SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended 09/30/98 Commission File Number 0-26504
Diasense, Inc.
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1605848
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
2275 Swallow Hill Road, Building 2500; Pittsburgh, PA 15220
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (412) 279-9740
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
and (2) has been subject to such filing requirements for the past
90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K, or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by
nonaffiliates of the registrant as of November 30, 1998:
Common Stock, $.01 par value -- $__________*
*The market value cannot be determined because there is no
established trading market for the stock.
As of November 30, 1998, 22,980,051 shares of Common Stock, par
value $.01 per share were outstanding. As of November 30, 1998,
no shares of Preferred Stock were outstanding.
Exhibit index is located on page 27.
PART I
Item 1. Business
General Development of Business
Diasense, Inc. ("Diasense" or the "Company") was incorporated in
the Commonwealth of Pennsylvania on July 5, 1989 as a wholly-
owned subsidiary of Biocontrol Technology, Inc. ("BICO").
Diasense's headquarters are located in its office condominium
located at 2275 Swallow Hill Road, Building 2500, 2nd Floor,
Pittsburgh, PA 15220.
The Company's business is the development, marketing and
manufacture of a noninvasive glucose sensor (the "Noninvasive
Glucose Sensor" or the "Sensor") for use by diabetics. During
Fiscal 1998, the Company continued to focus its efforts on the
Noninvasive Glucose Sensor. Diasense owns the patent, marketing
and distribution rights to the Sensor. BICO has the exclusive
rights to the research and development and manufacture of the
Sensor (See, "Intercompany Agreements"). Where applicable,
Diasense and BICO will be referred to herein as "the Companies".
Financial Information About Industry Segments
The Company operates in a single industry segment consisting of
the research, development, marketing and intended sale of
biomedical products and devices.
Forward-Looking Statements
From time to time, the Companies may publish forward-looking
statements relating to such matters as anticipated financial
performance, business prospects, technological developments, new
products, research and development activities, the regulatory
approval process, specifically in connection with the FDA
marketing approval process, and similar matters. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements. In order to comply with the
terms of the safe harbor, the Companies note that a variety of
factors could cause the Companies' actual results to differ
materially from the anticipated results or other expectations
expressed in the Companies' forward-looking statements. The
risks and uncertainties that may affect the operations,
performance, research and development and results of the
Companies' business include the following: additional delays in
the research, development and FDA marketing approval of the
Noninvasive Glucose Sensor; the Companies' future capital needs
and the uncertainty of additional funding; Diasense's substantial
reliance upon BICO, and BICO's uncertainty of additional funding;
competition and the risk that the Noninvasive Glucose Sensor may
become obsolete; the Company's dependence on a single technology;
the Companies' continued operating losses, negative net worth and
uncertainty of future profitability; potential conflicts of
interest; the status and risk to the Company's patents,
trademarks and licenses; the uncertainty of third-party payor
reimbursement for the Sensor and the general uncertainty of the
health care industry; the Companies' limited sales, marketing and
manufacturing experience; the attraction and retention of key
employees; the risk of product liability; the uncertain outcome
and consequences of the lawsuits pending against the Companies;
the absence of a public market for the Company's common stock;
the control of the Company by existing shareholders; and the
dilution of the Company's common stock.
Description of Business
Devel pment of the Noninvasive Glucose Sensor
Diasense and BICO are currently developing a Noninvasive Glucose
Sensor, which management believes will be able to measure the
concentration of glucose in human tissue without requiring the
drawing of blood. Currently available glucose sensors require
the drawing of blood by means of a finger prick.
BICO's initial research and development with insulin pumps led to
a theory by which blood glucose levels could be detected
noninvasively by correlating the spectral description of
reflected electromagnetic energy from the skin with blood glucose
levels in the 50 mg per deciliter to 500 mg per deciliter range
in the infrared region of the electromagnetic spectrum. The
method was studied in 1986 and 1987 by BICO and its consultants
at Battelle Memorial Institute in Columbus, Ohio, using
laboratory instruments. The results of the studies provided
information regarding the use of infrared light in the
noninvasive measurement of glucose. The information from the
studies, along with later affirmative work, led to a patent
application by BICO's research team in 1990. A patent covering
the method was granted to the research team and assigned to BICO
in December 1991. The rights of this patent have been purchased
by Diasense from BICO, pursuant to a Purchase Agreement (See,
"Intercompany Agreements"). A second patent application was
filed by BICO in December 1992, and was granted in January 1995.
This filing contained new claims which extended the coverage of
the patent based on additional discoveries and data obtained
since the original patent was filed. BICO has assigned the
rights to such patent to Diasense. Additional concepts to
improve the capability of the instrument to recognize blood
glucose were developed, and, in May 1993, corresponding patent
applications were filed. As of October 1996, a total of five
patents have been issued, with additional patent applications
pending (See, "Current Status of the Noninvasive Glucose Sensor"
and "Patents, Trademarks and Licenses"). BICO has been granted
the right to develop and manufacture sensors pursuant to
agreements with Diasense (See, "Intercompany Agreements").
In 1991, BICO's research team began development of a research
prototype utilizing different technology than previously studied
or developed. This device, the Beta 1 research prototype, was
initially tested on six human subjects, and was subsequently
tested on 110 human subjects in March 1992, during which
simultaneous spectral, blood and chemical data was recorded for
analysis in order to develop calibration data for the device.
The Beta 1 utilized a separate lap-top computer to perform
computational functions. The results of the March 1992 tests
were used to develop further refinements which led to the
development of the Beta 2A.
Although functionally equivalent in terms of performance with the
Beta 1, the next prototype, the Beta 2A, was smaller and had
fully integrated computational software and a liquid crystal
display which interacted with the operator. This model was
tested by BICO on 40 human subjects in July 1992. The spectral
and blood chemistry data obtained indicated that the Beta 2A did
not have a satisfactory signal-to-noise ratio to allow for the
calculation of algorithms of sufficient accuracy to be acceptable
to Diasense. The signal-to-noise ratio reflects the sensor's
ability to optimize the measurement by accepting the signal
desired (the glucose level) and rejecting the random
interference. A higher signal-to-noise ratio results in a more
accurate measurement.
Additional Beta prototypes evolved which addressed this problem.
Testing was performed with each prototype, culminating in
clinical trials at two hospitals with ten diabetic volunteers
each in Des Plaines, Illinois in May 1993 and in Indiana,
Pennsylvania in August 1993. These advanced systems embodying
improvements in the optics, electronics and detection subsystems
led to the design of the Beta 2D, Beta 2E, and Beta 2F
prototypes, designed and constructed to simulate production
models.
BICO initially obtained the approval of six Institutional Review
Boards ("IRBs") to conduct testing at their hospitals. Those
hospitals are Children's Hospital in Pittsburgh, Pennsylvania;
Rush North Shore in Skokie, Illinois; Westmoreland Hospital in
Greensburg, Pennsylvania; Lutheran General Hospital in Park
Ridge, Illinois; Holy Family Hospital in Des Plaines, Illinois;
and Indiana Hospital in Indiana, Pennsylvania. The Company
conducted initial testing at the Holy Family Hospital and Indiana
Hospital, and may conduct further studies on present and future
models at some or all of the other hospitals from which IRB
approval has been obtained.
On January 6, 1994, BICO submitted its initial 510(k)
Notification to the U.S. Food and Drug Administration (the "FDA")
for approval to market the production model, the Diasensorr 1000.
The submission was based on data obtained from the advanced Beta
2 prototypes, since functionally, the production model will be
identical to these prototype models. BICO's 510(k) Notification
claims that the product has substantial equivalence to home
market glucose monitoring devices presently in the marketplace
since its function is similar, although the device operates on a
different technological principle. BICO provided information in
this 510(k) submission which it believes substantiates that the
device does not raise different questions of safety and efficacy
and is as safe and effective as the legally marketed predicated
devices. Such information is required by the FDA before market
approval can be granted. In February 1996, the FDA convened a
panel of advisors to make a recommendation regarding BICO's
510(k) Notification. The majority of the panel members
recommended that BICO conduct additional testing and clinical
trials prior to marketing the Diasensorr 1000. BICO and Diasense
announced that they remained committed to bringing the Diasensorr
1000 to diabetics, and that additional research, development and
testing would continue (See, "Current Status of the Noninvasive
Glucose Sensor").
The Diasensorr 1000 is a spectrophotometer capable of
illuminating a small area of skin on a patient's arm with
infrared light, and then making measurements from the infrared
light diffusely reflected back into the device, which it then
displays on a liquid crystal display on the face of the
instrument for the user to read. The Diasensorr 1000 uses
internal algorithms to calculate a glucose measurement.
Since the Diasensorr 1000 will be calibrated individually, each
instrument will be sold by prescription only and will be
calibrated in a calibration center under a physician's direction.
This feature may limit the marketability of the Diasensorr 1000,
and, if the device is unable to qualify for third-party
reimbursement, the Company's ability to market the device could
be adversely effected.
Current Status of the Noninvasive Glucose Sensor
Due to continued delays of the FDA approval process, which are
summarized below, and while continuing to work with the FDA and
conduct its mandated testing, the Companies have also focused
their efforts on obtaining approval to market the Diasensorr 1000
overseas. The Companies have obtained a "CE" mark, and initial
orders have been obtained in Europe. In connection with
obtaining a CE mark, the Companies have undergone a series of
audits and have been certified as manufacturers and marketers in
Europe.
In 1998, BICO, as designer and manufacturer of the device, was
awarded for ISO certification by TUV Rheinland, a company
authorized to conduct such audits, which was contracted to
perform a "conformity assessment" of BICO's quality system. BICO
was awarded International Organization for Standardization
("ISO") Certification to the 9001 standard, evidencing that BICO
has in place a total quality system for the design, development
and manufacture of its products. Once the ISO 9001
certification was approved, BICO received approval to apply a
CE mark to the device. Much like an Underwriters Laboratory "UL"
mark, the CE mark is provided by the regulatory bodies of the
European Community, or by authorized private bodies, such as TUV
Rheinland, to indicate that the device adheres to "quality
systems" of the ISO and the European Committee for
Standardization. The CE mark permits the Companies to sell the
Diasensorr and other medical products in Europe.
With regard to marketing the device within the United States, the
Companies continue to work with the FDA to obtain approval. A
revised 510(k) Notification was submitted in October, 1996, and
was followed by continued discussions with the FDA. During 1997
and 1998, the Company continued to meet with the FDA, and
established a protocol for in-home testing of the Diasensorr
1000, which is continuing. Due to the Company's cash flow
problems during 1998, testing did not proceed at the pace
originally anticipated, and completion of the testing has been
delayed. As with all other FDA-related activities, the Companies
cannot provide any assurances as to the date upon which the
studies will be completed, the next 510(k) Notification will be
submitted, or when the FDA will complete its review of such
Notification.
Although the Company's research and development team continues to
have discussions with the FDA, due to the complex, technical
nature of the information being evaluated by the FDA, and the
slowed pace of the Company's testing, it is impossible for the
Company to estimate how much longer the FDA approval process will
take.
FDA approval is necessary to market the Diasensorr 1000 in the
United States. The Companies are continuing their efforts to
develop software with a more "universal" algorithm, which can be
used by a larger population. After introduction of the
Diasensorr 1000, BICO plans to finalize the development of the
Diasensorr 2000 which may contain more complex software,
allowing glucose measurements from many individuals to be
performed with one instrument. The Diasensorr 2000 may be
subject to the same regulatory testing and approval process as
was required for the Diasensorr 1000.
Diasense is responsible for the marketing and sales of the
Noninvasive Glucose Sensor. Diasense plans to market the
Noninvasive Glucose Sensor directly to diabetics, through their
doctors' orders, and is currently negotiating with domestic and
international distribution organizations to aid in the marketing
and distribution of the Noninvasive Glucose Sensor. Although
many factors may cause a change in management's current estimate,
the Company believes that the sales price of the Diasensorr 1000
at this time will range from approximately $7950 to approximately
$8500. Such price may be set at a level which would limit its
sales, absent third-party reimbursement. Due to the current
vicissitudes of the health-care insurance industry, the Companies
are unable to make any projections as to the availability of, or
procedures required in connection with, third-party
reimbursement. Although the Companies estimate, based on 1997
American Diabetes Association data, that there are nearly
16,000,000 diabetics in the United States, not all diabetics will
be suitable users of the Noninvasive Glucose Sensor. Those
diabetics who require and benefit from frequent glucose
monitoring comprise the potential market for the Noninvasive
Glucose Sensor. The Companies are unable to estimate the size of
that market at this time.
Invasive Glucose Sensors
Currently, blood glucose levels are generally measured by use of
invasive glucose sensors utilizing two different methods. The
simplest method for monitoring blood glucose levels requires the
user to prick a finger, draw a drop of blood, and place the blood
on a chemically-treated test strip. After a specified amount of
time has elapsed, the blood must be blotted or wiped off. After
an additional amount of time has elapsed, the color of the test
strip is visually compared to that of a color chart, and the
glucose level is read from the chart. The second method
requires the user of an invasive glucose sensor to prick a
finger, draw a drop of blood, and to place the blood on a test
strip similar to those described above. Later, the user must
wait a prescribed period of time and place the test strip in the
invasive glucose sensor which will display a readout of the blood
glucose level. Diasense believes that many of the existing
invasive glucose sensors are complicated, time-consuming, prone
to user error, inconvenient, unpleasant and entail significant
ongoing expenditures by the user for supplies.
The Company believes that these methods generally yield accuracy
levels within plus or minus 25-30 mg/dl of actual glucose levels
(depending upon testing conditions). Diasense believes that if
current research and development efforts are successful, the
Noninvasive Glucose Sensor will have a range of accuracy at least
as accurate as currently available invasive glucose sensors.
With either method, adequate control of blood glucose levels
requires several finger pricks each day, which is an unpleasant
experience for the user, especially for children. Depending upon
the relative facility of the user, it generally takes at least
two to four minutes for a readout to be provided from existing
invasive glucose sensors. Moreover, the ongoing costs of
repeated testing are significant to the average user, given the
cost of test strips, lancets, swabs, antiseptics, test solutions,
etc., and could represent a monthly cost of up to $100 or more.
Diasense believes that if the Noninvasive Glucose Sensor is
successfully developed, manufactured and marketed, the
unpleasantness of existing testing methods will be effectively
eliminated, and the expense and inconvenience will, over the long
term, be significantly reduced.
A clinical invasive glucose sensor marketed by Yellow Springs
Instruments, Inc. (the "Yellow Springs Sensor") is an invasive
glucose sensor which is relatively non-portable and costs
approximately $8,000 per unit. It is used nearly exclusively by
hospitals and other institutions. The Yellow Springs Sensor has
significantly different abilities, characteristics and
limitations than existing invasive glucose sensors. Although
Diasense believes that the Yellow Springs Sensor yields higher
accuracy levels than other invasive glucose sensors (within plus
or minus 3% of actual glucose levels) within up to 30 minutes,
Diasense believes that its Noninvasive Glucose Sensor may be more
desirable to most users of existing invasive glucose sensors, who
typically value speed and convenience, who do not require the
higher accuracy levels achieved by the Yellow Springs Sensor, and
who do not want to utilize invasive methods.
Diabetes
The American Diabetes Association (the "ADA") has estimated that
diabetes is the seventh leading cause of death in the United
States. The ADA also estimates that there are 16 million
diabetics in the United States, including 11% of all people
between the ages of 65 and 74, with corresponding estimated
annual health care and work loss costs of more than $90 billion.
It is also estimated that more than 385,000 diabetics die each
year from complications associated with diabetes. More than
625,000 new cases of diabetes are diagnosed each year. Diabetics
who are stricken with juvenile diabetes, the most severe form of
the disease, can survive with insulin injections. However, the
quality and length of their lives are generally reduced by
problems associated with insulin therapy and by the onset of
serious diabetic complications, including blindness, kidney
failure, impotence and increased susceptibility to infection.
Many tissues of the body normally rely on glucose, a form of
sugar, as a source of metabolic energy. Most cells store
significant amounts of glucose as glycogen, but certain tissues,
especially the brain, depend upon the blood to deliver a
continuous supply of glucose. The concentration of glucose in
the bloodstream must be controlled within a relatively tight
range to maintain normal health. If blood glucose drops too low,
causing hypoglycemia, the brain and nervous system stop working
properly, thereby causing faintness, weakness, tremulousness,
headache, confusion, and personality changes. Severe
hypoglycemia can progress to convulsions, coma, and death. If
blood glucose rises too high, causing hyperglycemia, there may be
excess urine production, thirst, weight loss, fatigue, and in the
most severe cases, dehydration, coma, and death. Moreover,
hyperglycemia causes damage from chemical reactions between the
excess glucose and proteins in cells, tissues, and organs. Over
long periods of time, episodes of hyperglycemia are thought to
lead to diabetic complications, including blindness, kidney
failure, impotence and increased susceptibility to infection.
To control the storage and metabolism of blood glucose, the
pancreas makes hormones that signal either removal or addition of
glucose to the blood, depending on the need. Insulin is a
pancreatic hormone that lowers blood glucose levels. Glucagon is
a pancreatic hormone that raises blood glucose levels. Although
certain other hormones affect blood glucose levels, insulin and
glucagon have been considered the principal regulators of glucose
metabolism associated with eating.
When the concentration of glucose in the bloodstream is not
controlled within a relatively tight range, severe complications
result. The principal disease associated with abnormal glucose
metabolism is diabetes mellitus, which is defined by the presence
of elevated blood glucose levels. Over the last 20 years, it has
become generally accepted that there are several distinct
subclasses of diabetes, the two most important of which are Type
I diabetes ("Type I Diabetes") and Type II diabetes ("Type II
Diabetes"). Type I Diabetes, or insulin-dependent diabetes
mellitus, typically begins during childhood or early adulthood
(and is therefore termed "juvenile diabetes"). Type II Diabetes,
or non-insulin-dependent diabetes mellitus, typically begins
during or after middle age (and is therefore termed "adult onset
diabetes").
Type I Diabetes. It is estimated that there are over 1 million
Type I diabetics in the United States, and about 45,000 new cases
are diagnosed each year. Type I Diabetes is caused by the
destruction of the pancreatic cells that make insulin, resulting
in deficient hormonal control of glucose metabolism and
abnormally high blood glucose. High blood glucose levels can
lead to coma and death if not adequately controlled.
Before the discovery of insulin, Type I Diabetes was a rapidly
fatal disease. Insulin therapy corrects the most serious
metabolic disorders, and the discovery of insulin is regarded as
a major triumph of medical science. However, even with modern
insulin therapy, Type I diabetics cannot lead normal lives. Type
I diabetics' life spans can be shortened by the onset of serious
complications, including blindness, kidney failure, impotence and
increased susceptibility to infection. Consequently, intensive
insulin therapy to control blood glucose is an objective of
modern diabetes treatment. For Type I diabetics, glucose control
requires frequent monitoring of glucose levels and rigid
management of diet, exercise and therapy and is difficult to
achieve for many patients.
Type II Diabetes. It is estimated that there are over 5 million
diagnosed Type II diabetics in the United States and equal
numbers of both undiagnosed Type II diabetics and people with
impaired glucose tolerance, a condition characterized by normal
blood glucose levels before eating but a tendency toward
hyperglycemia afterward. An estimated 600,000 new cases of Type
II Diabetes are diagnosed each year in the United States.
The cause of Type II Diabetes is not precisely known. What is
known is that Type II Diabetes usually occurs during or after
middle age, heredity plays a role, and energy-rich diets coupled
with sedentary lifestyles are involved. These factors appear to
combine to cause insulin resistance, which is a failure of
insulin to act normally to reduce blood glucose levels. As a
consequence, even though insulin continues to be secreted by the
pancreas, sometimes in above-normal amounts, blood glucose is
poorly controlled. Over time, the resulting episodes of
hyperglycemia are thought to cause widespread tissue damage,
including possible damage to insulin secretion mechanisms in the
pancreas. Current therapies for Type II diabetics include rigid
dietary control, often in conjunction with the prescription of
sulfonylurea compounds or, in the late stages of the disease,
daily insulin injections. Again, frequent monitoring of glucose
levels is required.
Other Potential Products
In addition to the Noninvasive Glucose Sensor, Diasense believes
that noninvasive sensors for monitoring the level of other blood
constituents are capable of development, utilizing certain of the
technologies and processes expected to be used in the Noninvasive
Glucose Sensor. These other blood constituents include alcohol,
cholesterol, globulin, albumin, urea, bilirubin, triglycerides
and total protein.
Once the development of the Noninvasive Glucose Sensor has been
successfully completed, as to which the Company can provide no
assurances, the Company intends to consider the development of
noninvasive sensors for these other blood constituents and will
evaluate at that time the respective marketability of such
sensors. Such development would require the filing of additional
patent applications, and there can be no assurance that the
Company will succeed in developing any other noninvasive sensors.
BICO has a right of first refusal with respect to the development
of such other sensors and the exclusive right to manufacture such
sensors if development is completed (See, "Intercompany
Agreements").
Foreign Subsidiaries
In connection with its office in London, Diasense has formed
Diasense U.K. Limited. Operations of this subsidiary is
currently limited to the employment of part-time consultants to
take orders for the Diasensorr 1000.
Net Sales
The Company is still in the research and development mode of its
product development; no sales have occurred since its inception.
Research and Development
The Company is continuing the research and development of the
Noninvasive Glucose Sensor. The research and development is
being conducted by BICO pursuant to a Research and Development
Agreement (See, "Intercompany Agreements").
Product Development
The Company is currently developing other models of the
Noninvasive Glucose Sensor for more universal use.
Manufacturing
Production and inventory buildup of the Diasensorr 1000 is
expected to continue. Manufacturing of the Diasensorr 1000 for
sale in the U.S. will not begin without FDA approval. BICO will
act as Diasense's exclusive manufacturer of production units of
the Noninvasive Glucose Sensor for fifteen years (See,
"Manufacturing Agreement"). Pursuant to the Manufacturing
Agreement, BICO will manufacture units of the Noninvasive Glucose
Sensor for sale to Diasense at its manufacturing facility in
Indiana, PA, although BICO may use various subcontractors to
provide certain components. The Companies plan to have the
optics, software, electronics and other mechanical components
supplied to BICO for assembly on a coordinated basis with BICO's
production schedule. After manufacturing is underway, BICO does
not expect to maintain significant inventories and, as a result,
backlogs may occur from time to time.
In September 1992, BICO entered into a 10-year lease with the
Indiana County Board of Commissioners for a 22,500 square foot
facility located in Indiana, PA, which will be used by BICO for
the assembly of production units of the Noninvasive Glucose
Sensor. During 1994, 1995 and 1996, BICO renovated the facility
and ordered the required capital equipment and machinery
necessary for assembly operations. BICO plans to spend
approximately $5 million on such renovations and equipment
purchases. In addition, during 1995, BICO obtained an additional
45,500 square feet of manufacturing space, which is being
completed for manufacturing. In 1998, BICO vacated this
additional space to its lessor in return for the lessor's
agreement not to pursue legal action against BICO for nonpayment
of rent.
BICO has undertaken, pursuant to the Manufacturing Agreement, to
comply with good manufacturing practices and other regulatory
standards and intends to establish a quality control and quality
assurance program once manufacturing begins. Although the
Companies plan to work closely to coordinate the implementation
of these undertakings, there can be no assurance that BICO will
meet Diasense's requirements for quality, quantity, or
timeliness.
Marketing and Distribution
Although Diasense's officers and marketing employees have
experience in sales, marketing, and/or distribution, Diasense has
no direct prior or existing experience. Diasense's officers have
such experience, but not specifically in the biomedical device
industry (See, "Directors and Executive Officers"). Although the
Company believes that a successfully developed Noninvasive
Glucose Sensor will attract a market, the Company anticipates
that substantial marketing efforts and the expenditure of
significant funds may be necessary to inform potential customers
and distributors of the distinctive characteristics and benefits
of the Company's Noninvasive Glucose Sensor. The Company's
success will also depend to a significant extent on its ability
to establish an effective internal marketing organization.
In addition, the Company's operating results will depend largely
on its ability to establish successful arrangements with domestic
and international distributors and marketing partners. Diasense
also contemplates that it will employ a direct sales force
focusing directly on diabetics. Although the Company believes
that a successfully developed Noninvasive Glucose Sensor will be
a profitable product for the Company, there can be no assurances
that Diasense will be able to establish sufficient direct sales
capabilities and distribution relationships or that it will be
successful in gaining market acceptance and profitability through
sales of its products.
Patents, Trademarks and Licenses
Diasense owns a patent entitled "Non-Invasive Determination of
Glucose Concentration in Body of Patients" (the "Patent") which
covers certain aspects of a process for measuring blood glucose
levels noninvasively. Such Patent was awarded to BICO's research
team in December 1991 and was sold to Diasense pursuant to a
Purchase Agreement dated November 18, 1991 (See, "Intercompany
Agreements"). The Patent will expire, if all maintenance fees
are paid, no earlier than the year 2008. If marketing of a
product made under the Patent is delayed by clinical testing or
regulatory review, an extension of the term of the Patent may be
obtained. Diasense's Patent relates only to noninvasive sensing
of glucose but not to other blood constituents. Diasense has
filed corresponding patent applications in a number of foreign
countries.
A second patent application was filed by BICO in December 1992,
which was assigned to Diasense. This second patent contained new
claims which extend the coverage based upon additional
discoveries and data obtained since the original patent was
filed. The patent application was amended in October 1993, and
was granted in January 1995.
In May 1993, four additional patent applications were filed by
BICO's research teams related to the methods, measurement and
noninvasive determination of analyte concentrations in blood.
As of November, 1998, a total of five patents have been issued,
all of which have been assigned to Diasense, and additional
patents are pending. Corresponding patent applications have
been filed in foreign countries where the Company anticipates
marketing the Noninvasive Glucose Sensor.
BICO's research team continues to file patent applications,
provisional patent applications, some of which are being
converted into "PCTs" (Patent Cooperative Treaty) which reflect
the continued research and development and additional refinements
to the Noninvasive Glucose Sensor.
Diasense or BICO may file applications in the United States and
other countries, as appropriate, for additional patents directed
to other features of the Noninvasive Glucose Sensor and related
processes.
Those competitors known by Diasense to be currently developing
non-invasive glucose sensors own patents directed to various
devices and processes related to the non-invasive monitoring of
concentrations of glucose and other blood constituents. It is
possible that such patents may require Diasense to alter any
model of the Noninvasive Glucose Sensor or the underlying
processes relating to the Noninvasive Glucose Sensor, to obtain
licenses, or to cease certain activities.
The Company also relies upon trade secret protection for its
confidential and proprietary information. Although Diasense and
BICO take all reasonable steps to protect such information,
including the use of Confidentiality Agreements and similar
provisions, there can be no assurance that others will not
independently develop substantially equivalent proprietary
information or techniques, otherwise gain access to the Company's
trade secrets, disclose such technology, or that the Company can
meaningfully protect its trade secrets.
The Company has filed for trademark protection for the term
"Diasensorr 1000", which is intended for use in connection with
the Diasensorr models; such filing will remain pending until the
first production unit is shipped. The Company intends to apply,
at the appropriate time, for registrations of other trademarks as
to any future products of the Company.
Warranties and Product Liability
Because the Company has not yet begun its manufacture or sale of
any products, it has not extended any warranties or incurred
product liability risk. BICO and Diasense currently have product
liability insurance. Upon the initiation of manufacture or sale
of products, the Company will attempt to obtain additional
insurance to cover product liability risk, if necessary.
Source of Supply
Once production of the Noninvasive Glucose Sensor begins, BICO,
as the manufacturer (See, "Intercompany Agreements"), will be
dependent upon suppliers for some of the components required to
manufacture the Noninvasive Glucose Sensor. Some components may
not be generally available, in which case BICO and the Company
may become dependent upon those suppliers which do provide such
specialized products.
Competition
With the rapid progress of medical technology, and in spite of
continuing research and development programs, the Company's
developmental products are always subject to the risk of
obsolescence through the introduction by others of new products
or techniques. Management is aware that other research groups
are developing noninvasive glucose sensors, but has limited
knowledge as to the technology used or stage of development of
these devices. There is a risk that those other groups will
complete the development of their devices before the Company
does. There is no other company currently producing or marketing
noninvasive sensors for the measurement of blood glucose similar
to those being developed by the Company. Competitive success in
the medical device field is dependent upon product
characteristics including performance, reliability, and design
innovations.
The Noninvasive Glucose Sensor will compete with existing
invasive glucose sensors. Although the Company believes that the
features of the Noninvasive Glucose Sensor, particularly its
convenience and the fact that no blood samples are required, will
compete favorably with existing invasive glucose sensors, there
can be no assurance that the Noninvasive Glucose Sensor will
compete successfully. Most currently available invasive glucose
sensors yield accuracy levels of plus or minus 25% to 30%, range
in price from $80 to $200, not including monthly costs for
disposable supplies and accessories, and are produced and
marketed by eight to ten sizable companies. Those companies
include Miles Laboratories, Inc., Boehringer Mannheim
Diagnostics, and Lifescan (an affiliate of Johnson & Johnson).
Such companies have established marketing and sales forces, and
represent established entities in the industry. Certain of the
Company's competitors (including their corporate or joint venture
partners or affiliates) currently marketing invasive glucose
sensors have substantially greater financial, technical,
marketing and other resources and expertise than Diasense, and
may have other competitive advantages over Diasense (based on any
one or more competitive factors such as accuracy, convenience,
features, price or brand loyalty). Additionally, competitors
marketing existing invasive glucose sensors may from time to time
improve or refine their products (or otherwise make them more
price competitive) so as to enhance their marketing
competitiveness relative to the Company's Noninvasive Glucose
Sensor. Accordingly, there can be no assurance that the product,
or Diasense as marketer for the Noninvasive Glucose Sensor, will
be able to compete favorably with such competition.
In addition to the invasive glucose sensors discussed above,
there exist invasive sensors, such as the Yellow Springs Sensor
(the "Clinical Sensors") which the Company believes achieve
accuracy levels within 30 minutes which are within plus or minus
3% of actual glucose levels. The Company will also compete with
this technology, which is relatively non-portable and bears a
price of approximately $8,000. The Clinical Sensors are
presently used almost exclusively by hospitals and other
institutions, and, like all invasive sensors, still require
repeated blood samples. It is anticipated that the Company will
also face competition from the Clinical Sensors, at least in some
markets. For example, certain institutions that might otherwise
purchase Diasense's products may decide to continue to use the
Clinical Sensors, whether due to the superior accuracy levels of
that sensor or institutional or historical bias, despite what
Diasense believes will be the superior convenience and cost
factors of the Noninvasive Glucose Sensor.
At this time, the Company estimates that the anticipated selling
price of the Diasensorr 1000 will range from $7950 to $8500,
depending upon the country in which it is sold and other factors;
such estimate is subject to change as the FDA process continues.
Such price will be a factor in the Company's ability to compete
with other available technology.
The Company faces more direct competition from other companies
who are currently researching and developing noninvasive glucose
sensors. The Company has very limited knowledge as to the stage
of development of these sensors; however, should another company
successfully develop a noninvasive glucose sensor, achieve FDA
approval, and reach the market prior to the Company, it would
have an adverse effect upon the Company's ability to market its
sensor.
The companies which are currently engaged in the research and/or
development of noninvasive glucose sensors include the following:
Rio Grande Medical Technology ("Rio Grande"), which is working
with the University of New Mexico, CME Telemetrix, Inc. ("CME"),
Cygnus, Inc. ("Cygnus"), Technical Chemicals and Products, Inc.
("TCPI"); and SpectRX. Although the Company is not aware, there
may be other companies engaged in similar research and
development. The named companies, and others, may be further
along in their development than the Company is aware, and may
have access to capital and other resources which would give them
a competitive advantage over the Company. The following is a
summary of the Company's current knowledge regarding the
companies listed.
Rio Grande, formerly associated with Sandia, is affiliated with
the University of New Mexico, continues to develop its
noninvasive glucose sensor based on infrared spectroscopy and
using near-infrared light. To the best knowledge of the Company,
no submission have been made to the FDA in connection with this
device. CME, a Canadian company is developing a device which
claims to measure glucose noninvasively via a finger receptacle.
Testing has been conducted in Canada and the U.S.; however, no
approval has been received to sell the device in Canada, and no
FDA submission has been made to date. Cygnus has disclosed that
it is developing a "GlucoWatch", which it claims periodically
directs an electrical current into the diabetic in order to
monitor glucose levels. Cygnus, has not yet submitted its
device for FDA scrutiny and, to the best of the Companies'
knowledge, must complete additional clinical trials prior to
applying for FDA approval to market the device. Cygnus' latest
reports indicate that its plans make a submission for FDA
approval have been further delayed. TCPI recently announced that
it began clinical studies of its system to correlate interstitial
glucose fluid data with various blood glucose; although TCPI
claims that its technology is noninvasive, it utilizes electronic
charges to penetrate the skin and draw fluid from the body.
SpectRX, which is funded by Abbott Laboratories, also uses lasers
to penetrate the skin and measure interstitial fluids; like the
TCPI device, it claims to be noninvasive; however, body fluids
are drawn from the body via lasers.
Certain organizations are also actively engaged in researching
and developing technologies that may regulate the use or
production of insulin or otherwise affect or cure the underlying
causes of diabetes. Diasense is not aware of any new or
anticipated technology that would effectively render the
Noninvasive Glucose Sensor obsolete or otherwise not marketable
as currently contemplated. However, there can be no assurance
that future technological developments or products will not make
the Noninvasive Glucose Sensor significantly less competitive or,
in the case of the discovery of a cure for diabetes, even
effectively obsolete.
Government Regulations
Since the Company's Noninvasive Glucose Sensor product is a
"medical device" as defined by the Federal Food, Drug and
Cosmetic Act, as amended (the "Act"), it is subject to the
regulatory authority of the FDA and will also be subject to the
authority of similar foreign regulatory agencies in countries
where the Noninvasive Glucose Sensor may be marketed. The FDA
has promulgated regulations that apply to the testing, marketing,
registration and manufacture of medical devices and products.
The FDA can subject the Company to inspections of its facilities
and operations and may also audit its record keeping procedures
at any time.
Moreover, approvals are subject to continual review, and the
future discovery of previously unknown problems may result in
certain restrictions being applied to the use or marketing of the
Noninvasive Glucose Sensor or a complete withdrawal from the
market.
Because the Noninvasive Glucose Sensor is subject to regulation
by the FDA, the Company will be required to meet applicable FDA
requirements prior to marketing the device in the United States.
These requirements include clinical testing, which must be
supervised by the IRBs of chosen hospitals. Clinical testing
began on the Noninvasive Glucose Sensor in May 1993 (See,
"Current Status of the Noninvasive Glucose Sensor"). The
clinical trials have been conducted based on a determination by
the Company and the IRBs that the device is a "non-significant
risk" device, thus obviating the need for an Investigational
Device Exemption ("IDE") filing with the FDA. Should any of the
IRBs determine, and are successful in convincing the FDA, that
the device is a "significant risk" device, the Company would be
required to submit an IDE filing to the FDA. Such filing would
result in material delays and expenses for the Company, and a
resulting significant delay in the completion, marketing and sale
of the Noninvasive Glucose Sensor. To date, neither the IRBs nor
the FDA have informed the Company that they are of the opinion
that the device is a "significant risk" device.
Diasense may conclude clinical testing on any device at any point
at which it believes additional data is not necessary for
inclusion in the 510(k) Notification. Such notification will
include a detailed description of the prototype and data produced
during clinical trials. The 510(k) Notification review by the
FDA involves a substantial period of time, and requests for
additional information and clinical data will require additional
time. Although the Company does not anticipate extraordinary
problems, there can be no assurance that the 510(k) Notification
will ultimately be approved, or when it will be approved.
The 510(k) Notification filed by the Company for the Diasensorr
1000 indicated that the device is "substantially equivalent" to
similar existing devices, namely invasive glucose sensors. In
connection with its review of the Company's 510(k) Notification,
the FDA will determine whether the device is "substantially
equivalent" to a similar existing device based upon the following
factors: (i) whether the device has the same "intended use" as an
the existing device; and (ii) whether the device has the same
technological characteristics as the existing device, unless the
different technological characteristics do not adversely affect
its safety and effectiveness. Although the Company and the IRBs
believe that the Noninvasive Glucose Sensor satisfies those
requirements, thus qualifying for a 510(k) Notification, there
can be no assurance that the FDA will agree. Although its
correspondence with the Company appears to indicate that the FDA
believes that the 510(k) Notification is the appropriate filing
for the Diasensorr 1000, should the FDA determine that the device
is not "substantially equivalent" to an existing device, or
refuse to approve the 510(k) Notification for any reason, the
Company would be required to submit to the FDA's full pre-market
approval process, which would require additional testing, and
result in significant delays and increased expenses. The FDA's
pre-market approval process is more extensive, time-consuming and
will result in increased research and development expenses, while
delaying the time period in which BICO and Diasense could begin
manufacturing and marketing the product.
The time elapsed between the completion of clinical testing at
IRBs and the grant of marketing approval by the FDA is uncertain,
and no assurance can be given that approval to market the
Noninvasive Glucose Sensor will ultimately be obtained. In
addition, delays or rejections may be encountered based upon
changes in the FDA's regulatory policies during the period of
research and development and the FDA's review.
The Company may also be required to comply with the same
regulatory requirements prior to introducing the 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.
The FDA's Good Manufacturing Practices for Medical Devices
specifies various requirements for BICO's manufacturing processes
and maintenance of certain records.
Because the FDA approval process has been subject to several
delays, the Companies have focused efforts on obtaining approval
to sell its device in Europe (SEE, "The Company and its
Business").
Human Resources
Diasense had no full-time employees until January 1992.
Presently, Diasense has two full-time employees. Diasense
employs consultants in its London office. Diasense believes
that, if and when FDA approval is obtained for the Noninvasive
Glucose Sensor, or manufacturing and marketing begins, it will
employ approximately 48 persons on a full-time or part-time basis
in the United States, and approximately sixteen persons in each
foreign office. Diasense's success will depend upon the efforts
of its key management personnel, the departure of any of whom may
adversely affect Diasense's business. None of the Company's
employees are represented by a collective bargaining unit, and
Diasense considers its relations with its employees to be
excellent.
Financial Information About Foreign and Domestic Operations and
Export Sales
The Company's operations are located primarily in the United
States of America. In 1994, the Company incorporated a majority-
owned foreign subsidiary, Diasense U.K. Limited, in order to
facilitate the opening of its office in London, England.
Although the Company is currently taking orders in its London
office, the Company has had no sales, foreign or domestic, since
its inception.
Item 2. Properties
In April 1992, Diasense purchased an office condominium for
$190,000. The office, which consists of approximately 4600
square feet, is located at 2275 Swallow Hill Road, Building 2500,
2nd Floor, Pittsburgh, PA 15220. Diasense's administrative
offices are located in such office, and BICO leases a portion of
the office at a monthly rental amount of $3,544 plus one-half of
the utilities (See, "Certain Relationships and Related
Transactions"). In December 1998, the Company entered into an
agreement to sell its office condiminium for $175,000 and lease it
back at a monthly rental of $5,750 per month for a five year term.
As of November 1998, Diasense has an office in London, England
for the purpose of taking orders for the Diasensorr 1000.
The Company believes that its existing facilities will be
sufficient to meet its needs through Fiscal 1999. Should the
Company require additional space, the Company believes such space
will be available at reasonable commercial rates.
Item 3. Legal Proceedings
In April 1996, the Pennsylvania Securities Commission commenced a
private investigation into Diasense's sales of its common stock
pursuant to its public offering in an effort to determine whether
any sales were made improperly to Pennsylvania residents. The
Company has been cooperating fully with the state and has
provided all of the information requested. As of the date of
this filing, no determinations had been made, and no orders have
been issued.
In May 1996, the Company, along with BICO and BICO's individual
directors, including David Purdy and Fred Cooper, who are also
officers and directors of Diasense, was served with a federal
class action lawsuit based on alleged misrepresentations and
violations of federal securities laws. The action is pending in
federal district court for the Western District of Pennsylvania,
and remains in the pre-trial pleadings stage with the consent of
all parties. No determinations as to possible liability or
exposure are possible at this time, although the Company does not
believe that any violations of the securities laws have occurred.
In April, 1998, the Company was served with a subpoena requesting
documents in connection with an investigation by the U.S.
Attorneys' office for the Western District of Pennsylvania. The
Company has submitted various scientific, financial and
contractual documents in response to such requests.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
Diasense was incorporated in the Commonwealth of Pennsylvania on
July 5, 1989. Diasense has the authority to issue 40,000,000
shares of common stock at a par value of $.01, and 1,000,000
shares of preferred stock. As of November 30, 1998, 22,980,051
shares of common stock were outstanding. No shares of Preferred
Stock are outstanding. As of November 30, 1998, there were
currently exercisable warrants outstanding to purchase 6,676,513
shares of the common stock of Diasense at exercise prices ranging
from $.50 to $3.50 per share. The warrants have various
expiration dates through November 1, 2003.
As of November 30, 1998, the Company had approximately 610
holders of record for its common stock and no holders of record
for its preferred stock.
Diasense is not currently listed on any stock exchange or market.
The Company currently acts as its own registrar and transfer
agent for its common stock and its warrants. Currently, there is
no established public trading market for the Company's common
stock.
Common Stock
The holders of common stock are entitled to one vote per share on
all matters to be voted on by shareholders and are entitled to
cumulative voting rights in the election of directors. In
cumulative voting, the holders of common stock are entitled to
cast, for each share held, the number of votes equal to the
number of directors to be elected. A holder may cast all of his
or her votes for one nominee or distribute them among any number
of nominees for election. Subject to any preferences that may be
granted to any holders of preferred stock, the holders of common
stock are entitled to receive, on a pro rata basis, dividends out
of funds legally available for distribution, when and if declared
by the Board of Directors, and to share ratably in the assets of
Diasense legally available for distribution to its shareholders
in the event of liquidation, dissolution or winding-up of
Diasense. The holders of common stock have no preemptive,
redemption or conversion rights. The shares of common stock
currently outstanding are fully paid and nonassessable.
Preferred Stock
The Company's Articles of Incorporation permit the issuance of up
to 1,000,000 shares of preferred stock. No shares of preferred
stock are currently issued or outstanding. Diasense has no
present intention to issue any such shares, although there can be
no assurance that preferred stock will not be issued in the
future.
Dividends
The Company has not paid cash dividends on its common stock or
preferred stock since its inception and cash dividends are not
presently contemplated at any time in the foreseeable future.
The Company anticipates that any excess funds generated from
operations in the foreseeable future will be used for working
capital and to continue to fund the research and development of
the Noninvasive Glucose Sensor. In accordance with the Company's
Articles of Incorporation, cash dividends are also restricted
under certain circumstances.
Warrants
As of November 30, 1998 there were outstanding warrants, all of
which are currently exercisable, to purchase 6,676,513 shares of
common stock at exercise prices ranging from $0.50 to $3.50 per
share and having expiration dates ranging from April 24, 1999 to
November 1, 2003. During Fiscal 1998, no warrants were granted.
The warrants were issued to directors, officers and employees of
Diasense and to certain other persons for certain goods and
services transferred or rendered to Diasense and, in the case of
certain officers, in consideration of meritorious service. The
number of shares of common stock issuable upon the exercise of
the warrants and the exercise prices relating thereto are subject
to adjustment upon the occurrence of certain events, including
stock dividends, stock splits, mergers, consolidations and
reorganizations. The warrants may not be redeemed by Diasense
prior to the expiration thereof.
Employment Agreement Provisions Related to Changes in Control
Diasense has entered into agreements (the "Agreements") with Fred
E. Cooper and David L. Purdy pursuant to which they receive
annual salaries of $100,000, and $50,000 from Diasense,
respectively, all of which are subject to review and adjustment
annually. As of the end of Fiscal 1998, such annual salaries had
been increased to $247,000 and $100,000 respectively, although,
due to the Company's cash flow problems, full payment was not
made. The initial term of Messrs. Cooper's and Purdy's
Agreements expire on October 31, 1999, but the Agreements
continue thereafter for additional three-year periods unless any
party gives proper notice of non-renewal. The Agreements also
provide that in the event of a "change of control" of Diasense,
Diasense is required to issue to Mr. Cooper and Mr. Purdy shares
of common stock equal to five percent (5%) of the outstanding
shares of common stock of the Company immediately after the
change in control. In general, a "change of control" is deemed
to occur for purposes of the Agreements: (i) when 20% or more of
Diasense's outstanding voting stock is acquired by any person,
(ii) when one-third (1/3) or more of Diasense's directors are not
Continuing Directors (as defined in the Agreements), or (iii)
when a controlling influence over the management or policies of
Diasense is exercised by any person or by persons acting as a
group within the meaning of Section 13(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") (See,
"Employment Agreements").
Item 6. Selected Financial Data
The selected financial data presented herein has been derived
from the Company's audited consolidated financial statements.
These financial statements have been audited by Thompson Dugan,
P.C. for the twelve-month periods ended September 30, 1998, 1997,
1996, 1995 and 1994, the reports of each of which include
explanatory paragraphs as to "going concern" considerations. The
selected financial data should be read in conjunction with
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" and the financial statements of the
Company and related notes thereto included elsewhere in this
report.
12 mos. 12 mos. 12 mos. 12 mos. 12 mos.
Ended Ended Ended Ended Ended
9/30 9/30 9/30 9/30 9/30
1998 1997 1996 1995 1994
R&D $ -0- $ -0- $ -0- $ 3,487,882 $ 2,807,508
Expenses
General &
Administrative
Expenses $ 669,764 $ 1,023,961 $ 1,509,298 $ 2,323,279 $ 2,388,854
Warrant
Extensions $ 25,000 $ 5,593,875 $ 7,644,033 $ 4,650,000 $ -0-
Net Loss ($ 2,914,329) $(6,564,837)($ 9,021,823)($10,361,514)($ 5,145,081)
Total Assets $ 292,322 $ 3,108,243 $ 4,171,910 $ 5,407,401 $ 694,712
Total
Liabilities $ 92,327 $ 22,419 $ 20,624 $ 1,323,980 $ 7,172,585
Working Capital
(Deficit) ($ 44,724) $ 2,862,349 $ 3,914,198 $ 3,839,965 ($ 6,707,855)
Accumulated ($44,875,100)($41,960,771)($35,395,934)($26,374,111)($16,012,597)
Deficit
Net Loss
Per Common ($ .13) ($ .29) ($ .39) ($ .54) ($ .29)
Share
Cash Dividends
Per Share: $ -0- $ -0- $ -0- $ -0- $ -0-
Common
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Diasense operates on a fiscal year ended September 30th.
Therefore, years are referred to as Fiscal years; for example,
the year from October 1, 1997 through September 30, 1998 is
referred to as Fiscal 1998.
Forward-Looking Statements
In addition to Part I of this Form 10-K, the Management's
Discussion and Analysis section also contains the type of forward-
looking statements discussed on page 2 herein. Please refer to
such discussion in connection with the information presented
here.
Liquidity and Capital Resources
Diasense's cash balance at September 30,1998 was $41,811, a
decrease from the balance at September 30, 1997 of $1,181,070 and
at September 30, 1996 of $1,143,312. The decrease occurred
because the Company did not raise additional capital during
Fiscal 1998, and continues in a research and development mode,
with no income generated from operations. Also $1,197,433
net advances to BICO in 1998. As a result, the Company
experienced significant cash flow problems during Fiscal
1998. The prior years' fluctuations in Diasense's cash balances
were primarily attributable to several placements of common
stock, which generated $5,701,492; and $1,365,155 in net
proceeds for the Company in Fiscal 1995, and Fiscal 1996;
respectively. No warrants to purchase common stock were
exercised during Fiscal 1996, 1997 or 1998.
Diasense had negative working capital of ($44,724) at September
30, 1998, as compared to positive working capital of $2,862,349
at September 30, 1997, and $3,914,198 at September 30, 1996.
This fluctuation in working capital was primarily attributable to
funds raised from sales of its stock, with no sales of stock or
other capital-raising activities during Fiscal 1998, and from a
decrease in accrued amounts due to BICO under the Research and
Development Agreement, which resulted when BICO accepted
3,000,000 shares of Diasense common stock at an assigned value of
$3.50 per share in exchange for $10,500,000 in amounts due during
Fiscal 1995.
In July 1995, BICO and Diasense agreed to suspend billings,
accruals and payments due pursuant to the R&D Agreement pending
the FDA's review of the Diasensorr 1000. The suspension
continued during Fiscal 1998; no amounts are due or being accrued
pursuant to the R&D Agreement.
During Fiscal 1998, the Company made allowances for doubtful
accounts, including amounts owed to the Company from BICO. These
allowances were recorded based upon the current financial
position of BICO.
Diasense has entered into employment agreements (the
"Agreements") with Fred E. Cooper and David L. Purdy effective
November 1, 1994, pursuant to which they will receive annual
salaries of $100,000 and $50,000, respectively, which are subject
to review and adjustment annually. As of the end of Fiscal 1998,
such annual salaries had been increased to $247,000 and $100,000,
respectively, although, due to the Company's cash flow problems,
such amounts were not paid during Fiscal 1998 (See, "Executive
Compensation"). The initial term of the Agreements expires on
October 31, 1999, and the Agreements are subject to review,
adjustment and renewal. In the event of a change in control of
the Company, as defined in the Agreements, and termination of
employment, continuation of salaries at 100%, which decreases to
25% over time, are payable in addition to the issuance of stock
as set forth in the Agreements. The Agreements also provide for
severance and disability benefits under certain circumstances
(See," DIRECTORS AND EXECUTIVE OFFICERS - Employment
Agreements"). As of September 30, 1998, Mr. Cooper and Mr. Purdy
had voluntarily deferred payment of $24,625 and $20,833, respectively,
of their wages which had been earned.
Based on Diasense's available cash, the ability of Diasense and
its affiliates to raise capital, its rate of monthly expenditures
and the deferrals agreed upon by Diasense and BICO, Diasense
believes that it will be able to continue its current activities
for a limited time. If Diasense is not able to obtain additional
financing or if such additional financing is insufficient,
Diasense will be required to cease operations and the development
of the Noninvasive Glucose Sensor altogether.
Accordingly, Diasense may be required to seek substantial
additional financing from third parties to complete the
development of the Noninvasive Glucose Sensor, to obtain FDA
approval to market the Noninvasive Glucose Sensor and to provide
for its general working capital requirements during that time
period. There can be no assurance that such additional financing
will be available or available on terms acceptable to Diasense.
Moreover, certain demands on liquidity, such as technological,
regulatory or legal problems, could cause Diasense's liquidity to
be further burdened. Diasense does not currently have any
additional sources of liquidity or working capital, including
bank lines of credit, etc. Long-term working capital needs are
expected to be met through sales of the Noninvasive Glucose
Sensor, although no assurance can be made that the Noninvasive
Glucose Sensor will be successfully developed, manufactured,
marketed or commercially viable.
Results of Operations
During Fiscal 1998, 1997 and 1996, research and development
expenses were $0 as compared to $3,487,882 in Fiscal 1995. This
decrease was due to the agreed-upon suspension of billings by
Diasense and BICO pursuant to the R&D Agreement (See, "Liquidity
and Capital Resources").
General and administrative expenses aggregated $669,764 during
Fiscal 1998, as compared to $1,023,961 during Fiscal 1997, and
$1,509,298 during Fiscal 1996. This decrease was due primarily
to the suspension of billings pursuant to the R&D Agreement, and
the reduction in personnel due to the Company's cash flow
problems.
Other income aggregated $62,914 in Fiscal 1998, as compared to
$52,999 in Fiscal 1997, and $133,083 in Fiscal 1996. Other
income is comprised of interest income and rental income; rental
income averages approximately $42,000 per year (all of which was
paid by BICO to Diasense), and the balance of other income is
from interest earned on deposits of liquid assets.
During Fiscal 1998, 1997, and 1996, the Company extended 10,000;
2,236,550; and 2,556,213 warrants, respectively, which were
originally granted to certain officers, directors, employees and
consultants in 1990 through 1992, until 1998 through 2000,
respectively. Because the exercise price of such warrants ($1.00
or $.50 per share) was lower than the market price of the common
stock at the time of the extensions (which is assumed to be $3.50
per share, although there is currently no public trading market
for the common stock), $25,000 was charged to operations in
Fiscal 1998; $5,593,875 was charged to operations in Fiscal 1997,
and $7,644,033 was charged to operations in Fiscal 1996.
During Fiscal 1998, the Company charged $2,282,479 to a provision
for doubtful accounts, reflecting amounts due to the Company from
BICO, due to BICO's current financial position.
Income Taxes
As of September 30, 1998, the Company had approximately
$24,700,000 in net operating losses available for federal tax
purposes. Subject to certain limitations, these losses will be
available as carry forwards to offset future taxable income
through the years 2005-2012. The Company also has federal
research and development credit carry forwards available to
offset federal income taxes of approximately $700,000, subject to
limitations and expiring in the years 2005 through 2012.
Supplemental Financial Information (unaudited)
In December 1998, the Company entered into an agreement to sell
its office condominium for $175,000 and lease it back at a
monthly rental of $5,750 per month for a five year term.
Item 8. Financial Statements and Supplementary Data.
The Company's consolidated financial statements appear on pages F-1
through F-21 of this report.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers
The directors and executive officers of the Company are as
follows:
Name Age Director Positions Held
Since
David L. Purdy 70 1989 Chairman of the Board,
Chief Scientist
Fred E. Cooper 53 1989 President,
CEO, Director
Anthony J. Feola 51 1991 Director
DAVID L. PURDY, 70, is the Chairman of the Board and Chief
Scientist of the Company. Mr. Purdy has been a director since
the Company's inception and became Chairman of the Board in
October 1992. Mr. Purdy acted as the Company's Treasurer from
its inception until October 1992, when he became its Chief
Scientist. Mr. Purdy has been employed primarily as the
President of BICO from 1972 to the present. Mr. Purdy is
currently the President, Chairman of the Board and a director of
BICO. Mr. Purdy currently devotes approximately 40% of his time
to Diasense, and 60% of his time to BICO and its subsidiaries.
FRED E. COOPER, 53, has been the President and a director of the
Company since its inception. Prior to joining the Company, Mr.
Cooper co-founded Equitable Financial Management, Inc. of
Pittsburgh, PA, a company in which he served as Executive Vice
President until his resignation and divestiture of ownership in
August 1990. Mr. Cooper is the Chief Executive Officer and a
director of BICO. Mr. Cooper currently devotes approximately 40%
of his time to Diasense and 60% to BICO and its subsidiaries.
ANTHONY J. FEOLA, 51, has been a director of the Company since
February 1991. In addition, Mr. Feola served as the Company's
Chief Operating Officer until April 1994, when he rejoined BICO
as its Senior Vice President. At that time, BICO assumed Mr.
Feola's employment contract with Diasense. Mr. Feola also served
as the Company's Vice President of Marketing and Sales from
December 1991 until October 1992. Until January 1, 1992, he was
BICO's Vice President of Marketing and Sales. Prior to joining
BICO in November, 1989, Mr. Feola was Vice President and Chief
Operating Officer with Gateway Broadcasting in Pittsburgh, PA and
a National Sales Manager for Westinghouse Corporation, also in
Pittsburgh, PA. He also serves as a director of BICO.
Pursuant to the requirements of Item 405 of Regulation S-K
regarding timely filings required by Section 16(a) of the
Securities and Exchange Act, the Company represents the
following. Based solely on its review of copies of forms
received and written representations from certain reporting
persons, the Company believes that all of its officers,
directors, and greater than ten percent beneficial owners
complied with applicable filing requirements.
Item 11. Executive Compensation
The following table sets forth information concerning the annual
and long-term compensation for services in all capacities to the
Company for the Fiscal Years ended September 30, 1998, 1997 and
1996 of those persons who were, at September 30, 1998: (i) the
Chief Executive Officer, and (ii) the other most highly
compensated executive officers of the Company whose remuneration
exceeded $100,000 (the "Named Executives").
<TABLE>
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term All Other
Compension (1) Compensation
($) (2)
<S> <C> <C> <C> <C> <C> <C>
- - -----------------------------------------------------------------------------------------------
Name and Year Salary ($) Bonus ($) (2)Other ($) Awards
Principal Warrants
Position (number of
shares) (#)
- - -----------------------------------------------------------------------------------------------
Fred E. 1998 $ 173,875 $ 0 $ 0 0 $ 0
Cooper, 1997 $ 150,000 $ 0 $ 0 363,500(3) $ 0
CEO (4) 1996 $ 150,000 $ 0 $ 0 478,545(3) $ 0
- - -----------------------------------------------------------------------------------------------
David L. 1998 $ 91,667 $ 0 $ 0 0 $ 0
Purdy 1997 $ 87,500 $ 0 $ 0 0 $ 0
Chief Scientist 1996 $ 100,000 $ 0 $ 0 600,000(3) $ 0
(5)
- - -----------------------------------------------------------------------------------------------
</TABLE>
(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. Except as noted
in Note (3) below, the Named Executives were awarded
warrants to purchase the number of shares of the Company's
common stock set forth in the table above in each of the
years noted (See, "Certain Relationships and Related
Transactions"). The Company has no retirement, pension or
profit-sharing programs for the benefit of its directors,
officers or other employees.
(2) During the years ended September 30, 1998, 1997 and 1996,
the Named Executives received medical benefits under the
Company's group insurance policy.
(3) During Fiscal 1996 and Fiscal 1997, 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, which is assumed to be
$3.50 per share, although there is currently no public
trading market for the common stock.
(4) Due to the Company's cash flow problems, Mr. Cooper's full
salary was not paid during Fiscal 1998. Mr. Cooper will be
paid salary and bonuses aggregating approximately $371,052,
$442,000, and $426,000 by BICO and its other subsidiaries
during calendar years 1998, 1997 and 1996, respectively.
(5) Due to the Company's cash flow problems, Mr. Purdy's full
salary was not paid during Fiscal 1998. During Fiscal
1997, Mr. Purdy waived part of his $100,000 salary, and
voluntarily decreased his annual salary in BICO. Mr. Purdy
will be paid salary and bonuses aggregating approximately
$83,470, $154,000, and $300,000 by BICO during calendar
years 1998, 1997, and 1996, respectively.
Option/Warrant/SAR Grants in Last Fiscal Year
No options, warrants or SARs were granted or extended to the
Named Executives during Fiscal 1998.
AGGREGATED OPTION/WARRANT/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/WARRANT/SAR VALUE TABLE
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Shares Options/SARs Options/SARs
Acquired on at FY-End (#) at FY-End ($)
Exercise Value Exercisable/ Exercisable/
Name (#)(1)(2) Realized($)(3) Unexercisable(4) Unexercisable(5)
Fred E. Cooper -0- -0- 1,180,045(6) $3,358,385
David L.
Purdy -0- -0- 950,000(7) $2,850,000
_________________
(1) This figure represents the number of shares of common stock
acquired by each Named Executive upon the exercise of
warrants.
(2) During the fiscal year ended September 30, 1998, neither of
the Named Executives exercised any warrants to purchase
common stock.
(3) The value realized of the warrants exercised would be
computed by determining the spread between the market value
of the underlying securities at the time of exercise minus
the exercise price of the option or warrant. For purposes
of this calculation, the "market price" was determined to
be $3.50 per share, the price per share in the Company's
previous public offering, although there is currently no
market for the Company's common stock.
(4) All warrants held by the Named Executives are currently
exercisable.
(5) The value of unexercised warrants was computed by
subtracting the exercise price of the outstanding warrants
from $3.50 per share, the price per share in the Company's
current public offering, although there is currently no
market for the Company's common stock.
(6) Includes warrants to purchase: 238,000 shares of common
stock at $.50 per share until April 24, 1995 (extended
until April 24, 1999); 100,000 shares of common stock at
$.50 per share until June 29, 1995 (extended until June 29,
1999); 300,000 shares of common stock at $.50 per share
until March 25, 1996 (extended until March 25, 1999);
178,545 shares of common stock at $.50 until May 7, 1996
(extended until May 7, 1999); 150,000 shares of common
stock at $1.00 per share until October 25, 1996 (extended
until October 25, 1999); and 213,500 shares of common stock
at $1.00 per share until January 27, 1997 (extended until
January 27, 2000).
(7) Includes warrants to purchase: 250,000 shares of common
stock at $.50 per share until April 24, 1995 (extended
until April 24, 1999); 100,000 shares of common stock at
$.50 per share until June 29, 1995 (extended until June 29,
1999); 300,000 shares of common stock at $.50 per share
until March 25, 1996 (extended until March 25, 1999); and
300,000 shares of common stock at $.50 per share until May
7, 1996 (extended until May 7, 1999).
Employment Agreements
Diasense has entered into employment agreements (the
"Agreements") with Fred E. Cooper and David L. Purdy effective
November 1, 1994, pursuant to which they will receive annual
salaries of $100,000 and $50,000 respectively, which are subject
to review and adjustment annually. As of the end of Fiscal 1998,
such annual salaries had been increased to $247,000, and
$100,000, respectively, although, due to the Company's cash flow
problems, full payment was not made during Fiscal 1998. The
initial term of the Agreements expires on October 31, 1999, but
continue thereafter for additional three-year terms unless any of
the parties give proper notice of non-renewal. The Agreements
also provide that in the event of a "change of control" of
Diasense, Diasense is required to issue to Messrs. Cooper and
Purdy shares of common stock equal to five percent (5%) of the
outstanding shares of the common stock of the Company immediately
after the change in control. In general, a "change of control"
is deemed to occur for purposes of the Agreements (i) when 20% or
more of Diasense's outstanding voting stock is acquired by any
person, (ii) when one-third (1/3) or more of Diasense's directors
are not Continuing Directors (as defined in the Agreement), or
(iii) when a controlling influence over the management or
policies of Diasense 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,
and Purdy 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. Diasense is also required
to continue medical insurance coverage for Messrs. Cooper and
Purdy 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. Cooper or Mr. Purdy becomes
disabled, as defined in the Agreements, they will be entitled to
the following payments, in lieu of salary, such payments to be
reduced by any amount paid directly to them pursuant to a
disability insurance policy provided by the Company or its
affiliates: 100% of their most recent annual salary for the first
three years; and 70% of their most recent salary for the next two
years.
The Agreements also generally restrict the disclosure of certain
confidential information obtained by Messrs. Cooper and Purdy
during the term of the Agreements and restricts them from
competing with Diasense for a period of one year in specified
states following the expiration or termination of the Agreements.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Percent of
Amount & Nature Ownership with Class with
Name and Address of Beneficial Percent of Warrants and Warrants and
of Beneficial Owner Ownership(1) Class (2) Options(3) Options (4)
Biocontrol 11,975,000 52.1% 11,975,000 52.1%
Technology, Inc.
300 Indian Springs Rd.
Indiana, PA 15701
David L. Purdy (5) 32,000 * 982,000(6) 4.1%
300 Indian Springs Road
Indiana, PA 15701
Fred E. Cooper 22,000 * 1,202,045(7) 5.0%
Building 2500, 2nd Floor
2275 Swallow Hill Rd.
Pittsburgh, PA 15220
Anthony J. Feola 20,000 * 820,000(8) 3.4%
Building 2500, 2nd Floor
2275 Swallow Hill Rd.
Pittsburgh, PA 15220
All directors and 74,000 * 3,004,045(9) 11.5%
executive officers
as a group (4 persons)
* Less than one percent
________________________
(1) Excludes currently exercisable warrants and options 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 and options, as a percentage of the
total number of shares of common stock outstanding as of
September 30, 1998, which was 22,980,051.
(3) Includes ownership of all shares of common stock which each
named person or group has the right to acquire, through the
exercise of warrants or options, within sixty (60) days,
together with the common stock currently owned.
(4) Represents total number of shares of common stock owned by
each person, as set forth in the third column, which each
named person or group has the right to acquire, through the
exercise of warrants or options within sixty (60) days,
together with common stock currently owned, as a percentage
of the total number of shares of common stock outstanding
as of September 30, 1998. For individual computation
purposes, the total number of shares of common stock
outstanding as of September 30, 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 solely by Mr. Purdy's spouse
or adult child. Mr. Purdy disclaims any beneficial
interest to shares held by members of his family.
(6) Includes currently exercisable warrants to purchase the
following: 250,000 shares of common stock at $.50 per share
until April 24, 1995 (extended until April 24, 1999);
300,000 shares of common stock at $.50 per share until
March 25, 1996(extended until March 25, 1999); 100,000
shares of common stock at $.50 per share until June 29,
1995 (extended until June 29, 1999); and 300,000 shares of
common stock at $.50 per share until May 7, 1996 (extended
until May 7, 1999).
(7) Includes currently exercisable warrants to purchase the
following: 238,000 shares of common stock at $.50 per
share until April 24, 1995 (extended until April 24, 1999);
100,000 shares of common stock at $.50 per share until June
29, 1995 (extended until June 29, 1999); 300,000 shares of
common stock at $.50 per share until March 25, 1996
(extended until March 25, 1999); 178,545 shares of common
stock at $.50 until May 7, 1996 (extended until May 7,
1999); 150,000 shares of common stock at $1.00 per share
until October 25, 1996 (extended until October 25, 1999);
and 213,500 shares of common stock at $1.00 per share until
January 27, 1997 (extended until January 27, 2000).
(8) Includes currently exercisable warrants to purchase the
following: 100,000 shares of common stock at $.50 per
share until April 24, 1995 (extended until April 24, 1999);
100,000 shares of common stock at $.50 per share until
October 23, 1995 (extended until October 23, 2000); 300,000
shares of common stock at $.50 per share until March 25,
1996 (extended until March 25, 1999); and 300,000 shares of
common stock at $.50 per share until May 7, 1996 (extended
until May 7, 1999).
(9) Includes shares of common stock, including stock currently
owned, available under currently exercisable warrants as
set forth above.
Item 13. Certain Relationships and Related Transactions
Diasense and BICO (the "Companies") share common officers and
directors. In addition, the Companies have entered into several
intercompany agreements which are summarized below. Management
believes that it was in the best interest of Diasense to enter
into such agreements and that the transactions were based on
terms as fair as those which may have been available in
comparable transactions with third parties. However, no
unaffiliated third party was retained to independently determine
the fairness of such transactions. The Company's policy
concerning related party transactions requires the approval of a
majority of the disinterested directors.
Employment Relationships
The Board of Directors of the Company approved employment
agreements effective November 1, 1994 for its officers and
directors Fred E. Cooper and David L. Purdy. (See, "Employment
Agreements").
David L. Purdy, Chairman of the Board, Chief Scientist and a
director of the Company, is a director of the BICO and Coraflex
Boards. He is also the Chairman of the Board, President and
Treasurer of BICO, and the Chairman and the President and
Treasurer of Coraflex. Fred E. Cooper, President and a director
of the Company, is a director of the BICO, Coraflex, and Petrol
Rem Boards. He is also the CEO and Executive Vice President of
BICO. Anthony J. Feola, a director, is also a director on the
BICO, Coraflex, and Petrol Rem Boards. He is also the Senior
Vice President of BICO.
Leases and Property
In April 1992, Diasense acquired an office condominium in
Pittsburgh, PA (See, "Properties"). BICO moved its Pittsburgh
offices to the Diasense office condominium and pays Diasense rent
in the amount of $3,544 per month plus one-half of the utilities.
Three of the Company's current executive officers and/or
directors and three former directors of the Company are members
of the eight-member 300 Indian Springs Road Real Estate
Partnership (the "Partnership") which in July 1990, purchased
BICO's real estate in Indiana, PA, and each has personally
guaranteed the payment of lease obligations to the bank providing
the funding. The cost of the property to BICO was $1,084,852.
The property was sold to the Partnership subject to the leaseback
provision and outstanding liens for approximately $800,000; BICO
received approximately $403,000 in cash as a result of the sale-
leaseback. The sale price was determined by First West Virginia
Bank. Each member of the Partnership received warrants in
consideration of their personal guarantees. The six members of
the Partnership who are also current or former officers and/or
directors of the Company, David L. Purdy, Fred E. Cooper, Gary R.
Keeling, Jack H. Onorato, Richard M. Erenberg and C. Terry
Adkins, each received warrants to purchase 100,000 shares of
BICO's common stock at an exercise price of $.33 per share until
June 29, 1995 (which were extended until June 29, 1999), and
warrants to purchase 100,000 shares of Diasense's common stock at
an exercise price of $.50 per share until June 29, 1995 (extended
until June 29, 1999). The warrant exercise prices were equal to
the market prices of the common stock at the time of issuance.
Mr. Keeling, who was not a director at the time of the
transaction, joined the board in October 1991, became a Vice
President in October 1992, and resigned from both positions in
August, 1997. Mr. Adkins, who was not a director at the time of
the transaction joined the board in March 1992 and became a Vice
President in October 1992; Mr.Adkins resigned as an officer and
director during Fiscal 1998. Mr. Onorato, who was not a director
at the time of the transaction, was a director until September
1992 when he became a director of BICO until April 1994. Mr.
Erenberg, who was not a director at the time of the transaction,
was a director until April 1993.
Intercompany Agreements
License and Marketing Agreement. Diasense acquired the exclusive
marketing rights for the Noninvasive Glucose Sensor and related
products and services from BICO in August 1989 in exchange for
8,000,000 shares of its common stock. That agreement was
canceled pursuant to a Cancellation Agreement dated November 18,
1991, and superseded by a Purchase Agreement dated November 18,
1991. The Cancellation Agreement provides that BICO retain the
8,000,000 shares of Diasense common stock which BICO received
pursuant to the License and Marketing Agreement.
Purchase Agreement. BICO and Diasense entered into a Purchase
Agreement dated November 18, 1991 whereby BICO conveyed to
Diasense its entire right, title and interest in the Noninvasive
Glucose Sensor and its development, including its extensive
knowledge, technology and proprietary information. Such
conveyance includes BICO's patent received in December 1991
(See, "Business").
In consideration of the conveyance of its entire right in the
Noninvasive Glucose Sensor and its development, BICO received
$2,000,000. In addition, Diasense may endeavor, at its own
expense, to obtain patents on other inventions relating to the
Noninvasive Glucose Sensor. Diasense also guaranteed BICO the
right to use such patented technology in the development of
BICO's proposed implantable closed-loop system, a related system
in the early stages of development.
In December 1992, BICO and Diasense executed an amendment to the
Purchase Agreement which clarified terms of the Purchase
Agreement. The amendment defines "Sensors" to include all
devices for the noninvasive detection of analytes in mammals or
in other biological materials. In addition, the amendment
provides for a royalty to be paid to Diasense in connection with
any sales by BICO of its proposed closed-loop system.
Research and Development ("R&D") Agreement. Diasense and BICO
entered into an agreement dated January 20, 1992 in connection
with the research and development of the Noninvasive Glucose
Sensor. Pursuant to the agreement, BICO will continue the
development of the Noninvasive Glucose Sensor, including the
fabrication of prototypes, the performance of clinical trials,
and the submission to the FDA of all necessary applications in
order to obtain market approval for the Noninvasive Glucose
Sensor. BICO will also manufacture the models of the Noninvasive
Glucose Sensor to be delivered to Diasense for sale (See,
"Manufacturing Agreement"). Upon the delivery of the completed
models, the research and development phase of the Noninvasive
Glucose Sensor will be deemed complete.
Diasense has agreed to pay BICO $100,000 per month for indirect
costs beginning April 1, 1992, during the 15 year term of the
agreement, plus all direct costs, including labor. BICO also
received a first right of refusal for any program undertaken to
develop, refine or improve the Noninvasive Glucose Sensor, and
for the development of other related products. In July 1995,
BICO and Diasense agreed to suspend billings, accruals of amounts
due and payments pursuant to the R&D Agreement pending the FDA's
review of the Sensor.
Manufacturing Agreement. BICO and Diasense entered into an
agreement dated January 20, 1992, whereby BICO will act as the
exclusive manufacturer of the Noninvasive Glucose Sensor and
other related products. Diasense will provide BICO with purchase
orders for the products and will endeavor to provide projections
of future quantities needed. The original Manufacturing
Agreement called for the products to be manufactured and sold at
a price to be determined in accordance with the following
formula: Cost of Goods (including actual or 275% of overhead,
whichever is lower) plus a fee of 30% of Cost of Goods. In July
1994, the formula was amended to be as follows: Costs of Goods
Sold (defined as BICO's aggregate cost of materials, labor and
associated manufacturing overhead) + a fee equal to one third
(1/3) of the difference between the Cost of Goods Sold and
Diasense's sales price of each Sensor. Diasense's sales price of
each Sensor is defined as the price paid by any purchaser,
whether retail or wholesale, directly to Diasense for each
Sensor. Subject to certain restrictions, BICO may assign its
manufacturing rights to a subcontractor with Diasense's written
approval. The term of the agreement is fifteen years.
Warrants
During Fiscal 1996 through Fiscal 1998, Diasense did not issue
any warrants to purchase common stock to officers or directors.
PART IV
Item 14. Exhibits, Financial Statements and Reports on Form 8-K
1. Consolidated Financial Statements
The consolidated financial statements, together with the report
thereon of the Company's independent accountants, are included in
this report on the pages listed below.
(a) Consolidated Financial Statements Page
Report of Independent Accountants Thompson Dugan, P.C. F-1
Consolidated Balance Sheets as of September 30, 1998;
September 30, 1997 F-3
Consolidated Statements of Operations For the Fiscal
Years Ended September 30, 1998, 1997, 1996; and July 5,
1989 (inception) through September 30, 1998 F-4
Consolidated Statements of Changes in Stockholders'
Equity for the Fiscal Years Ended September 30, 1998,
1997, 1996, 1995, 1994; 1993; 1992; the 12 months ended
December 31, 1991, 1990, and from July 5, 1989
(inception) through December 31, 1989 F-5
Consolidated Statements of Cash Flows for the Fiscal
Years Ended September 30, 1998, 1997, 1996; and July 5,
1989 (inception) through September 30, 1998 F-6
Notes to Consolidated Financial Statements for the Fiscal
Year Ended September 30, 1998 F-7
2. Exhibits
(a) Reports on Form 8-K
The Company filed a Form 8-K report dated August 28, 1998.
The items listed were Item 6, Resignation of Registrant's
Directors; and Item 7(c), Exhibits.
(c) Exhibits required by Item 601 of Regulation S-K
The following Exhibits required by Item 601 of Regulation S-
K are filed as part of this report. Except as otherwise
noted, all exhibits are incorporated by reference from
Exhibits to Form S-1 (Registration #33-56574) filed December
31, 1992 or from exhibits to Form 10-K filings subsequent to
that date.
3.1 Articles of Incorporation of Diasense, Inc., as
amended
3.2 Amended and Restated Bylaws of Diasense, Inc.
4.1 Form of Specimen Common Stock Certificate of
Diasense, Inc.
10.1 Purchase Agreement dated as of November 18, 1991
between Diasense, Inc. and Biocontrol Technology, Inc.
10.2 Manufacturing Agreement dated as of January 20, 1992,
between Diasense,Inc. and Biocontrol Technology, Inc.
10.3 Research and Development Agreement dated as of January
20, 1992 between Diasense, Inc. and Biocontrol Technology, Inc.
10.4 Lease dated as of May 1, 1992 between Diasense, Inc.
and Biocontrol Technology, Inc.
10.5 First Amendment to Purchase Agreement dated as of December 8,
1992 between Diasense, Inc. and Biocontrol Technology, Inc.
10.6(1) Amendment to Manufacturing Agreement dated as of June 7, 1994
between Diasense, Inc. and Biocontrol Technology, Inc.
10.7(1) Deferral Agreement, dated as of July 1, 1994, between Diasense,
Inc. and Biocontrol Technology, Inc.
10.8 Deferral Agreement dated as of September 30, 1994 between
Diasense, Inc. and Biocontrol Technology, Inc.
10.9 Employment Agreement dated as of November 1, 1994 between
Diasense, Inc. and Fred E. Cooper
10.10 Employment Agreement dated as of November 1, 1994 between
Diasense, Inc. and David L. Purdy
10.11(2) Letter of Resignation of director C. Terry Adkins
(1) Incorporated by reference from Exhibit with this title filed
with the Company's Form S-1 filed August 17, 1994 at 33-
82796.
(2) Incorporated by reference from Exhibit with this title filed
with the Company's Form 8-K dated August 29, 1997.
Conformed Copy
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on the 30th day of December 1998
DIASENSE, INC.
By: /s/ Fred E. Cooper
Fred E. Cooper, President
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
Signature Title Date
/s/ David L. Purdy Chairman of December 30,1998
David L. Purdy the Board;
Chief Scientist
/s/ Fred E. Cooper President and December 30, 1998
Fred E. Cooper Director
(principal executive
officer, principal
financial officer, and
principal accounting
officer)
/s/ Anthony J. Feola Director December 30, 1998
Anthony J. Feola
THOMPSON DUGAN
CERTIFIED PUBLIC ACCOUNTANTS
________________________
Pinebridge Commons
1580 McLaughlin Run Rd.
Pittsburgh, PA 15241
Report of Independent Certified Public Accountants
Independent Auditors' Report
Board of Directors
Diasense, Inc.
We have audited the accompanying consolidated balance sheets
of Diasense, Inc. (a development stage company) as of September
30, 1998 and 1997, and the related statements of operations,
changes in stockholders' equity and cash flows for each of the
three years in the period ended September 30, 1998, and for the
period from July 5, 1989 (inception) through September 30, 1998.
These financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
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 financial statements present fairly, in
all material respects, the consolidated financial position of
Diasense, Inc. as of September 30, 1998 and 1997, and the results
of its operations and its cash flows for each of the three years
in the period ended September 30, 1998, and for the period from
July 5, 1989 (inception) through September 30, 1998, in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in notes B and E to the financial
statements, the Company is in the development stage and has
incurred losses from operations and negative cash flows from
operations for each of the three years in the period ended
September 30, 1998 and from July 5, 1989 (inception) through
September 30, 1998, raising substantial doubt about its ability
to continue as a going concern. Management's plans in regard to
these matters are also described in note B. The financial
statements do not include any adjustments that might result from
the outcome of this uncertainty, including adjustments relating
to the recoverability and classification of recorded assets that
might be necessary in the event the Company cannot continue to
meet its financing requirements and achieve productive
operations.
In addition, as discussed in notes B and E, the Company is
dependent upon its parent, Biocontrol Technology, Inc. (BICO) to
continue to perform and fund contractual arrangements related to
research, development and manufacturing activities of products
for the Company. There has been and continues to be substantial
doubt about BICO's ability to continue as a going concern due to
their recurring losses from operations and negative cash flow.
These financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
December 30, 1998
<PAGE>1
Diasense, Inc.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
September 30, September 30,
ASSETS 1998 1997
----------- -----------
Current assets
Cash and cash equivalents (note A) $ 41,811 $ 1,871,070
Prepaid expenses 5,792 13,698
Due from BICO (note A and E) - 1,000,000
----------- -----------
Total current assets 47,603 2,884,768
Property and equipment-at cost(notes A,C and J)
Building and improvements 222,296 236,663
Furniture and fixtures 42,750 42,750
----------- -----------
265,046 279,413
Less accumulated depreciation 69,553 55,938
----------- -----------
195,493 223,475
----------- -----------
Other assets
Due from BICO(notes A and E) 2,197,433 -
Notes receivable-related parties(note E) 125,000 -
Interest receivable-related parties(note E) 9,272 -
Allowance for doubtful account(note E) (2,282,479) -
----------- -----------
49,226 -
----------- -----------
$ 292,322 $ 3,108,243
=========== ===========
LIABILITIES and STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 23,606 $ 9,433
Accrued payroll and withholdings 68,721 12,986
----------- -----------
Total current liabilities 92,327 22,419
Commitments and Contingencies (notes B and F)
Stockholders' equity
Preferred stock, 1,000,000 shares authorized, none issued
Common stock, 40,000,000 shares of $.01 par value
authorized; issued and outstanding
22,980,051 at Sep. 30, 1998 and
22,979,051 at Sep. 30, 1997 229,801 229,791
Additional paid-in capital 26,892,071 26,888,581
Warrants 17,953,223 17,928,223
Deficit accumulated during the
development stage (44,875,100) (41,960,771)
----------- -----------
199,995 3,085,824
TOTAL LIABILITIES AND ----------- -----------
STOCKHOLDERS' EQUITY $ 292,322 $ 3,108,243
=========== ===========
[FN]
The accompanying notes are an integral part of this statement.
<PAGE>3
Diasense, Inc.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
From July 5, 1989
For the year ended For the year ended For the year ended (inception) thru
September 30, 1998 September 30,1997 September 30, 1996 September 30, 1998
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Research and development expenses
notes A, E, and F) $ - $ - $ - $ 10,556,405
General and administrative expenses 669,764 1,023,961 1,509,298 11,918,065
Provision for doubtful account(note E) 2,282,479 - - 2,282,479
Warrant extensions (note G) 25,000 5,593,875 7,644,033 17,912,908
Technology and patent rights acquired (note E) - - - 2,650,000
Interest expense - - 1,575 10,529
Other income - (note C) (62,914) (52,999) (133,083) (522,691)
Other expense - - - 37,405
-------------- -------------- -------------- ---------------
Net loss $ (2,914,329) $ (6,564,837) $ (9,021,823) $ (44,845,100)
============== ============== ============== ===============
Net loss per common share (note A) $ (0.13) $ (0.29) $ (0.39) $ (2.40)
============== ============== ============== ===============
<FN>
The accompanying notes are an integral part of this statement.
</TABLE>
<PAGE>4
<TABLE>
Diasense, Inc.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (Note G)
For the period July 5, 1989 (inception) through September 30, 1998
Deficit Total
Accumulated Stock-
Common Additional During the Holders'
Common Stock Stock Paid-in Development equity
Shares Amount Subscribed Warrants Capital Stage (Deficit)
-------------------- ---------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
July 10,1989 Issuance of stock to BICO in connection with
obtaining License and Marketing Agreement 8,000,000 $ 80,000 $- - $ - $ - $ 80,000
Aug. 21 through Dec. 31, 1989 (various dates)
First Private Placement 656,000 6,560 - - 321,440 - 328,000
Sep. 29, 1989 - Issuance of stk in connection
with patent rights acquired by BICO 1,040,000 10,400 - - 509,600 - 520,000
Net loss - - - - - (80,000) (80,000)
-------------------- ---------- ---------- ----------- ------------ -----------
Balances at December 31, 1989 9,696,000 96,960 - - 831,040 (80,000) 848,000
Jan. 1 to Dec. 31, 1990 (various dates)
First private Placement 1,240,000 12,400 - - 607,600 - 620,000
May 1, 1990 through Aug. 31, 1990 (various dates)
First Private Placement
Exchange of debt for shares of stock 136,000 1,360 - - 66,640 - 68,000
Warrants issued - to BICO - - - 27,500 - - 27,500
Net loss - - - - - (497,628) (497,628)
-------------------- ---------- ---------- ----------- ------------ -----------
Balances at December 31, 1990 11,072,000 110,720 - 27,500 1,505,280 (577,628) 1,065,872
Jan. 1 to Dec. 31, 1991 (various dates)
First Private Placement 768,000 7,680 - - 376,320 - 384,000
Second Private Placement 3,948,250 39,482 - - 3,896,468 - 3,935,950
December 31, 1991 - common stock subscribed
62,500 shares at $ 1 - - 625 - 61,875 - 62,500
Warrants issued - to BICO - - - 19,085 - - 19,085
Net loss - - - - - (3,650,203) (3,650,203)
-------------------- ---------- ---------- ---------- ------------ -----------
Balances at December 31, 1991 15,788,250 157,882 625 46,585 5,839,943 (4,227,831) 1,817,204
Jan. 1 to Sep. 30, 1992 (various dates)
Second Private Placement 986,750 9,868 - - 976,883 - 986,751
Third Private Placement 7,212 72 - - 25,170 - 25,242
Fourth Private Placement 120,000 1,200 - - 418,800 - 420,000
Jan. 1992 - Exchange of debt for share of stk 235,000 2,350 - - 232,650 - 235,000
Jan. 1992 - Common stk subscriptions recieved 62,500 625 (625) - - - 0
Net loss - - - - - (2,846,584) (2,846,584)
-------------------- ---------- ---------- ---------- ------------ -----------
Balances at September 30, 1992 17,199,712 171,997 - 46,585 7,493,446 (7,074,415) 637,613
Sep. 30, 1992 to Oct. 31,1992(various dates)
Fourth Private Placement 180,000 1,800 - - 628,200 - 630,000
June 1993 thru July 1993 warrants exercised 25,000 250 - (3,770) 28,520 - 25,000
Net loss - - - - - (3,763,101) (3,763,101)
-------------------- ---------- ---------- ---------- ------------ -----------
Balances at September 30, 1993 17,404,712 174,047 - 42,815 8,150,166 (10,837,516) (2,470,488)
Oct. 1, 1993 to Sep. 30, 1994(various dates)
Registered Stock 230,961 2,309 - - 783,936 - 786,245
Consulting service in exchange for stock 7,200 72 - - 25,128 - 25,200
Treasury Stock purchase (10,000) (100) - - (4,900) (30,000) (35,000)
Treasury Stock sale 10,000 100 - - 34,900 - 35,000
Nov. 1993 thru Aug. 1994 warrants exercised 105,000 1,050 - (2,500) 38,950 - 37,500
June 1994 Private Placement subject to Reg. S 91,667 917 - - 287,834 - 288,751
Net Loss - - - - - (5,145,081) (5,145,081)
-------------------- ---------- ---------- ---------- ------------ -----------
Balances at September 30, 1994 17,839,540 178,395 - 40,315 9,316,014 (16,012,597) (6,477,873)
Consulting service in exchange for stock 17,500 175 - - 61,075 - 61,250
May 1995 Exchange of debt for shrs of stk 3,000,000 30,000 - - 10,470,000 - 10,500,000
Oct. 1994 thru Sep. 1995 warrants exercised 29,512 295 - - 9,771 - 10,066
Warrant extensions - - - 4,650,000 - - 4,650,000
Oct. 1, 1994 to Sep. 30, 1995(various dates)
Registered Stock 437,768 4,378 - - 1,497,114 - 1,501,492
July 12, 1995, unregistered stock to BICO 1,200,000 12,000 - - 4,188,000 - 4,200,000
Net Loss - - - - - (10,361,514) (10,361,514)
-------------------- ---------- ---------- ---------- ------------ -----------
Balances at September 30, 1995 22,524,320 225,243 - 4,690,315 25,541,974 (26,374,111) 4,083,421
Consulting service in exchange for stock:Reg. 10,000 100 - - 34,900 - 35,000
Consulting service in exchange for stock:Unreg. 5,000 50 - - 17,450 - 17,500
Oct. 1995 thru Sep. 1996 warrants exercised 56,000 560 - - 27,440 - 28,000
Warrant extensions - - - 7,644,033 - - 7,644,033
Oct. 1, 1995 to Sep. 30, 1996(various dates)
Registered Stock 410,731 4,108 - - 1,361,047 - 1,365,155
Net Loss - - - - - (9,021,823) (9,021,823)
-------------------- ---------- ---------- ---------- ------------ -----------
Balances at September 30, 1996 23,006,051 230,061 - 12,334,348 26,982,811 (35,395,934) 4,151,286
Warrant extensions - - 5,593,875 - - 5,593,875
Oct. 1, 1996 to Sep. 30, 1997(various dates)
Registered Stock (27,000) (270) - - (94,230) - (94,500)
Net Loss - - - - - (6,564,837) (6,564,837)
-------------------- ---------- ---------- ---------- ------------ -----------
Balances at September 30, 1997 22,979,051 $229,791 $ -$17,928,223 $26,888,581 $(41,960,771) $3,085,824
-------------------- ---------- ---------- ---------- ----------- -----------
Warrant extensions - - - 25,000 - - 25,000
Oct. 1, 1997 to Sep. 30, 1998(various dates)
Registered Stock 1,000 10 - - 3,490 - 3,500
Net Loss - - - - - (2,914,329) (2,914,329)
-------------------- ---------- ---------- ---------- ---------- -----------
Balances at September 30, 1998 22,980,051 $229,801 $ -$17,953,223 $26,892,071 $(44,875,100) $199,995
==================== ========== ========== ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>5
<TABLE>
Diasense, Inc.
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CASH FLOWS
<CAPTION>
From July 5, 1989
For the year ended For the year ended For the year ended (inception) thru
September 30, 1998 September 30, 1997 September 30, 1996 September 30, 1998
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (2,914,329) $ (6,564,837) $(9,021,823) $ (44,845,100)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation 13,615 13,613 13,373 69,553
Provision for doubtful accounts 2,282,479 - - 2,282,479
Impairment loss 14,367 - - 14,367
Stock issued in exchange for services - - 52,500 138,950
Stk issued for License & Marketing Agreement - - - 80,000
Warrant extensions 25,000 5,593,875 7,644,033 17,912,908
Inventory deposit - BICO - - - (1,000,000)
(Increase) decrease in prepaid expenses 7,906 615 469 (5,792)
Increase (decrease) in payable due to BICO - - (1,287,012) 10,500,000
Increase (decrease) in accounts payable 14,173 (10,662) (9,730) 23,606
Increase (decrease) in accrued payroll
and withholdings 55,735 12,457 (6,614) 68,721
------------- ------------- ------------- -------------
Net cash used in operating activities (501,054) (954,939) (2,614,804) (14,760,308)
Cash flows from investing activities:
Purchase of property and equipment - - (7,005) (279,413)
(Increase)in notes rec.-related parties (125,000) - - (125,000)
(Increase)in interest rec-related parties (9,272) - - (9,272)
------------- ------------- ------------- -------------
Net cash used in investing activities (134,272) - (7,005) (413,685)
Cash flows from financing activities:
Advances to BICO (2,853,665) (1,814,292) (3,143,864) (6,963,526)
Repayment of advances to BICO 1,656,232 3,591,489 1,366,667 6,332,679
Proceeds from issuance of common stock 3,500 (94,500) 1,365,155 10,971,834
Proceeds from issuance of common stk to BICO - - - 4,200,000
Proceeds from warrants exercised - - 28,000 118,066
Proceeds from treasury stock - - - (35,000)
Proceeds from Regulation S - - - 288,751
Proceeds from issuance of notes payable - - - 303,000
------------- -------------- ------------ --------------
Net cash provided by fin. activities (1,193,933) 1,682,697 (384,042) 15,215,804
------------- -------------- ------------ --------------
Net increase(decrease)in cash and cash equiv. (1,829,259) 727,758 (3,005,851) 41,811
Cash and cash equivalents at beg of period 1,871,070 1,143,312 4,149,163 -
------------- -------------- ------------ --------------
Cash and cash equivalents at end of period $ 41,811 $ 1,871,070 $ 1,143,312 $ 41,811
============ ============== ============ ==============
The accompanying notes are an integral part of this statement.
</TABLE>
DIASENSE, INC.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
1. ORGANIZATION
Diasense, Inc. (the Company) was incorporated in the Commonwealth
of Pennsylvania on July 5, 1989 as a wholly owned subsidiary of
Biocontrol Technology, Inc. (BICO). BICO owned approximately 52%
of the stock of the Company at September 30, 1998. The Company
and BICO are currently developing a Noninvasive Glucose Sensor
(Sensor), which management believes will be able to measure the
concentration of glucose in human tissue without requiring the
drawing of blood. The Company plans to market the Sensor
directly to diabetics, through their doctors' orders, and is
currently negotiating with domestic and international
distribution organizations.
The consolidated financial statements include the accounts of
Diasense UK LTD. a 100% owned subsidiary of Diasense as of
September 30, 1998. All significant intercompany accounts and
transactions have been eliminated.
2. CASH AND CASH EQUIVALENTS
For purposes of the consolidated statement of cash flows,
the Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
The Company places temporary cash deposits in financial institutions
and such deposits may be in excess of the FDIC insurance limit.
3. PROPERTY AND EQUIPMENT
Property and equipment are accounted for at cost and are
depreciated over their estimated useful lives (37 years for property
and 10 years for equipment) on a straight-line basis. The carrying
value of property and equipment are reduced for impairment losses
determined by management.
4. INCOME TAXES
The Company previously adopted Financial Accounting Standards
Board Statement No. 109 (FAS 109), Accounting for Income Taxes,
which requires the asset and liability method of accounting for
income taxes. Enacted statutory tax rates are applied to
temporary differences arising from the differences in financial
statement carrying amounts and the tax basis of existing assets
and liabilities. Due to the uncertainty of the realization of
income tax benefits (note D), the adoption of FAS 109 had no
effect on the financial statements of the Company.
5. ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
6. NET LOSS PER COMMON SHARE
Net loss per common share is based on the weighted average
number of common shares outstanding which amounted to
22,980,111, 22,979,125 and 22,983,654 for the years ended
September 30, 1998, September 30, 1997 and September 30, 1996
respectively. The loss per share does not include common stock
equivalents since the effect would be anti-dilutive
For the period from July 5, 1989 (inception) to September 30,
1998, net loss per common share is based on the weighted
average number of common shares outstanding and the number of
common shares issuable on the exercise of 1,708,000 warrants
issued in 1992; reduced by 488,000 common shares that were
assumed to have been purchased with the proceeds from the
exercise of the warrants at an assumed price of $3.50 per
share. The inclusion of the warrants in the loss per share
calculation is required by the rules of the Securities and
Exchange Commission relative to the initial registration
statement which included the Company's financial statements
through the period ended March 31, 1993. The registration
statement became effective July 19, 1993. The weighted
average number of common shares including the effect of the
conversion of the warrants for the period from July 5, 1989
(inception) to September 30, 1998 amounted to 18,664,225.
7. RESEARCH AND DEVELOPMENT
All research and development costs incurred by the Company, or
by BICO on its behalf, are charged to operations as incurred.
Patent and technology rights acquired from BICO (Note E) have
also been written off as a charge to operations.
8. TREASURY STOCK
The Company records treasury stock transactions using the par
value method.
9. INTERCOMPANY ACTIVITY
Certain expenses are allocated by management between the Company,
BICO and BICO's subsidiaries. These expenses are reimbursed to
the paying entity through the use of intercompany accounts, which
accounts are also used to account for non-interest bearing cash
advances between the companies.
10. COMMON STOCK WARRANTS
The Company recognizes cost, if any, on warrants granted based
upon the excess of the market price of the underlying shares of
common stock as of the warrant grant date over the warrant
exercise price. Had the Company adopted the fair value based
accounting method for recognizing stock-based compensation (as
permitted by Financial Accounting Standard No. 123) its reported
net losses (utilizing the Black-Scholes method of valuation)
would have been approximately $3,036,981 for the year ended
September 30, 1998, approximately $7,279,510 for the year ended
September 30, 1997, and approximately $15,371,524 for the year
ended September 30, 1996. Net loss per share under the fair
value based accounting method would have been approximately $.13,
$.32 and $.69 for the years ended September 30, 1998, 1997, and
1996 respectively.
11. COMPREHENSIVE INCOME
The Company's consolidated net income (loss) is substantially the
same as comprehensive income required to be disclosed by Financial
Accounting Standards Board Statement No. 130.
12. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
significant concentrations of credit risk consist principally of
receivables from BICO and from officers and directors of the
Company and BICO. The receivables from officers and directors of
the Company are unsecured and represent a concentration of credit
risk due to the common employment and financial dependency of
these individuals on the Company.
NOTE B - OPERATIONS
The Company is developing the Sensor and has not, as yet,
achieved a commercially marketable product. The ability of the
Company to continue in existence is dependent on its having
sufficient financial resources to maintain operations, to
complete the research and development necessary to successfully
bring the Sensor to market, and for marketplace acceptance. The
Company has no other commercial products and is dependent on the
successful development of the Sensor technology. The Company is
selling shares of its common stock pursuant to an offering with
the SEC which became effective July 19, 1993 and has an
intercompany receivable from BICO of $ 2,197,433. Any funds
generated by the Company through the sale of its common stock and
any repayment of funds due from Bico would be used to finance its
operations. The Company has had only minimal sales of its
common stock over the last two fiscal years.
The Company is in the development stage, and accordingly, it has
presented cumulative information on results of operations, cash
flows, and changes in stockholders' equity since inception.
The Company has incurred significant losses and negative cash
flows from operations from inception through September 30, 1998
and has a significant accumulated deficit as of September 30,
1998, raising substantial doubt about its ability to continue as
a going concern. The Company has financed its losses and its
research and development program, which is temporarily suspended,
primarily from the sale of the Company's common stock through
private placements. Management believes that its available cash
resources, including funds it reasonably expects to be raised by
the Company or its affiliates will be sufficient to fund its
operations through the year ending September 30, 1999.
Management believes that the recoverability and classification of
recorded assets and liabilities are comparable to approximate
liquidation values as of September 30, 1998.
As a result of agreements with BICO relating to development and
manufacture of the Noninvasive Glucose Sensor, Diasense is dependent
on BICO for substantially all of its activities in connection with
the development and manufacture of the Sensor, other than its
marketing efforts. Pursuant to the Research and Development
Agreement, BICO has undertaken the development of the Sensor and
has assumed certain other obligations. In July 1995, the Company
and BICO agreed to suspend billings, accruals of amounts due and
payments pursuant to the R&D Agreement pending FDA review of the
Sensor. No amounts are due pursuant to the R&D Agreement which
have not been recorded, and no adjustments will be made retroactively
or cumulatively if and when billings resume. Management believes
that billings may resume, based on negotiations between both companies,
after the Diasensor 1000 is approved for marketing. Pursuant to
a manufacturing agreement between BICO and Diasense, BICO will
manufacture the Sensor once development is completed. In the absence
of such agreements with BICO, the research, development and
manufacture of the Sensor could not continue as currently contemplated.
BICO's ability to successfully complete the development of the Sensor,
to obtain FDA approval in a timely fashion and to manufacture
production units of the Sensor without significant delays or defects
will directly affect Diasense's business and profitability. BICO
has experienced, and continues to experience, substantial losses
and financial difficulties. The consolidated financial statements
for BICO for the year ended December 31, 1997 included disclosures
which referred to the existence of substantial doubt about BICO's ability
to continue as a going concern. BICO has a net loss for the nine
month period ended September 30, 1998 of $17,996,197 (unaudited)
and for the fiscal year ended December 31, 1997 of $30,433,177,
compared to a net loss for the fiscal year ended December 31, 1996
of $24,045,702. As of December 31, 1997, and September 30, 1998,
BICO's accumulated deficit was $120,699,236 and $138,695,433
(unaudited) respectively.
In the past, BICO has financed its own operations from proceeds
generated from private and public sales of its securities, the
issuance of debt in the form of convertible debentures, from
funds paid by Diasense to BICO for research and development of
the Noninvasive Glucose Sensor and from intercompany advances
from Diasense and other BICO subsidiaries. The failure of BICO
to continue to exist as a going concern would have a material
adverse effect on Diasense's business and ability to continue
operations.
If BICO does not continue as a going concern, Diasense would need
to rely on other arrangements to develop and manufacture the
Sensor or to perform that work itself. There can be no assurance
that Diasense would be able to find acceptable alternatives,
negotiate acceptable collaborative arrangements with any
alternative organizations, or to perform the work itself.
NOTE C - OTHER INCOME
Other income for the years ending September 30, 1998, 1997 and
1996 consists of $20,368, $10,471 and $90,555 of interest income
and $42,528, $42,528 and $42,528 of rental income for their
respective periods. The total rental income for the years ended
September 30, 1998, 1997 and 1996, was from BICO for office
space.
NOTE D - INCOME TAXES
As of September 30, 1998, the Company has available approximately
$24,700,000 of net operating loss carryforwards for federal
income tax purposes. These carryforwards are available, subject
to limitations, to offset future taxable income, and expire in
the tax years 2005 through 2012. The Company also has research
and development credit carryforwards available to offset federal
income taxes of approximately $700,000 subject to limitations,
expiring in the years 2005 through 2012.
The Company has temporary differences arising from different
methods of accounting for the costs of patent and technology
rights for financial statement and tax purposes. For financial
statement purposes, these costs have been charged to operations.
For tax purposes, the costs of approximately $2,650,000 have been
capitalized and are being amortized over seventeen years. Also,
the fair market value of Warrant Extensions have been recorded
and expensed for financial statement purposes in the amount of
$17,907,908 as of September 30, 1998. For tax purposes, warrants
are not recorded until the warrants are exercised.
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 their 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
September 30, 1998 and 1997:
1998 1997
Net Operating Loss $ 8,398,000 $7,412,000
Warrant Expense 6,088,689 6,080,189
Patent Amortization 749,563 697,285
Tax Credit Carry Forward 700,000 700,000
----------- ----------
15,936,252 14,889,474
Valuation Allowance (15,936,252) (14,889,474)
----------- ----------
Net Deferred Tax Asset $ 0 $ 0
=========== ==========
The deferred tax benefit and the associated increase in the
valuation allowance are summarized in the following schedule:
Increase
in
Deferred Valuation
Tax Allowance Net
Benefit
Year Ended September 30,1998 $ (1,046,778) $ 1,046,778 $0
Year Ended September 30,1997 $ (2,326,496) $ 2,326,496 $0
Year Ended September 30,1996 $ (3,000,971) $ 3,000,971 $0
Year Ended September 30,1995 $ (3,877,527) $ 3,877,527 $0
Year Ended September 30,1994 $ (1,872,557) $ 1,872,557 $0
From July 5,1989 (inception)
through September 30,1998 $(15,936,252) $15,936,252 $0
NOTE E - RELATED PARTY TRANSACTIONS
1. SENSOR RELATED AGREEMENTS
The Company has a development agreement with BICO for the sensor.
If successfully developed, the Sensor will enable users to
measure blood glucose levels without taking blood samples. The
Company acquired the right from BICO to one United States patent
for $2,000,000 on November 18, 1991 which covers the process of
measuring blood glucose levels non-invasively. Approval to market
the Sensor is subject to federal regulations including the
Food and Drug Administration (FDA). Each model of the Sensor
is subject to clinical testing and regulatory approvals by the FDA.
The Company and BICO have entered into a series of agreements
related to the development, manufacture and marketing of the
Sensor. Under such agreements, BICO is required to carry out all
steps necessary to bring the Sensor to market including 1)
developing and fabricating the prototypes necessary for clinical
testing; 2) performing the clinical investigations leading to FDA
approval for marketing; 3) submitting all applications to the FDA
for marketing approval; and 4) developing a manufacturable and
marketable product. Diasense is to conduct the marketing of the
Sensor. Following is a brief description of the agreements:
Manufacturing Agreement
The manufacturing agreement between the Company and BICO was
entered into on January 20, 1992. Under such agreement, BICO is
to act as the exclusive manufacturer of production units of the
Sensor and to sell the units to the Company at a price determined
by the agreement. The term of the agreement is fifteen years.
Research and Development Agreement
Under a January 1992 agreement effective April 1992, the Company
is to pay BICO $100,000 for indirect costs per month, plus all
direct costs for the research and development of the Sensor. This
agreement replaced a previous agreement dated May 14, 1991 under
which Diasense had been paying BICO $50,000 for indirect costs
per month, plus all direct costs for the design and development
activities. The term of the agreement expires in 2007. In July
1995, the Company and BICO agreed to suspend billings, accruals
of amounts due and payments pursuant to the R&D Agreement,
pending FDA review of the Sensor.
The monthly charges from BICO for indirect costs are reflected as
general and administrative expenses and direct costs for the
research and development of the Sensor incurred by BICO are
reflected as R&D expenses in the statement of operations.
Purchase Agreement
In November 1991, the Company entered into a Purchase Agreement
with BICO under which the Company acquired all of BICO's rights
to the Sensor for a cash payment of $2,000,000 which was charged
to operations.
Sublicensing Agreement
In 1989, BICO acquired rights to certain concepts and patents
related to the Sensor from outside parties. The purchase price
was $650,000, and was paid by the conveyance of stock in BICO and
1,040,000 shares of Diasense common stock. The $520,000 value of
the Diasense stock issued was charged to the receivable due from
BICO. On May 14, 1991, Diasense and BICO entered into a
sublicense agreement under which Diasense acquired these rights
from BICO for a cash payment of $650,000 which was charged to
operations.
License and Marketing Agreement
In August 1989, BICO granted Diasense the exclusive right to
represent BICO and to market the Sensor and related products
worldwide. In exchange for these rights, Diasense conveyed
8,000,000 shares of its common stock to BICO. The assigned value
of these shares was $80,000 which was charged to operations. In
November 1991, this agreement was superseded when the Company
purchased all rights to the Sensor technology.
2. INTERCOMPANY ACTIVITY
For the fiscal years ended September 30, 1998, 1997 and 1996, net
intercompany charges by the Company to BICO and its subsidiaries
were $160,433, $129,960 and $5,558. During the year ended
September 30, 1996 the Company had net intercompany charges and
cash advances (non-interest bearing) to BICO amounting to
$1,777,197. During the year ended September 30, 1997 all of
these advances were repaid. During the year ended September 30,
1998, the Company had net intercompany charges and non-interest
bearing cash advances to BICO amounting to $1,197,433.
3. RECEIVABLES FROM OFFICERS AND DIRECTORS
During the fiscal year ended September 30, 1998 the Company made
loans to certain officers and directors totalling $125,000,
all of which were still outstanding at year end. The loans are
due upon demand and bear interest at a rate of 8.25%. Total
amounts due, including accrued interest, on these loans at
September 30, 1998, were $80,599 from Fred E. Cooper and $53,673
from Anthony J. Feola. In addition, Mr. Cooper had expense advances
of $2900 outstanding at September 30, 1998.
4. ALLOWANCE FOR DOUBTFUL ACCOUNTS
Due to the financial condition of BICO, as discussed in Note B,
management has established an allowance for doubtful
accounts covering amounts due from BICO and its officers and
directors. The allowance for $ 2,282,479 was recognized on the
books of the Company in the quarter ended September 30, 1998.
5. ACCRUED PAYROLL
Included in accrued payroll and withholdings at September 30, 1998,
is $24,625 and $20,833 for unpaid wages of Fred E. Cooper and David
L. Purdy, respectively, which were earned but voluntarily deferred
by these two directors.
NOTE F - COMMITMENTS AND CONTINGENCIES
1. RESEARCH AND DEVELOPMENT
Under terms of a Research and Development Agreement with BICO,
the Company is to pay BICO $100,000 for indirect costs per month,
plus direct costs associated with the research and development
through January, 2007.
In July 1995, the Company and BICO agreed to suspend billings,
accruals of amounts due and payments pursuant to the R&D
Agreement, pending FDA review of the Sensor.
2. EMPLOYMENT AGREEMENTS
Diasense has entered into agreements with Fred E. Cooper and
David L. Purdy pursuant to which they receive annual salaries of
$150,000 and $100,000 from Diasense, respectively, both of which
are subject to review and adjustment annually. The initial term
of the Agreements with Mr. Cooper and Mr. Purdy expires on
October 31, 1999, but continue thereafter for an additional
three-year period unless either party gives proper notice of non-
renewal. The Agreements also provide that in the event of a
"change of control" of Diasense, Diasense is required to issue to
Mr. Cooper and Mr. Purdy shares of common stock equal to five
percent (5%) of the outstanding shares of common stock of the
Company immediately after the change in control.
3. LITIGATION
Several class action lawsuits have been filed against the Company
along with BICO and certain of their directors, all of which have
been consolidated into a single action. The suit alleges various
violations of federal securities laws on behalf of a class of
plaintiffs who purchased common stock of the Company between April
25, 1995 and February 26, 1996, at which time the value of the
Company's stock dropped as a result of an unfavorable recommendation
of a Panel Review convened by the United States Food and Drug
Administration with respect to a certain medical device owned by
Diasense and manufactured by BICO. 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.
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.
4. PENNSYLVANIA SECURITIES COMMISSION
The Pennsylvania Securities Commission is conducting a private
investigation of the Company and BICO 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.
NOTE G - STOCKHOLDERS' EQUITY
Common Stock
The Company sold 2,800,000 shares of common stock at $0.50 per
share, from August 1989 to May 1991 in connection with a joint
private offering with BICO. The aggregate amount raised was
$1,400,000, on which no commissions were paid to any third party.
The Company sold 4,997,500 shares of common stock, at $1.00
per share, in a private offering from May 1991 to January
1992. The aggregate amount raised was $4,985,201, on which
no commissions were paid to any third party.
The Company sold, in July 1992, 7,212 shares of common stock,
at $3.50 per share, in a private offering to one accredited
investor. The aggregate amount raised was $25,242, on which no
commissions were paid to any third party.
The Company sold 300,000 shares of common stock, at $3.50 per
share, in a private offering from July 1992 through November
1992. The aggregate amount raised was $1,050,000, on which no
commissions were paid to any third party.
In December 1991, the Company issued 235,000 shares of common
stock in exchange for the cancellation of outstanding
promissory notes for $235,000.
In June 1994, the Company sold 91,667 shares of its common
stock pursuant to the requirements set forth in Regulation S of
the Securities Act of 1933 ("Regulation S"). In connection with
such sale, the purchasers and any entity which facilitated such
sale undertook to ensure compliance with Regulation S, which
among other things, limits a foreign investor's ability to
trade the Company's stock in the United States. The Company
received net proceeds in the amount of $288,751 pursuant to
such sales.
During 1995, the Company issued the following shares of its
common stock to BICO: 3,000,000 shares at an assigned price of
$3.50 per share in return for a corresponding reduction in the
amount due from Diasense to BICO pursuant to the R&D Agreement
of $10,500,000; and 1,200,000 shares of its common stock at a
price of $3.50 per share.
In July, 1993, the Company commenced a public offering, which
is continuing. As of September 30, 1998, an aggregate of
1,063,460 shares had been issued with proceeds to the Company
of $3,561,892. Of that total, 230,961 shares with net proceeds
of $786,245 were issued in fiscal 1994; 437,768 shares with net
proceeds of $1,501,492 were issued in fiscal 1995; 410,731
shares with net proceeds of $1,365,155 were sold in fiscal
1996; 1000 shares were issued in fiscal 1998 at $3.50 per
share. 10,000 shares were issued for consulting services at a
charge to operations of $35,000 in fiscal 1996; and 27,000
shares were reimbursed with net repayment of $94,500 in fiscal
1997.
The Company issued unregistered common stock in exchange for
consulting services of 7,200 shares in fiscal 1994, 17,500 shares
in fiscal 1995, 5,000 shares in fiscal 1996 and none in fiscal
1997 or 1998. The associated consulting service expense was
recognized at a rate of $3.50 per share, which is the price at
which the common stock was being sold in the Company's public
offering.
At September 30, 1998, the Company has reserved 6,676,513 shares
of the Company's unissued common stock for warrants which were
outstanding and exercisable. Of these, warrants on 4,053,250
shares were issued to directors, officers, and employees for
meritorious service, employment contracts, and personal
guarantees on Company indebtedness. Also, warrants on 2,223,263
shares were issued to consultants and medical advisers and on
400,000 shares to individuals for personal guarantees on Company
loans. The per share exercise price for 3,255,000 shares is
$.50, for 2,286,763 shares is $1.00 and for 1,134,750 shares is
$3.50. The fiscal years in which warrants expire are as follows:
Warrant Expiration Year Number of Shares
1999 3,085,013
2000 2,188,750
2001 1,187,750
2002 0
2003 215,000
---------
6,676,513
=========
The following is a summary of warrant transactions during fiscal
years ended September 30,
1998 1997 1996 1995 1994
Outstanding beginning 7,476,513 7,533,263 7,077,213 6,891,525 6,871,525
of year
Granted during the year 0 59,000 743,250 265,200 125,000
Canceled during the year (800,000) (115,750) (231,200) (50,000) 0
Exercised during the
years at prices ranging
from $.1875 to $1.00 per
share 0 0 (56,000) (29,512) (105,000)
--------- --------- --------- --------- ---------
Outstanding, and 6,676,513 7,476,513 7,533,263 7,077,213 6,891,525
eligible for exercise. ========= ========= ========= ========= =========
During the period October 1, 1997 through September 30, 1998, the
Company extended the exercise date of warrants to purchase
2,236,550 shares of common stock to certain officers, directors,
employees and consultants. Warrants for 748,000 were originally
granted at an exercise price of $.50 per share and warrants for
10,000 shares were origainally granted at an exercise price of
$1.00 and were extended at the same price. The assumed value of
the stock when extensions for the 10,000 shares were granted was
$3.50, which is the price at which the common stock was sold in
the Company's public offering; there is currently no trading
market for the common stock. The Company recorded $25,000
against operations, which is the difference between the assumed
value and warrant share price times the number of warrant shares
extended. In 1998, management reduced its assumed value of the
Company's common stock to $.50 based upon an absence of any
significant activity in the stock for an extended period of time.
During the period October 1, 1996 through September 30, 1997, the
Company extended the exercise date of warrants to purchase
2,236,550 shares of common stock to certain officers, directors,
employees and consultants. Warrants for 2,236,550 were
originally granted at an exercise price of $1.00 per share and
were extended at the same price. The assumed value of the stock
when the extensions were granted was $3.50, which is the price at
which the common stock has been sold in the Company's public
offering; there is currently no trading market for the common
stock. The Company recorded $5,593,875 against operations, which
is the difference between the assumed value and warrant share
price times the number of warrant shares extended.
During the period October 1, 1995 through September 30, 1996, the
Company extended the exercise date of warrants to purchase
2,556,213 shares of common stock to certain officers, directors,
employees and consultants. Warrants for 49,213 and 2,507,000
shares were originally granted at an exercise price of $1.00 and
$.50 per share, resepectively, and were extended at the same price.
The assumed value of the stock when the extensions were granted
was $3.50, which is the price at which the common stock has been
sold in the Company's public offering; there is currently no
trading market for the common stock. The Company recorded
$7,644,033 against operations, which is the difference between the
assumed value and warrant share price times the number of
warrant shares extended.
During the period October 1, 1994 through September 30, 1995, the
Company extended the exercise date of warrants to purchase
1,550,000 shares of common stock to certain officers, directors,
employees and consultants. The warrants were originally granted
at an exercise price of $.50 per share and were extended at the
same price. The assumed value of the stock when the extensions
were granted was $3.50. The Company recorded $4,650,000 against
operations, which is the difference between the assumed value and
warrant share price times the number of warrant shares extended.
In 1990, the Company granted warrants to purchase 800,000 shares
of common stock at an exercise price of $.50 per share to eight
current or former directors or officers of the Company or BICO
who personally guaranteed the payment of a lease obligation to
the bank for the premises occupied by BICO at the 300 Indian
Springs Road location. The Company also granted warrants to
purchase 100,000 shares of common stock each to an individual and
his company at an exercise price of $.50 per share for personally
guaranteeing the payment of an obligation related to the purchase
of equipment by BICO. In addition, the Company granted
warrants to purchase 100,000 shares of common stock for
services performed by consultants at an exercise price of $.50.
The Company recorded an estimated value of these warrants at
$27,500 which was charged to operations.
NOTE H- SUPPLEMENT CASH FLOW INFORMATION
The Company's financing activities included the following noncash
transactions.
During 1992 and 1990, notes payable aggregating $303,000
were canceled and exchanged for 371,000 shares of the Company's
common stock.
On March 31, 1995, the Company issued 3,000,000 shares of its
unregistered stock to BICO in payment of $10,500,000 due to
BICO.
Cash paid for interest and income taxes were as follows:
From July 5, 1989
(inception)
September September September through September
30,1998 30,1997 30,1996 30,1998
Interest Paid $ 0 $ 0 $ 1,575 $10,529
====== ====== ======= =======
Income Taxes Paid $ 0 $ 0 $ 0 $ 0
====== ====== ======= =======
NOTE I - 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. 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 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.
NOTE J - SUBSEQUENT EVENT
In December 1998 the Company entered into an agreement to sell
its building and lease it back. An impairment loss was
recognized as a charge to general and administrative expenses in
the financial statements for the year ended September 30,
1998 for $14,367 which represents the difference between the
previous book value of the building and the $175,000 sales price
in the December 1998 agreement. Under the terms of the agreement,
the Company will lease the building back at a monthly rental of
$5,750 per month under a commercial lease with a five year term.
