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 09/30/97
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Commission File Number 0-26504
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Diasense, Inc.
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(Exact name of registrant as specified in its charter)
Pennsylvania 25-1605848
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
2275 Swallow Hill Road, Building 2500; Pittsburgh, PA 15220
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(Address of principal executive offices) (Zip Code)
(412) 279-9740
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Registrant's telephone number, including area code
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, 1997:
Common Stock, $.01 par value -- $__________*
*The market value cannot be determined because there is no established trading
market for the stock.
As of October 31, 1997, 22,979,051 shares of Common Stock, par value $.01 per
share were outstanding. As of October 31, 1997, no shares of Preferred Stock
were outstanding.
Exhibit index is located on page 31.
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 1997, 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. For more detailed information on these risks
and uncertainties, please refer to the Company's current Form S-1 Registration
Statement and Prospectus.
Description of Business
Development 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 Diasensor(R) 1000. The submission was based on data
obtained from the advanced Beta 2 prototypes, since functionally, the
production model will be identical to these prototype models. BICO's 510(k)
Notification claims that the product has substantial equivalence to home
market glucose monitoring devices presently in the marketplace since its
function is similar, although the device operates on a different technological
principle. BICO provided information in this 510(k) submission which it
believes substantiates that the device does not raise different questions of
safety and efficacy and is as safe and effective as the legally marketed
predicated devices. Such information is required by the FDA before market
approval can be granted. In February 1996, the FDA convened a panel of
advisors to make a recommendation regarding BICO's 510(k) Notification.
The majority of the panel members recommended that BICO conduct
additional testing and clinical trials prior to marketing the Diasensor(R)
1000. BICO and Diasense announced that they remained committed to bringing the
Diasensor(R) 1000 to diabetics, and that additional research, development and
testing would continue (See, "Current Status of the Noninvasive Glucose
Sensor").
The Diasensor(R) 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 Diasensor(R) 1000 will be calibrated individually, each instrument
will be sold by prescription only and will be calibrated in a
calibration center under a physician's direction. This feature may limit the
marketability of the Diasensor(R) 1000, and, if the device is unable to
qualify for third-party reimbursement, the Company's ability to market the
device could be adversely effected.
Current Status of the Noninvasive Glucose Sensor
Due to continued delays of the FDA approval process, which are summarized
below, and while continuing to work with the FDA and conduct its mandated
testing, the Companies have also focused their efforts on obtaining approval
to market the Diasensor(R) 1000 overseas. The Companies are in the process of
obtaining a "CE" mark, which will facilitate sales in Europe. In connection
with obtaining a CE mark, the Companies have undergone a series of audits
to be certified as manufacturers and marketers in Europe, and are working with
European consultants to expedite the process as much as possible.
BICO, as designer and manufacturer of the device, was recently audited for
ISO certification by TUV Rheinland, a company authorized to conduct
such audits, which was contracted to perform a "conformity assessment" of
BICO's quality system. BICO has been told by the auditors that BICO is being
recommended for 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. The auditors have estimated that the certificate formalizing the
ISO 9001 certification will be received by BICO in mid-January, 1998.
BICO is planning to submit its technical file on the Diasensor(R) to TUV in
January in order to satisfy requirements of the European Medical Device
Directive. Once satisfied, BICO will receive approval to apply a CE mark to
the device. Much like an Underwriters Laboratory "UL" mark, the CE mark is
provided by the regulatory bodies of the European Community, or by authorized
private bodies, such as TUV Rheinland, to indicate that the device
adheres to "quality systems" of the ISO and the European
Committee for Standardization. The CE mark will permit the Companies to
sell the 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, the Company continued to meet with
the FDA, and established a protocol for in-home testing of the
Diasensorr 1000, which commenced in early 1997. The Companies will resubmit
a 510(k) Notification when the in-home studies have been completed and the
data has been analyzed. As with all other FDA-related activities,
the Companies cannot provide any assurances as to the date upon which the
studies will be completed, the next 510(k) Notification will be submitted, or
when the FDA will complete its review of such Notification.
In 1996, the Companies retained Mr. Jeff Nesbit, a former FDA Associate
Commissioner for Public Affairs, as a consultant to guide them through the
FDA approval process and to assist BICO with its ongoing overall relationship
with the FDA.
Although the Company's research and development team continues to meet with
and work closely with the FDA, due to the complex, technical nature of the
information being evaluated by the FDA, it is impossible for the Company to
estimate how much longer the FDA approval process will take.
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 Diasensor(R) 1000, BICO plans to finalize the
development of the Diasensor(R) 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 Diasensor(R) 1000.
Diasense is responsible for the marketing and sales of the Noninvasive
Glucose Sensor. Diasense plans to market the Noninvasive Glucose
Sensor directly to diabetics, through their doctors' orders, and is currently
negotiating with domestic and international distribution organizations to aid
in the marketing and distribution of the Noninvasive Glucose Sensor.
Although many factors may cause a change in management's current estimate, the
Company believes that the sales price of the Diasensor(R) 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 1996 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 Diasensor(R)
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 Diasensor(R) 1000 is expected to
continue. Manufacturing of the Diasensor(R) 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.
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, 1997, 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 "Diasensor(R)
1000", which is intended for use in connection with the Diasensor(R) 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 Diasensor(R) 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 until 1998. TCPI recently announced
that it began clinical studies of its system to correlate interstitial
glucose fluid data with various blood glucose; although TCPI claims that its
technology is noninvasive, it utilizes electronic charges to penetrate the
skin and draw fluid from the body. 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 Diasensor(R) 1000
indicated that the device is "substantially equivalent" to similar existing
devices, namely invasive glucose sensors. In connection with its review of
the Company's 510(k) Notification, the FDA will determine whether the
device is "substantially equivalent" to a similar existing device based upon
the following factors: (i) whether the device has the same "intended use" as an
the existing device; and (ii) whether the device has the same technological
characteristics as the existing device, unless the different technological
characteristics do not adversely affect its safety and effectiveness.
Although the Company and the IRBs believe that the Noninvasive Glucose
Sensor satisfies those requirements, thus qualifying for a 510(k)
Notification, there can be no assurance that the FDA will agree.
Although its correspondence with the Company appears to indicate that the FDA
believes that the 510(k) Notification is the appropriate filing for the
Diasensor(R) 1000, should the FDA determine that the device is not
"substantially equivalent" to an existing device, or refuse to approve
the 510(k) Notification for any reason, the Company would be required to
submit to the FDA's full pre-market approval process, which would require
additional testing, and result in significant delays and increased expenses.
The FDA's pre-market approval process is more extensive, time-consuming and
will result in increased research and development expenses, while delaying the
time period in which BICO and Diasense could begin manufacturing and marketing
the product.
The time elapsed between the completion of clinical testing at IRBs and the
grant of marketing approval by the FDA is uncertain, and no assurance can
be given that approval to market the Noninvasive Glucose Sensor will
ultimately be obtained. In addition, delays or rejections may be
encountered based upon changes in the FDA's regulatory policies during the
period of research and development and the FDA's review.
The Company may also be required to comply with the same regulatory
requirements prior to introducing the Diasensor(R) 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.
Future sales of Diasense's products may also be affected by the Clinical
Laboratory Improvement Amendments of 1988 ("CLIA"), which are intended to
assure the quality and reliability of all medical testing in the United
States, regardless of where the testing is performed. Regulations to
implement CLIA became effective in 1992, and, accordingly, the current or
future impact of such regulations on Diasense's products cannot fully be
determined at this time. These regulations affect previously unregulated
testing markets, including physician office laboratories and small
volume test sites. These market segments may be discouraged from
initiating, continuing or expanding patient testing as a result of CLIA.
There can be no assurance that the regulations will not have an effect on
the potential uses for the Noninvasive Glucose Sensor, with a resulting
impact on its potential markets.
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 four full-time employees, most of which are located at its
Pittsburgh, Pennsylvania office. Diasense also has one employee in its
Maryland office. 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").
As of November 1997, 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 1998. 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 violations of federal securities laws. The Companies have filed a
Motion to Dismiss the suit and are aggressively defending against
it. No determinations as to possible liability or exposure are possible at
this time, although the Company does not believe that any violations of the
securities laws have occurred.
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, 1997, 22,979,051 shares of common stock were outstanding. No
shares of Preferred Stock are outstanding. As of November 30, 1997, there
were currently exercisable warrants outstanding to purchase 7,476,513 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, 2001.
As of November 30, 1997, the Company had approximately 610 holders of
record for its common stock and no holders of record for its preferred stock.
On July 19, 1993, Diasense's S-1 Registration Statement became effective
with the SEC. The following shares were registered with the SEC pursuant
to such Registration Statement: 3,000,000 primary shares, which are
authorized shares of Diasense common stock to be sold by the Company;
6,931,525 warrant shares, which underlie currently exercisable warrants to
purchase Diasense common stock; and 4,760,012 secondary shares, which
are outstanding shares of Diasense common stock purchased by certain
shareholders in private placements. In December 1995, the Company
registered an additional 3,000,000 primary shares. The Diasense public
offering is self-underwritten.
During Fiscal 1995, Diasense issued 3,000,000 shares of its unregistered
common stock to BICO in exchange for a $10,500,000 reduction in amounts owed
to BICO by Diasense pursuant to the R&D Agreement. In addition, BICO
purchased 1,200,000 shares of Diasense unregistered common stock at $3.50
per share (See, "Management's Discussion and Analysis of Financial Condition
and Results of Operations").
Diasense is not currently listed on any stock exchange or market, although it
has applied to be listed on the NASDAQ Small-Cap 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, 1997 there were outstanding warrants, all of which are
currently exercisable, to purchase 7,476,513 shares of common stock at
exercise prices ranging from $0.50 to $3.50 per share and having expiration
dates ranging from April 24, 1998 to November 1, 2001. During Fiscal 1997,
warrants to purchase 59,000 shares of common stock were granted, and
warrants to purchase 2,236,550 shares of common stock, which were scheduled
to expire during Fiscal 1997, were extended. In November 1997, an
additional 10,000 warrants were extended until 2000. 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 1997, such
annual salaries had been increased to $150,000 and $100,000 respectively.
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, 1997, 1996, 1995, 1994, and 1993, 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.
<TABLE>
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
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
R&D Expenses $ -0- $ -0- $ 3,487,882 $ 2,807,508 $ 1,850,838
General &
Administrative
Expenses $ 1,023,961 $ 1,509,298 $ 2,323,279 $ 2,388,854 $ 1,968,378
Warrant
Extensions $ 5,593,875 $ 7,644,033 $ 4,650,000 $ -0- $ -0-
Net Loss ($ 6,564,837) ($ 9,021,823) ($10,361,514) ($ 5,145,081) ($ 3,763,101)
Total Assets $ 3,108,243 $ 4,171,910 $ 5,407,401 $ 694,712 $ 510,341
Liabilities $ 22,419 $ 20,624 $ 1,323,980 $ 7,172,585 $ 2,980,829
Working Capital
(Deficit) $ 2,862,349 $ 3,914,198 $ 3,839,965 ($ 6,707,855) ($ 2,689,986)
Accumulated
Deficit ($41,960,771) ($35,395,934) ($26,374,111) ($16,012,597) ($10,837,516)
Net Loss
Per Common
Share ($.29) ($.39) ($.54) ($.29) ($.21)
Cash Dividends
Per Share:
Common $ -0- $ -0- $ -0- $ -0- $ -0-
</TABLE>
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, 1996 through September 30, 1997 is referred to as Fiscal 1997.
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, 1997 was $1,181,070 as compared to a
balance at September 30, 1996 of $1,143,312 and a balance of $4,149,163 at
September 30, 1995. The 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. Sales of common stock during
Fiscal 1995 included a sale of 1,200,000 shares of the Company's unregistered
common stock to BICO, with net proceeds of $4,200,000. The decrease
during Fiscal 1996 and Fiscal 1997 was attributable to decreased funds raised
by the Company. Diasense is conducting its initial public offering, which
was effective with the SEC on July 19, 1993. As of September 30, 1997,
net proceeds of $3,558,392 had been raised pursuant to such
registration. No warrants to purchase common stock were exercised
during Fiscal 1997.
Diasense had working capital of $2,862,349 at September 30, 1997, as compared
to $3,914,198 at September 30, 1996 and $3,839,965 at September 30, 1995.
This fluctuation in working capital was primarily attributable to funds
raised from sales of its stock 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
Diasensor(R) 1000.
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 1997, such annual salaries had been increased to $150,000 and
$100,000, respectively. 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").
Diasense 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 activities through at least September 30, 1998. Such
estimate is based, in part, on monthly expenditures of approximately $85,000
during Fiscal 1997, as compared to $125,000 during Fiscal 1996 and $484,000
during Fiscal 1995; although that monthly aggregate amount may be
revised, as described below, depending upon the progress of development
of the Noninvasive Glucose Sensor.
In addition to the proceeds that Diasense is attempting to raise in its
self-underwritten public offering, Diasense is attempting to secure additional
financing from various sources. Based on Diasense's available cash, 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 through at least September 30, 1998. If, subsequent to that
date, Diasense is not able to obtain additional financing or if such
additional financing is insufficient, Diasense would be required to cease
operations and the development of the Noninvasive Glucose Sensor
altogether.
Accordingly, Diasense may be required, depending on the amount and timing
of the receipt of proceeds of its initial public offering, to seek
substantial additional financing from third parties to complete the
development of the Noninvasive Glucose Sensor, to obtain FDA or European
Community 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 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 $1,023,961 during Fiscal 1997,
as compared to $1,509,298 during Fiscal 1996 and $2,323,279 during Fiscal
1995. This decrease was due primarily to the suspension of billings pursuant
to the R&D Agreement.
Other income aggregated $52,999 in Fiscal 1997, as compared to $133,083 in
Fiscal 1996, and $103,106 in Fiscal 1995. 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 1997, 1996 and 1995, the Company extended 2,236,550;
2,556,213 and 1,550,000 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), $5,593,875 was charged to operations in Fiscal 1997, $7,644,033 was
charged to operations in Fiscal 1996 and $4,650,000 was charged to operations
in Fiscal 1995.
Income Taxes
As of September 30, 1997, the Company had approximately $21,800,000
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 2005-2011. 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 2010.
YEAR 2000 ISSUE
The Year 2000 issue results from problems which arise in connection with the
use of computer programs written for two digits, rather than four digits, to
indicate the applicable year. Programs written with a two-digit indicator for
the year may misinterpret "00" as the year 1900, instead of the year 2000.
Such a misinterpretation could result in a disruption in normal business
activities.
Based on its assessments, the Company has determined that it will not be
required to replace significant portions of its software to continue normal
operations and activities past December 31, 1999. Management currently
believes that any modifications necessary will be insignificant in scope and
expense. Management plans to have any necessary changes implemented prior to
the end of 1999, when such modifications will become necessary. The Company's
assessment of the Year 2000 issue is based on management's current best
estimates, and are based upon assumptions of future events, including the
efforts of its suppliers, payors, vendors and other third parties to address
this issue. There can be no assurance that management's assessment that the
Company's Year 2000 Issue is insignificant is correct.
Supplemental Financial Information (unaudited)
None.
Item 8. Financial Statements and Supplementary Data.
The Company's consolidated financial statements appear on pages F- 1 through
F-20 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Effective January 25, 1995, upon a determination by the Board of Directors,
the Company engaged Thompson Dugan, P.C. as its independent auditors and
accountants to replace Grant Thornton LLP. Thompson Dugan also serves as the
independent auditors and accountants for BICO, replacing Grant Thornton
LLP. Neither company had any disagreements with Grant Thornton LLP or
Thompson Dugan, P.C. on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure.
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 69 1989 Chairman of the Board,
Chief Scientist
Fred E. Cooper 52 1989 President, CEO, Director
Anthony J. Feola 50 1991 Director
C. Terry Adkins 46 1992 Vice President of
International Sales,
Director
DAVID L. PURDY, 69, 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, 52, 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, 50, 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.
C. TERRY ADKINS, 46, has been the Company's Vice President of International
Sales since October 1992, and a director since March 1992. From July 1990
until January 1992, Mr. Adkins was a private consultant to the banking
industry with an office in Annapolis, MD, and owned Brie Cor Funding, Inc.,
a company which provided financial advisory services. He became an employee
of Diasense on January 1, 1992. He was associated with Maryland Public
Banks, Inc. in 1989-90 and served as the President of the Annapolis National
Bank in 1990. From 1987 to 1989, he was President of the Madison Bank of
Maryland.
Gary Keeling, a former officer and director of Diasense, Inc., resigned his
positions in August, 1997 and left the Company.
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, 1997, 1996 and 1995 of those persons who
were, at September 30, 1997: (i) the Chief Executive Officer, and (ii)
the other most highly compensated executive officers of the Company whose
remuneration exceeded $100,000 (the "Named Executives").
<TABLE>
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term All Other
Compension (1) Compensation
($) (2)
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
Name and Year Salary ($) Bonus ($) (2)Other Awards
Principal Warrants
Position (number of
shares) ( )
- -----------------------------------------------------------------------------------------------
Fred E. 1997 $ 150,000 $ 0 $ 0 363,500(3) $ 0
Cooper, 1996 $ 150,000 $ 0 $ 0 478,545(3) $ 0
CEO (4) 1995 $ 167,045 $ 0 $ 0 350,000(3) $ 0
- -----------------------------------------------------------------------------------------------
David L. 1997 $ 87,500 $ 0 $ 0 0 $ 0
Purdy 1996 $ 100,000 $ 0 $ 0 600,000(3) $ 0
Chief Scientist 1995 $ 102,273 $ 0 $ 0 350,000(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 1997, 1996 or 1995. 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. The Company currently has key- man life insurance for
David L. Purdy and Fred E. Cooper.
(2) During the years ended September 30, 1997, 1996 and 1995, the Named
Executives received medical benefits under the Company's group insurance
policy.
(3) During Fiscal 1995, 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 (See, "Option/Warrant/SAR Grants
in Fiscal 1997" Table).
(4) Mr. Cooper will be paid salary and bonuses aggregating approximately
$442,000, $426,000 and $330,000 by BICO and its other subsidiaries
during calendar years 1997, 1996 and 1995, respectively.
(5) 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 $154,000,
$300,000, and $300,000 by BICO during calendar years 1997, 1996,
and 1995, respectively.
<TABLE>
Option/Warrant/SAR Grants in Last Fiscal Year
Potential Realized
Value at Assumed
Annual Rates of Stock
Price Appreication For
Individual Grants (1) Option Term (3)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Percent of
Number of Total
Securities Options/SARS
Underlying Granted to Exercise
Options Employees in or Expiration
Name SARS Fiscal Year Base Price Date 5% ($) 10% ($) 0% (5)
Granted (4) (2) ($/Sh)
- --------------------------------------------------------------------------------------------------
Fred E. Cooper 150,000 6.5% $ 1.00 10/25/99 $462,900 $554,700 $375,000
- --------------------------------------------------------------------------------------------------
</TABLE>
(1) The warrants set forth in this table represent the warrants already held
by the Named Executives which were extended by the Company during Fiscal
1997. These warrants to purchase the Company's common stock were
originally granted to the Named Executives in 1991 and 1992
(See, "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS"). Although
the warrants were not actually awarded during Fiscal 1997, they are
included in this Executive Compensation disclosure section because the
exercise price of the warrants, which was not changed at the time of the
extension, was less than the "market price" of the common stock at the
time of the extension.
(2) For purposes of calculating these percentages, the total number of
warrants granted or extended during Fiscal 1997 was 2,295,550 which
included 59,000 new grants in Fiscal 1997, and extensions of
2,236,550 warrants originally granted in 1991 and 1992.
(3) Potential realizable values reflect the difference between the warrant
exercise price at the end of Fiscal 1997 and the fair value of the
Company's common stock price from the date of the grant or extension
until the expiration of the warrant. The 5% and 10% appreciation
rates, compounded annually, are assumed pursuant to the rules
promulgated by the SEC and do not reflect actual historical or
projected rates of appreciation of the common stock. Assuming such
appreciation, the following illustrates the per share value on the
dates set forth (the expiration dates for the warrants), assuming
the values set forth ($3.50 per share, 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):
STOCK PRICE ON DATE EXPIRATION
OF GRANT OR EXTENSION DATE 5% 10%
--------------------- ---------- ------- ---------
10/22/96: $3.50 10/25/99 $4.086 $4.698
01/03/97: $3.50 01/27/00 $4.332 $4.995
The foregoing values do not reflect appreciation actually realized by
the Named Executives (See, "Option/Warrant/SAR Exercises in Last
Fiscal Year and Fiscal Year-End Option/Warrant/SAR Value" Table,
Below).
AGGREGATED OPTION/WARRANT/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL
YEAR-END OPTION/WARRANT/SAR VALUE TABLE
Number of Value of
Securities Unexercised
Underlying In-the-Money
Unexercised Options/SARs
Options/SARs at FY-End ($)
at FY-End (#)
Name Shares Value Exercisable/ Exercisable/
Acquired Realized($) Unexercisable(4) Unexercisable(5)
on Exercise (3)
(#)(1)(2)
- -----------------------------------------------------------------------------
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, 1997, 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 current 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, 1998);
100,000 shares of common stock at $.50 per share until June 29, 1995
(extended until June 29, 1998); 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, 1998);
100,000 shares of common stock at $.50 per share until June 29, 1995
(extended until June 29, 1998); 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 1997, such annual salaries had been increased to $150,000,
and $100,000, respectively. 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
<TABLE>
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)
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
C. Terry Adkins 16,000 * 116,000(9) *
1623 Forest Drive
Annapolis, MD 21403
All directors and 90,000 * 3,120,045(10) 12.0%
executive officers
as a group (4 persons)
* Less than one percent
________________________
</TABLE>
(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, 1997, which was 22,979,051.
(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, 1997. For individual computation purposes,
the total number of shares of common stock outstanding as of
September 30, 1997 has been increased by the number of additional
shares which would be outstanding if the person or group owned the number
of shares set forth in the third column.
(5) Does not include shares held 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, 1998); 300,000 shares of common stock at
$.50 per share until March 25, 1996; 100,000 shares of common stock at
$.50 per share until June 29, 1995 (extended until June 29, 1998); and
300,000 shares of common stock at $.50 per share until May 7, 1996
(extended until May 7, 1996).
(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, 1998); 100,000 shares of common stock at
$.50 per share until June 29, 1995 (extended until June 29, 1998);
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, 1998); 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 currently exercisable warrants to purchase the following:
100,000 shares of common stock at $.50 per share until June 29, 1995
(extended until June 29, 1995).
(10) Includes shares of common stock, including stock currently owned,
available under currently exercisable warrants as set forth above.
Item 13. Certain Relationships and Related Transactions
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, Barnacle
Ban, and Petrol Rem Boards. He is also the CEO and Executive Vice
President of BICO, and President of Barnacle Ban. Anthony J. Feola, a
director, is also a director on the BICO, Coraflex, Barnacle Ban 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, 1998), 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. 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 1995 through Fiscal 1997, Diasense issued warrants to purchase
common stock to the following executive officers and directors:
To Gary R. Keeling for meritorious service in 1995: warrants to purchase
100,000 shares at $3.50 per share until October 24, 2000. Mr. Keeling is
no longer an officer or director of the Company.
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, 1997; September 30,
1996 F-3
Consolidated Statements of Operations For the Fiscal Years Ended
September 30, 1997, 1996, 1995; and July 5, 1989 (inception) through
September 30, 1997 F-4
Consolidated Statements of Changes in Stockholders' Equity for the
Fiscal Years Ended September 30, 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, 1997, 1996, 1995; and July 5, 1989 (inception) through
September 30, 1997 F-6
Notes to Consolidated Financial Statements for the Fiscal Year Ended
September 30, 1997 F-7
2. Exhibits (a) Reports on Form 8-K
The Company filed a Form 8-K report dated August 29, 1997. 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.
5.1(3) Legal Opinion of Sweeney & Associates P.C.
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 Gary R. Keeling
24.1(3) Consents of Thompson Dugan, P.C., Independent Certified
Public Accountants
24.3(3) Consent of Counsel (Included in 5.1 above)
25.1(3) Power of Attorney of Fred E. Cooper (included under
"Signatures")
(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.
(3) Incorporated by reference from Exhibit with this title filed with the
Company's Amendment No. 2 to Form S-1 at 33-82796 filed November 22, 1995.
<PAGE>
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
31th day of December 1997.
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 31, 1997
David L. Purdy the Board;
Chief Scientist
/s/ Fred E. Cooper President and December 31, 1997
Fred E. Cooper Director
(principal executive
officer, principal
financial officer, and
principal accounting
officer)
/s/ C. Terry Adkins Vice President December 31, 1997
C. Terry Adkins International Sales;
Director
/s/ Anthony J. Feola Director December 31, 1997
Anthony J. Feola
<PAGE>
THOMPSON DUGAN
CERTIFIED PUBLIC
ACCOUNTANTS
________________________
Pinebridge Commons
1580 McLaughlin Run Rd.
Pittsburgh, PA 15241
Report of Independent Certified Public Accountants
Independent Auditor's 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, 1997 and 1996, and the
related statements of operations, changes in stockholder's equity and cash
flows for each of the three years in the period ended September 30, 1997, and
for the period from July 5, 1989 (inception) through September 30, 1997. 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, 1997 and 1996, and the results of its operations and its cash flows for
each of the three years in the period ended September 30, 1997, and for the
period from July 5, 1989 (inception) through September 30, 1997, 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, 1997
and from July 5, 1989 (inception) through September 30, 1997, 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 note B, 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, 1997
/s/ Thompson Dugan PC
- ---------------------
<PAGE>1
Diasense, Inc.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
September 30, September 30,
ASSETS 1997 1996
----------- -----------
Current assets
Cash and cash equivalents (note A) $ 1,871,070 $ 1,143,312
Due from BICO (notes A and E) - 1,777,197
Inventory deposit - BICO (note F) 1,000,000 1,000,000
Prepaid expenses 13,698 14,313
----------- -----------
Total current assets 2,884,768 3,934,822
Property and equipment - at cost (notes A and C)
Building and improvements 236,663 236,663
Furniture and fixtures 42,750 42,750
----------- -----------
279,413 279,413
Less accumulated depreciation 55,938 42,325
------------ -----------
223,475 237,088
----------- -----------
TOTAL ASSETS $ 3,108,243 $ 4,171,910
=========== ===========
LIABILITIES and STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 9,433 $ 20,095
Other accrued liabilities 12,986 529
----------- -----------
Total current liabilities 22,419 20,624
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
22,979,051 at Sep. 30, 1997 and
23,006,051 at Sep. 30, 1996 229,791 230,061
Additional paid-in capital 26,888,581 26,982,811
Warrants 17,928,223 12,334,348
Deficit accumulated during the
development stage (41,960,771) (35,395,934)
----------- -----------
3,085,824 4,151,286
TOTAL LIABILITIES AND ----------- -----------
STOCKHOLDERS' EQUITY $ 3,108,243 $ 4,171,910
=========== ===========
[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, 1997 September 30, 1996 September 30, 1995 September 30, 1997
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Research and development expenses
notes A, E, and F) $ - $ - $ 3,487,882 $ 10,556,405
General and administrative expenses
1,023,961 1,509,298 2,323,279 11,248,301
Warrant extensions (note G) 5,593,875 7,644,033 4,650,000 17,887,908
Technology and patent rights acquired (note E) - - - 2,650,000
Interest expense - 1,575 3,459 10,529
Other income - (note C) (52,999) (133,083) (103,106) (459,777)
Other expense - - - 37,405
-------------- -------------- -------------- ---------------
Net loss $ (6,564,837) $ (9,021,823) $ (10,361,514) $ (41,930,771)
============== ============== ============== ===============
Net loss per common share (note A) $ (0.29) $ (0.39) $ (0.54) $ (2.33)
============== ============== ============== ===============
<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, 1997
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
==================== ========== ========== ========== ============ ===========
</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, 1997 September 30, 1996 September 30, 1995 September 30, 1997
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (6,564,837) $ (9,021,823) $(10,361,514) $ (41,930,771)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation 13,613 13,373 10,022 55,938
Stock issued in exchange for services - 52,500 61,250 138,950
Stk issued for License & Marketing Agreement - - - 80,000
Warrant extensions 5,593,875 7,644,033 4,650,000 17,887,908
Inventory deposit - BICO - - (1,000,000) (1,000,000)
(Increase) decrease in prepaid expenses 615 469 1,210 (13,698)
Increase (decrease) in payable due to BICO - (1,287,012) 4,688,494 10,500,000
Increase (decrease) in accounts payable (10,662) (9,730) (32,432) 9,433
Increase (decrease) in accrued liabilities 12,457 (6,614) (4,667) 12,986
------------- ------------- ------------- -------------
Net cash used in operating activities (954,939) (2,614,804) (1,987,637) (14,259,254)
Cash flows from investing activities:
Purchase of property and equipment - (7,005) (23,496) (279,413)
------------- ------------- ------------- -------------
Net cash used in investing activities - (7,005) (23,496) (279,413)
Cash flows from financing activities:
Advances to BICO (1,814,292) (3,143,864) - (4,109,861)
Repayment of advances to BICO 3,591,489 1,366,667 - 4,676,447
Proceeds from issuance of common stock (94,500) 1,365,155 1,501,492 10,968,334
Proceeds from issuance of common stk to BICO - - 4,200,000 4,200,000
Proceeds from warrants exercised - 28,000 10,066 118,066
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 1,682,697 (384,042) 5,711,558 16,409,737
------------- -------------- ------------ --------------
Net increase (decrease) in cash and cash equiv. 727,758 (3,005,851) 3,700,425 1,871,070
Cash and cash equivalents at beg of period 1,143,312 4,149,163 448,738 -
------------ -------------- ------------ --------------
Cash and cash equivalents at end of period $ 1,871,070 $ 1,143,312 $ 4,149,163 $ 1,871,070
============ ============== ============ ==============
The accompanying notes are an integral part of this statement.
</TABLE>
<PAGE>6
DIASENSE, INC.
(A Development Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
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, 1997. 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, 1997. All significant intercompany accounts and
transactions have been elimated.
2. CASH AND CASH EQUIVALENTS
For purposes of the 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 on a straight-line
basis.
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.
<PAGE>7
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
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
22,979,125, 22,983,654 and 19,304,266 for the years ended
September 30, 1997, September 30, 1996 and September 30, 1995
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,
1997, 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, 1997 amounted to 17,986,154.
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
<PAGE>8
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
10. COMMON STOCK WARRANTS (Continued)
permitted by Financial Accounting Standard No. 123) its reported
net losses (utilizing the Black-Scholes method of valuation)
would have been approximately $7,279,510 for the twelve months
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 $.32
for the twelve months ended September 30, 1997, and approximately
$.69 for the year ended September 30, 1996.
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. 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 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, 1997
and has a significant accumulated deficit as of September 30,
1997, 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 ended 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. Pursuant to a manufacturing agreement
between BICO and Diasense, BICO will manufacture the Sensor once
development is completed.
<PAGE>9
NOTE B - OPERATIONS (Continued)
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, 1996 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, 1997 of $17,017,137 (unaudited) and for the fiscal
year ended December 31, 1996 of $22,395,703, compared to a net loss
for the fiscal year ended December 31, 1995 of $29,420,345. As of
December 31, 1996, and September 30, 1997, BICO's accumulated
deficit was $88,616,059 and $105,633,196 (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 and from funds paid by
Diasense to BICO for research and development of the Noninvasive Glucose
Sensor. 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.
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.
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, 1997, 1996 and
1995 consists of $10,471, $90,555 and $62,811 of interest income
and $42,528, $42,528 and $40,295 of rental income for their
respective periods. The total rental income for the year ended
September 30, 1997, 1996 and 1995 was from BICO for office space
under a lease which expires April 30, 1998.
NOTE D - INCOME TAXES
As of September 30, 1997, the Company has available approximately
$21,800,000 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 2011. 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 2010.
<PAGE>10
NOTE D - INCOME TAXES (Continued)
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
$17,882,908 as of September 30, 1997. For tax purposes, warrant
expenses are not recognized 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, 1997 and 1996:
1997 1996
----------- -----------
Net Operating Loss $7,412,000 $7,038,000
Warrant Expense 6,080,189 4,179,971
Patent Amortization 697,285 645,007
Tax Credit Carry Forward 700,000 700,000
----------- -----------
14,889,474 12,562,978
Valuation Allowance (14,889,474) (12,562,978)
----------- -----------
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
Deferred in
Tax Valuation
Benefit Allowance Net
----------- ----------- ---
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, 1997 $(14,889,474) $14,889,474 $0
<PAGE>11
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. Under
the terms of this agreement, BICO billed the Company for the
years ended September 30, 1997, 1996 and 1995 and, for the period
from July 5, 1989 (Inception) through September 30, 1997 in
amounts of $0, $0, $4,387,882 and $14,860,667, respectively. 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.
<PAGE>12
NOTE E - RELATED PARTY TRANSACTIONS (Continued)
1. SENSOR RELATED AGREEMENTS (Continued)
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 year ended September 30, 1997, 1996 and 1995, net
intercompany charges by the Company to BICO and its subsidiaries
were $129,960, $5,558 and $301,413. 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.
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.
<PAGE>13
NOTE F - COMMITMENTS AND CONTINGENCIES (Continued)
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. INVENTORY DEPOSIT
The Company has advanced $1,000,000 to BICO for purchases of the
Diasensor 1000. The classification and realization of this asset
is dependent upon achieving sufficient production and sales of
the Diasensor 1000 and BICO's ability to continue as a going concern.
These advances are expected to be realized within the fiscal year
ending September 30, 1998 through purchases of salable inventory
from Biocontrol.
4. LITIGATION
A class action lawsuit has been filed against the Company, along
with BICO and BICO's individual directors. The suit alleges
various violations of Federal securities laws on behalf of
certain BICO shareholders. The companies have filed a Motion to
Dismiss the suit to which the plantiffs have responded with a
motion in opposition, neither of which have been ruled upon by
the court. 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.
5. PENNSYLVANIA SECURITIES COMMISSION
The Pennsylvania Securities Commission is conducting a private
investigation of Diasense and BICO in connection with the sale of
securities. To date, no findings have been communicated to the
Company; no order has been issued; and no administrative action
has commenced.
<PAGE>14
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, 1997, an aggregate of 1,062,460
shares had been issued with proceeds to the Company of
$3,558,392. 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;
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.
<PAGE>15
NOTE G - STOCKHOLDERS' EQUITY (Continued)
Common Stock (Continued)
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. 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.
Common Stock Warrants
At September 30, 1997, the Company has reserved 7,476,513 shares
of the Company's unissued common stock for warrants which were
outstanding and exercisable. Of these, warrants on 4,853,250
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 4,055,000 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
----------------------- ----------------
1997 10,000
1998 1,763,000
1999 3,085,013
2000 2,178,750
2001 439,750
--------------
7,476,513
==============
The following is a summary of warrant transactions during fiscal
years ended September 30,
<TABLE>
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Outstanding beginning of year 7,533,263 7,077,213 6,891,525 6,871,525 6,946,525
Granted during the year 59,000 743,250 265,200 125,000 0
Canceled during the year (115,750) (231,200) (50,000) 0 (50,000)
Exercised during the years at
prices ranging from $.1875 to
$1.00 per share 0 (56,000) (29,512) (105,000) (25,000)
Outstanding, and eligible for --------- --------- --------- --------- ---------
exercise. 7,476,513 7,533,263 7,077,213 6,891,525 6,871,525
========= ========= ========= ========= =========
</TABLE>
<PAGE>16
NOTE G - STOCKHOLDERS' EQUITY (Continued)
Common Stock Warrants (Continued)
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.
<PAGE>17
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:
<TABLE>
From July 5, 1989
September 30, September 30, September 30, (inception) through
1997 1996 1995 September 30,1997
------------ ------------ ------------ -------------------
<S> <C> <C> <C> <C>
Interest Paid $0 $1,575 $3,459 $10,529
============ ============ ============ ===================
Income Taxes Paid $0 $0 $0 $0
============ ============ ============ ===================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,871,070
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 1,000,000
<CURRENT-ASSETS> 2,884,768
<PP&E> 279,413
<DEPRECIATION> 55,938
<TOTAL-ASSETS> 3,108,243
<CURRENT-LIABILITIES> 22,419
<BONDS> 0
0
0
<COMMON> 229,791
<OTHER-SE> 2,856,033
<TOTAL-LIABILITY-AND-EQUITY> 3,108,243
<SALES> 0
<TOTAL-REVENUES> 52,999
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6,617,836
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,564,837)
<EPS-PRIMARY> (.29)
<EPS-DILUTED> 0
</TABLE>
