In addition, a similar charge of $4,046,875 in 1997;
$8,571,033 in 1996 and $5,295,000 in 1995 was made by the
Company's subsidiary, Diasense (See, "EXECUTIVE COMPENSATION" and
Note J to the Financial Statements).
Interest expense on the Company's outstanding indebtedness was
$315,624 in 1997 as compared to $133,460 in 1996 and $17,048 in
1995. The increase was due to an increase in capital leases and
interest payment on the Company's subordinated debentures.
Segment Discussion
For purposes of accounting disclosure, the Company provides the
following discussion regarding three business segments:
Biomedical devices, which includes the operations of Biocontrol
Technology, Inc. and Diasense, Inc.; Bioremediation, which
includes the operations of Petrol Rem, Inc.; and Marine Paint
Products, which includes the operations of Barnacle Ban
Corporation. More complete financial information on these
segments is set forth in Note F to the accompanying financial
statements.
Biomedical Device Segment. During the year ended December 31,
1997, sales to external customers increased to $880,919 from
$508,561 in 1996 and $168,461 in 1995. These increases were
primarily due to increased sales of the functional electrical
stimulators. Corresponding increases in costs of products goods
sold occurred for the same reason, from $91,859 in 1995 to
$288,537 in 1996 and to $445,843 in 1997.
Bioremediation Segment. During the year ended December 31, 1997,
sales to external customers increased to $138,362 from $47,625 in
1996. Both years' sales to external customers decreased from
$215,211 in 1995. The decrease from 1995 to 1996 was due to
different marketing targets and a decrease in the orders for
products. The increase from 1996 to 1997 was due to increased
sales of the Bio-Sok to boating suppliers and users through trade
shows and marketing exposure. Costs of products sold fluctuated
due to the same factors, from $53,813 in 1995 to $16,092 in 1996
and $88,178 in 1997. The relatively higher costs of products
sold in 1997 was due to the higher cost of producing the Bio-Sok
as opposed to other bioremediation products.
Marine Paint Products Segment. Sales to external customers
increased to $136,624 in 1997 from $41,406 in 1996, which was a
decrease from $77,585 in 1995. The higher sales in 1995 and 1997
were due to a focus on marine craft, rather than municipal,
users, which was the focus in 1996. Costs of products sold
reflect the same impact, a decrease from 1995's $52,870 to 1996's
$20,785 and an increase to 1997's $107,310.
Income Taxes
Due to the Company's net operating loss carried forward from
previous years and its current year losses, no federal or state
income taxes were required to be paid for the years 1987 through
1997. As of December 31, 1997, the Company and its subsidiaries,
except for Diasense and Petrol Rem, had available net operating
loss carryforwards for federal income tax purposes of
approximately $63,260,000, which expire during the years 1998
through 2012 (See, Note K to the Financial Statements).
Supplemental Financial Information
As of March 25, 1998, the Company has outstanding approximately
$5,020,000 in subordinated convertible debentures with expiration
dates ranging from December 29, 1998 through March 25, 1999.
On February 2, 1998, BICO's shareholders approved an increase in
the number of authorized shares of common stock from 150,000,000
to 300,000,000 at a Special Shareholders Meeting convened for
that purpose.
Effective March 4, 1998, the Company acquired a majority interest
in International Chemical Technologies, Inc. ("ICTI"), a company
which produces metal-coating products (See, Note O to the
Financial Statements).
Item 8. Financial Statements and Supplementary Data
The Company's financial statements appear on pages F-1 through
F-22 of this report.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Effective January 25, 1995, upon a determination by the Board of
Directors, the Company engaged Thompson Dugan, P.C. as its
independent auditors and accountants to replace Grant Thornton
LLP. Thompson Dugan, P.C. also serves as the independent
auditors and accountants for Diasense, replacing Grant Thornton
LLP. Neither company had any disagreements with Grant Thornton
LLP or Thompson Dugan, P.C. on any matter of accounting
principles or practices, financial statement disclosure or
auditing scope or procedure.
Item 10. Directors and Executive Officers of the Registrant
The directors and executive officers of the Company as of
December 31, 1997 were as follows:
Director
Name Age Since Position
David L. Purdy 69 1972 President, Chaairman of the Board,
Treasurer, Director
Fred. E. Cooper 52 1989 Chief Executive Officer, Executive Vice
President, Director
Anthony J. Feola 50 1990 Senior Vice President, Director
Glenn Keeling 47 1991 Vice President, Director
_________________________________
DAVID L. PURDY, 69 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.
FRED E. COOPER, 52, is the Chief Executive Officer, Executive
Vice President and a director of the Company; he devotes
approximately 60% of his time to the business of the Company, and
40% to 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 and
Coraflex.
ANTHONY J. FEOLA, 50, 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, Petrol Rem and Barnacle Ban.
GLENN KEELING, 47, joined the Board of Directors in April 1991.
Mr. Keeling currently is a full-time employee of BICO in the
position of Vice President of Marketing; his primary
responsibilities during 1994 through 1997 have been the
management and operation of IDT's Whole-Body Extracorporeal
Hyperthermia project. From 1976 through 1991, he was a Vice
President in charge of new business development at Equitable
Financial Management, Inc., a regional equipment lessor. His
responsibilities included initial contacts with banks and
investment firms to open new lines of business referrals in
connection with financing large equipment transactions. He is
also President and a director of IDT.
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.
In February 1998, the Company appointed two new members to its
Board of Directors: Stan Cottrell and Richard Bourret. Both
Mssrs. Cottrell and Bourret are outside directors.
Item 11. Executive Compensation
The following table sets forth information concerning the annual
and long-term compensation for services in all capacities to the
Company for the fiscal years ended December 31, 1997, 1996 and
1995, of those persons who were, at December 31, 1997 (i) the
Chief Executive Officer, and (ii) the other most highly
compensated executive officers of the Company whose remuneration
exceeded $100,000 (the "Named Executives").
SUMMARY COMPENSATION TABLE
==============================================================================
Annual Compensation | (1)Long Term Compensation
- ------------------------------------------------------------------------------
| Awards
Name and | Securities
Principal (2) | Underlying (2) All other
Position Year Salary($) Bonus($) Other($) | Warrants(#) Compensation
==============================================================================
David L. |
Purdy , 1997 $241,667 $0 $0 | 0 $0
President, 1996 $400,000 $0 $0 | 0 $0
Treasurer (4) 1995 $400,000 $0 $0 | 820,000 (3) $0
- ------------------------------------------------------------------------------
Fred E. 1997 $592,000 $0 $0 | 0 $0
Cooper, 1996 $592,000 $0 $0 | 0 $0
CEO (5) 1995 $480,000 $0 $0 | 575,000 (3) $0
- ------------------------------------------------------------------------------
Anthony J. 1997 $300,000 $0 $0 | 0 $0
Feola , Sr. 1996 $300,000 $0 $0 | 350,000 (3) $0
Vice Pres.(6) 1995 $250,000 $93,125 $0 | 200,000 (3) $0
- ------------------------------------------------------------------------------
Glenn 1997 $200,000 $0 $0 | 0 $0
Keeling, VP 1996 $200,000 $0 $0 | 100,000 (8) $0
(7) 1995 $175,000 $0 $0 | 0 $0
==============================================================================
(1) The Company does not currently have a Long-Term Incentive
Plan ("LTIP"), and no payouts were made pursuant to any LTIP
during the years 1997, 1996, or 1995. The Company did not
award any restricted stock to the Named Executives during
any year, including the years 1997, 1996 or 1995. The
Company did not award any warrants, options or Stock
Appreciation Rights ("SARs") to the Named Executives during
the years ended December 31, 1997, 1996 or 1995; however,
the Company did extend warrants owned by the Named
Executives, which would have expired during 1995 and 1996
(See Note 3, below). The Company has no retirement, pension
or profit-sharing programs for the benefit of its directors,
officers or other employees. The Company currently has key-
man life insurance for David L. Purdy and Fred E. Cooper in
the amount of $1,000,000 each.
(2) During the year ended December 31, 1997, the Named
Executives received medical benefits under the Company's
group insurance policy, including disability and life
insurance benefits. The aggregate amount of all perquisite
compensation was less than 10% of the total annual salary
and bonus reported for each Named Executive.
(3) During 1995 and 1996, the Company extended warrants
previously issued to the Named Executives which would have
otherwise expired. Although the extensions were in
connection with warrants already held by the Named
Executives, they are shown in the table set forth above as
"awards" for executive compensation disclosure purposes
because at the time of the extension, the exercise price of
the warrants (which remained unchanged) was less than the
"market price" of the common stock.
(4) In November, 1994, Mr. Purdy's employment agreement was
renegotiated to provide for an annual salary of $250,000
effective November 1, 1994 through October 31, 1999. All
other terms of the contract remained substantially the same
(See, "Employment Agreements"). During 1995, Mr. Purdy's
salary was increased by $50,000. In 1997, 1996 and 1995,
Mr. Purdy was paid $87,500; $100,000 and $100,000 by
Diasense. Mr. Purdy is paid a salary by the Company based
upon his employment contract. Amounts paid to Mr. Purdy by
Diasense are determined by the Diasense Board of Directors
based upon services performed on its behalf.
(5) In November, 1994, Mr. Cooper's employment agreement was
renegotiated to provide for an annual salary of $250,000
effective November 1, 1994 through October 31, 1999. All
other terms of the contract remained substantially the same
(See, "Employment Agreements"). In addition, in 1997, 1996
and 1995, Mr. Cooper was paid $96,000; $96,000; and $40,000
respectively by both Petrol Rem and IDT, both of which are
subsidiaries of BICO. In 1997, 1996, and 1995, Mr. Cooper
was paid $150,000 in salary by Diasense. Mr. Cooper is paid
a salary by the Company based upon his employment agreement.
Amounts paid to Mr. Cooper by Diasense, Petrol Rem and IDT
are determined by the Boards of Directors of those companies
based upon services performed on their behalf.
(6) In April, 1994, Mr. Feola's employment agreement with
Diasense was assigned to BICO when he left Diasense to
rejoin BICO as its Senior Vice President. In November,
1994, Mr. Feola's employment agreement was renegotiated,
provides for an annual salary of $200,000 and is effective
November 1, 1994 through October 31, 1999. All other terms
of the contract remained substantially the same (See,
"Employment Agreements"). During 1996 and 1995, Mr. Feola's
salary was increased by $50,000 per year.
(7) In November, 1994, Mr. Keeling entered into an employment
agreement with the Company which provides for an annual
salary of $150,000 effective November 1, 1994 through
October 31, 1999 (See, "Employment Agreements"). During
1996 and 1995, Mr. Keeling's salary was increased by $25,000
per year.
(8) On August 26, 1996, Mr. Keeling was granted warrants to
purchase 100,000 shares of the Company's common stock at a
price of $1.48 per share (the market price as of that date)
until August 26, 2001.
Option/Warrant/SAR Grants in Last Fiscal Year
No options, warrants or SARs were granted or extended to the Named Executives
during 1997.
AGGREGATED OPTION/WARRANT/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL
YEAR-END OPTION/WARRANT/SAR VALUE TABLE
=========================================================================
Number of Value of
Securities Unexercised
Underlying In-the-Money
Unexercised Options/SARs
Options/SARs 12/31/97 ($)
at 12/31/97 (#)
Shares Value
Acquired on Realized ($) Exercisable Exercisable/
Exercise (2) Unexercisable(3) Unexercisable (4)
Name (#)(1)
- -------------------------------------------------------------------------------
David L. 52,800 $ 8,239 767,200 $ 0
Purdy (5) (6) (7) (13)
- -------------------------------------------------------------------------------
Fred E. 100,000 $33,440 300,000 $ 0
Cooper (8) (9) (10) (13)
- -------------------------------------------------------------------------------
Anthony J. 0 $ 0 550,000 $ 0
Feola (11) (13)
- -------------------------------------------------------------------------------
Glenn 0 $ 0 100,000 $ 0
Keeling (12) (13)
===============================================================================
(1) This figure represents the number of shares of common stock
acquired by each named executive officer upon the exercise
of warrants.
(2) The value realized of the warrants exercised was computed by
determining the spread between the market value of the
underlying securities at the time of exercise minus the
exercise price of the warrant.
(3) All warrants held by the Named Executives are currently
exercisable.
(4) The value of unexercised warrants was computed by
subtracting the exercise price of the outstanding warrants
from the closing sales price of the Company's common stock
on December 31, 1997 as reported by Nasdaq ($.1875).
(5) During the year ended December 31, 1997, Mr. Purdy exercised
warrants to purchase 52,800 shares of common stock at $.25
per share.
(6) The closing sales price as reported by Nasdaq on May 1,
1997, the date of the warrant exercise set forth in note (5)
was $.406 per share.
(7) Includes warrants to purchase: 187,200 shares of common
stock at $.25 per share until April 24, 1995 (extended until
April 24, 1998); 500,000 shares of common stock at $.25 per
share until May 1, 1995 (extended until May 1, 1998); and
80,000 shares of common stock at $.33 per share until June
29, 1995 (extended until June 29, 1998) (See, "Warrants").
(8) During year ended December 31, 1997, Mr. Cooper exercised
warrants to purchase 100,000 shares of common stock at $.25
per share.
(9) The closing sales price as reported by Nasdaq on April 21,
1997, the date of the warrant exercise set forth in note
(8), was $.594.
(10) Includes warrants to purchase: 300,000 shares of common
stock at $.25 per share until May 1, 1995 (extended until
May 1, 1998) (See, "Warrants").
(11) Includes warrants to purchase: 100,000 shares of common
stock at $.25 per share until May 1, 1995 (extended until
May 1, 1998); 100,000 shares of common stock at $.25 per
share until November 26, 1995 (extended until November 26,
1998); and 350,000 shares of common stock at $.50 per share
until October 11, 1996 (extended until October 11, 1999)
(See, "Warrants").
(12) Includes warrants to purchase: 100,000 shares of common
stock at $1.48 per share until August 26, 2001.
(13) Because the market price as of December 31, 1997 was less
than the exercise price of the warrants, such warrants were
not "in-the-money".
Employment Agreements
BICO has entered into employment agreements (the "Agreements")
with its Named Executives Fred E. Cooper, David L. Purdy, Anthony
J. Feola and Glenn Keeling effective November 1, 1994, pursuant
to which they are currently entitled to receive annual salaries
of $250,000, $300,000, $300,000 and $200,000 respectively, which
are subject to review and adjustment. The initial term of the
Agreements with Messrs. Cooper and Purdy expires on October 31,
1999, and continues thereafter for additional three-year terms
unless any of the parties give proper notice of non-renewal. The
initial term of the Agreements with Messrs. Feola and Keeling
expires on October 31, 1999, and continues thereafter for
additional two-year terms unless either of the parties give
proper notice of non-renewal. The Agreements also provide that
in the event of a "change of control" of BICO, BICO is required
to issue the following shares of common stock, represented by a
percentage of the outstanding shares of common stock of the
Company immediately after the change in control: five percent
(5%) to Mr. Cooper and Mr. Purdy; four percent (4%) to Mr.
Feola; and three percent (3%) to Mr. Keeling. In general, a
"change of control" is deemed to occur for purposes of the
Agreements (i) when 20% or more of BICO's outstanding voting
stock is acquired by any person, (ii) when one-third (1/3) or
more of BICO's directors are not Continuing Directors (as defined
in the Agreement), or (iii) when a controlling influence over the
management or policies of BICO is exercised by any person or by
persons acting as a group within the meaning of Section 13(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange
Act").
In addition, in the event of a change in control within the term
of the Agreements or within one year thereafter, Messrs. Cooper,
Purdy, Feola and Keeling are entitled to receive severance
payments in amounts equal to: 100% of their most recent annual
salary for the first three years following termination; 50% of
their most recent annual salary for the next two years; and 25%
of their most recent salary for the next five years. BICO is
also required to continue medical insurance coverage for Messrs.
Cooper, Purdy, Feola and Keeling and their families during such
periods. Such severance payments will terminate in the event of
the employee's death.
In the event that either Mr. Purdy or Mr. Cooper becomes
disabled, as defined in their Agreements, he will be entitled to
the following payments, in lieu of salary, such payments to be
reduced by any amount paid directly to him pursuant to a
disability insurance policy provided by the Company or its
affiliates: 100% of his most recent annual salary for the first
three years; and 70% of his most recent salary for the next two
years. In the event that either Mr. Feola or Mr. Keeling becomes
disabled, as defined in their Agreements, he will be entitled to
the following payments, in lieu of salary, such payments to be
reduced by any amount paid directly to him pursuant to a
disability insurance policy provided by the Company or its
affiliates: 100% of his most recent annual salary for the first
year; and 70% of his most recent salary for the second year.
The Agreements also generally restrict the disclosure of certain
confidential information obtained by Messrs. Cooper, Purdy, Feola
and Keeling during the term of the Agreements and restricts them
from competing with BICO for a eriod of one year in specified
states following the expiration or termination of the Agreements.
In addition to the Employment Agreements described above, BICO
also entered into employment agreements with two of its non-
executive officer employees effective November 1, 1994. The
terms of such agreements are similar to those described for
Messrs. Feola and Keeling above, with the following amendments:
the term of one agreement is from November 1, 1994 through
October 31, 2002, and is renewable for successive two-year terms;
the term of the other agreement is from November 1, 1994 through
October 31, 1999, and is renewable for successive two-year terms;
in the event of a "change in control", BICO is required to issue
both employees shares of common stock equal to two percent (2%)
of the outstanding shares of the common stock of the Company
immediately after the change in control.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth the indicated information as of
December 31, 1997 with respect to each person who is known by the
Company to be the beneficial owner of more than five percent (5%)
of the outstanding common stock, each director of the Company,
and all directors and executive officers of the Company as a
group. The table excludes disclosure of entities such as Cede &
Co. and other companies which would reflect the ownership of
entities who hold stock on behalf of shareholders.
As of December 31, 1997, there were 138,583,978 shares of the
Company's common stock outstanding. The first column sets forth
the common stock currently owned by each person or group,
excluding currently exercisable warrants for the purchase of
common stock. The second column sets forth the percentage of the
total number of shares of common stock outstanding as of December
31, 1997 owned by each person or group, excluding exercisable
warrants. The third column sets forth the total number of shares
of common stock which each named person or group has the right to
acquire, through the exercise of warrants, within sixty (60)
days, plus common stock currently owned. The fourth column sets
forth the percentage of the total number of shares of common
stock outstanding as of December 31, 1997 which would be owned by
each named person or group upon the exercise of all of the
warrants held by such person or group together with common stock
currently owned, as set forth in the third column. Except as
otherwise indicated, each person has the sole power to vote and
dispose of each of the shares listed in the columns opposite his
name.
Amount and Nature Percent of
Name and Address of of Beneficial Percent of Ownership with Class with
Beneficial Owner Ownership(1) Class (2) Warrants (3) Warrants(4)
David L. Purdy (5) 240,140 * 1,007,340(6) *
300 Indian Springs Road
Indiana, PA 15701
Fred E. Cooper 776,200 * 1,076,200(7) *
Building 2500, 2nd Floor
2275 Swallow Hill Rd.
Pittsburgh, PA 15220
Anthony J. Feola 354,000 * 904,000(8) *
Building 2500, 2nd Floor
2275 Swallow Hill Rd.
Pittsburgh, PA 15220
Glenn Keeling 138,500 * 238,500(9) *
200 Julrich Drive
McMurray, PA 15317
All directors and 1,508,840 1.1% 3,226,040(10) 2.3%
executive officers
as a group (4 persons)
* Less than one percent
________________________
(1) Excludes currently exercisable warrants set forth in the
third column and detailed in the footnotes below.
(2) Represents current common stock owned by each person, as set
forth in the first column, excluding currently exercisable
warrants, as a percentage of the total number of shares of
common stock outstanding as of December 31, 1997.
(3) Includes ownership of all shares of common stock which each
named person or group has the right to acquire, through the
exercise of warrants, within sixty (60) days, together with
the common stock currently owned.
(4) Represents total number of shares of common stock owned by
each person, as set forth in the third column, which each
named person or group has the right to acquire, through the
exercise of warrants within sixty (60) days, together with
common stock currently owned, as a percentage of the total
number of shares of common stock outstanding as of December
31, 1997. For computation purposes, the total number of
shares of common stock outstanding as of December 31, 1997
has been increased by the number of additional shares which
would be outstanding if the person or group owned the number
of shares set forth in the third column.
(5) Does not include shares held by Mr. Purdy's spouse or adult
children. Mr. Purdy disclaims any beneficial interest to
shares held by members of his family.
(6) Includes currently exercisable warrants to purchase the
following: 187,200 shares of common stock at $.25 per share
until April 24, 1995 (extended until April 24, 1998); 80,000
shares of common stock at $.33 per share until June 29, 1995
(extended until June 29, 1998); and 500,000 shares of common
stock at $.25 per share until May 1, 1995 (extended until
May 1, 1998) pursuant to Mr. Purdy's previous employment
agreement. In addition, Mr. Purdy is entitled to certain
shares of Common Stock upon a change of control of BICO as
defined in his employment agreement (See, "Employment
Agreements").
(7) Includes currently exercisable warrants to purchase the
following: 300,000 shares of common stock at $.25 per share
until May 1, 1995 (extended until May 1, 1998) pursuant to
Mr. Cooper's previous employment agreement. In addition, Mr.
Cooper is entitled to certain shares of Common Stock upon a
change of control of BICO as defined in his employment
agreement (See, "Employment Agreements").
(8) Includes currently exercisable warrants to purchase the
following: 100,000 shares of common stock at $.25 per
share until November 26, 1995 (extended until November 26,
1998); 100,000 shares of common stock at $.25 per share
until May 1, 1995 (extended until May 1, 1998) pursuant to
Mr. Feola's previous employment agreement; and 350,000
shares of common stock at $.50 per share until October 11,
1996 (extended until October 11, 1999). In addition, Mr.
Feola is entitled to certain shares of Common Stock upon a
change of control of BICO as defined in his employment
agreement (See, "Employment Agreements").
(9) Includes currently exercisable warrants to purchase 100,000
shares of common stock at $1.48 per share until August 26,
2001. In addition, Mr. Keeling is entitled to certain
shares of Common Stock upon a change of control of BICO as
defined in his employment agreement (See, "Employment
Agreements").
(10) Includes shares of common stock, including stock currently
owned, available under currently exercisable warrants as set
forth above.
Item 13. Certain Relationships and Related Transactions
The Company and its affiliates share common officers and
directors. In addition, BICO and Diasense have entered into
several intercompany agreements including a Purchase Agreement, a
Research and Development Agreement and a Manufacturing Agreement,
which are summarized herein. Management believes that it was in
the best interest of the Company to enter into such agreements
and that the transactions were based upon terms as fair as those
which may have been available in comparable transactions with
third parties. However, no unaffiliated third party was retained
to determine independently the fairness of such transactions.
The Company's policy concerning related party transactions
requires the approval of a majority of the disinterested
directors of both the corporations involved, if applicable.
Employment Relationships
The Board of Directors of the Company approved employment
agreements on November 1, 1994 for its officers, David L. Purdy,
Fred E. Cooper, Anthony J. Feola and Glenn Keeling (See
"Employment Agreements").
David L. Purdy, President, Treasurer and a director of the
Company, is a director of Diasense and Coraflex. He is also the
chairman and Chief Scientist of Diasense, and the President and
Treasurer of Coraflex. Mr. Purdy devotes 60% of his time to
BICO, and 40% to Diasense. In addition to his salary paid by
BICO, Mr. Purdy was paid $87,500 and $100,000 by Diasense in 1997
and 1996, respectively. Fred E. Cooper, Chief Executive Officer,
Executive Vice President and a director of the Company, is a
director of Diasense, Coraflex, Petrol Rem, and Barnacle Ban.
He is also the President of Diasense, and Barnacle Ban. Mr.
Cooper devotes approximately 60% of his time to BICO and 40% to
Diasense. In addition to his salary and bonus paid by BICO, he
was paid $150,000 by Diasense in 1996 and 1997. Anthony J.
Feola, Senior Vice President and a director of the Company, is
also a director of Diasense, Coraflex, Petrol Rem, and Barnacle
Ban. Glenn Keeling, Vice President and a director of the
Company, was employed on January 1, 1992 as BICO's manager of
product development. Mr. Keeling is also the President and a
director of IDT. Gary Keeling, the brother of Glenn Keeling,
resigned as an officer and director of Diasense in August, 1997.
Property
Three of the Company's current executive officers and/or
directors and two former directors of the Company are members of
the nine-member 300 Indian Springs Road Real Estate Partnership
(the "Partnership") which in July 1990, purchased the Company's
real estate in Indiana, Pennsylvania, and each has personally
guaranteed the payment of lease obligations to the bank providing
the funding. The five members of the Partnership who are also
current or former officers and/or directors of the Company, David
L. Purdy, Fred E. Cooper, Glenn Keeling, Jack H. Onorato and C.
Terry Adkins, each received warrants on June 29, 1990 to purchase
100,000 shares of the Company's common stock at an exercise price
of $.33 per share until June 29, 1995 (those warrants still
outstanding as of the original expiration date were extended
until June 29, 1998). Mr. Adkins, who was a director at the time
of the transaction, resigned from the Board of Directors on March
30, 1992, and is currently an officer and director of Diasense.
Mr. Keeling, who was not a director at the time of the
transaction, joined the Board of Directors on May 3, 1991. Mr.
Onorato, who was not a director at the time of the transaction,
was a BICO director from September 1992 until April 1994.
In all instances where warrants were issued in connection with
the transactions set forth above, the exercise price of the
warrants was equal to or above the current quoted market price of
the Company's common stock on the date of issuance.
In April 1992, Diasense purchased an office condominium located
at the Bourse Office Park, Virginia Manor, Building 2500, Second
Floor, Pittsburgh, Pennsylvania 15220 for $190,000. The Company
has entered into a lease with Diasense and pays rent in the
amount of $3,544 per month, plus one-half of the utilities.
Warrants
The following paragraphs, along with the notes to the financial
statements, include disclosure of the warrants which were granted
to executive officers and directors of the Company from 1995
through 1997. These warrants were accounted for in accordance
with Accounting Principles Board Opinion 25 (based on the spread,
if any, between the exercise price and the quoted market price of
the stock on the date that the warrants were granted). No value
was recorded for these warrants since they were all granted at
exercise prices which were equal to or above the current quoted
market price of the stock on the date issued (See, Note J to the
Financial Statements). In 1995 and 1996, the Company extended
warrants granted in 1990 and 1991, which were scheduled to expire
in 1995 and 1996, until 1998-2000. Because the exercise price of
the warrants, which remained unchanged, was less than the market
price of the common stock on the dates of the extensions, charges
were made against operations (See, "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS", and
Note J to the Financial Statements).
On August 26, 1996, the Board of Directors approved the granting
of warrants to purchase 100,000 shares of common stock at $1.48
per share to Glenn Keeling, an officer and director of the
Company.
Loans
On October 1, 1990, the Board of Directors approved a $75,000
loan from the Company to Fred E. Cooper. Mr. Cooper signed a
promissory note promising to pay the principal amount plus twelve
percent (12%) simple interest. Mr. Cooper repaid $66,500 of the
$75,000 principal balance during 1991. During 1991, the Company
granted loans to Fred E. Cooper in the aggregate amount of
$57,400. Mr. Cooper signed promissory notes promising to pay the
principal amounts upon demand plus ten percent (10%) simple
interest. In January 1992, the Company granted a loan to Fred E.
Cooper in the amount of $25,000. Mr. Cooper signed a promissory
note promising to pay the principal amount upon demand plus ten
percent (10%) simple interest. In 1997, the Companies granted
loans to Fred E. Cooper aggregating $158,000; Mr. Cooper signed
promissory notes promising to pay the principal amounts upon
demand plus 8.25% simple interest. In 1998, the Company granted
loans to Fred E. Cooper aggregating $275,000; Mr. Cooper signed
a promissory note promising to pay the principal amount upon
demand plus 8.25% simple interest. Except for the joint
liability set forth below, the aggregate balance of the loans as
of March 15, 1998, including accrued interest, was $597,636.
In November 1997, the Companies granted a loan to Anthony J.
Feola in the amount of $50,000. Mr. Feola signed a promissory
note promising to pay the principal amount upon demand plus 8.25%
simple interest. In February 1998, the Company granted a loan to
Anthony J. Feola in the amount of $185,000. Mr. Feola signed a
promissory note promising to pay the principal upon demand plus
8.25% simple interest. Except for the joint liability set forth
below, the aggregate balance of the loans as of March 15, 1998,
including accrued interest, was $237,762.
In December 1991, the Company granted a loan to Glenn Keeling in
the amount of $5,000. Mr. Keeling signed a Promissory Note
promising to pay the principal amount upon demand plus ten
percent (10%) simple interest. In December 1996, the Company
granted a loan to Glenn Keeling in the amount of $50,000. Mr.
Keeling signed a promissory note promising to pay the principal
amounts upon demand plus 8.25% simple interest. In November,
1997, the Company granted a loan to Glenn Keeling in the amount
of $20,000. Mr. Keeling signed a promissory note promising to
pay the principal upon demand plus 8.25% simple interest. In
February 1998, the Company granted a loan to Glenn Keeling in the
amount of $190,000. Mr. Keeling signed a promissory note
promising to pay the principal upon demand plus 8.25% simple
interest. Except for the joint liability set forth below, the
aggregate balance of the loans as of March 15, 1998, including
accrued interest, was $275,310.
In September 1995, the Company granted a loan in the amount of
$250,000 to Allegheny Food Services in the form of a one-year
renewable note bearing interest at prime rate as reported by the
Wall Street Journal plus one percent (1%). Interest payments
have been made on the note, and as of December 31, 1997, the
balance was $250,000. Joseph Kondisko, a former director of
Diasense, is a principal owner of Allegheny Food Services.
In 1997, the Company paid $35,000 in connection with the
settlement of a lawsuit. The payment was secured with a loan
executed jointly by all of the directors: Fred E. Cooper, David
L. Purdy, Anthony J. Feola and Glenn Keeling. The balance of the
loan as of December 31, 1997 and March 20, 1998 was $35,000.
Each of the loans made to officers or directors and their
affiliates was made for a bona fide business purpose. All future
loans to officers, directors and their affiliates will be made
for bona fide business purposes only.
Intercompany Agreements
Management of the Company believes that the agreements between
BICO and Diasense, which are summarized below, were based upon
terms which were as favorable as those which may have been
available in comparable transactions with third parties. However
no unaffiliated third party was retained to determine
independently the fairness of such transactions.
License and Marketing Agreement. Diasense acquired the exclusive
marketing rights for the Noninvasive Glucose Sensor and related
products and services from BICO in August 1989 in exchange for
8,000,000 shares of its common stock. That agreement was
canceled pursuant to a Cancellation Agreement dated November 18,
1991, and superseded by a Purchase Agreement dated November 18,
1991. The Cancellation Agreement provides that BICO will retain
the 8,000,000 shares of Diasense common stock which BICO received
pursuant to the License and Marketing Agreement.
Purchase Agreement. BICO and Diasense entered into a Purchase
Agreement dated November 18, 1991 whereby BICO conveyed to
Diasense its entire right, title and interest in the Noninvasive
Glucose Sensor and its development, including its extensive
knowledge, technology and proprietary information. Such
conveyance includes BICO's patent received in December 1991
(See, Report to Shareholders - "Business").
In consideration of the conveyance of its entire right in the
Noninvasive Glucose Sensor and its development, BICO received
$2,000,000. In addition, Diasense may endeavor, at its own
expense, to obtain patents on other inventions relating to the
Noninvasive Glucose Sensor. Diasense also guaranteed BICO the
right to use such patented technology in the development of
BICO's proposed implantable closed-loop system, a related system
in the early stages of development.
In December 1992, BICO and Diasense executed an amendment to the
Purchase Agreement which clarified terms of the Purchase
Agreement. The amendment defines "Sensors" to include all
devices for the noninvasive detection of analytes in mammals or
in other biological materials. In addition, the amendment
provides for a royalty to be paid to Diasense in connection with
any sales by BICO of its proposed closed-loop system.
Research and Development ("R&D") Agreement. Diasense and BICO
entered into an agreement dated January 20, 1992 in connection
with the research and development of the Noninvasive Glucose
Sensor. Pursuant to the agreement, BICO will continue the
development of the Noninvasive Glucose Sensor, including the
fabrication of prototypes, the performance of clinical trials,
and the submission to the FDA of all necessary applications in
order to obtain market approval for the Noninvasive Glucose
Sensor. BICO will also manufacture the models of the Noninvasive
Glucose Sensor to be delivered to Diasense for sale (See,
"Manufacturing Agreement"). Upon the delivery of the completed
models, the research and development phase of the Noninvasive
Glucose Sensor will be deemed complete.
Diasense has agreed to pay BICO $100,000 per month for indirect
costs beginning April 1, 1992, during the 15 year term of the
agreement, plus all direct costs, including labor. BICO also
received a first right of refusal for any program undertaken to
develop, refine or improve the Noninvasive Glucose Sensor, and
for the development of other related products. In July 1995,
BICO and Diasense agreed to suspend billings, accruals of amounts
due and payments pursuant to the R&D Agreement pending the FDA's
review of the 510(k) Notification.
Manufacturing Agreement. BICO and Diasense entered into an
agreement dated January 20, 1992, whereby BICO will act as the
exclusive manufacturer of the Noninvasive Glucose Sensor and
other related products. Diasense will provide BICO with purchase
orders for the products and will endeavor to provide projections
of future quantities needed. The original Manufacturing
Agreement called for the products to be manufactured and sold at
a price to be determined in accordance with the following
formula: Cost of Goods (including actual or 275% of overhead,
whichever is lower) plus a fee of 30% of Cost of Goods. In July
1994, the formula was amended to be as follows: Costs of Goods
Sold (defined as BICO's aggregate cost of materials, labor and
associated manufacturing overhead) + a fee equal to one third
(1/3) of the difference between the Cost of Goods Sold and
Diasense's sales price of each Sensor. Diasense's sales price of
each Sensor is defined as the price paid by any purchaser,
whether retail or wholesale, directly to Diasense for each
Sensor. Subject to certain restrictions, BICO may assign its
manufacturing rights to a subcontractor with Diasense's written
approval. The term of the agreement is fifteen years.
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) 1. Financial Statements
The financial statements, together with the report thereon of the
Company's independent accountants, are included in this report on
the pages listed below.
Financial Statements Page
Report of Independent Certified Public Accountants
Thompson Dugan, P.C. F-1
Consolidated Balance Sheets
December 31, 1997 and 1996 F-2
Consolidated Statements of Operations
for the years ended December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Stockholders' Equity
for the years ended December 31, 1997, 1996, 1995 and 1994 F-5
Consolidated Statements of Cash Flows
for the years ended December 31, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995 F-8
2. Exhibits:
(b) Reports on Form 8-K
The Company filed a Form 8-K report dated April 7, 1997.
The items listed were Item 5, Other Events; and Item 7(c),
Exhibits.
The Company filed a Form 8-K report dated April 14, 1997.
The items listed were Item 5, Other Events; and Item 7(c),
Exhibits.
The Company filed a Form 8-K report dated April 24, 1997.
The items listed were Item 5, Other Events; and Item 7(c),
Exhibits.
The Company filed a Form 8-K report dated May 2, 1997. The
items listed were Item 5, Other Events; and Item 7(c),
Exhibits.
The Company filed a Form 8-K report dated May 8, 1997. The
items listed were Item 5, Other Events; and Item 7(c),
Exhibits.
The Company filed a Form 8-K report dated May 14, 1997. The
items listed were Item 5, Other Events; and Item 7(c),
Exhibits.
The Company filed a Form 8-K report dated May 21, 1997. The
items listed were Item 5, Other Events; and Item 7(c),
Exhibits.
The Company filed a Form 8-K report dated June 3, 1997. The
items listed were Item 5, Other Events; and Item 7(c),
Exhibits.
The Company filed a Form 8-K report dated June 18, 1997.
The items listed were Item 5, Other Events; and Item 7(c),
Exhibits.
The Company filed a Form 8-K report dated July 15, 1997.
The items listed were Item 5, Other Events, and Item 7(c),
Exhibits.
The Company filed a Form 8-K report dated July 17, 1997.
The items listed were Item 5, Other Events; and Item 7(c),
Exhibits.
The Company filed a Form 8-K report dated July 23, 1997.
The items listed were Item 5, Other Events; and Item 7(c),
Exhibits.
The Company filed a Form 8-K report dated August 12, 1997.
The items listed were Item 5, Other Events; and Item 7(c),
Exhibits.
The Company filed a Form 8-K report dated August 19, 1997.
The items listed were Item 5, Other Events; and Item 7(c),
Exhibits.
The Company filed a Form 8-K report dated August 26, 1997.
The item listed was Item 5, Other Events.
The Company filed a Form 8-K report dated September 11,
1997. The items listed were Item 5, Other Events; and Item
7(c), Exhibits.
The Company filed a Form 8-K report dated September 15,
1997. The items listed were Item 5, Other Events; and Item
7(c), Exhibits.
The Company filed a Form 8-K report dated September 22,
1997. The item listed was Item 5, Other Events.
The Company filed a Form 8-K report dated September 30,
1997. The item listed was Item 5, Other Events; and Item
7(c), Exhibits.
The Company filed a Form 8-K report dated October 31, 1997.
The items listed were Item 5, Other Events; and Item 7(c),
Exhibits.
The Company filed a Form 8-K report dated October 31, 1997.
The items listed were Item 5, Other Events; and Item 7(c),
Exhibits.
The Company filed a Form 8-K report dated November 3, 1997.
The items listed were Item 5, Other Events; and Item 7(c),
Exhibits.
The Company filed a Form 8-K report dated November 4, 1997.
The items listed were Item 5, Other Events; and Item 7(c),
Exhibits.
The Company filed a Form 8-K report dated November 13, 1997.
The items listed were Item 5, Other Events; and Item 7(c),
Exhibits.
The Company filed a Form 8-K report dated November 18, 1997.
The items listed were Item 5, Other Events; and Item 7(c),
Exhibits.
The Company filed a Form 8-K report dated December 3, 1997.
The items listed were Item 5, Other Events; and Item 7(c),
Exhibits.
The Company filed a Form 8-K report dated January 6, 1998.
The items listed were Item 5, Other Events; and Item 7(c),
Exhibits.
The Company filed a Form 8-K report dated January 21, 1998.
The items listed were Item 5, Other Events; and Item 7(c),
Exhibits.
The Company filed a Form 8-K report dated January 30, 1998.
The items listed were Item 5, Other Events; and Item 7(c),
Exhibits.
The Company filed a Form 8-K report dated February 2, 1998.
The items listed were Item 5, Other Events; and Item 7(c),
Exhibits.
The Company filed a Form 8-K report dated February 23, 1998.
The items listed were Item 5, Other Events; and Item 7(c),
Exhibits.
The Company filed a Form 8-K report dated February 25, 1998.
The item listed was Item 5, Other Events.
The Company filed a Form 8-K report dated February 27, 1998.
The items listed were Item 5, Other Events; and Item 7(c),
Exhibits.
The Company filed a Form 8-K report dated March 5, 1998.
The items listed were Item 5, Other Events; and Item 7(c),
Exhibits.
The Company filed a Form 8-K report dated March 17, 1998.
The items listed were Item 5, Other Events; and Item 7(c),
Exhibits.
(c) Exhibits Required by Item 601 of Regulation S-K
The following exhibits required by Item 601 of
Regulation S-K are filed as part of this report.
Except as otherwise noted, all exhibits are
incorporated by reference from exhibits to Form S-1
(Registration #33-55200) filed December 1, 1992 or from
exhibits to Form 10-K filings prior to or subsequent to
that date.
3.1 Articles of Incorporation as filed March 20, 1972
3.2 Amendment to Articles filed May 8, 1972
3.3 Restated Articles filed June 19, 1975
3.4 Amendment to Articles filed February 4, 1980
3.5 Amendment to Articles filed March 17, 1981
3.6 Amendment to Articles filed January 27, 1982
3.7 Amendment to Articles filed November 22, 1982
3.8 Amendment to Articles filed October 30, 1985
3.9 Amendment to Articles filed October 30, 1986
3.10 By-Laws
3.11(1) Amendment to Articles filed December 28, 1992
4.1 Incentive Stock Option Plan and Schedule
4.2 Form of Warrant and Schedule
5.1(2) Legal Opinion of Sweeney & Associates P.C.
16.1(3) Disclosure and Letter Regarding Change in
Certifying Accountants dated January 25, 1995
____________________________
(1) Incorporated by reference to First Amendment to Registration
Statement on Form S-1 (Registration #33-55200) filed
February 8, 1993
(2) Incorporated by reference from Exhibit with this title to
Form S-1 and Prospectus dated August 16, 1993
(3) Incorporated by reference from Report on Form 8-K dated
November 1, 1995
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on the 31st day of March, 1998.
BIOCONTROL TECHNOLOGY, INC.
By: /s/ David L. Purdy
David L. Purdy
President, Treasurer, Director
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated.
Signature Title Date
/s/ Fred E. Cooper Director, CEO, March 31, 1998
Fred E. Cooper (principal executive
officer, principal
financial officer and
principal accounting
officer)
/s/ Anthony J. Feola Senior Vice President, March 31, 1998
Anthony J. Feola Director
/s/ Glenn Keeling Director March 31, 1998
Glenn Keeling
/s/ Stan Cottrell Director March 31, 1998
Stan Cottrell
/s/ Richard Bourret Director March 31, 1998
Richard Bourret
Biocontrol Technology, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
THOMPSON DUGAN
CERTIFIED PUBLIC ACCOUNTANTS
________________________
Pinebridge Commons
1580 McLaughlin Run Rd.
Pittsburgh, PA 15241
Report of Independent Certified Public Accountants
Board of Directors
Biocontrol Technology, Inc.
We have audited the accompanying consolidated balance sheets of
Biocontrol Technology, Inc. and its subsidiaries as of December 31,
1997 and 1996, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1997. These financial
statements are the responsibility of the Corporation's management.
Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the consolidated financial position
of Biocontrol Technology, Inc. and its subsidiaries as of December
31, 1997 and 1996, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared
assuming that the Corporation will continue as a going concern. As
discussed in Note B to the financial statements, the Corporation has
incurred losses and negative cash flows from operations in recent
years through December 31, 1997 and these conditions are expected to
continue through 1998, raising substantial doubt about the
Corporation's ability to continue as a going concern. Management's
plans in regard to these matters are also discussed in Note B. These
financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
As discussed, in Note P to the consolidated financial
statements, certain restatements have been made to financial
statements which were previously issued by the Company.
Pittsburgh, Pennsylvania
March 25, 1998, except for Note P
as to which the date is November 17, 1998
<PAGE> F-1
<TABLE>
Biocontrol Technology, Inc. and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
Dec. 31, 1997 Dec. 31, 1996
------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents (note A) $ 2,759,067 $ 3,802,874
Accounts receivable - net of allowance for doubtful accounts
of $14,931 at Dec. 31, 1997 and $195,840 at Dec. 31, 1996 417,329 98,769
Inventory - net of valuation allowance (notes A and D) 1,834,018 3,340,120
Notes receivable - related parties (notes C and L) 35,000 300,000
Notes receivable (note C) 87,000 12,000
Interest receivable (note C) 2,134 -
Prepaid expenses 164,012 277,409
------------- -------------
TOTAL CURRENT ASSETS 5,298,560 7,831,172
PROPERTY, PLANT AND EQUIPMENT (notes A and H)
Building 1,444,273 1,442,423
Land 246,250 246,250
Construction in progress 1,465,152 1,240,320
Leasehold improvements 1,197,977 1,157,239
Machinery and equipment 5,042,736 4,386,364
Furniture, fixtures & equipment 812,221 735,962
------------- -------------
Subtotal 10,208,609 9,208,558
Less accumulated depreciation 3,516,677 2,670,207
------------- -------------
6,691,932 6,538,351
OTHER ASSETS
Notes receivable - related parties (notes C and L) 598,900 95,900
Interest receivable - related parties (notes C and L) 75,343 53,958
Deposit on Equipment 300,000 -
Patents, net of amortization (note A) 6,765 11,097
Other assets 9,800 13,513
------------- -------------
990,808 174,468
------------- -------------
TOTAL ASSETS $ 12,981,300 $ 14,543,991
============= =============
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE> F-2
<TABLE>
Biocontrol Technology, Inc. and Subsidiaries
Consolidated Balance Sheets
(Continued)
<CAPTION>
Dec. 31, 1997 Dec. 31, 1996
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 646,535 $ 1,035,171
Current portion of long-term debt (note G) 18,765 30,478
Current portion of capital lease obligations (note H) 109,933 48,944
Debentures payable (note I) 3,301,280 4,600,000
Accrued liabilities (note E) 215,119 148,303
Escrow payable (note J) 2,700 2,700
Deferred revenue on contract billings (note A) 116,146 180,000
------------- -------------
TOTAL CURRENT LIABILITIES 4,410,478 6,045,596
LONG-TERM LIABILITIES
Capital lease obligations (note H) 2,688,293 2,660,730
Long-term debt (note G) 8,806 38,997
------------- -------------
2,697,099 2,699,727
COMMITMENTS AND CONTIGENCIES (notes M and O)
UNRELATED INVESTORS'INTEREST
IN SUBSIDIARY (note A) 1,409,647 1,881,437
STOCKHOLDERS' EQUITY (notes J and O)
Common stock, par value $.10 per share,
authorized 150,000,000 shares, issued and
outstanding 138,583,978 at Dec. 31, 1997 and
49,213,790 at Dec. 31, 1996 13,858,398 4,921,379
Additional paid-in capital (note P) 104,932,920 82,354,749
Notes receivable issued for common stock-related party (note C) (25,000) -
Warrants 6,396,994 6,907,162
Accumulated deficit (note P) (120,699,236) (90,266,059)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 4,464,076 3,917,231
TOTAL LIABILITIES AND
STOCKHOLDER' EQUITY $12,981,300 $14,543,991
============= =============
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE> F-3
<TABLE>
BIOCONTROL TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Year Ended December 31,
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Revenues
Net Sales $ 1,155,907 $ 597,592 $ 461,257
Interest income 165,977 176,478 294,734
Other income 104,250 2,657 -
------------- ------------- -------------
1,426,134 776,727 755,991
Costs and expenses
Cost of products sold 641,331 325,414 198,542
Research and development (notes A and L) 6,977,590 8,742,922 7,649,678
General and administrative 12,704,146 8,963,693 11,117,107
Debt issue costs (note A) 3,306,812 502,000 -
Warrant extensions (note J) - 604,342 7,228,220
Warrant extensions - Subsidiary (note J) 4,046,875 8,571,033 5,295,000
Interest expense 315,624 133,460 17,048
Beneficial convertible debt feature (note P) 6,278,853 1,650,000 -
------------- ------------- -------------
34,271,231 29,492,864 31,505,595
------------- ------------- -------------
Loss before unrelated investors' interest (32,845,097) (28,716,137) (30,749,604)
Unrelated investors' interest in net loss of
subsidiary 2,411,920 4,670,435 1,329,259
------------- ------------- -------------
Net loss (note P) ($30,433,177) ($24,045,702) ($29,420,345)
============= ============= ==============
Loss per common share (notes A and P) ($0.43) ($0.57) ($0.84)
============= ============== ==============
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE> F-4
<TABLE>
Biocontrol Technology, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
<CAPTION>
Note rec.
Preferred Stock Common Stock issued for Additional
--------------- ---------------- Common Stk Paid in Accumulated
Shares Amount Shares Amount Warrants Rel Party Capital Deficit Total
------- -------- --------- ---------- ---------- --------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at Dec. 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 Dec. 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 stk. (1,700) (17,000) 17,000 1,700 - - 15,300 - -
Additional PIC from
subsidiary stock offering - - - - - - 1,648,677 - 1,648,677
Warrant extensions - - - - 7,228,220 - - - 7,228,220
Warrant extensions - sub. - - - - - - 4,984,755 - 4,984,755
Change in ownership int.-sub. - - - - - - (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 - - 7,839,065 783,907 - - 12,571,822 - 13,355,729
Conversion of preferred stk. (22,730)(227,300) 1,958,602 195,860 - - 31,440 - -
Cash redemp. at par-pref stk. (1,060) (10,600) - - - - - - (10,600)
Proceeds from sale of
preferred stk.- series A 20,000 200,000 - - - - 1,640,000 - 1,840,000
Conversion of debenture - - 2,275,005 227,500 - - 1,799,623 - 2,027,123
Warrant extensions - - - - 604,342 - - - 604,342
Warrant extensions - sub. - - - - - - 4,441,262 - 4,441,262
Change in ownership int.-sub. - - - - - - (22,873) - (22,873)
Warrants exercised - - 120,000 12,000 (375,000) - 393,600 - 30,600
Issuance of convertible
debt (note P) - - - - - - 1,650,000 - 1,650,000
Net loss (note P) - - - - - - - (24,045,702) (24,045,702)
-------- -------- ----------- ---------- ---------- -------- ------------ -------------- ----------
Balance at Dec. 31, 1996 - - 49,213,790 4,921,379 6,907,162 - 82,354,749 (90,266,059) 3,917,231
-------- -------- ----------- ---------- ---------- -------- ------------ ------------ ----------
Proceeds from stk offering - - 1,705,000 170,500 - - 765,648 - 936,148
Conversion of preferred stk. (22,000)(220,000) 6,913,366 691,337 - - (471,337) - -
Proceeds from sale of
preferred stk.-Series B 22,000 220,000 - - - - 1,807,000 - 2,027,000
Conversion of debenture - - 80,599,022 8,059,902 - - 11,554,077 - 19,613,979
Warrant extensions - sub. - - - - - - 2,108,421 - 2,108,421
Change in ownership int-sub. - - - - - - 2,421 - 2,421
Warrants exercised - - 152,800 15,280 (510,168) (25,000) 533,088 - 13,200
Issuance of convertible
debt (note P) - - - - - - 6,278,853 - 6,278,853
Net loss (note P) - - - - - - - (30,433,177) (30,433,177)
-------- -------- ----------- ---------- ----------- --------- ----------- ------------- ----------
Balance at Dec. 31, 1997 - $ - 138,583,978 $13,858,398 $6,396,994 ($25,000)$104,932,920 ($120,699,236) $4,464,076
======== ======== =========== =========== =========== ========= =========== ============== ===========
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE> F-5
<TABLE>
Biocontrol Technology, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<CAPTION>
Year ended December 31,
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows used by operating activities:
Net loss ($30,433,177) ($24,045,702) ($29,420,345)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 850,802 587,507 459,778
Unrelated investors' interest in susidiary (2,411,920) (4,670,435) (1,329,259)
Stock issued in exchange for services 936,148 17,200 180,373
Stock issued in exchange for services by subsidiary 600 7,000 -
Debenture interest converted to stock 164,055 - -
Premium for extension on Debenture 527,113 - -
Beneficial convertible debt feature 6,278,853 1,650,000 -
Provision for potential loss on notes receivable - - 1,050,000
Warrant extensions - 604,342 7,228,220
Warrant extensions by subsidiary 4,046,875 8,571,033 5,295,000
(Decrease)increase in allowance for losses on accounts receivable (180,909) 195,840 -
(Increase) in accounts receivable (137,651) (92,083) (169,805)
(Increase) in inventories (586,029) (1,679,981) (2,379,694)
(Increase) in inventory valuation allowance 2,092,131 - 900,000
(Increase) decrease in prepaid expenses 113,397 (128,883) 38,934
(Increase) decrease in other assets 3,713 (2,445) 79,472
Increase (decrease) in accounts payable (388,636) (803,237) 1,195,044
Increase (decrease) in other liabilities 66,737 (35,960) (18,960)
(Decrease) in deferred revenue (63,854) (146,000) -
------------- ------------- -------------
Net cash flow used by operating activities (19,121,752) (19,971,804) (16,891,242)
------------- ------------- -------------
Cash flows from investing activities:
Purchase of property, plant and equipment (845,512) (954,610) (1,441,509)
(Increase) in notes receivable (313,000) (50,000) (1,312,000)
Deposit on equipment (300,000) - -
(Increase) in interest receivable (23,519) (11,721) (9,792)
------------- ------------- -------------
Net cash used by investing activites (1,482,031) (1,016,331) (2,763,301)
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from stock offering - 13,338,531 16,195,788
Proceeds from sale by subsidiary of its common stock 3,500 (172,315) 3,079,200
Proceeds from warrants exercised 13,200 30,600 273,325
Proceeds from warrants exercised-subsidiary - 2,000 -
Proceeds from sale of Preferred stock-Series A - 1,840,000 -
Proceeds from sale of Preferred stock-Series B 2,027,000 - -
Cash redemption at par - Preferred stock - (7,900) -
Proceeds from debentures payable 20,230,000 6,600,000 -
Payments on debentures payable (2,605,833) - -
Payments on notes payable (41,904) (19,509) (5,115)
Payments on capital lease obligations (65,987) (24,899) -
------------- ------------- -------------
Net cash provided by financing activities 19,559,976 21,586,508 19,543,198
Net increase (decrease) in cash (1,043,807) 598,373 (111,345)
------------- ------------- -------------
Cash and cash equivalents, beginning of year 3,802,874 3,204,501 3,315,846
------------- ------------- -------------
Cash and cash equivalents, end of year $2,759,067 $3,802,874 $3,204,501
============= ============= =============
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>F-6
<TABLE>
Biocontrol Technology, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Continued)
<CAPTION>
Year ended December 31,
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Supplemental Information:
Interest paid $ 155,647 $ 72,578 $ 17,048
============= ============ ============
Supplemental schedule of non-cash
investing and financing activities:
Acquisition of equipment with note payable $ 0 $ 145,063 $ 47,282
============= =========== ============
Acquisition of property under a capital lease:
Building $ - $ 1,205,760 $ -
Land - 246,250 -
Construction in progress - 1,137,500 -
Equipment 154,539 - -
------------- ------------- -------------
$ 154,539 $ 2,589,510 $ -
============= ============= =============
Conversion of Series I-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 $ - $ 2,700 $ -
============= ============= =============
Conversion of Series A - preferred stock for common stock:
Common stock $ - $ 193,130 $ -
Additional paid in capital - 6,870 -
------------- ------------- -------------
$ - $ 200,000 $ -
============= ============= =============
Conversion of Series B- preferred stock for common stock:
Common stock $ 220,000 $ - $ -
Additional paid-in capital 1,807,000 - -
------------- ------------- -------------
2,027,000 $ - -
============= ============= =============
Conversion of debentures for common stock $ 19,449,924 $ 2,000,000 $ -
============= ============= =============
Converion of debenture interest for common stock $ 164,055 $ 27,122 $ -
============= ============= =============
Stock granted to related party for note receivable $ 25,000 $ 0 $ -
============= ============= =============
Conversion of warrants for common stock $ 510,168 $ 375,000 $ 550,400
============= ============= =============
The accompanying notes are an integral part of these statements.
</TABLE>
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: Diasense, Inc. (Diasense) a 52% owned subsidiary as of
December 31, 1997 and 1996; Petrol Rem, Inc., a 67% owned
subsidiary as of December 31, 1997 and 1996; IDT, Inc., a
99.1% owned subsidiary as of December 31, 1997 and 1996; and
Barnacle Ban Corporation, a 100% owned subsidiary as of
December 31, 1997 and 1996. All significant intercompany
accounts and transactions have been eliminated. Subsidiary
losses in excess of the unrelated investors' interest are
charged against the Company's interest.
3. Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company
considers all highly liquid investments with a maturity of
three months or less at acquisition to be cash equivalents.
4. Inventory
Inventory is valued at the lower of cost (first-in, first-out
method) or market. An inventory valuation allowance is
provided against finished goods and raw materials for
products for which a market has not yet been established.
5. Property and Equipment
Property and equipment are accounted for at cost and are
depreciated over their estimated useful lives on a straight-
line basis.
6. Patents
Patents are amortized over their legal or useful lives,
whichever is less. Accumulated amortization on patents was
$90,176 and $85,844 at December 31, 1997 and 1996,
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
71,415,351 shares in 1997, 42,266,597 shares in 1996 and
35,025,237 shares in 1995, 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 K), the adoption of
FAS 109 had no effect on the financial statements of the
Company.
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. Total interest incurred for the
periods December 31, 1997, 1996, and 1995 was $528,942,
$236,280 and $17,048, respectively, of which $315,624,
$133,460 and $17,048, respectively, 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 and accounts
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) for the periods ending December 31, 1997, 1996 and
1995 would have been approximately $27,150,101, $24,173,787
and $29,911,000, respectively. Net loss per share under the
fair value based accounting method for the periods ending
December 31, 1997, 1996 and 1995 would have been approximately
$.38, $.88 and $.85, respectively.
14. Debt Issue Costs
The Company follows the policy of expensing debt issue costs
on debentures during the period of debenture issuance. Total
debt issue costs incurred for the periods December 31, 1997,
1996, and 1995 was $3,306,812, $502,000 and $0, respectively.
15. Concentration of Credit Risk
Financial instruments which potentially subject the Company to
significant concentrations of credit risk consist principally
of cash investments at commercial banks and receivables from
officers and directors of the Company. Cash and cash
equivalents are temporarily invested in interest bearing
accounts in financial institutions, and such investments may
be in excess of the FDIC insurance limit. Receivables from
directors and officers of the Company (Note C, L and O) are
unsecured and represent a concentration of credit risk due to
the common employment and financial dependency of these
individuals on the Company.
NOTE B - OPERATIONS AND LIQUIDITY
The Company and its subsidiaries have incurred substantial
losses in 1997 and in prior years and have funded their
operations and product development primarily through the sale
of stock and issuance of debt instruments. Until such time
that products can be successfully developed and marketed, the
Company and its subsidiaries will continue to need to fulfill
working capital requirements through the sale of stock and
issuance of debt. The inability of the Company to continue
its operations as a going concern would impact the
recoverability and classification of recorded asset amounts.
The ability of the Company to continue in existence is
dependent on its having sufficient financial resources to
complete the research and development necessary to
successfully bring products to market and for marketplace
acceptance. As a result of its significant losses, negative
cash flows from operations, and significant accumulated
deficits for each of the periods ending December 31, 1997,
1996 and 1995, there is substantial doubt about the Company's
ability to continue as a going concern.
Management believes that its currently available working
capital, anticipated contract revenues, subsequent sales of
stock and future debt issuance will be sufficient to meet its
projected expenditures for a period of at least twelve months
from December 31, 1997.
NOTE C - NOTES RECEIVABLE
Notes receivable due from various related and unrelated
parties consisted of:
Dec. 31, Dec. 31,
1997 1996
Related Parties
Note receivable from Fred E.
Cooper, Chief Executive
Officer, payable upon demand
with 12% interest. $ 8,500 $ 8,500
Note receivable from Fred E.
Cooper, Chief Executive
Officer, payable upon demand 82,400 82,400
with 10% simple interest.
Note receivable from Fred E.
Cooper, Chief Executive
Officer, payable upon demand 83,000 -
with 8.25% simple interest.
Note receivable from Fred E.
Cooper, Chief Executive
Officer, payable upon demand 35,000 -
with 8.25% simple interest.
Note receivable from Fred E.
Cooper, Chief Executive
Officer, payable upon demand 15,000 -
with 8.25% simple interest.
Note receivable from Glenn
Keeling, Director,
payable upon demand with 10% 5,000 5,000
simple interest.
Note receivable from Glenn
Keeling, Director
payable upon demand with 8.25% 50,000 50,000
interest.
Note receivable from Glenn
Keeling, Director
payable upon demand with 8.25% 20,000 -
interest.
Note receivable from T.J. Feola,
Director
payable upon demand with 8.25% 50,000 -
interest.
Note receivable from Dave Purdy,
T.J. Feola, Fred Cooper, Glen 35,000 -
Keeling, all directors who are
jointly liable to the company.
Note receivable from Allegheny
Food Services, Inc. of which
Joseph Kondisko, a former 250,000 250,000
director, is principal owner,
payable 9/1/98 with interest at
prime plus 1% interest.
Unrelated Parties
Note receivable from an
individual, payable upon
demand with 8.75% interest. 12,000 12,000
Note receivable from HemoCleanse
Inc, payable without
interest on demand. -
75,000
------- -------
720,900 407,900
Less current notes receivable 122,000 312,000
------- -------
Noncurrent $ 598,900 $ 95,900
======= =======
Accrued interest receivable on the related party notes as of
December 31, 1997 and 1996 was $77,477 and $53,958,
respectively.
NOTE D - INVENTORY
Inventories consisted of the following as of:
Dec. 31, Dec. 31,
1997 1996
Raw materials 4,380,254 3,928,565
Work-in-process 47,976 191,220
Finished goods 1,005,788 728,204
--------- ---------
5,434,018 4,847,989
Less valuation
allowance (3,600,000) (1,507,869)
----------- -----------
$ 1,834,018 $ 3,340,120
The inventory valuation allowance was increased to $3,600,000
in 1997 based upon management's estimation of market value of
materials for products for which a market has not yet been
established. There was no change in the allowance during
1996.
NOTE E - ACCRUED LIABILITIES
Accrued liabilities consisted of the following as of:
Dec. 31, Dec. 31,
1997 1996
Current
-------
Accrued payroll taxes $ 13,606 $ 18,537
Accrued vacation 87,652 68,344
Other accrued liabilities 113,861 61,422
------- -------
$ 215,119 $ 148,303
========= ==========
NOTE F - BUSINESS SEGMENTS
The Company operates in three reportable business segments:
Biomedical devices, which includes the operations of Biocontrol
Technology, Inc., and Diasense, Inc.; Bioremediation, which includes
the operations of Petrol Rem, Inc.; and Marine Paint Products, which
includes the operations of Barnacle Ban Corporation. Following is
summarized financial information for the Company's reportable
segments:
<TABLE>
<CAPTION>
Biomedical Bioremediation Marine All Consolidated
Devices Paint Other
Products
<S> <C> <C> <C> <C> <C>
1997
Sales to external customers $ 880,919 $138,362 $136,624 $ 0 $ 1,155,905
Cost of product sold 445,843 88,178 107,310 0 641,331
Gross profit 435,076 50,184 29,314 0 514,574
Identifiable assets 11,122,314 602,460 56,860 999,666 12,981,30
Capital expenditures 661,095 4,460 8,680 526,933 1,000,051
Depreciation & amortization 720,150 33,976 2,751 93,925 850,802
1996
Sales to external customers 508,561 47,625 41,406 0 597,592
Cost of products sold 288,537 16,092 20,785 0 325,414
Gross profit 220,024 31,533 20,621 0 272,178
Identifiable assets 13,683,657 380,851 96,710 382,773 14,543,991
Capital expenditures 3,362,400 9,188 23,755 293,840 3,689,183
Depreciation & amortization 498,256 35,725 5,406 48,120 587,507
1995
Sales to external customers 168,461 215,211 77,585 0 461,257
Cost of products sold 91,859 53,813 52,870 0 198,542
Gross profit 76,602 161,398 24,715 0 262,715
Identifiable assets 8,467,569 452,601 24,969 129,530 9,074,669
Capital expenditures 1,424,388 31,501 2,463 9,476 1,467,828
Depreciation & amortization 404,392 29,999 858 24,529 459,778
</TABLE>
The Company will adopt Statement of Financial Accounting Standards
No. 131, "Disclosures about segments of an Enterprise and Related
Information" in 1998. The disclosures under this new standard are
not expected to be significantly different from the Company's current
disclosures of segment information.
NOTE G - LONG TERM DEBT
Long term debt consisted of the following as of:
Dec. 31, Dec. 31,
1997 1996
Note Payable to a bank in monthly payments of
$999 including interest at a rate of 7.35%. $13,007 $ 23,584
Collateralized by cash on deposit.
Note Payable in monthly payments of $495
including interest at a rate of 8.48%.
Collateralized by equipment. - 15,095
Canceled and reissued as a Capital Lease in 1997.
Note Payable in monthly payments of $374
including interest at a rate of 18.00%. 5,452 7,810
Collateralized by equipment.
Note Payable in monthly payments of $851
including interest at a rate of 10.11%.
Collateralized by equipment. - 9,675
Note Payable to a bank in monthly payments of
$433 including interest at a rate of 8.75%. 9,112 13,311
Collateralized by equipment. --------- --------
27,571 69,475
Current portion of long-term debt 18,765 30,478
-------- --------
Long-term debt $ 8,806 $ 38,997
========= =========
NOTE H - LEASES
Operating Leases
The Company is committed under a noncancelable operating
lease for its research and product development facility. The
lease between the Company and a group of investors (lessor)
which includes four of the Company's Executive Officers
and/or Directors is for a period of 240 months beginning
September 1, 1990. Monthly rental under the terms of the
lease is $8,810 for a period of 119 months to August 1, 2000
when the monthly rental payments shall be fixed at an amount
equal to the fair rental value of the property as determined
by mutual agreement of lessor and the Company for the balance
of the lease. Total rent expense was $105,720 in each of the
years 1997, 1996 and 1995. Future minimum lease payments as
of December 31, 1997 are $105,720 for 1998 and 1999 and
$61,670 for 2000 on which date the rental payments shall be
renegotiated.
The Company and its related subsidiaries also lease other
office facilities, various equipment and automobiles under
operating leases expiring in various years through 2002.
Total lease expense related to these leases was $295,809,
$239,096 and $216,143 in the years ended December 31, 1997,
1996 and 1995, respectively.
During 1996, the Company leased two manufacturing buildings
under capital leases expiring in various years through 2011.
The assets and liabilities under capital leases are recorded
at the lower of the present value of the minimum lease
payments or the fair value of the asset. The assets are
depreciated over the lower of their related lease terms or
their estimated productive lives. Depreciation of assets
under capital leases is included in depreciation expense.
The following is a summary of property held under capital
leases:
Dec. 31, Dec. 31,
1997 1996
Building $ 1,207,610 $ 1,205,760
Construction in Progress 1,465,152 1,240,320
Land 246,250 246,250
Equipment 243,271 166,026
----------- -----------
Sub Total 3,162,283 2,858,356
Less: Accumulated Depreciation
165,951 46,278
Total Property under ----------- -----------
Capital Leases 2,996,332 2,812,078
=========== ===========
Minimum future lease payments to related and unrelated
parties are as follows:
Related Unrelated
Parties Parties Total
1998 $ 105,720 $ 635,536 $ 741,256
1999 105,720 466,938 572,658
2000 61,670 394,872 456,542
2001 0 393,617 393,617
2002 0 362,958 362,958
Thereafter 0 3,142,160 3,142,160
--------- --------- ----------
Future minimum lease payments $ 273,110 $5,396,081 $5,669,191
========= ========== ==========
NOTE I - SUBORDINATED CONVERTIBLE DEBENTURE
During 1997 and 1996 the Company issued subordinated 4%
convertible debentures totaling $20,230,000 and $6,600,000,
respectively, with a one year mandatory maturity. At
December 31, 1997 and 1996, the subordinated convertible
debentures totaled $3,301,280 and $4,600,000, respectively.
As of December 31, 1997 and 1996, the conversion price of the
debentures would have been approximately $.146 and $.686 per
share, respectively, based upon a formula which applies a
discount to the average market price for the previous week
and determined by the length of the holding period. As of
December 31, 1997 and 1996, the number of shares issued upon
conversion of all outstanding debentures was approximately
23.9 million and 6.7 million shares, respectively, which
would have reflected discounts of approximately 18% and 17%,
respectively.
NOTE J - STOCKHOLDERS' EQUITY
Preferred Stock
The Board of Directors of the Company may issue preferred
stock in series which would have rights as determined by the
Board.
During 1996, 2,730 shares of the Series I preferred stock
were converted to common stock, 790 shares were redeemed for
cash and an escrow payable of $2,700 was established for the
redemption of the remaining 270 shares.
During 1996, 20,000 shares of the Series A convertible
preferred stock were sold and converted.
During 1997 22,000 shares of the Series B convertible
preferred stock were sold and converted.
Common Stock Warrants
During 1997, warrants ranging from $.22 to $1.25 per share to
purchase 2,594,000 shares of common stock were granted at
exercise prices which were equal to or above the current
quoted market price of the stock on the date issued.
Warrants to purchase 5,346,662 shares of common stock were
exercisable at December 31, 1997. The per share exercise
prices of these warrants are as follows:
Shares Exercise
Price
10,000 $.22
1,226,700 $.25
180,000 $.33
50,000 $.38
1,482 $.45
350,000 $.50
2,334,000 $1.00
200,000 $1.25
994,480 $1.48 - $4.03
Total 5,346,662
The fiscal year in which common stock warrants were granted
and the various expiration dates by fiscal year are as
follows:
Fiscal Warrants Warrants Expire During Fiscal Year
Year Granted 1998 1999 2000 2001 2002
Granted
1990 506,700 506,700 - - - -
1991 1,251,482 900,000 351,482 - - -
1992 25,000 - - 25,000 - -
1993 209,000 209,000 - - - -
1994 130,000 - 130,000 - - -
1995 21,000 - - 21,000 - -
1996 609,480 59,480 - - 550,000 -
1997 2,594,000 - 200,000 - 1,400,000 994,000
--------- --------- --------- --------- --------- ---------
5,346,662 1,675,180 681,482 46,000 1,950,000 994,000
========= ========= ========= ========= ========= =========
The following is a summary of warrant transactions during
1997:
Outstanding beginning of period: 2,905,462
Granted during the twelve month period: 2,594,000
Canceled during the twelve month period: -0-
Exercised during the twelve month period: (152,800)
-----------
Outstanding, and eligible for exercise: 5,346,662
===========
Common Stock Reserve
At December 31, 1997 the Company has reserved unissued common
stock as follows:
Warrants 5,346,662
Convertible debentures 23,874,729
Total 29,221,391
Warrant Extensions
During 1997, the Company extended the exercise date of
warrants to purchase 177,800 shares of common stock to
certain officers and consultants. The warrant shares were
originally granted at exercise prices ranging from $.25 to
$3.50, and were extended at the original grant price. No
expense was charged to operations since the market price was
less than the original warrant price.
During 1996, the Company extended the exercise date of
warrants to purchase 351,482 shares of common stock to
certain officers and consultants. The warrant shares were
originally granted at exercise prices ranging from $.45 to
$.50, and were extended at the original grant price. The
Company recorded a $604,342 expense for the difference
between the fair market value on the date the warrants were
extended and the warrant exercise prices.
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 exercise prices
ranging from $.25 to $.33, and were extended at the original
grant price. The company recorded a $7,228,220 expense for
the difference between the fair market values on the date the
warrants were extended and the warrants' exercise prices.
Diasense Common Stock
At December 31, 1997, warrants to purchase 7,476,513 shares
of Diasense common stock were exercisable. The per share
exercise price for 4,055,000 shares is $.50, for 2,286,763
shares is $1.00 and for 1,134,750 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 December
31, 1997 to 39.2%.
Diasense Warrant Extensions
During 1997, Diasense extended the exercise date of warrants
to purchase 2,236,550 shares of common stock to certain
officers, directors, employees and consultants. The warrant
shares were originally granted at an exercise price of $1.00,
and extended at the same price. Diasense recorded a
$4,046,875 expense for the difference between the assumed
value on the date the warrants were extended and the
warrants' exercise prices.
During 1996, Diasense extended the exercise date of warrants
to purchase 2,970,013 shares of common stock to certain
officers, directors, employees and consultants. The warrant
shares were originally granted at exercise prices ranging
from $.50 to $1.00, and extended at the same price. Diasense
recorded a $8,571,033 expense for the difference between the
assumed value on the date the warrants were extended and the
warrants' exercise prices.
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 exercise prices of $.50,
and extended at the same price. Diasense recorded a
$5,295,000 expense for the difference between the assumed
value on the date the warrants were extended and the
warrants' exercise prices.
Petrol Rem Common Stock
At December 31, 1997 warrants to purchase 3,920,000 shares of
Petrol Rem common stock were exercisable at the exercise
price of $.10. The warrants expire at various dates through
2002. To the extent that if all the warrants were exercised,
the Company's proportionate ownership would be diluted from
67% at December 31, 1997 to 53.3%.
IDT Common Stock
At December 31, 1997 warrants to purchase 3,875,000 shares of
IDT common stock were exercisable. The per share exercise
price for 3,780,000 shares is $.10 and for 75,000 shares is
$1.00 and for 20,000 shares is $2.00. The warrants expire at
various dates through 2001. To the extent that if all the
warrants were exercised, the Company's proportionate
ownership would be diluted from 99.1% at December 31, 1997 to
71.6%.
NOTE K - INCOME TAXES
As of December 31, 1997, the company and its subsidiaries,
except Diasense and Petrol Rem, have available approximately
$63,260,000 of net operating loss carryforwards for federal
income tax purposes. These carryforwards are available,
subject to limitations, to offset future taxable income, and
expire in tax years 1998 through 2012. The Company also has
research and development credit carryforwards available to
offset federal income taxes of approximately $580,000 subject
to limitations, expiring in tax years 2005 through 2012.
As of September 30, 1997, the end of its fiscal year,
Diasense had available approximately $21,500,000 of net
operating loss carryforwards for federal income tax purposes.
These carryforwards, which expire during the years 2005
through 2012, 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 2012.
As of December 31, 1997, Petrol Rem had available
approximately $8,700,000 of net operating loss carryforwards
for federal income tax purposes. These carryforwards, which
expire during the years 2008 through 2012, are available,
subject to limitations, to offset future taxable income.
Petrol Rem also has research and development credit
carryforwards available for federal income tax purposes of
approximately $75,000.
Certain items of income and expense are recognized in
different periods for financial and income tax reporting
purposes. In the years ended December 31, 1996 and 1995, a
warrant exercise adjustment of $211,520 and $1,267,640,
respectively, was reported for tax purposes. The fair market
value of warrant extensions have been recorded and expensed
for financial statement purposes in the years ended December
31, 1996 and 1995 in the amounts of $604,342 and $7,228,220,
respectively.
The Company has not reflected any future income tax benefits
for these temporary differences or for net operating loss and
credit carryforwards because of the uncertainty as to
realization. Accordingly, the adoption of FAS 109 had no
effect on the financial statements of the Company.
The following is a summary of the composition of the
Company's deferred tax asset (all long-term) and associated
valuation allowance at December 31, 1997, December 31, 1996
and December 31, 1995:
Dec. 31, Dec. 31, Dec. 31,
1997 1996 1995
Net Operating Loss $ 21,508,400 $ 15,330,642 $ 10,959,420
Warrant Expense 2,741,397 2,741,397 2,529,877
Tax Credit Carryforward 580,000 520,000 400,000
------------ ------------ ------------
24,829,797 18,592,039 13,889,297
Valuation Allowance (24,829,797) (18,592,039) (13,889,297)
------------ ------------ ------------
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:
Deferred Increase in
Tax Valuation
Benefit Allowance Net
Year-ended December 31,1997 $(6,237,758) $ 6,237,758 $ 0
Year-ended December 31, 1996 $(4,702,742) $ 4,702,742 $ 0
Year-ended December 31, 1995 $(6,977,857) $ 6,977,857 $ 0
From March 20, 1972 (inception)
through December 31, 1997 $(24,829,797) $24,829,797 $ 0
NOTE L - RELATED PARTY TRANSACTIONS
Research and Development Activities
The Company is currently performing research and development
activities related to the non-invasive glucose sensor (the
Sensor) under a Research and Development Agreement with
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). The Sensor is
subject to clinical testing and regulatory approvals by the
FDA. BICO is responsible for substantially all activities in
connection with the development, clinical testing, FDA
approval and manufacturing of the Sensor. As discussed in
Note B, BICO finances its operations from the sales of stock
and issuance of debt and was reimbursed for costs incurred
under the terms and conditions of the Research and
Development Agreement for the research and development of the
Sensor by 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.
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 Sensor.
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.
Amounts due from Officers
At December 31, 1997 and 1996, Mr. Cooper owed the Company
$8,500 related to a 12 percent simple interest demand loan.
At December 31, 1997 and 1996, Mr. Cooper owed the Company
$82,400, related to 10 percent simple interest demand loans.
At December 31, 1997, Mr. Cooper owed the Company in
aggregate notes of $158,000, related to 8.25 percent simple
interest demand loans The accrued interest owed by Mr.
Cooper on all demand notes at December 31, 1997 and 1996 was
$66,121 and $50,070, respectively.
At December 31, 1997 and 1996, the Company had a demand loan
of $5,000 with 10 percent simple interest with Glenn Keeling,
a Director. At December 31, 1997 and 1996 the Company had a
demand loan of $50,000 with 8.25 percent interest with Mr.
Keeling. At December 31, 1997, the Company had a demand loan
of $50,000 with 8.25 percent interest with Mr. Keeling. The
accrued interest owed by Mr. Keeling on all demand notes at
December 31, 1997 and 1996 was $7,664 and $2,804,
respectively.
At December 31, 1997, the Company had a demand loan of
$50,000 with 8.25 percent simple interest with TJ Feola, a
Director. The accrued interest owed by Mr. Feola on the
demand note at December 31, 1997 was $1,254 .
At December 31, 1997, the Company had a note receivable of
$35,000 with 8.25 percent simple interest with Dave Purdy,
Fred Cooper, TJ Feola and Glen Keeling, all Directors who are
jointly liable. As of December 31, 1997, there was no
accrued interest owed
At December 31, 1997 and 1996, the Company had extended a one
year judgment note payable September 1, 1997, for $250,000,
with an interest rate of prime plus one percent, with Joseph
Kondisko, Allegheny Food Services, Inc. of which Joseph
Kondisko, a former director, is principal owner. As of
December 31, 1997 and 1996 there was no accrued interest
owed.
Advances to Officers
During the periods 1997 and 1996, the Company and its
subsidiaries made advances to Mr. Cooper. At December 31,
1997 and 1996, these advances accumulated to $26,150 and
$32,535, respectively.
Employment Contracts
The Company's employment contracts with four officers and two
employees commenced November 1, 1994 and end October 31,
1999. These employment contracts set forth annual basic
salaries aggregating $1,500,000 in 1997 and expiring in
periods beginning October 1999 through 2002, which are
subject to review and adjustment. The contracts may be
extended for two to three - year periods. In the event of
change in control in the Company and termination of
employment, continuation of annual salaries at 100%
decreasing to 25% are payable in addition to the issuing of
shares of common stock as defined in the contracts. The
contracts also provide for severance, disability benefits and
issuances of BICO common stock under certain circumstances.
NOTE M - COMMITMENTS AND CONTINGENCIES
Litigation
Several class action lawsuits have been filed against the
company and its subsidiary Diasense as well as certain of
their directors, all of which have been consolidated into a
single action. The suit alleges various violations of
federal securities laws on behalf of a class of plaintiffs
who purchased common stock of the Company between April 25,
1995 and February 26, 1996, at which time the value of the
Company's stock dropped as a result of an unfavorable
recommendation of a Panel Review convened by the United
States Food and Drug Administration with respect to a certain
medical device owned by Diasense and manufactured by the
Company. To date, a complaint has been filed in the action,
to which the defendants have filed a Motion to Dismiss. The
Company has engaged in voluntary mediation in order to
explore whether settlement is an option. As a result of the
mediation, the plaintiffs agreed to a "standstill" period,
which has now expired; however, no further activity has been
conducted by the plaintiffs to move the case forward.
Management believes that no federal securities violation has
occurred, and they intend to strongly defend the action. At
this time it is not possible to predict the outcome of the
litigation or to estimate the potential damages arising from
the claims, since the number of class members, and the volume
and pricing of shares traded, are unknown.
Pennsylvania Securities Commission
The Pennsylvania Securities Commission is conducting a
private investigation of the Company and its subsidiary,
Diasense, Inc. in connection with the sale of securities.
The Companies have cooperated with and provided information
to the Pennsylvania Securities Commission in connection with
the private investigation. As the Commission's investigation
is not yet complete, there can be no estimate or evaluation
of the likelihood of an unfavorable outcome in this matter or
the range of possible loss, if any.
License Agreement
Under terms of a license agreement with a shareholder of
Petrol Rem for the marketing rights with respect to certain
inventions Petrol Rem is to make minimum royalty payments of
$120,000 per year for each year starting in 1994 through
2001.
NOTE N - EMPLOYEE BENEFIT PLAN
The Company has a defined contribution plan with 401k
provisions which covers all employees meeting certain age and
period of service requirements. Employer contributions are
discretionary as determined by the Board of Directors. There
have been no employer contributions to the plan through
December 31, 1997.
NOTE O - SUBSEQUENT EVENTS
Special Meeting
On February 2, 1998 BICO's shareholders approved an increase
in the number of authorized common shares from 150,000,000 to
300,000,000 at a special shareholders meeting convened for
that purpose.
Debentures
Subsequent to December 31, 1997, and through March 25, 1998.
the Company issued additional 4% subordinated convertible
debentures totaling $5,020,000 with a one year mandatory
maturity and converted $4,271,280 of subordinate debentures
into common stock.
Common Stock
Subsequent to December 31, 1997 and through March 25, 1998,
the Company issued an additional 50,385,098 shares of common
stock bringing total outstanding common stock at March 25,
1998, to 188,969,076.
The Company's common stock is currently traded on the NASDAQ
Small-Cap Market. Revised requirements for this market
include a minimum trading price of $1.00 which will limit the
Company's option to continue to trade on NASDAQ.
Related Party Transactions
Subsequent to December 31, 1997, the company issued Mr.
Cooper demand notes in the amount of $275,000 with 8.25
percent simple interest.
Subsequent to December 31, 1997, the company issued Mr.
Keeling a demand note in the amount of $190,000 with 8.25
percent simple interest.
Subsequent to December 31, 1997, the company issued Mr. Feola
a demand note in the amount of $185,000 with 8.25 percent
simple interest.
Stock Purchase Agreement
Effective March 4, 1998, pursuant to a Stock Purchase
Agreement dated February 20, 1998, the Company acquired 58.4%
of International Chemical Technologies, Inc. (ICTI) a
development stage corporation. ICTI commenced operations in
May 1997 and plans to engage in the business of manufacturing
and marketing, and licensing rights with respect to certain
corrosion/wear-resistant metal alloy coating compositions.
The unaudited financial statements of ITCI as of December 31,
1997 present accumulated losses of $680,335, a working
capital deficiency of $457,164, and a net deficiency in
assets of $678,335.
Consideration for the purchase of the 58.4% interest in ICTI
included a cash payment of $1,030,000; a promissory note for
$3,350,000 at 8%; 2,000,000 shares of Biocontrol common stock
(fair market value of $250,000), a warrant to purchase 1,000,000
shares of Biocontrol stock for $2 per share anytime through
March 4, 2003; and the guarantee by Biocontrol of a promissory
note for $1,300,000 payable by ICTI to the seller.
The Biocontrol promissory note for $3,350,000 is payable in
monthly installments as follows; (i) on the first day of each
calendar month from April 1, 1998 through and including
September 1, 1998 a principal payment of $150,000 per month plus
accrued interest (ii) on October 1, 1998, a principal payment
of $1,100,000 plus accrued interest (iii) on the first day of
each calendar month from November 1, 1998 through and including
November 1, 1999 a principal payment of $100,000 per month plus
accrued interest and (iv) on December 1, 1999 a final payment
equal to the remaining outstanding principal balance plus all
accrued interest thereon. The note is collateralized by shares
of ICTI purchased by Biocontrol.
The ICTI promissory note, guaranteed by Biocontrol, is for
$1,300,000 at an annual interest rate of 9.5% and is payable
in monthly principal amounts of $36,111 plus interest. This
note is collateralized by all tangible and intangible assets
of ICTI.
In addition, Biocontrol has agreed to make nonscheduled
capital contributions totaling $3,000,000 to ICTI on or
before September 4, 1998.
NOTE P - RESTATEMENT
The accompanying financial statements include the effect of
adjustments which were made to financial statements previously
issued by the Company.
Subsequent to the issuance of its consolidated financial
statements in March 1998, the Company determined that beneficial
conversion terms included in its convertible debentures issued in
1996 and 1997 should be reflected in its financial statements
as expense and as additional paid-in capital. The amount of
expense charged to operations as a result of this adjustment was
$1,650,000 in 1996, and $6,278,853 in 1997. Corresponding amounts
were recognized as additional paid-in capital and there was no
effect to the total Stockholders Equity as a result of these
adjustments.
