SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended March 31, 1999 Commission file number 0-10822 BIOCONTROL TECHNOLOGY, INC. (Exact name of registrant as specified in its charter) Pennsylvania 25-1229323 (State of other jurisdiction (IRS Employer of incorporation or organization) Identification no.) 300 Indian Springs Road, Indiana, Pennsylvania 15701 (Address of principal executive offices) ( Zip Code) (412) 349-1811 Registrant's telephone number, including area code 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No As of March 31, 1999, 581,369,005 shares of Biocontrol Technology, Inc. common stock, par value $.10 were outstanding. 1 Biocontrol Technology, Inc. and Subsidiaries Consolidated Balance Sheets Mar. 31, 1999 Dec. 31, 1998 ------------- ------------- CURRENT ASSETS Cash and equivalents $ 1,971,271 $ 125,745 Accounts receivable - net of allowance for doubtful accounts 61,543 55,959 Inventory - net of valuation allowance 69,638 74,515 Notes receivable - related parties 0 0 Notes receivable 0 0 Interest receivable 0 0 Prepaid expenses 125,491 170,544 ------------ ------------- TOTAL CURRENT ASSETS 2,227,943 426,763 PROPERTY, PLANT AND EQUIPMENT Building 1,207,610 1,429,906 Land 133,750 133,750 Construction in progress 0 0 Leasehold improvements 1,477,573 1,477,573 Machinery and equipment 5,015,563 5,014,103 Furniture, fixtures & equipment 802,044 794,740 ------------- ------------- Subtotal 8,636,540 8,850,072 Less accumulated depreciation 4,372,297 4,244,650 ------------- ------------- 4,264,243 4,605,422 OTHER ASSETS Related Party Receivables Notes receivable - related parties 1,221,266 1,223,900 Interest receivable - related parties 170,646 155,628 Advances-Officers 111,848 90,779 ------------- ------------- 1,503,760 1,470,307 Allowance for related party receivables (1,251,351) (1,270,307) ------------- ------------ 252,409 200,000 Notes receivable 142,493 142,493 Interest receivable 26,303 19,778 Goodwill, net of amortization 4,157,898 4,423,421 Deposit on equipment 32,809 0 Patents, net of amortization 1,350 2,433 Other assets 0 15,259 ------------- ------------- 4,360,853 4,803,384 ------------- ------------- TOTAL ASSETS $ 11,105,448 $ 9,835,569 ============= ============= The accompanying notes are an integral part of these statements. 2 Biocontrol Technology, Inc. and Subsidiaries Consolidated Balance Sheets (Continued) Mar. 31, 1999 Mar. 31, 1998 ------------- ------------- CURRENT LIABILITIES Accounts payable $ 860,394 $ 1,750,188 Current portion of long-term debt 4,263,334 4,552,178 Current portion of capital lease obligations 85,784 99,061 Debentures payable 1,244,942 2,825,000 Accrued liabilities 942,290 1,096,644 Escrow payable 2,700 2,700 ------------- ------------- TOTAL CURRENT LIABILITIES 7,399,444 10,325,771 LONG-TERM LIABILITIES Capital lease obligations 1,391,764 1,412,880 ------------- ------------- 1,391,764 1,412,880 UNRELATED INVESTORS'INTEREST IN SUBSIDIARY 0 24,162 STOCKHOLDERS' EQUITY (DEFICIT) Common stock, par value $.10 per share, authorized 600,000,000 shares, issued and outstanding 581,369,005 at Mar. 31, 1999 and 420,773,568 at Dec. 31, 1998 58,136,901 42,077,357 Additional paid-in capital 85,162,470 92,725,285 Notes receivable issued for common stock - related party (25,000) (25,000) Warrants 6,396,994 6,396,994 Accumulated deficit (147,357,125) (143,101,880) ------------- ------------- TOTAL STOCKHOLDERS' EQUITY (DEFICIT) 2,314,240 (1,927,244) -------------- -------------- TOTAL LIABILITIES AND STOCKHOLDER' EQUITY (DEFICIT) $ 11,105,448 $ 9,835,569 ============= ============= The accompanying notes are an integral part of these statements. 3 BIOCONTROL TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) For the three months ended March 31, 1999 March 31, 1998 -------------- -------------- Revenues Sales $ 27,320 $ 457,705 Interest income 26,706 45,478 Other income 6,767 0 ------------- ------------- Total revenues 60,793 503,183 Costs and expenses Cost of products sold 66,419 268,980 Research and development 743,845 2,653,534 Selling, general and administrative 2,443,443 1,878,754 Warrant extensions - subsidiary 0 0 Interest expense 140,763 92,807 Beneficial convertible debt feature 945,730 1,960,238 ------------- ------------- 4,340,200 6,854,313 ------------- ------------- Loss before unrelated investors' interest (4,279,407) (6,351,130) Unrelated investors' interest in net loss of subsidiary 24,162 64,628 Net loss ($4,255,245) ($6,286,502) ============= ============= Loss per common share ($0.03) ($0.04) ============= ============= See notes to consolidated financial statements. 4 BIOCONTROL TECHNOLOGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the three months ended March 31, 1999 March 31, 1998 -------------- -------------- Cash flows used by operating activities: Net loss ($4,255,245) ($6,585,727) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 441,549 213,391 Unrelated investors' interest in subsidiary (24,162) (1,911,630) Warrant extensions by subsidiary 0 3,715,000 Beneficial convertible debt feature 945,730 250,000 Stock issued in exchange for services 64,463 18,369 (Increase) decrease in accounts receivable (5,584) (32,086) (Increase) in inventories 4,877 (349,665) (Increase) decrease in prepaid expenses 45,053 8,628 (Increase) decrease in other assets (5,810) 20 (Decrease) in accounts payable (805,773) (64,821) Increase (decrease) in other liabilities (101,897) 35,052 (Decrease) increase in allowance for related party recv. (18,956) 0 ------------ ------------ Net cash flow (used) by operating activities (3,715,755) (4,703,469) ------------ ------------ Cash flows from investing activities: Disposal of property, plant and equipment 175,000 0 Purchase of property, plant and equipment (8,764) (329,240) (Increase) decrease in notes receivable 2,634 (83,000) (Increase) in interest receivable (21,543) (7,294) Deposit on equipment (32,809) 0 -------------- ------------ Net cash provided (used) by investing activities 114,518 (419,534) -------------- ------------ Cash flows from financing activities: Net proceeds from sale of Preferred stock- Series B 0 2,027,000 Proceeds from debentures payable 5,770,000 1,000,000 Payments on notes payable (288,844) (21,572) Payments on capital lease obligations (34,393) 57,906 -------------- ------------ Net cash provided by financing activities 5,446,763 3,063,334 -------------- ------------ Increase (decrease) in cash and equivalents 1,845,526 (2,059,669) Cash and equivalents, beginning of period 125,745 3,802,874 ------------- ----------- Cash and equivalents, end of period $1,971,271 $1,743,205 ============== ============ See notes to consolidated financial statements. BIOCONTROL TECHNOLOGY, INC. NOTES TO FINANCIAL STATEMENTS NOTE A - Basis of Presentation The accompanying consolidated financial statements of Biocontrol Technology, Inc. (the "Company") and its 89.9% owned subsidiary, Coraflex, Inc., and its 52% owned subsidiary, Diasense, Inc., and its 67% owned subsidiary, Petrol Rem, Inc., and its 99.1% owned subsidiary, IDT, Inc., and its 99.4% owned subsidiary, Barnacle Ban Inc., and its 58.4% owned subsidiary, ICTI, Inc., have been prepared in accordance with generally accepted accounting principles for interim financial information, and with the instructions to Form 10-Q and Rule 10-O Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For further information, refer to the consolidated financial statements and footnotes included in the Company's annual report on Form 10-K for the year ended December 31, 1998. The Company's consolidated net income (loss) is substantially the same as comprehensive income required to be disclosed by SFAS130. NOTE B - Net Loss Per Common Share Net loss per common share is based on the average number of outstanding common shares. The loss per share does not include common stock equivalents since the effect would be anti-dilutive. The weighted average shares used to calculate the loss per share for the period ending March 31, 1999, and March 31, 1998, were 487,994,207 and 156,110,750, respectively. NOTE C - Stockholders Equity During the three months ended March 31, 1999, the Company raised $5,770,000 in connection with its public offering. (See "Management's Discussion and Analysis"). The Company's common stock is currently traded on the NASDAQ electronic bulletion board. NOTE D - Goodwill The company recognized $5,310,501 of goodwill in connection with a Stock Purchase Agreement dated February 20, 1998 to acquire 58.4% of International Chemical Technologies, Inc. For purposes of amortizing this goodwill, Management has determined a useful life of 5 years. NOTE E - Legal Proceedings During April 1998, the Company and its affiliates were served with subpoenas by the U.S. Attorneys' office for the U.S. District Court for the Western District of Pennsylvania. The subpoenas requested certain corporate, financial and scientific documents and the Company continues to provide documents in response to such requests. On April 30, 1996, a class action lawsuit was filed against the Company, Diasense, Inc., and individual officers and directors. The suit, captioned Walsingham v. Biocontrol Technology,etal., has been certified as a class action, and is pending in the U.S. District Court for the Western District of Pennsylvania. The suit alleges misleading disclosures in connection with the Noninvasive Glucose Sensor and other related activities. By mutual agreement of the parties, the suit remains in the pre-trial pleading stage, and the Company is unable to determine the outcome or its impact upon the Company at this time. NOTE F - Year 2000 Issue The Company is currently working to resolve the potential impact of the Year 2000 on the processing of date-sensitive information. The Year 2000 Issue is the result of computer programs being written using two digits (rather than four) to define the applicable year. Programs which are susceptible to problems after December 31, 1999 are those which recognize a date using "00" as the year 1900 rather than the year 2000, which could result in miscalculations or system failures. Based upon a review of its own internal programs and software, the Company currently believes that the Year 2000 will not pose significant operational problems to its information systems, because such systems are already compliant. In addition, ChaseMellon Shareholder Services, the Company's transfer agent, has disclosed that it will be Year 2000 compliant and that no interruptions in service will occur. The Company's common stock currently trades on the Nasdaq electronic bulletin board; Nasdaq and its parent, the NASD, have analyzed its products and systems; are addressing their Year 2000 issues; and are implementing a plan to test their systems and to remediate any Year 2000 problems. As of this date, Nasdaq has not made a definitive statement regarding when it will be compliant, but has stated that it is making all necessary changes to its trading systems. The Company's current estimates indicate that the costs of addressing potential problems are not expected to have a material impact upon the Company's financial position, results of operations or cash flows in future periods. There can be no assurance, however, that modifications to information systems which impact the Company and which are required to remediate year 2000 issues will be made on a timely basis and that they will not adversely affect the Company's systems or operations. Management's Discussion and Analysis of Financial Condition and Cash Flows Liquidity and Capital Resources Cash increased from $ 125,745 at December 31, 1998 to $1,971,271 March 31, 1999 attributable to proceeds of $ 5,770,000 from the Company's public offering and to the Company's $ 3,715,755 net operating expenditures. The Company also had net cash provided by investing activities of $ 114,518, which includes proceeds from the sale of property. Results of Operations Sales during the first quarter decreased to $ 27,230 in 1999 from $ 457,705 in 1998. The decrease was due to the discontinuation of sales of its Functional Electrical Stimulators, which accounted for 51% of sales during the three- month period ended March 31, 1998. Interest income decreased during the first quarter to $ 26,706 in 1999 from $ 45,478 in 1998. The decrease was due to the Company's decrease in cash available to invest. Costs of Products Sold during the first quarter decreased to $ 66,419 in 1999 from $268,980 in 1998. The fluctuations were primarily due to the loss of orders for the Functional Electrical Stimulators. Research and Development expenses during the first quarter decreased to $ 743,845 in 1999 from $ 2,653,534 in 1998. The decrease was due to a reduction in research and development expenditures, driven by the Company's cash flow problems and reduction in personnel. Selling, General and Administrative expenses during the first quarter increased to $2,443,443 in 1999 from $ 1,878,754 in 1998. The increase was due to the Company's expenses in connection with its public offering of securities. Interest expense decreased during the first quarter to $ 54,461 in 1999 from $ 92,807 in 1998. The decrease was due to the Company's decreased use of convertible debentures as a means to generate capital. PART II - OTHER INFORMATION Item 1. Legal Proceedings None. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (A) Exhibits (B) Reports on Form 8-K (1) A report on form 8-K dated January 22, 1999, with respect to Item 5 other events and Item 7 (c), Exhibit. (2) A report on form 8-K dated January 29, 1999, with respect to Item 5 other events. and Item 7 (c), Exhibit. (3) A report on form 8-K dated February 9, 1999, with respect to Item 5 other events and Item 7 (c), Exhibit. (4) A report on form 8-K dated February 24, 1999, with respect to Item 5 other events and Item 7 (c), Exhibit. (5) A report on form 8-K dated March 22, 1999, with respect to Item 5 other events and Item 7 (c), Exhibit. (6) A report on form 8-K dated March 29, 1999, with respect to Item 5 other events and Item 7 (c), Exhibit. (7) A report on form 8-K dated April 1, 1999, with respect to Item 5 other events and Item 7 (c), Exhibit. (8) A report on form 8-K dated April 19, 1999, with respect to Item 5 other events and Item 7 (c), Exhibit. SIGNATURES Pursuant to the requirements 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 this 15th day of May, 1999. BIOCONTROL TECHNOLOGY, INC. By /s/ Fred E. Cooper Fred E. Cooper CEO