As filed with the Securities and Exchange Commission on May 5, 1999
Registration No. 333-77451
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
PRE-EFFECTIVE AMENDMENT NO.1
FORM S-1/A
under
THE SECURITIES ACT OF 1933
BIOCONTROL TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 3841 25-1229323
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification
organization) Number)
300 Indian Springs Road
Indiana, Pennsylvania 15701 (412) 349-1811
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices and principal
place of business)
___________________________________________
Fred E. Cooper, Chief Executive Officer
Biocontrol Technology, Inc.
2275 Swallow Hill Road, Building 2500, Pittsburgh, Pennsylvania
15220
(412)429-0673
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
___________________________________________
Copy to:
Sweeney & Associates P.C.
7300 Penn Avenue, Pittsburgh, Pennsylvania 15208
_____________________________________________________
Approximate date of commencement of proposed sale to the public:
As soon as possible after this registration statement becomes
effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415
under the Securities Act of 1933 check the following box. [X]
CALCULATION OF REGISTRATION FEE
Title of Each Amount to Proposed Proposed Amount of
Class of be Maximum Maximum Registra-
Securities to be Registered Offering Aggregate tion Fee
Registered Price Per Offering
Share Price
Common Stock 375,000,000 $0.06(1) $37,500,000 $6,465.00
(Primary Shares)
Total 375,000,000 $37,500,000 $6,465.00
Total
Registration Fee
TOTAL OF SEPARATELY NUMBERED PAGES 72 EXHIBIT INDEX ON SEQUENTIALLY
NUMBERED PAGE 67
(1) Estimated solely for purposes of calculating the registration
fee pursuant to Rule 457(c) of the Securities Act of 1933, as
amended, and based on the average of the high and low sales
prices of the common stock of Registrant on the Electronic
Bulletin Board reported in March, 1999. This fee was
previously paid in connection with Post-Effective Amendment
No.1 to Form S-1 at 333-63193, which has been withdrawn and
replaced with this Form S-1.
_____________________
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective date
until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall
become effective on such date as the Commission acting pursuant to
Section 8(a) may determine.
_____________________
DATED May 5, 1999
THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE
SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS
375,000,000 Shares
Biocontrol Technology, Inc.
Common Stock
This is an offering of shares of common stock of Biocontrol
Technology, Inc. We are selling these shares directly and through
brokers, but not through an underwriter. We will use the money
received from selling the shares when we receive it - there is no
minimum which must be sold before we can use the proceeds.
______________________________________
Price $.13 per share
_______________________________________
Trading Symbol:
Electronic Bulletin Board - BICO
Investing in our common stock involves a high degree of risk - you
should not buy this stock unless you can afford to lose your
entire investment. See "Risk Factors" beginning on page 2.
Per ShareTotal
Public Offering Price
$0.13
$48,750,000
Commissions
$0.01
$3,750,000
Proceeds to Biocontrol
$0.12
$45,000,000
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved these securities
or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
PROSPECTUS SUMMARY
You should read the following summary together with the
more detailed information regarding our Company and the common
stock being sold in this offering and our financial statements and
related notes included in this prospectus.
The Company
We research, develop, market and sell biomedical and
environmental products. Our primary project is to develop a
noninvasive glucose sensor for diabetics, which allows them to
check their glucose level without pricking their fingers. The
machine, called the Diasensor, is a joint project with another
company called Diasensor.com, Inc. We own 52% of Diasensor.com,
and work together with them on the Diasensor project.
We also have other products:
a whole-body hyperthermia system, which permits doctors to
induce an artificial fever, designed to help treat HIV and cancer;
environmental bioremediation products which help clean up
chemical spills in water and on dry surfaces, and filter
pollutants before they enter the water; and
implantable devices such as ports for drug delivery and
hemodialysis use and an artificial heart valve.
Last year, we discontinued our work on a marine paint product
and an implantable electrical stimulator project because our
limited cash forced us to choose which projects to pursue. We
also bought the majority of the stock of a company which makes a
metal-coating product, but we are restructuring its operations, so
we have not received any revenue yet.
Our executive offices are located at 2275 Swallow Hill Road,
Building 2500, Pittsburgh, Pennsylvania 15220. Our telephone
number is (412) 429-0673.
The Offering
Common Stock Offered: 375,000,000
Common Stock to be
outstanding immediately
after this offering: 967,000,838
Use of proceeds:
We will use the net proceeds of this
offering to continue to fund our
research and development projects,
and for general corporate purposes,
including working capital and
research and development.
Electronic Bulletin Board symbol
for our common stock: BICO
The number of shares of our common stock outstanding
immediately after this offering is based on the assumption that
all of the shares offered are sold, the number of shares
outstanding as of March 31, 1999 and excluding the 7,999,162
shares of our common stock which are subject to outstanding
warrants.
Summary Financial Information
The following table summarizes our financial data. The data
presented in this table is derived from the "Selected Financial
Information" and the financial statements which are included in
this prospectus. You should read those other sections for a
further explanation of the financial data summarized here.
Statement of Operations Data:
Year ended December 31,
1996 1997 1998
Revenues $776,727 $ 1,426,134 $1,378,213
Net Loss ($24,045,702) ($30,433,177) ($22,402,644)
Net Loss per Common Share ($.57) ($.43) ($.08)
Balance Sheet Data:
Year ended December 31,
1996 1997 1998
Working Capital (deficiency) $ 1,785,567 $ 863,082 ($ 9,899,008)
Total Assets $14,543,991 $ 12,981,300 $ 9,835,569
Long-Term Liabilities $ 2,699,727 $ 2,697,099 $ 1,412,880
Total stockholders'equity (deficit)$ 3,917,231 $ 4,464,076 ($ 1,927,244)
Other Data
Common Shares Outstanding 49,213,790 138,583,978 420,773,568
RISK FACTORS
An investment in our common stock involves a high degree of
risk. You should carefully consider the following risk factors,
as well as the other information in this prospectus, before
investing in our common stock. You should not invest in our
common stock unless you are willing to lose your entire
investment.
If we continue to incur losses, we will not be able to
complete our projects. We have experienced losses and had
negative cash flow in each quarter and year for all relevant
periods, and we expect to continue to operate at a loss for the
foreseeable future. For us to make a profit, we need to increase
our revenues. If we cannot do so, our losses will extend beyond
the foreseeable future, we will not be able to finance and
complete any of our projects, and we will have to stop operating.
We lost ($24,045,702) in 1996; ($30,433,177) in 1997; and
($22,402,644) in 1998. Our accumulated deficit aggregated
($120,699,236) as of December 31, 1997, and ($143,101,880) as of
December 31, 1998.
Our auditors issued a "Going Concern" condition in their
auditors' report. When our independent auditors issued their
report, they included a paragraph emphasizing that they were
concerned that we may not be able to continue operations because
of our continuing losses, limited cash flow and lack of revenues.
We may not be able to obtain necessary additional capital to
fund operations in the future. To date, we have funded operations
primarily through the sales of equity securities. If we are
unable to obtain additional financing on terms acceptable to us as
needed, we may not be able to complete any of our projects, and
may not be able to continue operations. We cannot assure you that
we will receive any proceeds from this offering, or that the funds
will be sufficient to complete any of our projects. We have
enough capital to fund operations in the short term; however, we
do not have sufficient capital to continue indefinitely.
We develop new products, and their future is uncertain.
Research and development of new products involves a high degree of
financial risk and experimentation. Our projects involve the
application of novel theories, unproven technology and new
engineering. Our products are at various stages of development.
In 1998, we received approval to sell our Noninvasive Glucose
Sensor in Europe. In April 1999, the FDA accepted our proposal
for submitting the Diasensor for marketing approval in the United
States. Our bioremediation products have been developed for
various uses in water and on hard surfaces. Our hyperthermia
project has received FDA approval to conduct additional clinical
trials. Our heart valve and other implantable devices are in
various stages of preliminary development. We cannot assure you
that any of these products will ever be fully developed. Even if
any of these products are developed, we cannot assure you that
they will be successful or profitable.
We face competition from other more stable and well-
positioned companies. Other research groups and companies are
also researching and developing products which compete with our
products. Those companies may be further along in their research
and development, may be better capitalized, may have more
sophisticated equipment and expertise and may have various other
competitive advantages over us. Those companies may be able to
bring their products to market before we do, which would have a
negative impact on our future prospects and profitability.
Although its features are different, our Noninvasive Glucose
Sensor, if successfully developed, will compete with existing
invasive glucose sensors which have an established market with
diabetics. In addition, we are aware that other companies are
developing noninvasive glucose sensors. We don't have much
information on the status of other products, but we do not believe
that any other company is in a position to get FDA approval to
sell their device. Our bioremediation products will compete with
other groups and companies in the environmental clean-up industry,
and many of those other companies are very large and well-
established. Our other products will face similar competitiion.
We are obligated to manufacture the Noninvasive Glucose
Sensor, and we have no prior experience in manufacturing large
commercial quantities. We have a contract with Diasensor.com to
manufacture the Noninvasive Glucose Sensor. We lease
manufacturing space in Indiana, Pennsylvania, which we renovated
to use as our manufacturing facility. We can also hire
subcontractors to help us. Although we have previous
manufacturing experience, we do not have prior experience of the
kind which will be necessary to manufacture the Noninvasive
Glucose Sensor.
The price of the Noninvasive Glucose Sensor may be too high
for many people to afford, and we don't know whether any
reimbursement will be available. We believe that the price of
the Noninvasive Glucose Sensor will be much higher than the
current finger prick products. If we cannot convince the health
insurance companies to reimburse diabetics for all or part of the
cost of our device, many diabetics will be unable to buy it.
Because the health care insurance industry changes so frequently,
we cannot project whether reimbursement will be available.
Our business would suffer if we lost the services of key
personnel. Our success depends, in part, on the continued service
of David L. Purdy, our president, treasurer and Chairman of the
Board, and Fred E. Cooper, our CEO.
We lost a primary source of revenue in 1998. During 1998, we
lost the primary purchaser of our functional electrical stimulator
product when NeuroControl, Inc. suspended its orders. This loss
had a significant negative impact on our revenues, liquidity and
results of operations, since sales to NeuroControl accounted for
approximately 76% of total revenues during the year ended December
31, 1997 and 51% of total revenues for the year ended December 31
1998. We cannot estimate whether or not sales to NeuroControl
will resume; therefore, prospective investors should assume that
this material source of revenue has been lost.
We depend on Independent Contractors. In experimenting with
and developing new technologies, devices and engineering, we rely
upon independent contractors who may not devote full-time efforts
to the development of our projects. Moreover, our ability to
develop new products depends, in part, upon the evaluation,
coordination and supervision of those contractors in areas where
we do not possess particular expertise.
Our products may become obsolete. The medical device
industry is subject to rapid technological innovation. Although
we are not aware of any new or anticipated technology which would
make our products under development obsolete, the possibility
exists.
We depend on component suppliers. Our projects involve the
fabrication of custom, novel or unique component parts for use in
experimentation, testing and development of new devices.
Suppliers of those components are not always readily available,
which would require us to create those components in-house.
Delays in obtaining components can cause delays in the development
process. If we cannot find or make components, it could cause a
total failure of the development process. .
The government regulates and controls our products. Our
operations, medical devices and other projects are regulated by
the FDA, the Federal Nuclear Regulatory Commission, the
Environmental Protection Agency and other federal and state
regulatory agencies. We must have FDA approval before we can sell
the Noninvasive Glucose Sensor in the U.S. The FDA has the
ability to refuse to approve any product.
The EPA, through the National Environmental Technology
Applications Corporation, conducted the testing on our
bioremediation product. The EPA monitors the use of bioremediation
products, our products can be modified or delayed by the EPA.
Many factors may adversely affect our common stock:
We don't pay dividends. We don't expect to pay dividends on
common stock any time soon. We expect to use all earnings, and
the proceeds from this offering, to continue to develop our
products and run our operations.
The market for our common stock is limited. We are no longer
listed on the Nasdaq Small-Cap market, since the requirements for
listing changed. Our common stock trades on the Electronic
Bulletin Board, which is not as well-covered or well-established
as other markets. We can't assure you that there will continue to
be an active market for our common stock. And the stock market is
highly volatile because of general market conditions.
You will experience dilution. If you buy our common stock,
you will experience immediate dilution in net tangible book value.
Our negative net tangible book value was ($6,353,098), or ($.015)
per share, as of December 31, 1998. After giving effect to this
entire offering at $.13 per share, our net tangible book value
as of that date would have been $38,646,902. This results in an
immediate increase to our existing stockholders of $.063 per share,
and an immediate dilution to you of $.082 per share.
We are subject to Penny Stock Rules and Regulations. Because
of our price, our common stock is subject to the SEC's Penny
Stock Rules. Those rules require the delivery, prior to any penny
stock transaction, of a disclosure schedule explaining the penny
stock market and the risks associated, and impose various sales
practice requirements on broker-dealers who sell penny stocks to
persons other than established customers and accredited investors.
For these types of transactions, the broker-dealer must make a
special suitability determination for the purchaser and have
received the purchaser's written consent to the transaction prior
to sale. The broker-dealer also must disclose the commissions
payable to the broker-dealer, current bid and offer quotations for
the penny stock and, if the broker-dealer is the sole market-
maker, the broker-dealer must disclose the fact and the broker-
dealer's resumed control over the market. The additional burdens
imposed upon broker-dealers by such requirements may discourage
them from buying and selling our common stock, which would limit
our liquidity.
Intellectual property claims against us can be costly and
result in the loss of significant rights. We hold patents on some
of our products, as well as trademarks on the names of some of our
products and procedures. We cannot provide assurances that future
patents will be granted, that any patent held or pending will not
be challenged or circumvented by a competitor or other entity, or
that any patent contest will result in a favorable outcome. If
any our patents are successfully challenged, or if future patents
are not granted, or we are found to have infringed upon another
company's patent, it would result in substantial costs and delays
our product development, and could limit our rights to use our
products or names.
We may have liability for our products. We are engaged in
activities which include the testing and selling of biomedical
devices. These activities expose us to potential product
liability claims. We carry an aggregate amount of $500,000 in
product liability insurance. In the event that a successful claim
in excess of that amount is brought against the us, we may be
liable for the excess.
We may have liability for our warranties. We used to
manufacture pacemakers, and we warranted our conventional
pacemakers against defects in materials and workmanship for
periods presently ranging from six to ten years from implantation.
We warranted our isotopic pacemaker for twenty years. We are
subject to liability in the event that warranted pacemakers
function improperly. We discontinued our pacemaker operations in
1988; therefore only pacemakers implanted prior to that time are
subject to warranties.
Our executive officers have conflicting interests. Our
executive officers are also officers and directors of other
related entities. Accordingly, they will be subject to competing
demands and will face conflicts of interest. Therefore, the good
faith and integrity of management in all transactions with respect
to all of the companies and their businesses are of utmost
importance.
FORWARD-LOOKING STATEMENTS
This prospectus contains statements that plan for or
anticipate the future. Forward-looking statements include
statements about the future of the biomedical and environmental
industries, statements about our future business plans and
strategies, and most other statements that are not historical in
nature. In this prospectus, forward-looking statements are
generally identified by the words "anticipate", "plan", "believe',
"expect", "estimate" and the like. Because forward-looking
statements involve future risks and uncertainties, there are
factors that could cause actual results to differ materially from
those expressed or implied. For example, a few of the
uncertainties that could affect the accuracy of forward-looking
statements include:
additional delays in the research, development and FDA
marketing approval of the Noninvasive Glucose Sensor;
delays in the manufacture or marketing of the our other
products and medical devices;
our future capital needs and the uncertainty of additional
funding;
the uncertainty of additional funding; competition and the
risk that the Noninvasive Glucose Sensor or our other products may
become obsolete;
our continued operating losses, negative net worth and
uncertainty of future profitability;
our potential conflicts of interest;
the status and risk to our patents, trademarks and licenses;
the uncertainty of third-party payor reimbursement for the
Sensor and other medical devices and the general uncertainty of
the health care industry;
our limited sales, marketing and manufacturing experience;
the amount of time or funds required to complete or continue
any of our various products or projects;
the attraction and retention of key employees;
the risk of product liability;
the uncertain outcome and consequences of the lawsuits
pending against us; and
our ability to maintain a trading market for our common
stock, given its dilution.
USE OF PROCEEDS
We will receive net proceeds of approximately $45,000,000 if
all the common stock offered is sold at the price listed. We cannot
assure you that we will sell any common stock, or receive any proceeds.
We are selling this common stock on a continuous, no minimum basis. We
will use any proceeds we receive immediately, regardless of how
few shares are sold. We cannot assure you that we will raise
enough capital to fund all of our projects.
We will use any proceeds received from this offering to
continue the development of the Noninvasive Glucose Sensor, for
inventory build-up, and to satisfy general working capital
requirements, if sufficient. We will use the proceeds as received
first for salaries of employees, general and administrative
expenses and legal fees.
Depending upon the actual sales price of the common stock,
the number of shares sold, and the timing of the sales, we may not
have sufficient funds available at any given time to fund both the
development of the Noninvasive Glucose Sensor and to satisfy its
general working capital requirements. If the net proceeds of this
offering are insufficient at any given time, we will be required
to seek additional financing from third parties. We cannot assure
you that any additional financing will be available when we need
it, or on terms which are acceptable to us. If we cannot obtain
sufficient financing, we will be forced to cease operations.
DIVIDEND POLICY
We have not paid cash dividends on our common stock or its
preferred stock since our inception, and cash dividends are not
presently contemplated at any time in the foreseeable future. In
accordance with the Company's Articles of Incorporation, cash
dividends are restricted under certain circumstances.
DILUTION
As of December 31, 1998, our common stock had a negative net
tangible book value of ($6,353,098) or ($.015) per share based
upon 420,773,569 shares outstanding. Net tangible book value per
share is determined by dividing the number of shares of common
stock outstanding into our total tangible assets less total
liabilities, minority interest and preferred stock.
Our negative net tangible book value as of December 31, 1998,
was ($6,353,098). Net tangible book value consists of our net
tangible assets (total assets less total liabilities, intangible
assets, minority interest and preferred stock). As of December
31, 1998 there were 420,773,568 shares of our common stock
outstanding. Therefore, our negative net tangible book value as
of that date was ($.015) per share.
In the event that all 375,000,000 shares of common
stock are sold at a price of $0.12 per share, the net tangible
book value of our common stock as of December 31, 1998 would be
$38,646,902 or approximately $.048 per share. These figures give
effect to the deduction of all of the estimated expenses,
including filing, printing, legal, accounting, transfer agent and
other fees, including commissions. The net tangible book
value of each share will have increased by approximately $.063 per
share to the present stockholders, and decreased by approximately
$.082 per share to you, if all 375,000,000 shares are sold.
Dilution represents the difference between the offering price
and the net tangible book value per share immediately after the
completion of the offering. Dilution arises mainly from the
arbitrary decision as to the offering price per share. Your share
value will be diluted, in part, due to the far lower book value of
the shares presently outstanding, and in part, to expenses
incurred in connection with the offering. In the table set forth
below, no attempt was made to determine the dilutive effect of the
exercise of outstanding warrants, options, or the conversion of
debentures, which will further dilute the value of the shares.
The following table illustrates this dilution, rounding off
dilution to the nearest thousandth of a cent:
ASSUMING: 100%-375,000,000 50%-187,500,000 10%-37,500,000
SHARES / SOLD SHARES / SOLD SHARES / SOLD
Offering Price Per Share $0.130 $0.130 $0.130
Net Tangible Book Value
Per Share Before Offering ($0.015) ($0.015) ($0.015)
Increase Per Share
Attributable to Payment
by Investors $0.063 $0.041 $.011
Net Tangible Book Value
Per Share After Offering $0.048 $0.026 ($.004)
Dilution Per Share
to Investors $0.082 $0.104 $0.124
CAPITALIZATION
The following table sets forth our capitalization as of and
December 31, 1997 and December 31, 1998. The December 31, 1997
and 1998 figures were taken from the audited financial statements
for the years ended December 31, 1997 and 1998, which included a
qualification regarding our ability to continue as a going
concern.
(1) (1)
December 31, 1997 December 31, 1998
----------------- -----------------
Shareholders' Equity:
Common Stock, par value $.10
per share; authorized 600,000,000
shares; shares issued and
outstanding: 138,583,978 at
December 31, 1997 and 420,773,568
at December 31, 1998 $ 13,858,398 $ 42,077,357
Additional Paid-in Capital 104,932,920 92,725,285
Note Receivable issued for
common stock (25,000) (25,000)
Warrants 6,396,994 6,396,994
Accumulated Deficit (120,699,236) (143,101,880)
--------------- -------------
Total Capitalization $ 4,464,076 $ (1,927,244)
=============== =============
December 31, 1997 December 31, 1998
----------------- -----------------
(1) Does not include the effects
of the following:
Outstanding Warrants to purchase
common stock granted by the
Company, at exercise prices
ranging from $.05 to $4.03
per share, expiring 1999
through 2003. 5,346,662 7,831,662
Note: In March 1999, the Company's authorized common stock was increased
from 600,000,000 to 975,000,000 shares pursuant to a vote of the shareholders.
MARKET PRICE FOR COMMON STOCK
Our common stock is traded on the Electronic Bulletin Board
under the symbol "BICO" and is also reported under the symbol
"BIOCNTRL TEC". On April 27, 1999, the closing price for our
common stock as reported by Nasdaq was $.122. The following
table sets forth the high and low sales prices for our common
stock during the calendar periods indicated, through March 31,
1999 as reported by Nasdaq:
Calendar Year and Quarter High Low
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
1998 First Quarter .25 .0937
Second Quarter .1875 .0313
Third Quarter .359 .0313
Fourth Quarter .126 .049
1999 First Quarter .084 .049
As of December 31, 1998, we had approximately 47,000 stock
holders, including those who hold in street name.
Because Nasdaq revised its requirements for companies listed
on its Small-Cap market to include a minimum trading price of
$1.00, our common stock was delisted from the Small-Cap Market and
is now listed on the Electronic Bulletin Board. The risk exists
that its trading volume and price will decrease.
SELECTED FINANCIAL DATA
The Selected Financial Data provided below is a summary of
the information set forth in the Company's audited financial
statements for the years ended December 31, 1994 through 1998.
YEARS ENDED DECEMBER 31st
1998 1997 1996 1995 1994
Total Assets $9,835,569 $12,981,300 $14,543,991 $9,074,669 $6,375,778
Long-Term
Obligations $1,412,880 $ 2,697,099 $ 2,669,727 $ 175,330 $ 163,201
Working Capital
(deficiency) ($9,899,008)$ 863,082 $ 1,785,576 $3,188,246 $2,612,884
Preferred Stock $ 0 $ 0 $ 0 $ 37,900 $ 54,900
Net Sales $1,145,968 $ 1,155,907 $ 597,592 $ 461,257 $ 184,507
TOTAL REVENUES $1,378,213 $ 1,426,134 $ 776,727 $ 755,991 $ 481,453
Warrant $ 0 $ 4,046,875 $ 9,175,375 $12,523,220 $ 0
Extensions
Benefit $ 0 $ 0 $ 0 $ 0 $ 0
(Provision)for
Income Taxes
Net Loss ($22,402,644)($30,433,177)($24,045,702)($29,420,345)($11,672,123)
Net Loss per ($ .08)($ .43)($ .57)($ .84)($ .43)
Common Share
Cash Dividends
per share:
Preferred $ 0 $ 0 $ 0 $ 0 $ 0
Common $ 0 $ 0 $ 0 $ 0 $ 0
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following is a summary of the more detailed information
set forth in the 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 earlier in this prospectus.
Liquidity and Capital Resources
Working capital (deficiency) was ($9,899,008) at December 31, 1998
as compared to $863,082 at December 31, 1997, and $1,785,567 at
December 31, 1996. Working Capital fluctuations are due primarily
to our varied capital-raising efforts, which aggregated
approximately $10,700,000 in 1998; $22,300,000 in 1997; and
$21,600,000 in 1996, 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, and to $74,515 as of December 31, 1998.
Cash decreased from $3,802,874 at December 31, 1996 to $2,759,067
at December 31, 1997 to $125,745 at December 31, 1998. These
changes were attributable to the following factors. Our
securities sales raised funds aggregating $10,700,000 during 1998;
$22,300,000 during 1997 ; and $21,600,000 during 1996. During
those periods, our cash flows used by operating activities
aggregated $11,855,294; $19,121,752; and $19,972,000
respectively. During 1998 and 1997, those activities included a
$.8 and $2.1 million increase in inventory reserves, respectively.
We expended cash and other resources in connection with its
purchase of a majority interest in ICTI, which is described below.
In addition, we recorded a $4 million charge against operations
due to warrant extensions by us and Diasensor.com in 1997, with
similar charges of approximately $9 million in 1996. (See, Note J
to the Financial Statements). Our other assets decreased from
$669,243 at year-end 1997 to $200,000 at year-end 1998 due to an
allowance for related party receivables in 1998.
In March 1998, we acquired a majority interest of ICTI, a metal-
plating company in Florida.. ICTI is a development-stage company
which commenced operations in May 1997, but has incurred losses to
date. The purchase required us to make a cash payment of
$1,030,000, issue a $3,350,000 promissory note, 2 million shares
of our common stock, and other consideration (See Note A to the
Financial Statements).
Our current liabilities increased by $5,915,293 from 1997 to 1998;
that increase was primarily due to an increased issuance of
convertible debentures and cash flow problems during 1998.
We continued to fund operations mostly from sales of our
securities. During 1998, we issued $10,700,000 of its 4%
Subordinated Convertible Debentures. The debentures have one-year
terms, minimum holding periods prior to conversion and mandatory
conversion provisions. During 1997, we sold 22,000 shares of
Series B convertible preferred stock; and issued $20.2 million in
subordinated convertible debentures.
As of December 31, 1998 and 1997, the conversion price of the
debentures would have been approximately $.059 and $.146 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, 1998 and
1997, the number of shares issued upon conversion of all
outstanding debentures was approximately 60.1 million and 23.9
million shares, respectively, which would have reflected discounts
of approximately 23% and 18%, respectively.
Due to our current limited sources of revenue, we plan 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. We cannot
make any assurances to the availability of any financing.
We currently have a commitment for capital leases on certain
capital equipment and future commitments for new capital
expenditures will be required to continue our efforts in research
and development, and to manufacture and market our existing
products and any other products it may develop.
As of April, 1999, we estimate that our short-term liquidity needs
will be met from currently available funds. We estimate that
those funds will be sufficient to complete the research and
development stage of the Noninvasive Glucose Sensor, to complete
the FDA submission process, and to begin marketing the device. We
anticipate that we will finance those expenses with existing
funds, as well as funds raised through the sales of our
securities. We have a history of successful capital-raising
efforts; since 1989, and through December 1998, we, along with
Diasensor.com, have raised over $110,000,000 in private and public
offerings alone.
In prior years, we met a portion of our short-term working capital
needs through development contracts with other organizations and
through manufacturing for other companies on a contractual basis.
During 1996, 1997 and 1998, the we were 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 implantable electrical products.
Those contracts generated revenues of $508,561, $880,919 and
$1,028,484 in 1996, 1997 and 1998, respectively. During 1998,
orders related to those contracts were cancelled. As a result, we
terminated those project activities for the present, and may not
receive any additional revenue on a going-forward basis.
In view of our expenses resulting from product development
projects, as compared to our contract revenues, currently
available funds, and established ability to raise capital in
public and private markets, we estimate that we will be able to
fund operations for at least a year. This estimate is based, in
part, upon the current absence of any extraordinary technological,
regulatory or legal problems. Should any problems, which could
include unanticipated delays resulting from new developmental
hurdles in product development, FDA requirements, or the loss of a
key employee, arise, our estimates will be wrong. We cannot
assure you that our estimates are accurate.
Our 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. Delays in the development of our products will
result in increased needs for capital from other sources. We
anticipate that 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 we are unable to
raise the funds necessary to fund the long-term expenses necessary
to complete the development or manufacture of products, we will be
unable to continue operations.
Results of Operations
The following seven paragraphs discuss the Results of Operations
of all our operations based on its consolidated financial
statements. A discussion of the business segments follows.
In 1998, our net sales increased to $1,145,968 from $1,155,907 in
1997 and $597,592 in 1996. The increase was due to an increase
in all product sales, the vast majority of which were from
implantable electrical device sales, which have been discontinued.
In 1998, 1997 and 1996, we received interest income in the amount
of $182,033; $165,977 and $176,478, respectively. The fluctuation
was due to the investment of our liquid assets (which are
composed primarily of funds raised via sales of securities), the
availability of such assets and applicable interest rates. Our
other income decreased to $50,212 in 1998 as compared to $104,250
in 1997 from $2,657 in 1996. The fluctuation was due primarily to
payments made in connection with legal actions.
In 1998, our costs of products sold was $587,821 as compared to
$641,331 in 1997 and $325,414 in 1996. The increase is primarily
due to our corresponding increases in product sales, and products
produced pursuant to implantable electrical device contracts,
which have been discontinued.
Our research and development expenses were $6,340,676 in 1998, a
decrease from $6,977,590 in 1997 and $8,742,922 in 1996. The
overall decrease was due to our realignment of personnel and
resources in an effort to obtain a CE Mark for sale of the
Noninvasive Glucose Sensor outside the U.S., and, in 1998, to a
loss of personnel due to cash flow problems.
In 1998, General and Administrative expenses were $11,560,345 a
decrease from $12,695,628 in 1997, and compared to $8,963,693 in
1996. The decrease in 1998 from 1997 was due to a loss in
personnel and reduction in related expenses. The increase from
1996 to 1997 was due, in part, to the allocation of funds to
outside consultants and other advisors to assist us in our efforts
to obtain a CE Mark.
During 1997, we extended 177,800 warrants originally granted to
certain officers, directors, employees and consultants in 1992, as
compared to similar extension of 351,482 warrants in 1996.
Because the exercise price of some such warrants ($.25 to $3.20)
was lower than the market price of the common stock at the time of
the extensions $604,342 was charged to operations during 1996.
During 1997 and 1998, 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 and
$8,571,033 in 1996 was made by our subsidiary, Diasensor.com
Interest expense on our outstanding indebtedness was $481,025 in
1998 as compared to $315,624 in 1997 and $133,460 in 1996. The
increase was due to an increase in capital leases and interest
charges on our subordinated debentures.
Segment Discussion
For purposes of accounting disclosure, we provide the following
discussion regarding three business segments: Biomedical devices,
which includes the operations of Biocontrol Technology, Inc. and
Diasensor.com, Inc.; Bioremediation, which includes the operations
of Petrol Rem, Inc.; and Marine Paint Products, including the
operations of Barnacle Ban Corporation, which have been
discontinued. 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,
1998, sales to external customers increased to $1,028,484 from
$880,919 in 1997 and $508,561. These increases were primarily due
to increased sales of the functional electrical stimulators, which
have been discontinued. Corresponding increases in costs of
products goods sold occurred for the same reason, from $288,537 in
1996 to $445,843 in 1997, and $483,388 in 1998.
Bioremediation Segment. During the year ended December 31, 1998,
sales to external customers decreased to $45,382 as compared to
$138,362 in 1997 and $47,625 in 1996. The decrease from 1997 to
1998 was due to an inability to effectively penetrate the market
with products other than the Bio-Sok. 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
$16,092 in 1996 to $88,178 in 1997 and $33,061 in 1998. 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
decreased to $40,835 in 1998 from $136,624 in 1997 and $41,406 in
1996. This decrease was due primarily to the Company's decision
to discontinue this segment's operations. Costs of products sold
reflect the same impact, with $32,777 in 1998, $107,310 in 1997
and $20,785 in 1996.
Income Taxes
Due to our 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 1998. As of
December 31, 1998, we and our subsidiaries, except for
Diasensor.com and Petrol Rem, had available net operating loss
carryforwards for federal income tax purposes of approximately
$83,220,000, which expire during the years 1998 through 2019
(See, Note K to the Financial Statements).
Year 2000 Issue
The Year 2000 Issue is the result of computer programs being
written using two digits (rather than four) to define the
applicable year. Programs which are susceptible to problems after
December 31, 1999 are those which would recognize the year 2000 as
"00", creating confusion with the year 1900, which could result in
miscalculations or system failures. Based upon a review of our
internal programs and software, as well as a survey of its outside
suppliers, landlords and vendors, we currently believe that the
Year 2000 will not pose significant operational or other problems
because such systems and third parties are either already
compliant or have undertaken to become compliant with minor
adjustments. It has not been necessary for us to expend any
material amounts in our effort to address the Year 2000 issue. We
have determined that minimal contingency plans may be necessary to
assure the avoidance of interruptions, and are finalizing the
preparation of such plans on a departmental basis. However, we
can make no assurances regarding certain global system operations
which are beyond our control such as utilities and banks. As a
result, we cannot assure you that Year 2000 issues will not
adversely affect the Company's systems or operations.
Supplemental Financial Information
In January 1999, the Company's Form S-1 Registration Statement was
declared effective by the SEC. Approximately $7,310,000 has been
raised pursuant to such registration as of April 15, 1999.
BUSINESS OF THE COMPANY
General Development of Business
Biocontrol Technology, Inc. was incorporated in the Commonwealth
of Pennsylvania in 1972 as Coratomic, Inc. Our operations are
currently located at Kolter Drive, Indiana, PA, and our
administrative offices are located at 2275 Swallow Hill Road,
Bldg. 2500, Pittsburgh, PA. We are developing the Noninvasive
Glucose Sensor with Diasensor.com, Inc., our 52% owed subsidiary.
Our primary business is the development of new devices which
include models of a 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 HIV and bioremediation
products. Due to economic and other factors, including the loss
of orders, we discontinued our functional electrical stimulator
and Barnacle Ban projects. In early 1998, we acquired a majority
interest in a company which manufactures and sells metal coating
products.
Description of Business
Development of the Noninvasive Glucose Sensor
We have completed the development of the first commercial
Noninvasive Glucose Sensor, which is able to measure the
concentration of glucose in human tissue without requiring the
drawing of blood. Currently available glucose sensors require the
drawing of blood by means of a finger prick.
Our 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 wiht blood glucose levels in
the 50 milligrams per deciliter (mg/dl) to 500 mg/dl range in the
ingrared region of the electromagnetic spectrum. We studied this
as early as 1986 and 1987 with consultants at Battelle Memorial
Institute in Columbus, Ohio, using laboratory instruments. These
studies, along with later affirmative work, led to a patent
application by our research team in 1990. A patent covering the
method was granted to the research team and assigned to us in
December 1991. The rights of this patent have been purchased by
Diasensor.com pursuant to a purchase agreement. We filed other
patent applications which contained new claims, extending to new
discoveries made during the development of the Sensor. As of
March, 1999, we have been granted a total of seven U.S. patents,
with additional U.S. and foreign patent applications pending. We
have been granted the right to develop and manufacture Sensors
pursuant to agreements with Diasensor.com.
Our research team advanced its technology base through the
development of several research prototypes which were tested in
human clinical trials. In a trial we conducted on 110 human
subjects in March 1992, spectral, blood and chemical data was
recorded for analysis in order to develop calibration data for the
Sensor. A second trial on 40 human subjects in July 1992
indicated that the device did not have a satisfactory signal-to-
noise ratio to allow for the calculation of algorithms of
sufficient accuracy to be acceptable for patient use. Signal-to-
noise ratio is determined by the relationship of the signal (the
glucose level) and the noise (random interferences). Other trials
were conducted at several testing sites under the guidance of the
sites' Institutional Review Board using prototypes which addressed
the signal -to-noise problem. These prototypes were designed and
constructed to simulate production models.
On January 6, 1994, we submitted our initial 501(k) Notification
to the Food and Drug Administration for approval to market the
production model, the Diasensorr1000. The submission was based on
data obtained from the advanced research prototypes, since we
believed that the production model would be identical to the
advanced prototypes. In February 1996, the FDA convened a panel
of advisors to make a recommendation regarding our 510(k)
Notification. The majority of the panel members recommended that
we conduct additional testing and clinical trials of a production
model prior to marketing the Diasensor 1000.
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. The Diasensor 1000 uses internal
algorithms to calculate a glucose measurement.
The Diasensor 1000 is the first home-use noninvasive blood glucose
monitor for use by patients with diabetes mellitus. Unlike
currently marketed invasive home-use devices, the Diasensor 1000
does not require that patients prick their fingers to obtain a
sample of blood to test their blood glucose. A patient only needs
to place his or her arm on the Diasensor 1000 and press a button
to perform a blood glucose test. The Diasensor is currently
approved for sale in the 15-country European Union, and plans are
currently being formulated for the next submission to the FDA to
seek approval to market the device in the U.S.
Current Status of the Noninvasive Glucose Sensor
Due to continued delays in the FDA approval process, which are
summarized below, and while continuing to work with the FDA and
conduct its mandated testing, we turned our focus to other markets
for the Diasensor 1000 besides the U.S. We, as design authority
and manufacturer of the Diasensor 1000, applied for certification
to ISO 9001, a standard defined by the International Organization
for Standardization ("ISO") evidencing that we have in place a
total quality system for the design, development and manufacture
of our products. We received the certification formalizing the
ISO 9001 certification was in January 1998. At the same time, we
also received certification to EN46001, a standard specifically
for medical products. The certifications were received after an
extensive audit by TUV Rheinland, a company authorized to conduct
"conformity assessments" of an entity's quality system. In early
1998, we submitted our technical file on the Diasensor 1000 to TUV
Rheinland to satisfy requirements of the European Medical Device
Directive. In addition, we submitted our device to a TUV testing
center in Connecticut for device electrical safety testing. In
March 1998 we received approval to apply a CE mark to the device.
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
has permitted us to begin selling the Diasensor in Europe.
In order to facilitate sales in Europe, we have contracted with
EuroSurgical Ltd., a distributor of medical products in the United
Kingdom. During 1998 we educated the marketing and technical
staffs of EuroSurgical in the use and repair of the Diasensor
1000. Devices have now been placed with patients in Portugal,
Spain, Germany, South Africa and England. Because of the lengthy
calibration procedures, and our agreement with the distributor to
invoice after successful calibration was completed, minimal sales
were recorded for 1998.
With regard to marketing the device within the United States, we
are continuing to work with the FDA to obtain approval. Upon
advice from the FDA, we submitted, under the FDA's new modular
review, a Premarket Approval Application Shell, which was accepted
by the FDA in April 1999. In addition, we Companies plan to
submit an Investigational Device Exemption to conduct human
clinical trials at three clinical centers to obtain additional
data.
FDA approval is necessary to market the Diasensor 1000 in the
United States. In addition to the Diasensor 1000, we are
conducting further developments which will allow future models of
the device to be smaller, less costly, with reduced calibration
and evaluation periods. We cannot speculate as to when such
developments will be completed. Any future models of the
Diasensor may be subject to the same regulatory testing and
approval processes as have been required for the Diasensor 1000,
both in the United States and abroad.
The Diasensor 1000 is intended to promote greater compliance for
self-monitoring blood glucose for those patients concerned with
the pain and discomfort of frequent finger prick procedures by
allowing patients to perform a majority of their daily self-
monitoring blood glucose with a noninvasive device. The use of
the Diasensor 1000 in a defined target population is intended to
assist the physician responsible for the patient's diabetes care
in making appropriate treatment adjustments. Such adjustments may
include changes to the patient's daily insulin dose, caloric
intake, and exercise regimen. Averages of daily blood glucose
test results from the Diasensor 1000 obtained at clinically
relevant times of the day (e.g. fasting, pre-meal, post-meal, and
bedtime) over at least two to four weeks are to be used by
physicians together with other test results (including invasive
home-use meters, laboratory test such as HbA1c and fructosamine)
changes in weight, patient-reported acute complications (such as
hypoglycemia or ketonuria) and changes in lifestyle, to make
appropriate treatment decisions.
Because of the current need for 60-day calibration, after which
there is a 30-day evaluation period, and the inability of the
Diasensor 1000 to completely replace a patient's invasive meter at
this point, the market will be limited by the number of patients
who opt to use the device. Due to the current vicissitudes of the
health-care insurance industry, we are unable to make any
projections as to the availability of, or procedures required in
connection with, third-party reimbursement. Although we estimate,
based on 1998 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 are in poor glycemic control, who are
currently under a physicians care, and who do not perform self-
monitoring blood glucose because of the pain and discomfort of
fingersticks comprise the potential market for the Noninvasive
Glucose Sensor. We are unable to estimate the size of that market
at this time.
Bioremediation
We are 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, PRPr, 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 PRPr comes
in contact with the petroleum substances, the contaminants are
bound to the PRPr, 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, we created a subsidiary, Petrol
Rem, Inc. 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, a group endorsed by the Environmental
Protection Agency, to determine whether the product is effective.
As a result of such testing, NETAC reported positive results
regarding the effectiveness of the product.
PRPr is now being manufactured and marketed for use in water and
on solid surfaces in the form of Petrol Rem's OIL BUSTER r
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 Product Schedule, and is available in free-flowing powder or
absorbent socks. In 1995, the EPA required that all products
previously listed on the National Contingency Plan Product
Schedule be submitted to additional testing. Because PRPr
successfully passed the Tier II efficacy test conducted by NETAC,
the product was requalified for listing. 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
PRPr. 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 PRPr in quantities of 2,500
pounds per day, and Petrol Rem has built an adequate inventory.
Petrol Rem has also completed development of a new spray
applicator for its PRPr 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 PRPr, Petrol Rem has also developed other products.
In order to address water pollution issues at marinas, Petrol Rem
has introduced BIO-SOKr, which is PRPr 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-SOKr, 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-SOKr helps to keep
waters clear. In addition, BIO-SOKr 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.
BIO-SOKr 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 r, which is a mixture of
PRPr and an absorbent material. OIL BUSTER r is used to clean up
and remediate oil spills on hard surfaces.
Petrol Rem's BIO-BOOM r product is used in water clean-up
projects. The product is a 3" x 10' fabric tube which is filled
with PRPr, and is used to both contain and biodegrade contaminants
in water. BIO-BOOM r 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 PRPr 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 PRPr
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 PRPr
will be a viable product in the bioremediation marketplace.
We believes that we have expended the necessary funds to complete
the development of its bioremediation products, and to build up
sufficient inventory pending additional orders. We spent
approximately $9,963,700 on this project through December 31,
1998.
Whole-Body Extracorporeal Hyperthermia
In connection with this project, we formed a wholly-owned
subsidiary, IDT, Inc. IDT's executive officers and directors
include Glenn Keeling, who is also our officer and director.
IDT and HemoCleanse, an unaffiliated company located in Lafayette,
Indiana, are currently engaged in a project which involves the
experimental use of a delivery system, the ThermoChem SystemT, for
perfusion-induced systemic hyperthermia 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 SystemT, which
incorporates this technology, is designed for use in the
hyperthermia procedure. The ThermoChem SystemT is used in IDT's
clinical trials.
Perfusion-induced systemic hyperthermia, a form of whole-body
hyperthermia, achieved through extracorporeal blood heating
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 of
our knowledge, 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 SystemT increase the safety of the procedure. The
ThermoChem SystemT 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 SystemT 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 SystemT 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 SystemT. In November 1996, the
Companies submitted an Investigational Device Exemption
application to the FDA for a study utilizing the ThermoChem
SystemT 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 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 to begin a human
clinical trial in October 1997. The trial will utilize the
ThermoChem SystemT 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 SystemT 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-HTT, a component of the ThermoChem SystemT, 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 SystemT 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 Wake Forest School of
Medicine has approved a protocol concept to conduct a pilot study
investigating the safety of the ThermoChem-HTT for intraperitoneal
hyperthermic chemotherapy (IPHC) in the treatment of advanced
gastrointestinal and ovarian cancers.
This hyperthermic chemotherapy technique has been done at Wake
Forest School of Medicine since 1992 utilizing a non-standardized
perfusion setup. The ThermoChem-HTT can possibly make the
technique more efficient with better temperature monitoring and
control. An IDE has been approved by 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.
We have expensed approximately $9,789,000 on this project through
December 31, 1998, which includes our acquisition of HemoCleanse
common stock, via a purchase of common stock and the conversion of
a loan into common stock.
Other Projects
Implantable Technology
In April 1996, we received FDA approval to market its theraPORTr
Vascular Access System ("VAS"). The approval was in connection
with the our 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 theraPORTr 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. We 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, we submitted a supplement to the FDA in response
to a request for additional information. We are currently
developing a dual port device and plans to submit another 510(k)
for that device in the near future.
Through our subsidiary, Coraflex Inc., we are engaged in the
development of a polyurethane heart valve which we believe may not
have the disadvantages of the mechanical and bioprosthetic valves
currently being marketed. The Coraflexr valve, which resembles
the human heart's aortic valve, is made by means of a proprietary
manufacturing process. We believe that the polyurethane used in
the construction of the heart valve exhibits 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 Coraflexr 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 prior to
making an application to the FDA for approval to begin clinical
testing in humans. We will need additional financing to complete
clinical testing of the valve and to begin production. We cannot
assure you that we 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.
.We also developed technology for other implantable devices, such
as hemodialysis ports, implantable insulin dispensers and
rate-adaptive pacemakers. Because we to focus most of our
resources on the research and development of the Noninvasive
Glucose Sensor, little progress was made on these other 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.
Functional Electrical Stimulator Project. We discontinued
its functional electrical stimulator project due to a loss of
orders from NeuroControl, our sole purchaser. Because these
products accounted for the majority of our sales revenues, this
loss is significant and will have a corresponding negative impact
upon our cash flows, liquidity and revenue
Metal-Plating Technology
During 1998, we acquired a majority interest in International
Chemical Technologies, Inc. ("ICTI") from its existing majority
shareholders, none of whom had any prior affiliation with the
Company. In connection with such purchase, we paid consideration
consisting of cash, common stock, and the undertaking to make
certain additional payments.
ICTI developed a metal-coating or plating process known as
cemkoter, a hard, wear-resistant coating engineered to be
environmentally safe and cost effective. ICTI obtained a patent
on the product. Cemkoter began as an answer to the search for an
environmentally friendly replacement for chrome, and testing
revealed additional attractive features.
During 1998, ICTI focused on the research and development, testing
and application of cemkoter on a number of parts and products for
various companies. For example, research and testing was
conducted to determine whether cemkoter could be produced to meet
military and commercial aircraft specifications.
When we acquired our interest in ICTI, we made disclosures in a
Form 8-K which contained estimates of the potential revenues of
both the metal-finishing industry and the potential revenue of
ICTI. We also disclosed, based on estimates as of the date of the
acquisition, that we expected cemkoter to "generate immediate
revenue and be a major profit center" for us. The results have
differed materially from the our initial estimates. ICTI did not
acheive any significant revenue during 1998. Our early estimates
were based upon its assessment not only of the marketability of
the product, but on our ability to penetrate the metal finishing
market using the features of the product. Our actual experience
has indicated that it is much more difficult to exploit the
existing market, regardless of whether our product has superior
features. As a result, we have been compelled to adjust our
marketing strategy. Accordingly, we can no longer estimate the
amounts or timing of any revenue or profit which may be generated
by cemkoter.
A new Chief Executive Officer for ICTI has been hired and assumed
his position effective January 1, 1999. Among other duties, the
new CEO, who has more than 37 years' experience in the metal
finishing industry, will thoroughly evaluate the Company's current
cemkoter product as well as other metal coatings for use at ICTI.
The information set forth herein regarding our 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
We continue to be actively engaged in the research and development
of new products. Our major emphasis has been the development of a
Noninvasive Glucose Sensor. In order to raise funds for the
research and development of new products, we have conducted sales
of stock.
MARKETING AND DISTRIBUTION
Petrol Rem began marketing of its bioremediation product, PRPr, 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. 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
We own patents on certain of its products and files applications
to obtain patents on new inventions when practical. Additionally,
we endeavor to obtain licenses from others as it deems necessary
to conduct its business.
We also rely upon trade secret protection for its confidential and
proprietary information. Although we take all reasonable steps to
protect such information, including the use of Confidentiality
Agreements and similar provisions, there can be no assurance that
others will not independently develop substantially equivalent
proprietary information or techniques, otherwise gain access to
our trade secrets, disclose such technology, or that we can
meaningfully protect our trade secrets.
Noninvasive Glucose Sensor
Diasensor.com 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. The patent was awarded to our
research team in December 1991 and was sold to Diasensor.com
pursuant to a Purchase Agreement dated November 18, 1991. The
Patent will expire, if all maintenance fees are paid, no earlier
than the year 2008. If marketing of a product made under the
Patent is delayed by clinical testing or regulatory review, an
extension of the term of the Patent may be obtained.
Diasensor.com's Patent relates only to noninvasive sensing of
glucose but not to other blood constituents. Diasensor.com has
filed corresponding patent applications in a number of foreign
countries.
We filed a second patent application in December 1992, which was
assigned to Diasensor.com. This second patent contained new
claims which extend the coverage based upon additional discoveries
and data obtained since the original patent was filed. The patent
application was amended in October 1993, and was granted in
January 1995.
In May 1993, our research team filed four additional patent
applications related to the methods, measurement and noninvasive
determination of analyte concentrations in blood.
As of March, 1999, a total of seven U.S., including two design
patents, have been issued, all of which have been assigned to
Diasensor.com, and additional patents are pending.
Corresponding patent applications have been filed in foreign
countries where we anticipate marketing the Noninvasive Glucose
Sensor.
We or Diasensor.com 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 us 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 us to alter any model of
the Noninvasive Glucose Sensor or the underlying processes
relating to the Noninvasive Glucose Sensor, to obtain licenses, or
to cease certain activities.
We also relies upon trade secret protection for its confidential
and proprietary information. Although we take all reasonable
steps to protect such information, including the use of
Confidentiality Agreements and similar provisions, there can be no
assurance that others will not independently develop substantially
equivalent proprietary information or techniques, otherwise gain
access to the our trade secrets, disclose such technology, or that
we can meaningfully protect our trade secrets.
We received trademark protection for the term "Diasensorr 1000",
which is intended for use in connection with the Diasensorr
models. We intend to apply, at the appropriate time, for
registrations of other trademarks as to any future products.
Whole-Body Hyperthermia
In September 1992, our research team 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 SystemT 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 SystemT, was allowed in July 1995 and was issued in
December 1995.
Implantable Technology
During 1995, we renewed our U.S. trademark registration for the
name Coraflexr, which was originally granted in 1988. We also
obtained trademark registration for the name theraPORTr.
In October, 1996, a patent was issued for the our 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.
We received trademark authorization for the use of the product
names PRPr, BIO-SOKr, BIO-BOOMr, and Oil Busterr.
WARRANTIES AND PRODUCT LIABILITY
Our present product liability insurance coverage is $500,000 in
the aggregate, which we believe is sufficient due to our
discontinuance of sales of certain products, including our former
pacemaker line and its functional electrical stimulators, and
potential exposure to liability.
SOURCE OF SUPPLY
In connection with the manufacture the Noninvasive Glucose Sensor,
we will be dependent upon suppliers for some of the components
required for the devices' fabrication. We plan 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, our developmental
products are always subject to the risk of obsolescence through
the introduction by others of new products or techniques. We are
aware that other research groups are developing noninvasive
glucose sensors, but we have 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 we do. To the best of our knowledge, there
is no other company currently producing or marketing noninvasive
sensors for the measurement of blood glucose similar to those
being developed by us.
The Noninvasive Glucose Sensor will compete with existing invasive
glucose sensors. Although we believe 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).
Those companies have established marketing and sales forces, and
represent established entities in the industry. Certain
competitors (including their corporate or joint venture partners
or affiliates) currently marketing invasive glucose sensors have
substantially greater financial, technical, marketing and other
resources and expertise than Diasensor.com, and may have other
competitive advantages over Diasensor.com (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 our Noninvasive Glucose Sensor. Accordingly,
there can be no assurance that the product, or Diasensor.com 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 which we
believe achieve accuracy levels within 30 minutes which are within
plus or minus 3% of actual glucose levels. We 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.
We anticipate that we will also face competition from the clinical
sensors, at least in some markets. For example, certain
institutions that might otherwise purchase Diasensor.com'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 Diasensor.com
believes will be the superior convenience and cost factors of the
Noninvasive Glucose Sensor.
We face more direct competition from other companies who are
currently researching and developing noninvasive glucose sensors.
We have very limited knowledge as to the stage of development of
these sensors; however, should another company successfully
develop a noninvasive glucose sensor, achieve FDA approval, and
reach the market before we do, it would have an adverse effect
upon our ability to market its sensor.
The companies which are currently engaged in the research and/or
development of noninvasive glucose sensors include the following:
CME Telemetrix, Inc., Cygnus, Inc., Technical Chemicals and
Products, Inc. Although we are 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 we are aware, and may have access to capital and other
resources which would give them a competitive advantage over the
us. The following is a summary of our current knowledge regarding
the companies listed.
CME Telemetrix has developed a product called GlucoNIRr. In
February 1999, they announced an FDA meeting concerning the
development and initial testing of their device for use in
institutional settings such as nursing homes. CME Telemetrix is a
Canadian company, and have received approval to sell their device
in Canada.
Cygnus of Redwood City, California has developed a device which,
when fastened to the wrist, extracts interstitial fluid by means
of an electrical voltage applied between the wrist and the device.
Cygnus has submitted the first part of a Premarket Approval
Application for the device, called the Gluco Watchr
AutomaticGlucose Biographer. Cygnus plans to submit the remainder
of their submission by June 1999.
Technical Chemicals and Products of Pompano Beach, Florida, is
developing the use of a disposable patch which is a dermal
transport system for the transport of interstitial fluid. The
patch is applied to the forearm and read with a portable
reflective meter. Technical Chemicals and Products estimates that
the company is approximately 30% of the way toward the completion
of its FDA application.
Although not noninvasive like the Diasensor , devices which claim
to be less invasive than standard fingerpricks are being
introduced. One device, made by Chronimed in Minneapolis, uses a
laser rather than a sylett to draw blood from the finger. Another
company, Amira Medical, uses a small needle in conjunction with a
meter which draws blood from the forearm, upper arm or thigh.
These devices have been approved by the FDA. These devices are
purported by their makers to be improvements on the fingerprick
glucose sensors which use stylets to draw blood.
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. We are 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 our products are "medical devices" as defined by the
Federal Food, Drug and Cosmetic Act, as amended, 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 us 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. We are 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 hyperthermia
delivery system, any other product, or on our 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 our
products or business, cannot be accurately determined.
In 1997, Congress enacted legislation directed toward regulation
of pharmaceutical and medical devices. The impact of the FDA
Administration Modernization Act of 1997 is expected to reduce the
quantity of information a company must submit for approval of
devices and allows product and establishment licenses to be
combined. In certain sections of the law concerned with Risk-
Based Regualtion of Medical Devices, the agency promulgated
guidance for industry on the use of national and international
consensus standards. The FDA anticipates that the use of
consensus standards will accelerate premarket notification
clearance. The impact of the law on the approval process for
obtaining marketing approval for the Diasensor has yet to be
established.
Noninvasive Glucose Sensor
Because the Noninvasive Glucose Sensor is subject to regulation by
the FDA, we 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 Institutional Review Boards of chosen hospitals. Clinical
testing began on the Noninvasive Glucose Sensor in May 1993. In
January 1994 we submitted a 510(k) Notification to the FDA for
approval to market the Diasensor 1000r. The 510(k) Notification
indicated that the device is "substantially equivalent" a similar
existing device based on 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. The Company formally withdrew its 510(k)
Notification after an FDA panel review, in which the majority of
the reviewers were not satisfied that the Company had produced
sufficient evidence to prove equivalence to an existing device.
We recently submitted a PMA Shell which outlines plans for the
Modular PMA submission. The FDA approved our proposal in April
1999.
The submission of a PMA will require that the Company conduct
additional testing, and may result in significant delays and
increased expenses. The FDA's PMA process is more expensive and
time consuming than a 510(k) Notification, and may also result in
additional delays in the time period in which the we could begin
manufacturing and marketing the device for sale in the United
States. The time elapsed between the completion of clinical
testing at Institutional Review Boards and the grant of marketing
approval by the FDA is uncertain, and no assurance can be given
that approval to market the device in the U.S. will ultimately be
obtained.
In June of 1998, the FDA instituted new Quality System Regulations
which took the place of Good Manufacturing Practices. These
regulations align closely with those guidelines specified by the
ISO which sets quality requirements for products being shipped to
the European Union. These regulations have added control of the
design process as well as the manufacturing process.
On January 14, 1998, we received certification to ISO 9001, and on
June 23, 1998, it received the CE mark. The CE mark and the ISO
certification is provided by the regulatory bodies of the EU or
private "notified bodies" which are third-party companies
certified by the European Union as able to also provide the
certifications. The CE mark indicates that the device adheres to
quality systems guidelines of the ISO and its European signatory,
European Norm Standards for Medical Devices. Rigorous audits were
conducted at our facility to certify that our development and
manufacturing procedures, as well as the Diasensor 1000r itself
met the international standards laid down by the Medical Device
Directive. In order to maintain its approval to ship the device
into the European Union, we must be vigilant in our adherence to
our quality system, and audits will be conducted on an annual
basis by its third-party notified body to verify that we continue
to meet the standards.
We may also be required to comply with the same regulatory
requirements prior to introducing the Diasensorr 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.
Our 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 our 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 SystemT
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
SystemT 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
Our bioremediation project will be supervised by 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, 1998, we had had 76 full-time employees who
were located primarily in either the Indiana or Pittsburgh
locations. Due to our cash flow problems during 1998, we were was
compelled to lay off certain employees; other employees resigned.
We have employment contracts with some of its non-officer
employees, most of whom are scientists and engineers employed in
our research and development operations. Those contracts are
typically for terms of five years and contain confidentiality
provisions. We also employ consultants as needed; some of the
consultants are employed pursuant to consulting contracts which
contain confidentiality provisions.
Properties
During 1998, our research and development operations are located
in a 20,000 square foot one-story building at 300 Indian Springs
Road, Indiana, Pennsylvania. We lease the building from the 300
Indian Springs Road Real Estate Partnership. The lease period is
20 years and runs concurrently for 10 years with a mortgage
arranged by the partnership at a stated amount of rent. At the
end of ten years, the amount of rent 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, we pay all taxes, utilities, insurance, and
other expenses related to its operations at that location. We has
vacated this building and the partnership has listed it for sale.
The operations and activities formerly located on Indian Springs
Road have been moved to the manufacturing space on Kolter Drive.
In September 1992, we entered into a ten-year lease agreement with
the Indiana County Board of Commissioners for 22,500 square feet
of space which we plan to use for the manufacture of the
Noninvasive Glucose Sensor, once developed. The facility,
comprised of 22,500 square feet, has been reconfigured to our
specifications. We recently moved the balance of its Indiana,
Pennsylvania operations to this space. This facility contains
sufficient additional space to accommodate our projected
operations through 1999.
LEGAL PROCEEDINGS
During April 1998, we were served with subpoenas by the U.S.
Attorneys' office for the U.S. District Court for the Western
District of Pennsylvania. The subpoenas requested certain
corporate, financial and scientific documents and we continue
to provide documents in response to such requests.
On April 30,1996, a class action lawsuit was filed against us,
Diasensor.com and individual officers and directors. The suit,
captioned Walsingham v. Biocontrol Technology, et al., has been
certified as a class action, and is pending in the U.S.
District Court for the Western District of Pennsylvania. The
suit alleges misleading disclosures in connection with the
noninvasive glucose sensor and other related activities. By
mutual agreement of the parties, the suit remains in the pre-
trial pleading stage, we are unable to determine the outcome or
its impact upon us at this time.
We leased space in two locations in Indiana County for its
manufacturing facilities. We are still using one space, which
has been upgraded with leasehold improvements. The other
space, which had been leased as expansion space, was the
subject of a judgment proceeding. We gave up possession of the
expansion space in Indiana County in response to the filing of
such judgment for nonpayment of lease fees. In return for
possession of the space, the leaseholder agreed not to pursue
any action on the judgment at this time.
DIRECTORS AND EXECUTIVE OFFICERS
Nominee Age Since Position
David L. Purdy 70 1972 President, Chairman 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
Stan Cottrell 55 1998 Director
Paul W. Stagg 51 1998 Director
______________________________
The Company's six directors were most recently elected at its
Shareholders' Meeting on March 31, 1999.
DAVID L. PURDY, 70 is our President, Chairman of the Board,
Treasurer and a director. Mr. Purdy has been a director and
Chairman of the Board since its organization in 1972 and is
considered our organizer and founder. He has also served as
President 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 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 . Mr. Purdy is also an officer and
director of Diasensor.com and Coraflex.
FRED E. COOPER, 52, is our Chief Executive Officer, Executive Vice
President and a director. Prior to joining us, Mr. Cooper
co-founded Equitable Financial Management, Inc. of Pittsburgh, PA,
a company in which he served as Executive Vice President until his
resignation and divestiture of ownership in August 1990. 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 Diasensor.com, and a director
of Petrol Rem and Coraflex.
ANTHONY J. FEOLA, 50, rejoined us as our Senior Vice President in
April, 1994, after serving as Diasensor.com's Vice President of
Marketing and Sales from January, 1992 until April, 1994. Prior to
January, 1992, he was our Vice President of Marketing and Sales.
Prior to joining us 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 in February 1990, and also serves as a director
of Diasensor.com, Coraflex and Petrol Rem.
GLENN KEELING, 47, joined the Board of Directors in April 1991.
Mr. Keeling currently is a full-time employee 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.
STAN COTTRELL, 55, was appointed to the Board of Directors in
1998. Mr. Cottrell is the Chairman and Founder of Cottrell
Associates International, Inc., which provides international
business development, brokerage, specialty marketing and
promotional services. He is a former director of marketing for
Inhalation Therapy Services and was employed by Boehringer
Ingelheim, Ltd. as a national product manager. Mr. Cottrell is a
world ultra-distance runner and the author of several books.
PAUL W. STAGG, 51, was appointed to the Board of Directors in
1998. Mr. Stagg is the marketing manager for the Wholesale
Division of First Financial Resources, Inc., where he is
responsible for marketing, underwriting, supervising and
coordinating various types of financing for institutional
investors. Prior to his current position, he was District
Distributor of Marketing for Ginger Mae, a division of United
Companies of Baton Rouge, LA.
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, we represent the following. Based
solely on its review of copies of forms received and written
representations from certain reporting persons, we believe that
all of its officers, directors and greater than ten percent
beneficial owners complied with applicable filing requirements.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Employment Relationships
The Board of Directors approved employment agreements on November
1, 1994 for its officers, David L. Purdy, Fred E. Cooper, Anthony
J. Feola and Glenn Keeling.
David L. Purdy, President, Treasurer and a director, is a director
of Diasensor.com and Coraflex. He is also the chairman and Chief
Scientist of Diasensor.com, and the President and Treasurer of
Coraflex. Mr. Purdy devotes 60% of his time to BICO, and 40% to
Diasensor.com. Fred E. Cooper, Chief Executive Officer,
Executive Vice President and a director, is a director of
Diasensor.com, Coraflex and Petrol Rem. He is also the President
of Diasensor.com. Mr. Cooper devotes approximately 60% of his
time to BICO and 40% to Diasensor.com. Anthony J. Feola, Senior
Vice President and a director, is also a director of
Diasensor.com, Coraflex, and Petrol Rem. Glenn Keeling, Vice
President and a director, was employed on January 1, 1992 as
BICO's manager of product development. Mr. Keeling is also the
President and a director of IDT.
Property
Three of our current executive officers and/or directors and two
former directors are members of the nine-member 300 Indian Springs
Road Real Estate Partnership which in July 1990, purchased our
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 our common stock at an exercise price of $.33
per share until June 29, 1995. Mr. Adkins, who was a director at
the time of the transaction, resigned from the Board of Directors
on March 30, 1992. 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 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 our
common stock on the date of issuance.
In April 1992, Diasensor.com purchased an office condominium
located at the Bourse Office Park, Virginia Manor, Building 2500,
Second Floor, Pittsburgh, Pennsylvania 15220 for $190,000. We
entered into a lease with Diasensor.com and pay 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 from 1996 through 1998. 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, we 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 .
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. The aggregate balance of the loans as
of December 31, 1998, including accrued interest, was $633,499.
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. The aggregate balance of the loans as of
December 31, 1998, including accrued interest, was $253,219.
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. The
aggregate balance of the loans as of December 31, 1998, including
accrued interest, was $292,810.
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 and principal
payments have been made on the note, and as of December 31, 1998,
the balance was $200,000. Joseph Kondisko, a former director of
Diasensor.com, is a principal owner of Allegheny Food Services.
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 Diasensor.com, 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. Diasensor.com 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 Diasensor.com common stock which BICO
received pursuant to the License and Marketing Agreement.
Purchase Agreement. BICO and Diasensor.com entered into a
Purchase Agreement dated November 18, 1991 whereby BICO conveyed
to Diasensor.com 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, Diasensor.com may endeavor, at its own
expense, to obtain patents on other inventions relating to the
Noninvasive Glucose Sensor. Diasensor.com 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 Diasensor.com 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 Diasensor.com in connection with any sales
by BICO of its proposed closed-loop system.
Research and Development ("R&D") Agreement. Diasensor.com 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 Diasensor.com 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.
Diasensor.com 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
Diasensor.com 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 Diasensor.com 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. Diasensor.com 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 Diasensor.com's sales price of
each Sensor. Diasensor.com's sales price of each Sensor is
defined as the price paid by any purchaser, whether retail or
wholesale, directly to Diasensor.com for each Sensor. Subject to
certain restrictions, BICO may assign its manufacturing rights to
a subcontractor with Diasensor.com's written approval. The term
of the agreement is fifteen years.
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, 1998, 1997 and
1996, of those persons who were, at December 31, 1998 (i) the
Chief Executive Officer, and (ii) the other most highly
compensated executive officers of the Company whose remuneration
exceeded $100,000 (the "Named Executives").
SUMMARY COMPENSATION TABLE
YEARS ENDED DECEMBER 31, 1998, 1997, and 1996
==============================================================================
Annual Compensation | (1)Long Term Compensation
- ------------------------------------------------------------------------------
| Awards
Name and | Securities
Principal (2) | Underlying (2) All other
Position Year Salary($) Bonus($) Other($) | Warrants(#) Compensation
==============================================================================
David L. |
Purdy , 1998 $166,802 $0 $0 | 0 $0
President, 1997 $241,667 $0 $0 | 0 $0
Treasurer (4) 1996 $400,000 $0 $0 | 0 $0
- ------------------------------------------------------------------------------
Fred E. 1998 $556,173 $0 $0 | 0 $0
Cooper, 1997 $592,000 $0 $0 | 0 $0
CEO (5) 1996 $592,000 $0 $0 | 0 $0
- ------------------------------------------------------------------------------
Anthony J. 1998 $326,912 $0 $0 | 0 $0
Feola , Sr. 1997 $300,000 $0 $0 | 0 $0
Vice Pres.(6) 1996 $300,000 $0 $0 | 350,000 (3) $0
- ------------------------------------------------------------------------------
Glenn 1998 $180,003 $0 $0 | 0 $0
Keeling, VP 1997 $200,000 $0 $0 | 0 $0
(7) 1996 $200,000 $0 $0 | 100,000(8) $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 1998, 1997, or 1996. The Company did not
award any restricted stock to the Named Executives during any
year, including the years 1998, 1997 or 1996. The Company
did not award any warrants, options or Stock Appreciation
Rights ("SARs") to the Named Executives during the years
ended December 31, 1998, 1997 or 1996; however, the Company
did extend warrants owned by the Named Executives, which
would have expired during 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.
(2) During the year ended December 31, 1998, 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 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 November1, 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 1996, 1997 and 1998, Mr.
Purdy was paid $87,500, $100,000 and $100,000 by
Diasensor.com; such amounts are included in the table above.
Mr. Purdy is paid a salary by the Company based on his
employment contract. Amounts paid to Mr. Purdy by
Diasensor.com are determined by the Diasensor.com Board of
Directors based upon services performed on its behalf.
During 1998, Mr. Purdy voluntarily reduced his salary by 69%.
(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 1998, 1997
and 1996, Mr. Cooper was paid $84,000, $96,000, and $96,000,
respectively by both Petrol Rem and IDT, both of which are
subsidiaries of BICO; such amounts are included in the table
above. In 1998, 1997, and 1996, Mr. Cooper was paid
$177,542, $150,000, and $150,000 in salary by
Diasensor.com, respectively; such amounts are included in
the table above. Mr. Cooper is paid a salary by the company
based on his employment agreement. Amounts paid to Mr.
Cooper by Diasensor.com, 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
Diasensor.com was assigned to BICO when he left Diasensor.com
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 1998, 1997, and 1996, Mr.
Feola's salary was increased by $27,000, $50,000 and $50,000
per year respectively.
(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 $1.48 per share (the market price as of that date)
until August 26, 2001.
Option/Warrant/SAR Grants in Last Fiscal Year
No options, warrants or SARs were granted or extended to the Named
Executives during 1998.
AGGREGATED OPTION/WARRANT/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/WARRANT/SAR VALUE TABLE
Number of Value of
Securities Unexercised
Underlying In-the-Money
Unexercised Options/SARs
Options/SARs 12/31/98 ($)
at 12/31/98 (#)
Shares Value
Acquired on Realized ($) Exercisable Exercisable/
Exercise (2) Unexercisable(3) Unexercisable (4)
Name (#)(1)
- -------------------------------------------------------------------------------
David L. 0 $ 0 767,200 $ 0
Purdy (5) (9)
- -------------------------------------------------------------------------------
Fred E. 0 $ 0 300,000 $ 0
Cooper (6) (9)
- -------------------------------------------------------------------------------
Anthony J. 0 $ 0 550,000 $ 0
Feola (7) (9)
- -------------------------------------------------------------------------------
Glenn 0 $ 0 100,000 $ 0
Keeling (8) (9)
__________________
(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, 1998 as reported by Nasdaq ($.06).
(5) Includes warrants to purchase: 187,200 shares of common
stock at $.25 per share until April 24, 1995 (extended until
April 24, 1999); 500,000 shares of common stock at $.25 per
share until May 1, 1995 (extended until May 1, 1999); and
80,000 shares of common stock at $.33 per share until June
29, 1995 (extended until June 29, 1999) (See, "Warrants").
(6) Includes warrants to purchase: 300,000 shares of common stock
at $.25 per share until May 1, 1995 (extended until May 1,
1999) (See, "Warrants").
(7) Includes warrants to purchase: 100,000 shares of common
stock at $.25 per share until May 1, 1995 (extended until May
1, 1999); 100,000 shares of common stock at $.25 per share
until November 26, 1995 (extended until November 26, 1999);
and 350,000 shares of common stock at $.50 per share until
October 11, 1996 (extended until October 11, 1999) (See,
"Warrants").
(8) Includes warrants to purchase: 100,000 shares of common stock
at $1.48 per share until August 26, 2001.
(9) Because the market price as of December 31, 1998 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.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the indicated information as of
December 31, 1998 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, 1998, there were 420,773,659 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, 1998 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, 1998 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) 400,140 * 1,167,340(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 1,668,840 * 3,386,040(10) *
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, 1998.
(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, 1998. For computation purposes, the total number of
shares of common stock outstanding as of December 31, 1998
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 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, 1999); 80,000
shares of common stock at $.33 per share until June 29, 1995
(extended until June 29, 1999); and 500,000 shares of common
stock at $.25 per share until May 1, 1995 (extended until May
1, 1999) 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, 1999) 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, 1999);
100,000 shares of common stock at $.25 per share until May 1,
1995 (extended until May 1, 1999) 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.
DESCRIPTION OF SECURITIES
Our authorized capital currently consists of 975,000,000
shares of common stock, par value $.10 per share and 500,000
shares of cumulative preferred stock, par value $10.00 per share.
As of December 31, 1998, there were 420,773,568 shares of common
stock and zero shares of preferred stock outstanding. In March
1999, our shareholders approved the authorization of an
additional 375,000,000 shares of common stock.
Preferred Stock
Our Articles of Incorporation authorize the issuance of a
maximum of 500,000 shares of non-voting cumulative convertible
preferred stock, and authorize our Board of Directors to divide
such class of preferred stock into series and to fix and
determine the relative rights and preferences of the shares.
As of December 31, 1998, we had no outstanding shares of
preferred stock.
Common Stock
All the shares of common stock will be equal to each other
with respect to liquidation rights and dividend rights and there
are no preemptive rights to purchase any additional shares of
common stock. Holders of common stock are entitled to one vote
per share on all matters submitted to a vote of shareholders, but
are not entitled to cumulate their votes in the election of
directors. Accordingly, the holders of more than 50% of the
outstanding common stock voting for the election of directors,
could elect the entire slate of the Board of Directors, and the
holders of the remaining common stock would not be able to elect
any member to the Board of Directors. As of December 31, 1998,
there were 420,773,569 shares of common stock outstanding. In
March 1999, our shareholders approved the authorization of an
additional 375,000,000 shares of common stock.
In the event of our liquidation or dissolution, holders of
the common stock are entitled to receive on a pro rata basis all
our assets remaining after satisfaction of all liabilities
including liquidation preferences granted to holders of the
preferred stock.
Convertible Debentures
As of December 31, 1998, we had outstanding $2,825,000 in
Convertible Debentures. The debentures are convertible beginning
ninety days from issuance into shares of common stock. As of
December 31, 1998 and 1997, the conversion price of the debentures
would have been approximately $.059 and $.146 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, 1998 and 1997,
the number of shares issued upon conversion of all outstanding
debentures was approximately 60.1 million and 23.9 million shares,
respectively, which would have reflected discounts of
approximately 23% and 18%, respectively. The convertible
debentures were sold pursuant to Section 4(2) and/or Regulation D,
bear a 4% interest rate, are redeemable at 115% of face value, and
are subject to mandatory conversion prior to or upon one year from
issuance.
Employment Agreement Provisions Related to Changes in Control
We have entered into 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", we are required to issue to Mr. Cooper and
Mr. Purdy shares of common stock equal to five percent (5%), to
issue to Mr. Feola four percent (4%), to issue Mr. Keeling three
percent (3%), and to issue the two non-executive officer
employees two percent (2%) each of the outstanding shares of
common stock immediately after the change in control. In general,
a "change of control" is deemed to occur for purposes of the
Agreement: (i) when 20% or more of our outstanding voting stock is
acquired by any person, (ii) when one-third (1/3) or more of our
directors are not continuing directors, or (iii) when a
controlling influence over the management or policies is exercised
by any person or by persons acting as a group within the meaning
of Section 13(d) of the Securities Exchange Act of 1934, as
amended.
Warrants
As of December 31, 1998, there were outstanding warrants to
purchase 7,831,662 shares of the Company's common stock at
exercise prices of between $0.05 and $4.03 per share. These
warrants are held by members of our Company's Scientific Advisory
Board, certain employees, officers, directors, loan guarantors,
lenders and consultants.
The holders of warrants are not entitled to vote, to receive
dividends or to exercise any of the rights of the holders of
shares of common stock for any purpose until such warrants have
been duly exercised and payment of the exercise price has been
made.
Transfer Agent
Chase-Mellon Shareholder Services in New York, New York acts
as our Company's Registrar and Transfer Agent for its common and
preferred stock. We act as its own warrant transfer agent.
PLAN OF DISTRIBUTION
This Offering is a "best-efforts" offering, and will not be
underwritten nor will any underwriter be engaged for the
marketing, distribution or sale of any shares registered hereby.
We may sell shares from time to time in one or more transactions
at a price of $ .13 per share. Sales may be made to purchasers
directly by us or, alternatively, we may offer the shares through
dealers, brokers or agents, who may receive compensation in the
form of concessions or commissions. Any dealers, brokers or
agents that participate in the distribution of shares may be
deemed to be underwriters, and any profits on the sale of the
shares by them and any discounts or commissions received by any
such dealers, brokers or agents may be deemed to be underwriting
discounts and commissions under the 1933 Act.
To the extent required at the time a particular offer of the
shares is made, a supplement to this Prospectus will be
distributed which will set forth the number of shares being
offered and the terms of the offering, including the name or names
of any underwriters, or dealers, the purchase price paid by any
underwriter for the shares purchased , and any discounts,
commissions, or concessions allowed or reallowed to dealers,
including the proposed selling price to the public.
To comply with the securities laws of certain jurisdictions,
as applicable, the common stock may be offered and sold only
through registered or licensed brokers or dealers. In addition,
the common stock may not be offered or sold in certain
jurisdictions unless they are registered or otherwise comply with
the applicable securities laws of such jurisdictions by exemption,
qualification or otherwise.
SHARES ELIGIBLE FOR FUTURE SALE
So long as the Registration Statement concerning this
offering is effective under the 1933 Act and we remain current in
our information filing requirements under Rule 144, promulgated
under the 1933 Act, substantially all of the outstanding will be
freely transferable, or freely transferable upon issuance in the
case of shares issuable upon exercise of the warrants, without
restriction or further registration under the 1933 Act, unless
acquired by our affiliate. "Affiliates" generally would include
our directors and executive officers and any other person or
entity which controls, is controlled by, or is under common
control with, us. Affiliates who acquire common stock pursuant to
this Prospectus will continue to be subject to the volume
restrictions of Rule 144, as set forth below.
In general, under Rule 144 as currently in effect, an
affiliate and any person (or persons whose shares are aggregated)
who has beneficially owned restricted shares for at least two
years would be entitled to sell within any three-month period a
number of shares which does not exceed the greater of (i) one
percent (1%) of the then outstanding shares of common stock, or
(ii) the average weekly trading volume of the common stock on the
open market during the four calendar weeks preceding such sale.
Rule 144 also requires such sales to be placed through a broker or
with a market maker on an unsolicited basis and requires that
there be adequate current public information available. A person
who is deemed not to have been an affiliate at any time during the
three months preceding a sale, and who has beneficially owned the
restricted shares for at least one year, would be entitled to sell
such shares under Rule 144(k) without regard to any of the
limitations discussed above immediately following the commencement
of this offering. Restricted shares properly sold in reliance
upon Rule 144 are thereafter freely tradable without restriction
or registration under the 1933 Act, unless thereafter held by an
affiliate.
We can make no prediction as to the effect, if any, that
sales of shares of common stock or the availability of shares for
sale will have on the market price prevailing from time to time.
Nevertheless, sales of substantial amounts of common stock in the
public market could adversely affect the prevailing market price
of the common stock.
INTERESTS OF NAMED EXPERTS AND COUNSEL
The validity for the issuance of the common stocks offered
hereby will be passed upon by Sweeney & Associates P.C.,
Pittsburgh, Pennsylvania. Thomas E. Sweeney, Jr., Esq., the
President of Sweeney & Associates P.C., currently holds warrants
to purchase the following shares of the common stock of
Diasensor.com,: 40,000 shares at $.50 per share until October 23,
2000 and 60,000 shares at $1.00 per share until January 6, 2000.
EXPERTS
Our financial statements as of December 31, 1998, 1997 and
1996, (which report included an explanatory paragraph referring to
an uncertainty regarding our ability to continue as a going
concern), incorporated in this Prospectus, has been audited by
Thompson Dugan, independent certified public accountants, as
stated in their report appearing in our Form 10-K for the year
ended December 31, 1998, and has been so included in reliance upon
such report given upon the authority of that firm as experts in
auditing and accounting.
AVAILABLE INFORMATION
We are subject to the informational requirements of the
Securities Exchange Act of 1934 and we file reports, proxy
statements and other information with the Securities and Exchange
Commission. Those reports, proxy statements and other information
can be inspected and copied at the Public Reference Room of the
SEC, 450 Fifth Street, N.W., Washington, D.C. and at the
Commission's regional offices including those located at 601
Walnut Street, Curtis Center, Suite 1005E, Philadelphia, PA 19106-
34322; and 75 Park Place, New York, NY. Copies of this material
may also be obtained from the Public Reference section of the
Commission, 450 Fifth Street, N.W. Washington, D.C. 20549, at
prescribed rates or electronically via the SEC's website at
www.sec.gov and EDGAR, the electronic database for all filings
with the SEC. For more information on the SEC's public reference
section, call (800) SEC-0330. Our common stock is traded on the
Electronic Bulletin Board. In accordance with 1934 Act requirements,
we file reports, proxy statements and other information with NASDAQ.
Those reports, proxy statements and other information can be inspected at
NASDAQ's offices located at 1735 K Street N.W., Washington D.C.,
20006. You can also obtain information on our website at
www.bico.com. This Prospectus omits certain information contained
in the Registration Statement and the exhibits which the
Registrant has filed with the SEC, under the Securities Act of
1933. Descriptions concerning the provisions of any document are
qualified in their entirety by reference to the full text of such
document as filed with the SEC as an exhibit to the Registration
Statement.
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, 1998 and 1997, and the related consolidated statements of
operations, changes in stockholders' equity (deficiency) and cash
flows for each of the three years in the period ended December 31,
1998. 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, 1998 and 1997, and the
consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998 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, 1998 and these
conditions are expected to continue through 1999, 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.
Pittsburgh, Pennsylvania
March 25, 1999
<PAGE> F-1
<TABLE>
Biocontrol Technology, Inc. and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
Dec. 31, 1998 Dec. 31, 1997
------------- -------------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents (note A) $ 125,745 $ 2,759,067
Accounts receivable - net of allowance for doubtful accounts
of $27,059 at Dec. 31, 1998 and $14,931 at Dec. 31, 1997 55,959 383,747
Inventory - net of valuation allowance (notes A and D) 74,515 1,834,018
Notes receivable - related parties (notes C and L) 0 35,000
Notes receivable (note C) 0 87,000
Interest receivable (note C) 0 2,134
Prepaid expenses 170,544 137,862
Advances - Officers 0 34,732
------------- -------------
TOTAL CURRENT ASSETS 426,763 5,273,560
PROPERTY, PLANT AND EQUIPMENT (notes A and H)
Building 1,429,906 1,444,273
Land 133,750 246,250
Construction in progress 0 1,465,152
Leasehold improvements 1,477,573 1,197,977
Machinery and equipment 5,014,103 5,042,736
Furniture, fixtures & equipment 794,740 812,221
------------- -------------
Subtotal 8,850,072 10,208,609
Less accumulated depreciation 4,244,650 3,516,677
------------- -------------
4,605,422 6,691,932
OTHER ASSETS
Related Party Receivables
Notes receivable - (notes C and L) 1,223,900 623,900
Interest receivable - (notes C and L) 155,628 75,343
Advances-Officers 90,779 0
------------- -------------
1,470,307 699,243
Allowance for related party receivables (1,270,307) 0
------------- ------------
200,000 699,243
Notes receivable - (notes C) 142,493 0
Interest receivable 19,778 0
Goodwill, net of amortization - (note A) 4,423,421 0
Deposit on equipment 0 300,000
Patents, net of amortization (note A) 2,433 6,765
Other assets 15,259 9,800
------------- -------------
4,803,384 1,015,808
------------- -------------
TOTAL ASSETS $ 9,835,569 $ 12,981,300
============= =============
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. 31,1998 Dec. 31, 1997
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 1,750,188 $ 646,535
Current portion of long-term debt (note G) 4,552,178 18,765
Current portion of capital lease obligations (note H) 99,061 109,933
Debentures payable (note I) 2,825,000 3,301,280
Accrued liabilities (note E) 1,096,644 215,119
Escrow payable (note J) 2,700 2,700
Deferred revenue on contract billings (note A) 0 116,146
------------- -------------
TOTAL CURRENT LIABILITIES 10,325,771 4,410,478
LONG-TERM LIABILITIES
Capital lease obligations (note H) 1,412,880 2,688,293
Long-term debt (note G) 0 8,806
------------- -------------
1,412,880 2,697,099
COMMITMENTS AND CONTIGENCIES (notes M)
UNRELATED INVESTORS'INTEREST
IN SUBSIDIARY (note A) 24,162 1,409,647
STOCKHOLDERS' EQUITY (notes J and O)
Common stock, par value $.10 per share,
authorized 600,000,000 shares, issued and
outstanding 420,773,568 at Dec. 31, 1998 and
138,583,978 at Dec. 31, 1997 42,077,357 13,858,398
Additional paid-in capital 92,725,285 104,932,920
Notes receivable issued for common stock-related party (note L) (25,000) (25,000)
Warrants 6,396,994 6,396,994
Accumulated deficit (143,101,880) (120,699,236)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY (1,927,244) 4,464,076
-------------- --------------
TOTAL LIABILITIES AND
STOCKHOLDER' EQUITY $9,835,569 $12,981,300
============= =============
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,
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Revenues
Net Sales $1,145,968 $ 1,155,907 $ 597,592
Interest income 182,033 165,977 176,478
Other income 50,212 104,250 2,657
------------- ------------- -------------
1,378,213 1,426,134 776,727
Costs and expenses
Cost of products sold 587,821 641,331 325,414
Research and development (notes A and L) 6,340,676 6,977,590 8,742,922
General and administrative 11,560,345 12,695,628 8,963,693
Loss on disposal of assets 531,066 8,518 -
Debt issue costs (note A) 1,865,682 3,306,812 502,000
Warrant extensions (note J) - - 604,342
Warrant extensions - Subsidiary (note J) - 4,046,875 8,571,033
Interest expense 481,025 315,624 133,460
Beneficial convertible debt feature (note P) 3,799,727 6,278,853 1,650,000
------------- ------------- -------------
25,166,342 34,271,231 29,492,864
------------- ------------- -------------
Loss before unrelated investors' interest (23,788,129) (32,845,097) (28,716,137)
Unrelated investors' interest in net loss of
subsidiary 1,385,485 2,411,920 4,670,435
------------- ------------- -------------
Net loss (note P) $(22,402,644) $ (30,433,177) $ (24,045,702)
============= ============= ==============
Loss per common share (notes A and P) ($0.08) ($0.43) ($0.57)
============= ============== ==============
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 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
-------- ------- ---------- ---------- -------- ------- ---------- ------------ ----------
Proceeds from stock offering - - 2,055,000 205,500 - - 22,423 - 227,923
Conversion of debenture - - 280,134,590 28,013,459 - - (16,029,785) - 11,983,674
Issuance of convertible debt - - - - - - 3,799,727 - 3,799,727
Net Loss - - - - - - - (22,402,644) (22,402,644)
-------- ------- ---------- ---------- ---------- --------- ---------- ------------ ------------
-------- -------- ----------- ---------- ----------- --------- ----------- ------------- ----------
Balance at Dec. 31, 1998 - $ - 420,773,568 $42,077,357 $6,396,994 ($25,000) $92,725,285 ($143,101,880) ($1,927,244)
======== ======== =========== =========== =========== ========= =========== ============== ===========
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,
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows used by operating activities:
Net loss ($22,402,644) ($30,433,177) ($24,045,702)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 1,706,537 850,802 587,507
Loss of disposal of assets 531,066 - -
Unrelated investors' interest in susidiary (1,385,485) (2,411,920) (4,670,435)
Stock issued in exchange for services (22,063) 936,148 17,200
Stock issued in exchange for services by subsidiary - 600 7,000
Debenture interest converted to stock 106,894 164,055 -
Premium for extension on Debenture 680,500 527,113 -
Beneficial convertible debt feature 3,799,727 6,278,853 1,650,000
Provision for potential loss on notes receivable 1,270,307 - -
Warrant extensions - - 604,342
Warrant extensions by subsidiary - 4,046,875 8,571,033
(Decrease)increase in allowance for losses on accounts receivable 12,128 (180,909) 195,840
(Increase) in accounts receivable 268,195 (137,651) (92,083)
(Increase) in inventories 987,948 (586,029) (1,679,981)
(Increase) in inventory valuation allowance 779,050 2,092,131 -
(Increase) decrease in prepaid expenses (31,495) 113,397 (128,883)
(Increase) decrease in other assets 36,927 3,713 (2,445)
Increase (decrease) in accounts payable 1,078,124 (388,636) (803,237)
Increase (decrease) in other liabilities 845,136 66,737 (35,960)
(Decrease) in deferred revenue (116,146) (63,854) (146,000)
------------- ------------- -------------
Net cash flow used by operating activities (11,855,294) (19,121,752) (19,971,804)
------------- ------------- -------------
Cash flows from investing activities:
Purchase of property, plant and equipment (111,216) (845,512) (954,610)
(Increase) in notes receivable (31,493) (313,000) (50,000)
Deposit on equipment - (300,000) -
(Increase) in interest receivable (97,929) (23,519) (11,721)
Acquisition of ICTI (1,030,000) - -
------------- ------------- -------------
Net cash used by investing activites (1,270,638) (1,482,031) (1,016,331)
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from stock offering - - 13,338,531
Proceeds from sale by subsidiary of its common stock - 3,500 (172,315)
Proceeds from warrants exercised - 13,200 30,600
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 10,720,000 20,230,000 6,600,000
Payments on debentures payable - (2,605,833) -
Payments on notes payable (675,393) (41,904) (19,509)
Increase in notes payable 550,000 - -
Payments on capital lease obligations (101,997) (65,987) (24,899)
------------- ------------- -------------
Net cash provided by financing activities 10,492,610 19,559,976 21,586,508
Net increase (decrease) in cash (2,633,322) (1,043,807) 598,373
------------- ------------- -------------
Cash and cash equivalents, beginning of year 2,759,067 3,802,874 3,204,501
------------- ------------- -------------
Cash and cash equivalents, end of year $ 125,745 $2,759,067 $3,802,874
============= ============= =============
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,
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Supplemental Information:
Interest paid $ 364,716 $ 155,647 $ 72,578
============= ============ ============
Supplemental schedule of non-cash
investing and financing activities:
Acquisition of equipment with note payable $ - $ - $ 145,063
============= =========== ============
Acquisition of ICTI with note payable $ 3,350,000 $ - $ -
============= =========== ============
Acquisition of property under a capital lease:
Building $ - $ - $ 1,205,760
Land - - 246,250
Construction in progress - - 1,137,500
Equipment 24,050 154,539 -
------------- ------------- -------------
$ 24,050 $ 154,539 $ 2,589,510
============= ============= =============
Capital Lease Termination
Reduction of capital lease obligation $ 1,184,288 $ - $ -
============= ============= =============
Reduction of property
Construction of Progress $ 1,459,110 $ - $ -
Land 112,500 - -
------------- ------------- -------------
$ 1,571,610 $ - $ -
============= ============= =============
Conversion of Series I-preferred stock for common stock:
Common stock $ - $ - $ 2,730
Additional paid-in capital - - 24,570
------------- ------------- -------------
$ - $ - $ 27,300
============= ============= =============
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 $ 11,876,780 $19,449,924 $ 2,000,000
============= ============= =============
Converion of debenture interest for common stock $ 106,894 $ 164,055 $ 27,122
============= ============= =============
Stock granted to related party for note receivable $ - $ 25,000 $ -
============= ============= =============
Conversion of warrants for common stock $ - $ 510,168 $ 375,000
============= ============= =============
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: Diasensor.com, Inc. (Diasense) a 52% owned subsidiary as
of December 31, 1998 and 1997; Petrol Rem, Inc., a 67% owned
subsidiary as of December 31, 1998 and 1997; IDT, Inc., a
99.1% owned subsidiary as of December 31, 1998 and 1997;
International Chemical Technologies, Inc., a 58.4% owned
subsidiary as of December 31, 1998 and Barnacle Ban
Corporation, a 100% owned subsidiary as of December 31, 1998
and 1997. 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. Amortization of assets recorded under capital
leases is included with depreciation expense.
6. Patents
Patents are amortized over their legal or useful lives,
whichever is less. Accumulated amortization on patents was
$94,508 and $90,176 at December 31, 1998, and 1997,
respectively.
7. Goodwill
The Company recognized $5,310,501 of goodwill in connection
with a Stock Purchase Agreement dated February 20, 1998 to
acquire 58.4% of International Chemical Technologies, Inc.
For purposes of amortizing this goodwill, management has
determined a useful life of 5 years. Accumulated
amortization on goodwill was $878,080 at December 31, 1998.
8. 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.
9. Loss Per Common Share
Loss per common share is based upon the weighted average
number of common shares outstanding which amounted to
266,362,526 shares in 1998, 71,415,351 shares in 1997 and
42,266,597 shares in 1996, respectively. Shares issuable
under stock options, stock warrants, convertible debentures
and convertible preferred stock are excluded from
computations, as their effect is antidilutive.
10. 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.
11. 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.
12. 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, 1998, 1997, and 1996 was $589,300
$528,942, and $236,280, respectively, of which $481,025,
$315,624, and $133,460, respectively, was charged to
operations.
13. Estimates and Assumptions
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates. The Company has established allowances based upon
management's evaluation of inventories, accounts receivable,
and receivables from related parties.
14. 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, 1998, 1997 and
1996 would have been approximately $25,500,000, $33,400,000,
and $25,800,000, respectively. Net loss per share under the
fair value based accounting method for the periods ending
December 31, 1998, 1997 and 1996 would have been approximately
$.10, $.47, and $.92, respectively.
15. 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, 1998,
1997, and 1996 was $1,865,682, $3,306,812, and $502,000,
respectively.
16. 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
and L) are unsecured and represent a concentration of credit
risk due to the common employment and financial dependency of
these individuals on the Company.
17. Comprehensive Income
The Company's consolidated net income (loss) is substantially
the same as comprehensive income to be disclosed under
Statement of Financial Accounting Standards No. 130.
18. Beneficial Convertible Debt Feature
Beneficial conversion terms included in the Company's
convertible debentures are recognized as expense and
additional paid in capital at the time the associated
debentures are issued.
19. Reclassification
Certain items included in the financial statements of prior
periods have been reclassified to conform to classifications
in the 1998 financial statements. Such reclassification had
no effect on prior year reported net losses.
NOTE B - OPERATIONS AND LIQUIDITY
The Company and its subsidiaries have incurred substantial
losses in 1998 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, 1998,
1997 and 1996, 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, 1998.
NOTE C - NOTES RECEIVABLE
Notes receivable due from various related and unrelated
parties consisted of:
Dec. 31, Dec. 31,
1998 1997
Related Parties
Note receivable from Fred E.
Cooper, Chief Executive
Officer, payable upon demand $ 8,500 $ 8,500
with 12% interest.
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 83,000
with 8.25% simple interest.
Note receivable from Fred E.
Cooper, Chief Executive
Officer, payable upon demand 25,000 25,000
with 8.25% simple interest.
Note receivable from Fred E.
Cooper, Chief Executive
Officer, payable upon demand 35,000 35,000
with 8.25% simple interest.
Note receivable from Fred E.
Cooper, Chief Executive
Officer, payable upon demand 15,000 15,000
with 8.25% simple interest.
Note receivable from Fred E.
Cooper, Chief Executive
Officer, payable upon demand 25,000 -
with 8.25% simple interest.
Note receivable from Fred E.
Cooper, Chief Executive
Officer, payable upon demand 250,000 -
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% 190,000 -
interest.
Note receivable from Glenn
Keeling, Director
Payable upon demand with 8.25% 20,000 20,000
interest.
Note receivable from T.J. Feola,
Director
Payable upon demand with 8.25% 50,000 50,000
interest.
Note receivable from T.J. Feola,
Director
Payable upon demand with 8.25% 185,000 -
interest.
Note receivable from Dave Purdy,
T.J. Feola, Fred Cooper, Glenn - 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 200,000 250,000
director, is principal owner,
payable in monthly installments
of $3,630, including interest at
9.25%, with a final balloon
payment on April 1, 2001.
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
Note receivable from HemoCleanse
Inc, payable on demand after
December 31,2002 with interest
accrued at a Rate of 20% per annum. 130,493 -
----------- ---------
1,366,393 745,900
Less current notes receivable 0 122,000
----------- ---------
Noncurrent $ 1,366,393 $ 623,900
============== ===========
Accrued interest receivable on the related party notes as of
December 31, 1998 and 1997 was $155,628 and $75,343,
respectively.
Due to the financial dependency of the above officers and
directors on the Company, an allowance of $1,270,307 was
provided by Management during 1998.
NOTE D - INVENTORY
Inventories consisted of the following as of:
Dec. 31, Dec. 31,
1998 1997
Raw materials $ 3,498,976 $ 4,380,254
Work-in-process 0 47,976
Finished goods 954,589 1,005,788
------------ -------------
4,453,565 5,434,018
Less valuation allowance (4,379,050) (3,600,000)
------------- -------------
$ 74,515 $ 1,834,018
============= =============
The inventory valuation allowance was increased to $4,379,050
in 1998, from $3,600,000 in 1997 and $ 1,507,869 in 1996
based upon management's estimation of market value of
materials for products for which a market has not yet been
established.
NOTE E - ACCRUED LIABILITIES
Accrued liabilities consisted of the following as of:
Dec. 31, Dec. 31,
1998 1997
Current
Accrued interest $ 276,378 $ 37,347
Accrued payroll 733,657 12,500
Accrued payroll taxes 1,919 13,606
and withholdings
Accrued vacation 46,654 87,652
Other accrued liabilities 38,036 64,014
----------- ---------
$ 1,096,644 $215,119
=========== =========
NOTE F - BUSINESS SEGMENTS
The Company operates in three reportable business segments:
Biomedical devices, which includes the operations of Biocontrol
Technology, Inc., and Diasensor.com, 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>
Biomedical Bioremediation Marine All Consolidated
Devices Paint Other
Products
<S> <C> <C> <C> <C> <C>
1998
Sales to external customers 1,028,484 45,382 40,835 31,267 1,145,968
Cost of products sold 483,388 33,061 32,777 38,595 587,821
Gross profit (Loss) 545,096 12,321 8,058 (7,328) 558,147
Identifiable assets 8,614,498 168,315 8,770 1,043,986 9,835,569
Capital expenditures 105,827 0 0 5,389 111,216
Depreciation & amortization 1,563,366 36,061 5,938 105,504 1,710,869
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 12,981,300
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
</TABLE>
NOTE G - LONG TERM DEBT
Long term debt consisted of the following as of:
Dec. 31, Dec. 31,
1998 1997
Note Payable to individuals with interest at $ 250,000 $ 0
prime plus 2%, collateralized by a
confession of judgement, payable in monthly
installments of $60,000 beginning on
February 10, 1999 with a final balloon
payment of all remaining principal and
interest on May 10, 1999.
Note Payable in connection with stock 2,900,000 0
purchase agreement for 58.4% interest in
International Chemical Technologies, Inc.
(ICTI). The note bears interest at a rate of
8% and is collateralized by the shares of
ICTI purchased in the transaction. The note
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 interest
(ii) on October 1, 1998, a principal
payment of $1,000,000 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. At December 31,
1998, the Company was, and continues to be,
in default on the terms of this loan.
Accordingly, the unpaid balance could be
declared immediately due and payable at the
option of the lender.
Note Payable by the Company's subsidiary, 1,191,667 0
International Chemical Technologies, Inc.
(ICTI) to, it's former shareholder. The
loan is guaranteed by the Company and
collateralized by all tangible and
intangible assets of ICTI, and assignment of
ICTI's interest in its lease for its
production facilities. Principle and
interest at 9.5% per annum are payable in
thirty-five equal monthly installments of
$36,111 each commencing on April 1,1998 with
a final payment of all remaining principal
and interest due on March 1, 2001. At
December 31, 1998, the Company was, and
continues to be in default on the terms of
this loan. Accordingly, the unpaid balance
could be declared immediately due and
payable at the option of the lender.
Commercial Premium Finance Agreement payable 53,296 0
in nine monthly installments of $7,818
including interest at 8% per annum beginning
November 1, 1998.
Note Payable due on January 5, 1999 with 150,000 0
interest at a rate of 8% per annum.
Collateralized by 5,444,644 shares of the
Company's common stock.
Note Payable to a bank in monthly payments
of $999 including interest at a rate of 7.35%. - 13,007
Collateralized by cash on deposit.
Note Payable in monthly payments of $374
including interest at a rate of 18.00%. 2,682 5,452
Collateralized by equipment.
Note Payable to a bank in monthly payments
of $433 including interest at a rate of 8.75%. 4,533 9,112
Collateralized by equipment.
---------- ---------
4,552,178 27,571
Current portion of long-term debt 4,552,178 18,765
---------- ---------
Long-term debt $ 0 $ 8,806
=========== =========
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 1998, 1997 and 1996. Future minimum lease payments
as of December 31, 1998 are $ 105,720 for 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 $173,609,
$295,809, and $239,096 in the years ended December 31, 1998,
1997 and 1996, 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.
During 1998, the Company terminated the lease of one of its
two manufacturing buildings in response to the filing of a
judgement for nonpayment under the terms of the lease. The
company recognized a loss of $387,321 based upon the
difference between the remaining lease obligation and the
property relinquished.
The following is a summary of property held under capital
leases:
Dec. 31, Dec. 31,
1998 1997
Building $ 1,207,610 $ 1,207,610
Construction in Progress 0 1,465,152
Land 133,750 246,250
Equipment 289,531 297,828
----------- ---------
Sub Total 1,630,891 3,216,840
Less: Accumulated Depreciation 277,069 159,129
----------- ---------
Total Property under Capital Leases $ 1,353,822 $ 3,057,711
=========== ===========
Minimum future lease payments to related and unrelated
parties are as follows:
Related Unrelated
Parties Parties Total
1999 105,720 423,314 529,034
2000 61,670 360,586 422,256
2001 0 337,893 337,893
2002 0 268,724 268,724
2003 0 252,720 252,720
Thereafter 0 1,630,566 1,630,566
-------- --------- ---------
Future minimum lease
payments 167,390 3,273,803 3,441,193
======== ========= =========
NOTE I - SUBORDINATED CONVERTIBLE DEBENTURE
During 1998, 1997 and 1996 the Company issued subordinated 4%
convertible debentures totaling $10,720,000, $20,230,000 and
$6,600,000, respectively. Such convertible debentures were
issued pursuant to Regulation S, Regulation D, and/or Section
4(2) and have a one-year mandatory maturity and are not
saleable or convertible for a minimum of 45 to 90 days from
issuance. At December 31, 1998 and 1997, the subordinated
convertible debentures totaled $2,825,000 and $3,301,280,
respectively.
As of December 31, 1998, and 1997, the conversion price of
the debentures would have been approximately $.059 and $.146
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, 1998, and 1997, the number of shares issuable
upon conversion of all outstanding debentures was
approximately 60.1 million and 23.9 million shares,
respectively, which would have reflected discounts of
approximately 23% and 18%, respectively.
NOTE J - STOCKHOLDERS' EQUITY
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 1998, warrants ranging from $.05 to $2.00 per share to
purchase 2,670,000 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 7,831,662 shares of common stock were
exercisable at December 31, 1998. The per share exercise
prices of these warrants are as follows:
Shares Exercise
Price
20,000 $.05
20,000 $.06
400,000 $.13
10,000 $.22
1,226,700 $.25
80,000 $.33
50,000 $.38
1,482 $.45
350,000 $.50
3,484,000 $1.00
200,000 $1.25
150,000 $1.48
2,000 $1.69
1,425,000 $2.00
2,000 $2.09
94,000 $2.125
2,000 $2.13
69,480 $2.25
50,000 $2.41
105,000 $2.75
25,000 $3.00
25,000 $3.20
5,000 $3.31
25,000 $3.50
10,000 $4.03
----------
Total 7,831,662
==========
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 1999 2000 2001 2002 2003
Granted
1990 406,700 - - 226,700 - 180,000
1991 1,251,482 351,482 - 900,000 - -
1992 25,000 - 25,000 - - -
1993 154,000 - - 144,000 - 10,000
1994 130,000 130,000 - - - -
1995 21,000 - 21,000 - - -
1996 609,480 59,480 - 550,000 - -
1997 2,544,000 200,000 - 1,400,000 944,000 -
1998 2,690,000 - - - 1,200,000 1,490,000
--------- ------- ------- ------ --------- ---------
7,831,662 740,962 46,000 3,220,700 2,144,000 1,680,000
========= ========= ======= ========= ========= =========
The following is a summary of warrant transactions during
1998:
Outstanding beginning of period: 5,346,662
Granted during the twelve-month period: 2,690,000
Canceled during the twelve-month period: 205,000
Exercised during the twelve-month period: 0
----------
Outstanding and eligible for exercise: 7,831,662
==========
Common Stock Reserve
At December 31, 1998 the Company has reserved unissued common
stock as follows:
Warrants 7,831,662
Convertible debentures 63,422,600
Loan Security 5,444,644
----------
Total 76,698,906
==========
Warrant Extensions
During 1998, the Company extended the exercise date of
warrants to purchase 1,510,180 shares of common stock to
certain officers, employees and consultants. The warrant
shares were originally granted at exercise prices ranging
from $.25 to $3.20, 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 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.
Diasensor.com, Inc. Common Stock
At December 31, 1998, warrants to purchase 6,674,113 shares
of Diasensor.com, Inc. common stock were exercisable. The per
share exercise price for 3,255,000 shares is $.50, for
2,286,763 shares is $1.00 and for 1,132,350 shares is $3.50.
The warrants expire at various dates through 2003. To the
extent that all the warrants are exercised, the Company's
proportionate ownership would be diluted from 52% at December
31, 1998 to 40.3%.
Diasensor.com,Inc. Warrant Extensions
During 1998, Diasensor.com,Inc. extended the exercise date of
warrants to purchase 825,000 shares of common stock to
certain officers, directors, employees and consultants. The
warrant shares were originally granted at an exercise price
of $.50 and extended at the same price.No expense was charged
to operations since the market price was less than the
original warrant price.
During 1997, Diasensor.com, Inc. 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. Diasensor.com, Inc.
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, Diasensor.com, Inc. 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.
Diasensor.com, Inc. 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.
Petrol Rem Common Stock
At December 31, 1998 warrants to purchase 4,140,000 shares of
Petrol Rem common stock were exercisable. The per share
exercise price for 3,940,000 is $.10 and for 2,000,000 is
$1.00. The warrants expire at various dates through 2003.
To the extent that if all the warrants were exercised, the
Company's proportionate ownership would be diluted from 75%
at December 31, 1998 to 62.1%.
IDT Common Stock
At December 31, 1998 warrants to purchase 4,330,000 shares of
IDT common stock were exercisable. The per share exercise
price for 4,135,000 shares is $.10 and for 175,000 shares is
$1.00 and for 20,000 shares is $2.00. The warrants expire at
various dates through 2003. To the extent that if all the
warrants were exercised, the Company's proportionate
ownership would be diluted from 99.1% at December 31, 1998 to
69.3%.
NOTE K - INCOME TAXES
As of December 31, 1998, the company and its subsidiaries,
except Diasensor.com, Inc. and Petrol Rem, have available
approximately $83,220,000 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 2019. The
Company also has research and development credit
carryforwards available to offset federal income taxes of
approximately $1,100,000 subject to limitations, expiring in
tax years 2005 through 2019.
As of September 30, 1998, the end of its fiscal year,
Diasensor.com, Inc. had available approximately $24,700,000
of net operating loss carryforwards for federal income tax
purposes. These carryforwards, which expire during the years
2005 through 2019, are available, subject to limitations, to
offset future taxable income. Diasensor.com, Inc. 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, 1998, Petrol Rem had available
approximately $10,150,000 of net operating loss carryforwards
for federal income tax purposes. These carryforwards, which
expire during the years 2008 through 2019, 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 $15,000.
Certain items of income and expense are recognized in
different periods for financial and income tax reporting
purposes.
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 and associated valuation
allowance at December 31, 1998, December 31, 1997 and
December 31, 1996:
Dec. 31,1998 Dec. 31,1997 Dec. 31, 1996
Net Operating Loss $28,294,800 $ 21,508,400 $ 15,330,642
Warrant Expense 2,741,397 2,741,397 2,741,397
Tax Credit
Carryforward 1,100,000 580,000 520,000
----------- ------------ -----------
32,136,197 24,829,797 18,592,039
Valuation Allowance (32,136,197) (24,829,797) (18,592,039)
----------- ------------ -----------
Net Deferred Tax
Asset $ 0 $ 0 $ 0
=========== ============ ===========
The deferred tax benefit and the associated increase in the
valuation allowance are summarized in the following schedule:
Increase
in
Deferred Valuation
Tax Allowance Net
Benefit
Year-ended December 31, 1998 ($ 7,306,400) $ 7,306,400 $ 0
Year-ended December 31, 1997 ($ 6,237,758) $ 6,237,758 $ 0
Year-ended December 31, 1996 ($ 4,702,742) $ 4,702,742 $ 0
From March 20,1972(inception) ------------- ----------- ---
through December 31, 1998 ($32,136,197) $32,136,197 $ 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
Diasensor.com, Inc. If successfully developed,the Sensor will
enable users to measure blood glucose levels without taking
blood samples. Diasensor.com, Inc. 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 Diasensor.com, Inc.. If BICO is unable to
perform under the Research and Development or Manufacturing
Agreements, Diasensor.com, Inc. would need to rely on other
arrangements to develop and manufacture the Sensor or perform
these efforts itself.
BICO and Diasensor.com, Inc. 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. Diasensor.com, Inc. 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 Diasensor.com,
Inc. 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 Diasensor.com, Inc. at a price
determined by the agreement. The term of the agreement is
fifteen years.
Research and Development Agreement
Under a January 1992 agreement between BICO and Diasense.com,
Inc. 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 Diasensor.com, Inc. $2,955,863 in research and
development and general and administrative expenses for the
year ending December 31, 1995. In July 1995, BICO and
Diasensor.com, Inc. 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.com, Inc. under which Diasens.com, Inc. 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 Diasens.com, Inc. 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, 1998 and 1997, Mr. Cooper owed the Company
$8,500 related to a 12 percent simple interest demand loan.
At December 31, 1998 and 1997, Mr. Cooper owed the Company
$82,400, related to a 10 percent simple interest demand loan.
At December 31, 1998, Mr. Cooper owed the Company $458,000,
(including a $25,000 note for common stock purchased in
1997), related to 8.25 percent simple interest demand loans.
The accrued interest owed by Mr. Cooper on all demand notes
at December 31, 1998 and 1997 was $ 109,599 and $67,092,
respectively.
At December 31, 1998 and 1997, the Company had a demand loan
of $5,000 with 10 percent simple interest with Glenn Keeling,
a Director. At December 31, 1998 and 1997 the Company had a
demand loan of $50,000 with 8.25 percent interest with Mr.
Keeling. At December 31, 1998 and 1997, the Company had a
demand loan of $20,000 with 8.25 percent interest with Mr.
Keeling. At December 31, 1998 the Company had a demand loan
of $190,000 with 8.25 percent interest with Mr. Keeling. The
accrued interest owed by Mr. Keeling on all demand notes at
December 31, 1998 and 1997 was $ 27,810 and $7,664,
respectively.
At December 31, 1998 and 1997, the Company had a demand loan
of $50,000 with 8.25 percent simple interest with T.J. Feola,
a Director. At December 31,1998 the Company had a demand loan
of $185,000 with 8.25 percent simple interest with Mr.
Feola. The accrued interest owed by Mr. Feola on the demand
note at December 31, 1998 and 1997 was $ 18,219 and $588,
respectively.
At December 31, 1997, the Company had a note receivable of
$35,000 with 8.25 percent simple interest with Dave Purdy,
Fred Cooper, T.J. Feola and Glenn Keeling, all Directors who
are jointly liable. As of December 31, 1998, this loan had
been repaid in full.
At December 31, 1997, 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, 1998, this loan had been reduced to $200,000,
and restructured to require monthly installments of $3,630,
including interest of 9.25% with a final balloon payment on
April 1, 2001.
Advances to Officers
During the periods 1998 and 1997, the Company and its
subsidiaries made advances to Mr. Cooper. At December 31,
1998 and 1997, these advances accumulated to $90,779 and
$34,732, 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 Diasensor.com, Inc. 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 Diasensor.com, Inc. 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.com, 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.
Additional Legal Proceedings
During April 1998, the Company and its affiliates were served
with subpoenas by the U.S. Attorneys' office for the U.S.
District Court for the Western District of Pennsylvania. The
subpoenas requested certain corporate, financial and
scientific documents and the Company has provided documents
in response to such requests.
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
$50,000 per year for each year starting in 1999 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, 1998.
NOTE O - SUBSEQUENT EVENTS
Public Offering
Subsequent to December 31, 1998, and through March 19, 1999,
the Company raised funds totaling $4,290,000 pursuant to its
public offering.
Common Stock
Subsequent to December 31, 1998 and through March 19, 1999,
the Company issued a total additional 143,455,285 shares of
common stock bringing total outstanding common stock at March
19, 1999, to 564,228,854.
NOTE P -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.
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 pro forma results listed below are unaudited and reflect
purchase price accounting adjustments assuming the acquisition
occurred at January 1, 1997. The pro forma results are not
necessarily indicative of what actually would have occurred if
the acquisition had been in effect for the entire period
presented. In addition, they are not intended to be a
projection of future results and do not reflect any efficiencies
that might be achieved from the combined operation.
Revenue $ 1,434,953
Net loss $(32,404,191)
Loss per share $ (0.45)
NOTE Q - YEAR 2000 ISSUE
The Company is currently working to resolve the potential impact
of the Year 2000 on the processing of date-sensitive
information. The Year 2000 Issue is the result of computer
programs being written using two digits (rather than four) to
define the applicable year. Programs which are susceptible to
problems after December 31,1999 are those which recognize a date
using "00" as the year 1900 rather than the year 2000, which
could result in miscalculations or system failures. Based upon
a review of its own internal programs and software, the Company
currently believes that the Year 2000 will not pose significant
operational problems to its information systems, because such
systems are already compliant or will be made compliant with
minor adjustments. In addition, ChaseMellon Shareholder
Services, the Company's transfer agent, has disclosed that it
will be Year 2000 compliant and that no interruptions in service
will occur. The Company is also conducting an investigation of
its major suppliers, vendors and other parties to determine
their respective plans for the Year 2000 compliance. The
Company's common stock currently trades on the Nasdaq electronic
bulletin board; Nasdaq and its parent, the NASD, have analyzed
its products and systems; are addressing their Year 2000 issues;
and are implementing a plan to test their systems and to
remediate any Year 2000 problems. As of this date, Nasdaq has
not made a definitive statement regarding when it will be
compliant, but has stated that it is making all necessary
changes to its trading systems. The Company's current estimates
indicate that the costs of addressing potential problems are not
expected to have a material impact upon the Company's financial
position, results of operations or cash flows in future periods.
There can be no assurance, however, that modifications to
information systems which impact the Company and which are
required to remediate year 2000 issues will be made on a timely
basis and that they will not adversely affect the Company's
systems or operations.
Back Cover of Prospectus
Until 90 days after the
effective date of this
Prospectus, all dealers
effecting transactions in
these securities, whether or
not participating in this
offering, may be required to
deliver a prospectus. This is
in addition to the obligation
of dealers to deliver a
prospectus when acting as
underwriters and with respect
to their unsold allotments or
subscriptions.
__________________________
TABLE OF CONTENTS Page
375,000,0000 Shares
Prospectus Delivery
Requirements ii
Incorporation by Reference ii
The Company 1
Risk Factors 2
Use of Proceeds 6 BIOCONTROL TECHNOLOGY, INC.
Dilution 6
Capitalization 8
Market Price for Common Stock 9
Description of Securities 43 Common Stock
Plan of Distribution 44
Shares Eligible for Future ____________________
Sale 44
Legal Proceedings 31 P R O S P E C T U S
Interests of Named
Experts and Counsel 45 _____________________
Experts 45
Indemnification of Directors
and Officers 45 May 5, 1999
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
EXPENSES OF ISSUANCE AND DISTRIBUTION
The following sets forth the Company's estimated expenses
incurred in connection with the issuance and distribution of the
securities described in the Prospectus other than underwriting
discounts and commissions:
Printing and Copying $ 2,500.00
Legal Fees 15,000.00
SEC Registration Fees 4,100.00
State Filing Fees 2,500.00
Accounting Fees 7,900.00
-----------
Total 32,000.00
===========
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Except as set forth herein, the Company has no provisions
for the indemnification of its officers, directors or control
persons. David L. Purdy, Fred E. Cooper, Anthony J. Feola and
Glenn Keeling have employment contracts which include
indemnification provisions which indemnify them to the extent
permitted by law. The Company and its affiliates Diasensor.com,
Inc., Coraflex, Inc., Petrol Rem, Inc., and IDT, Inc. are
incorporated under the Business Corporation Law of the
Commonwealth of Pennsylvania. Section 1741, et seq. of said law,
in general, provides that an officer or director shall be
indemnified against reasonable and necessary expenses incurred in
a successful defense to any action by reason of the fact that he
serves as a representative of the corporation, and may be
indemnified in other cases if he acted in good faith and in a
manner he reasonably believed was in, or not opposed to, the best
interests of the corporation, and if he had no reason to believe
that his conduct was unlawful, except that no indemnification is
permitted when such person has been adjudged liable for
recklessness or misconduct in the performance of his duty to the
corporation, unless otherwise permitted by a court of competent
jurisdiction.
Insofar as indemnification for liabilities arising under the
1933 Act may be permitted to directors, officers or persons
controlling the registrant, the registrant has been informed that
in the opinion of the SEC such indemnification is against public
policy as expressed in the 1933 Act and is therefore
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer,
or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final
adjudication of such issue.
RECENT SALES OF UNREGISTERED SECURITIES
The Company recently completed sales of unregistered
securities as summarized below. Unless otherwise indicated, all
offers and sales were made based on the "private offering"
exemption under Section 4(2) of the 1933 Act. Accordingly,
because the shares sold constitute "restricted securities" within
the meaning of Rule 144 under the 1933 Act, stop-transfer
instructions were given to the transfer agent, and the stock
certificates evidencing the shares bear a restrictive legend.
In January through March of 1997, the Company sold an aggregate
of 22,000 shares of Series B Convertible Preferred Stock based on
Regulation S. All of such preferred stock was converted, on
various dates no earlier than ninety days from the sale of the
preferred stock, into common stock during 1997, with total
proceeds tot he Company of $2,027,000. Proceeds were used
primarily to continue to fund the Company's research and
development projects and to provide working capital for the
Company.
During 1997, the Company sold an aggregate of $20.2 million in
Subordinated Convertible Debentures based on Regulation S. All
such debentures were converted, on various dates no earlier than
ninety days, and no later than one year from the sale of the
debenture, into common stock. The debentures had a mandatory
conversion feature, which required conversion prior to their
expiration. The debentures resulted in total net proceeds to the
Company of approximately $18 million. Proceeds were used
primarily to fund the Company's research and development projects
and to provide working capital for the Company.
During the first two quarters of 1998, the Company sold an
aggregate of approximately $7 million in Subordinated Convertible
Debentures based on Regulation S. All such debentures were
converted, on various dates no earlier than forty-five to ninety
days from issuance, into shares of common stock; all such
debentures had been converted as of the date of this filing. The
net proceeds to the Company of approximately $6.3 million.
Proceeds were used to fund the Company's research and development
projects, the acquisition of ICTI, and to provide working capital
for the Company.
In August 1998, the Company sold an aggregate of $3,125,000 in
convertible subordinated debentures which are due between August
14, 1999 and August 31, 1999. The debentures are convertible
beginning ninety days from issuance into shares of common stock.
The convertible debentures were sold based on Section 4(2) and
/or Regulation D, bear a 4% interest rate, are redeemable by the
Company at 115% of face value, and are subject to mandatory
conversion prior to or upon one year from issuance. Proceeds
from the sale of the securities were used for general working
capital expenses and to contunue the Company's research and
development projects.
UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or
sales are being made, a post-effective amendment to
this registration statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts
or events arising after the effective date of the
registration statement (or the most recent post-
effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change
in the information set forth in the registration
statement; and
(iii) To include any material information with respect to
the plan of distribution not previously disclosed
in the registration statement;
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-
effective amendment shall be deemed to be a new
registration statement relating to the securities
offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of a post-
effective amendment any of the securities being
registered which remain unsold at the termination of
the offering.
The undersigned registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act of
1933, each filing of the registrant's annual report pursuant to
section 13(a) or section 15(d) of the Securities Exchange Act of
1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to section 15(d) of the Securities
Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to supplement
the prospectus, after the expiration of the subscription period,
to set forth the results of the subscription offer and the terms
of any subsequent reoffering thereof. If any public offering is
to be made on terms differing from those set forth on the cover
page of the prospectus, a post-effective amendment will be filed
to set forth the terms of such offering.
EXHIBIT TABLE
Exhibit Sequential Page No.
3.1 (4) Articles of Incorporation as filed March 20, 1972 N/A
3.2 (4) Amendment to Articles filed May 8, 1972 N/A
3.3 (4) Restated Articles filed June 19, 1975 N/A
3.4 (4) Amendment to Articles filed February 4, 1980 N/A
3.5 (4) Amendment to Articles filed March 17, 1981 N/A
3.6 (4) Amendment to Articles filed January 27, 1982 N/A
3.7 (4) Amendment to Articles filed November 22, 1982 N/A
3.8 (4) Amendment to Articles filed October 30, 1985 N/A
3.9 (4) Amendment to Articles filed October 30, 1986 N/A
3.10(4) By-Laws N/A
3.11(5) Amendment to Articles filed December 28, 1992 N/A
5.1 Legal Opinion of Sweeney & Associates P.C 70
10.1(1) Manufacturing Agreement N/A
10.2(1) Research and Development Agreement N/A
10.3(1) Termination Agreement N/A
10.4(1) Purchase Agreement N/A
10.5(2) Sublicensing Agreement and Amendments thereto N/A
10.6(3) Lease Agreement with 300 Indian Springs Partnership N/A
10.7(4) Lease Agreement with Indiana County N/A
10.8(5) First Amendment to Purchase Agreement dated December 8, 1992 N/A
10.9(6) Fred E. Cooper Employment Agreement dated 11/1/94 N/A
10.10(6) David L. Purdy Employment Agreement dated 11/1/94 N/A
10.11(6) Anthony J. Feola Employment Agreement dated 11/1/94 N/A
10.12(6) Glenn Keeling Employment Agreement dated 11/1/94 N/A
16.1(7) Disclosure and Letter Regarding Change in
Certifying Accountants dated 1/25/95 N/A
24.1 Consents of Thompson Dugan, Independent Certified
Public Accountants 72
24.2 Consent of Counsel (Included in Exhibit 5.1 above) 70
25.1 Power of Attorney of Fred E. Cooper 69
(included under "Signatures")
(1) Incorporated by reference from Exhibit with this title filed
with the Company's Form 10-K for the year ended December 31,
1991
(2) Incorporated by reference from Exhibit with this title to
Form 8-K dated May 3, 1991
(3) Incorporated by reference from Exhibit with this title to
Form 10-K for the year ended December 31, 1990
(4) Incorporated by reference from Exhibits with this title to
Registration Statement on Form S-1 filed on December 1, 1992
(5) Incorporated by reference from Exhibits with this title to
Amendment No. 1 to Registration Statement on Form S-1 filed
on February 8, 1993
(6) Incorporated by reference from Exhibit with this title to
Form 10-K for the year ended December 31, 1994
(7) Incorporated by reference from Exhibit with this title to
Form 8-K dated January 25, 1995
Exhibit 25.1
SIGNATURES
Based on the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be
signed on its behalf by the undersigned on May 5, 1999.
BIOCONTROL TECHNOLOGY, INC.
By: /s/ Fred E. Cooper
Fred. E. Cooper, Director, CEO,
(principal executive officer,
principal financial officer, and
principal accounting officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose
signature appears below constitutes and appoints Fred E. Cooper
his true and lawful attorney-in-fact and agent with full power of
substitution, for him and in his name, place and stead, in any
and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and to
file the same with all exhibits thereto, and all documents in
connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full
power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Based on the requirements of the Securities Act of 1933,
this Registration Statement has been signed by the following
persons in the capacities indicated on the dates indicated.
Signature Title Date
/s/ David L. Purdy President, May 5, 1999
David L. Purdy Treasurer, Director
/s/ Anthony J. Feola Senior Vice President, May 5, 1999
Anthony J. Feola Director
/s/ Glenn Keeling Director May 5, 1999
Glenn Keeling
/s/ Stan Cottrell Director May 5, 1999
Stan Cottrell
/s/ Paul W. Stagg Director May 5, 1999
Paul W. Stagg
SWEENEY & ASSOCIATES P.C. Exhibit 5.1
ATTORNEYS AT LAW
7300 PENN AVENUE
PITTSBURGH, PA 15208 TELEPHONE (412) 731-1000
FACSIMILE (412) 731-9190
May 5, 1999
To the Board of Directors
Biocontrol Technology, Inc.
2275 Swallow Hill Road
Building 2500; 2nd Floor
Pittsburgh, PA 15220
Gentlemen:
We have examined the corporate records and proceedings of Biocontrol
Technology, Inc, a Pennsylvania corporation (the "Company"), with respect to:
1. The organization of the Company;
2. The legal sufficiency of all corporate proceedings
of the Company taken in connection with the creation,
issuance, the form and validity, and full payment and
non-assessability, of all the present outstanding and
issued common stock of the Company; and
3. The legal sufficiency of all corporate proceedings
of the Company, taken in connection with the creation,
issuance, the form and validity, and full payment and
non-assessability, when issued, of shares of the
Company's common stock (the "Shares"), to be issued by
the Company covered by the registration statement
(hereinafter referred to as the "Registration
Statement") filed with the Securities and Exchange
Commission May 5, 1999, file number 333-77451 (in
connection with which Registration Statement this
opinion is rendered.)
We have also examined other documents and questions of law as we have
deemed to be necessary and appropriate, and on the basis of those examinations,
we are of the opinion:
(a) That the Company is duly organized and validly existing under
the laws of the Commonwealth of Pennsylvania;
(b) That the Company is authorized to have outstanding 975,000,000
shares of common stock of which 420,773,569 shares of common
stock were outstanding as of December 31, 1998;
(c) That the Company has taken all necessary and required corporate
proceedings in connection with the creation and issuance of the
presently issued and outstanding shares of common stock and that
all of stock so issued and outstanding has been validly issued,
is fully paid and non-assessable, and is in proper form and
valid;
(d) That when the Registration Statement shall have been declared
effective by order of the Securities and Exchange Commission,
after a request for acceleration by the Company, and the Shares
shall have been issued and sold upon the terms and conditions
set forth in the Registration Statement, then the Shares will be
validly authorized and legally issued, fully paid and
non-assessable.
We hereby consent (1) to be named in the Registration Statement, and in
the Prospectus which constitutes a part thereof, as the attorneys who will
pass upon legal matters in connection with the sale of the Shares, and
(2) to the filing of this opinion as Exhibit 5.1 of the Registration
Statement.
Sincerely,
SWEENEY & ASSOCIATES P.C.
Exhibit 24.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTS
We have issued our report dated March 25, 1999, accompanying the consolidated
financial statements of Biocontrol Technology, Inc. and subsidiaries appearing
in the 1998 Annual Report on Form 10-K for the year ended December 31, 1998. We
consent to the inclusion in the Registration Statement of the aforementioned
report and to the use of our name as it appears under the caption "EXPERTS".
Our reports on the financial statements referred to above include explanatory
paragraphs which discuss going concern considerations as to Biocontrol
Technology, Inc.
/s/ Thompson Dugan
Pittsburgh, Pennsylvania
May 5, 1999
