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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-19606
AMERICAN BIOMED, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 76-0136574
(State of other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
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10077 GROGAN'S MILL ROAD, SUITE 100, THE WOODLANDS, TEXAS 77380
(Address of principal executive office) (Zip Code)
(281) 367-3895
(Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
(TITLE OF CLASS)
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 [ ]
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 non-affiliates of
the registrant as of March 2, 1998, was $6,740,533.
The number of outstanding shares of Common Stock, $.001 par value, of the
registrant was 19,732,351 shares as of March 2, 1998.
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TABLE OF CONTENTS
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PART I
ITEM 1. BUSINESS.................................................... 2
ITEM 2. PROPERTIES.................................................. 19
ITEM 3. LEGAL PROCEEDINGS........................................... 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS..................................................... 20
ITEM 6. SELECTED FINANCIAL DATA..................................... 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 26
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........ 26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 26
ITEM 11. EXECUTIVE COMPENSATION...................................... 28
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 30
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K......................................................... 33
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PART I
ITEM 1. BUSINESS
Cautionary Statement For Purposes of The "Safe Harbor" Provisions Of The
Private Securities Litigation Reform Act of 1995
American BioMed, Inc. is including the following cautionary statement in
this Annual Report on Form 10-K to make applicable and take advantage of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of 1995
for any forward-looking statement made by, or on behalf of, the Company. The
factors identified in this cautionary statement are important factors (but not
necessarily all important factors) that could cause actual results to differ
materially from those expressed in any forward-looking statement made by, or on
behalf of, the Company.
The statements contained in all parts of this document regarding future
business activities, products and product developments, financial performance,
future regulatory approvals, business strategies, market acceptance, business
arrangements, and results and other statements which are not historical facts
are forward-looking statements that involve risks and uncertainties, including,
but not limited to, those relating to: (i) the Company's business strategy; (ii)
the intention to contract with other organizations for the research, development
and, if applicable, registration of product candidates, and to seek joint
development or licensing arrangements; (iii) the research or development of
particular products or technologies; (iv) anticipated results of such
development activities and related clinical trials or of required regulatory
approvals; and (v) the reliance on collaborative partners for development,
regulatory or marketing activities. Many important factors affect the Company's
ability to achieve the stated outcomes and to successfully develop and
commercialize its product candidates, including, among other things, the ability
to: (i) obtain substantial additional funds; (ii) obtain and maintain all
necessary patents or licenses; (iii) demonstrate the safety and efficacy of
product candidates at each stage of development; (iv) meet applicable regulatory
standards and receive required regulatory approvals; (v) produce product
candidates in commercial quantities at reasonable costs; (vi) compete
successfully against other products; and (vii) market products in a profitable
manner. As a result, there also can be no assurance that the forward-looking
statements included herein will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives and plans
of the Company will be achieved.
GENERAL
American BioMed, Inc., including its wholly-owned subsidiary, (the
"Company"), a development stage enterprise, is engaged in the development,
manufacture and marketing of medical devices. The Company's primary technology
is directed at interventional cardiology, endovascular surgery and minimally
invasive surgical devices. The principal products are atherectomy catheters,
stents, clot filters, 100% silicone balloon catheters and drug delivery catheter
systems. The Company's primary business strategy is to design and develop
minimally invasive medical devices to treat atherosclerotic disease. The Company
holds patents on its OmniCath(R) atherectomy catheter, a device that
mechanically removes the atherosclerotic disease ("plaque") from within blood
vessels or other synthetic implanted vessel devices. The Company also has patent
and/or proprietary rights to stent devices, the OmniStent(TM) and the
OmniFilter, a catheter-mounted temporary blood filter. These devices are
implantable within the vessel of the body to maintain an open lumen allowing
necessary rates of blood flow.
The third product area, 100%-silicone balloon catheters, is protected by a
series of patents for the ten 510(k) product approvals which the Company is
currently marketing. The Company's subsidiary, Cathlab Corporation ("Cathlab"),
manufactures and markets a series of non-angioplasty 100%-silicone balloon
catheter products. These products are used to remove arterial blockages and
gallstones, to measure the cardiac output of the heart (through thermodilution)
and to angioscopically view the interior of the blood vessel.
The fourth product area is a toposcopic catheter, the Evert-O-Cath(TM) a
drug delivery catheter which is used to precisely inject fluids or drugs to the
lesion or diseased area. This product group is also protected by
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patents and has 510(k) approval for sale in the U.S. It is believed that
drugs/coatings applied to the treated disease site will further reduce the
incidence of restenosis as coatings should allow for a smoother artery lining
after an atherectomy or stent procedure. The clinical success objective of
interventional cardiologists, radiologists and vascular surgeons in treating
atherosclerosis is to facilitate an acceptable rate of blood flow through the
vessel and to eliminate or minimize subsequent reoccurrence of plaque re-buildup
(restenosis).
Efforts are underway to bring the Company's core technologies to market.
The Company received Institutional Review Board (IRB) approval at the University
of California at Los Angeles authorizing the start of Phase II human clinical
trials for the OmniCath(R) peripheral atherectomy catheter to begin in August
1996. The clinical trials at UCLA commenced August 1, 1996 and are temporarily
suspended as the Company has filed an amended protocol with the FDA for the
peripheral indication. The Company expects these clinical trials to be resumed
during the second quarter of 1998 and submission to the FDA approximately 18
months later. Currently the Company has eight clinical sites and intends to
expand the number of sites to 10 in 1998.
In addition, the Company filed an Investigative Device Exemption (IDE) with
the FDA in February 1997 to conduct human clinical trials for its OmniCath(R)
atherectomy catheter for hemodialysis A-V fistula restenosis and expects to
receive this approval to start the trials in the second quarter of 1998. These
clinical trials will be conducted in parallel with the ongoing peripheral
clinical trials. The Company anticipates completion of these trials before the
end of 1999 and hopes to make an FDA submission in the U.S. within six months
after conclusion of the clinical trials.
The Company is moving forward in its efforts to commercialize its
OmniStent(TM) and stent delivery system technologies. Management hopes to start
clinical trials for these products within twelve months. The Company will
require significant additional financing to fund the clinical trials for
OmniCath(R), OmniStent(TM) and all its other products which require approval of
the FDA. (See "Item 7 -- Liquidity and Capital Resources.")
INDUSTRY BACKGROUND
Interventional Cardiology and Endovascular Surgery
Over 65 million Americans suffer from some form of coronary or peripheral
vascular disease. The most noted of these diseases is cardiovascular. This
disease is progressive and degenerative, and is characterized by a buildup of
fatty materials ("plaque") within the lining of the arterial blood vessels. The
buildup of plaque results in an obstruction (stenosis) that reduces blood flow
through the arteries and may eventually lead to total blockage causing tissue
damage and death. The plaque forms at varying degrees of hardness, eccentrically
or concentrically within the artery, reducing the elastic nature of the vessel
and thereby compromising the vessel's ability to efficiently pump blood to vital
organs.
Despite significant advances in product technologies, the disease continues
to be the leading cause of mortality in the U.S. today. Degenerative
atherosclerotic narrowing of the arteries that feed the heart ("coronary
arteries"), known as coronary heart disease, afflicts over six million persons
in the U.S. alone. It is largely responsible for approximately 1.5 million
"heart attacks" each year in the U.S., of which approximately 500,000 result in
death. Atherosclerosis also affects arteries in the kidneys ("renal arteries")
and in the abdomen, groin and legs ("peripheral arteries") and is a leading
cause of strokes, reno-vascular hypertension (a type of high blood pressure) and
peripheral vascular disease.
Prior to the late 1960's, pharmaceuticals represented the most common form
of treatment for coronary heart disease and other forms of atherosclerosis.
While often effective in alleviating many symptoms, pharmaceuticals did not
address the underlying problems of narrowed arteries and reduced blood flow.
During the late 1960's, cardiovascular surgeons pioneered a new type of open
heart surgery that grafted a blood vessel from the patient's leg to the diseased
coronary artery to bypass the blockage, thereby providing a longer-term
treatment, but one that was highly invasive, costly and required a lengthy
hospital stay. Today, bypass graft surgeries of the coronary arteries and of
other peripheral vessels account for over 600,000 procedures annually in the
United States. Bypass surgery generally is performed when the patient displays
extensive deposits of atherosclerotic plaque throughout the length of one or
more vessels thereby rendering impractical the
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attempted opening ("dilating") of the blocked ("occluded") arteries due to the
procedural time required, the critical location of the occlusion, or the
inability to safely access the blockage.
In the late 1970's, cardiologists developed a less-invasive method of
treating atherosclerosis, the method known as balloon angioplasty. In its
simplest form, balloon angioplasty involves threading a small balloon-tipped
catheter through the arterial system to the site of the blockage. The balloon is
inflated, dilating the vessel and thereby displacing the plaque by pressing it
against the artery wall. The arterial opening is thereby enlarged, restoring
blood flow.
There are inherent risks in balloon angioplasty, including vessel
dissection, acute closure due to overstretching of the vessel, and the potential
that small pieces of plaque will break off and move downstream to block critical
parts of the blood vessel. The blood supply to critical heart tissue is
temporarily cut off while the balloon is inflated, increasing the risk of a
heart attack during the procedure. The balloon-dilated artery may spasm during
and/or immediately after the procedure and cut off the blood supply to critical
tissues. Balloon angioplasty is generally not considered suitable for patients
with extensive atherosclerosis nor for patients who suffer from very severe
blockages of arteries that supply large areas of the heart with blood.
Additionally, since the atherosclerotic plaque is not removed during the balloon
procedure and because certain damage to the inner lining of the arteries can
occur when the balloon is inflated, there is a high rate of re-blockage or
"restenosis" of the treated artery(ies).
The limitations inherent in balloon angioplasty have created a significant
opportunity for alternative types of angioplasty devices, including stents and
atherectomy devices. A third method, lasers, has been shown to be damaging to
the arterial walls and now is used only for narrowly defined clinical
indications. Laser systems are expensive and require special facilities and
maintenance. Stents and atherectomy devices are rapidly becoming the growth
products in atherosclerotic procedures.
The number of angioplasty (including atherectomy) procedures performed and
the market for coronary and peripheral angioplasty devices and accessories have
grown at a rapid rate as a result of a number of factors, including the general
aging of the world's population. Industry sources project the stent and
atherectomy device market to grow at a rate of 50% and 30% per annum,
respectively. Based upon such projections, stents would become a $750 million
business by 1998, while the sale of atherectomy devices would grow to $350
million in sales by 1998. Delivery catheters for coatings of the treated
stenosis is projected to be over $100 million by 1998.
PRODUCTS
The OmniCath(R) Atherectomy Catheter
The OmniCath(R) is an "atherectomy catheter," designed to allow physicians
to remove atherosclerotic plaque from obstructed blood vessels throughout the
body, enlarging the narrowed vessel openings and thereby restoring normal blood
flow. The Company is developing the OmniCath(R) with catheter shafts of several
different diameters for use in coronary arteries which feed the heart (5.8 to 7
French) and in peripheral arteries in the abdomen, groin and legs (7 French and
8 French). "French" is a measure of diameter, one French is equivalent to 1/3rd
of a millimeter. The OmniCath(R) is self-contained and disposable and is powered
by a small battery pack and motor assembly in the handle. Connected to the
handle is the catheter shaft which will vary in length depending on the distance
needed from insertion to the treatment site. The weight of the OmniCath(R) is
approximately 11 ounces.
The OmniCath(R)'s shaft has a side-window and a small rotating cylindrical
blade near its distal end (the end of the catheter or farthest part of the
catheter which is inserted into the body). At the surface opposite the
side-window are two deflector wires which, when advanced against the arterial
wall opposite the plaque using controls in the handle, stabilize the catheter
shaft and allow the window to cover a larger volume of the plaque, compressing
it into the path of the rotating blade. Once the deflector wires are engaged and
the side window is in position, using controls on the OmniCath(R) handle, the
rotating blade can be advanced and retracted across the side-window at
approximately 11,000 RPM to shave the atherosclerotic plaque from the interior
surface of the vessel walls. The blade does not come into contact with the
non-diseased arterial walls during the
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atherectomy procedure. The shaved plaque is aspirated into an annular space in
the catheter and evacuated through a removal port at the proximal end of the
catheter (the end at the OmniCath(R) handle) via a vacuum system. This enables
the excised plaque to be collected and examined while the atherectomy is taking
place. There is very little loss of blood during the procedure as the
OmniCath(R) is designed to restrict the amount of blood which enters the
catheter system. Further, the blockage of blood circulation by an inflated
balloon, which often occurs in balloon angioplasty, does not occur in a
procedure using the OmniCath(R). The deflectable system which holds the catheter
in place is designed to allow for continuous blood flow. This allows more time
to complete a procedure although a procedure using the OmniCath(R) should
generally require less time than a procedure utilizing multiple balloon
inflations to break up the plaque. As opposed to balloon angioplasty, which
cracks and displaces plaque, the shaving mechanism of the OmniCath(R) removes
plaque and is designed to leave the artery clean and smooth, free of fissures,
ruptures, and flaps.
Overall, the OmniCath(R) is designed for ease of use and provides the
physician with the capability to multiple lesion atherectomy procedures with a
single placement as opposed to the multiple placements often required with
balloon angioplasty and competitive atherectomy devices. The OmniCath(R)'s
features, including its lightweight and compact construction are designed to
provide a competitive advantage over existing atherectomy catheters. See "Item
1 -- Business -- Competition."
The Company had commenced limited human clinical trials in the United
States with the 8 French OmniCath(R) for peripheral use. The device was
initially used on patients during 1991 and 1992. Although no adverse effects or
complications were observed or reported from the use of the OmniCath(R) on any
patient, the trials indicated that the OmniCath(R) needed certain modifications.
In July 1992, the Company contracted with an independent third party to conduct
a product design review of the OmniCath(R). Based on the results of that review,
improvements to the OmniCath(R) were made including increasing battery and motor
power for guiding the catheter through the body, strengthening the deflector
wires which hold the catheter in place, enhancing the cutter and debris-removal
system, and creating a better ergonomically profiled product for the end user.
The Company informed the FDA of the improvements in July 1992, and the FDA
requested additional information on the modifications before human clinical
testing could resume. The Company submitted the additional information and
received permission from the FDA to resume Phase I clinical trials in July 1993.
The Company completed its Phase I trials and submitted its data to FDA. The
Company received approval by the FDA for its Phase II peripheral OmniCath(R)
atherectomy clinical trials in 1995 and commenced Phase I on August 1, 1996 at
the University of California at Los Angeles. However, the clinical trials are
temporarily suspended as the Company has filed an amended protocol with the FDA.
The Company expects these clinical trials to be resumed during the second
quarter of 1998 and submission to the FDA approximately 18 months later.
Currently the Company has eight clinical sites and intends to expand the number
of sites to 10 in 1998.
The Company has not yet applied for U.S. FDA approval of the OmniCath(R)
for coronary use but expects to file for investigative device exemption (IDE) at
the successful conclusion of the OmniCath(R) peripheral clinical trials. There
can be no assurance that required regulatory approvals will be received on a
timely basis or at all. See "Item 1 -- Business -- Government Regulation." The
Company received a Notice of Allowance from the U.S. Patent and Trademark Office
for its sixth patent for the OmniCath(R).
The OmniStent(TM)
Although angioplasty and atherectomy contributed greatly to less invasive
treatment of atherosclerosis, it was not until 1994 that a third less invasive
means of treatment was developed. This new means consists of simple spring-like
devices called stents which when placed in a treated vessel, greatly reduces
acute and chronic clinical failure rate of restenosis.
Stents provide a foundation for support to a weakened vessel. The most
common design is the metal stent which comprises a tubular structure, normally
having a pattern of slots which when expanded produce a tiny tubular grillwork
which can hold a diseased vessel open, thereby providing a channel for blood
flow to the heart or limbs.
It appears that the majority of flow-limiting lesions, whether in a duct
(biliary), tract (esophageal) or vessel (vascular stenosis, aneurysm,
arteriovenous shunts, etc.), are stent treatable. The stent is placed in a
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relatively conventional manner for angioplasty. The lesion is crossed with a
conventional guide wire, and the lesion is predilated using a conventional
balloon catheter; using the exchange technique, the delivery balloon catheter is
then advanced over the wire to the lesion being treated. At the site of the
lesion, initial inflation to 5-6 atm is carried out. To further imbed the coiled
stent into the subintimal layers of the arterial wall, higher inflation
pressures that expand the compliant delivery balloon to larger diameters are
then used.
The OmniStent(TM) has been successfully manufactured using a unique,
patented proprietary process that makes a one piece, endless loop without
welding, soldering or annealing. The Company also has a proprietary process in
which it forms and shapes the stents prior to use. The Company is also looking
at metals other than stainless steel (which it has previously used) and is
designing its own delivery catheter which may use a variation of its
Evert-O-Cath(TM).
The Company has patented two distinct stent configurations, the coil stent
and the bifurcated stent. The coil stent is a straight coil wound in helix which
would be used in supporting a longitudinal section of vessel such as a major
coronary vessel, (i.e., left anterior descending or right coronary artery or a
major peripheral vessel such as the aortic iliac or femoral). The coil is formed
from an endless loop of wire formed in a plurality of arcuate sections.
The bifurcated OmniStent(TM) is a Y-shaped bifurcated stent designed for
use in aortic bifurcation. However, small versions may be used at any branched
blood vessel. The bifurcated version is also an endless stent overcoming the
deficiencies of prior art in construction. However, it is unique in design as no
other company has solved the dilemma of manufacturing and deploying a bifurcated
stent. All rely on a series of single stents, placed in close proximity, and
usually requiring an access from each artery (lateral and contralateral
femoral). This is very distressful to the patient requiring a surgical prep,
artery puncture and catheter sheath on each side of the groin. Potentially it is
twice as difficult, dangerous and time consuming to both patient and doctor as
the bifurcated OmniStent(TM). In addition, the Company has developed a process
of reproducing the stents using photoetching which significantly reduces cost
and production error.
The Company's stent technology is protected by two patents, US Patent No.
5,342,387 issued August 30, 1994 titled Artificial Support for a Blood Vessel,
and US Patent No. 5,607,445 issued March 4, 1997 titled Method and Apparatus for
Making a Stent. In addition, on January 8, 1998 the Company received a Notice of
Allowance from the US Patent and Trademark Office for the Company's stent
delivery system. All patents are assigned to the Company.
The Company's patent includes a proven biocompatible coating used to coat
the interior surface of artificial hearts. This neutralized collagen compound is
considered to be one of the most blood- and tissue-compatible biomaterials used
to construct a smooth blood flow around the device. When applied as a thin film
it provides a smooth, biochemically stable protein coating with non-pseudo
intimal properties, very little platelet adhesion, and high blood compatibility.
In addition, when used as a substrate, the coating bonds easily with various
anticoagulant molecules such as Heparin and phospholipids which are used to
further reduce thrombosis. The Company has developed a concept for covering its
stents with graft material and plans to file a patent on this process in the
future. The endoprosthesis will enable the Company to become active in the
endovascular graft market. The greatest advantage in using the endless loop,
self-expanding metals is the potential for generating mural pressures within a
stenosis sufficient for precise stent-vessel apposition.
Once the vessel is acutely dilated, the stent could be passed through the
stenosis on a guide wire, in its endless, elongated configuration, then released
to allow the coils to reform at the stenosis. The gradual mural pressure of the
"memory" reforming coil produces a subsequent chronic vessel dilation over a
period of several hours or days until the "memory" diameter of the coil is
reached. This could greatly impact the restenosis problem in that the acute
trauma of angioplasty (i.e., rapid vessel wall stretching, dissection of
internal elastic lamina and media) could be modulated over the succeeding days
after angioplasty by gentle though constant vessel wall "remolding."
The OmniStent(TM) has several advantages over competitive products. It is a
dual, endless coil which gives the stent versatility in using almost any
material; the dual coil gives more than two times the hoop strength of a single
coil; the continuous loop allows easy deployment whether on a balloon,
guidewire, or through a sheath
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(such as the Schneider Wallstent). When coiled, according to the reversible
arcuate sections (the preferred embodiment in US Patent 5,342,387), the open
sections can be used to place at vessel branches allowing open flow into these
branches. In addition, the patent claims a bifurcated stent made of the same
endless loop, that presents wide applications in peripheral stenting and grafts
(the aortoileal stenosis is the most common pathology in peripheral vascular
disease). The endless, bifurcated stent can thus be inserted into both iliac
vessels from a unilateral (one puncture) technique. It is the most versatile
stent in the interventional field.
Although the Company intends to commercialize the OmniStent(TM) as quickly
as possible, the current regulatory climate at the FDA has made the approval
process extremely slow for new products. Therefore, there can be no assurances
that the product will be approved within a timeframe which will permit the
stents to contribute to the Company's need for short-term capital, nor can there
be any assurances that the FDA will ever approve the OmniStent(TM).
The Evert-O-Cath(TM) Drug Delivery Catheter
The Evert-O-Cath(TM) is a "toposcopic catheter" used to inject fluids and
drugs, such as thrombolytic agents (drugs that dissolve blood clots) and
chemotherapeutic agents, in the body in an extremely precise and localized
manner and to withdraw fluids from the body. The Evert-O-Cath(TM) features a
flexible and extremely soft-tipped catheter (the "primary catheter"), inside of
which lies a second, interior catheter known as a "topo" element. The thin and
flexible toposcopic catheter adapts to the contours of lumen permitting it to be
extended further into the body than a conventional catheter. The toposcopic
catheter also can be extended around near-total obstructions, causing less
friction and less damage to the lumen and allowing passage of the catheter
through tight strictures that, otherwise, would be unpassable. The
Evert-O-Cath(TM) is designed to be useful for reaching remote or extremely
fragile places in the body that, currently, are inaccessible to other catheters.
The most applicable use of the Evert-O-Cath(TM) is in conjunction with
balloon angioplasty where it can be used to both dilate and deliver localized
drugs to the angioplasty site to modulate restenosis or thrombus formations.
The Company is developing a dilating version of the Evert-O-Cath(TM) to
combine drug delivery with angioplasty. As an angioplasty catheter, the
Evert-O-Cath(TM) is expected to provide a method of extruding a drug delivery
balloon from the interior of a catheter. In addition, the eversion of the
balloon from within the Evert-O-Cath(TM) makes the placement through narrow and
tortuous blood vessels, such as saphenous vein grafts, much easier than with
conventional balloon catheters. This procedure, when used in fragile grafts,
should result in less abrasion to arterial walls, and fewer cases of downstream
blockage of the blood vessel by dislodged plaque. The everting balloon could
remain extruded continually during dilatation from the Evert-O-Cath(TM),
allowing perfusion through the lumen and thus making multiple and prolonged
dilations easy to perform without withdrawing the catheter from the vessel.
A version of the Evert-O-Cath(TM) was approved by the FDA for certain
non-coronary applications in July 1994. The Company developed prototypes during
1994 and, based on feedback from potential users of the dilating
Evert-O-Cath(TM), the prototypes have been modified to better satisfy existing
medical needs. The Company intends to file a 510(k) Notification with the FDA
with respect to these modifications when the Company is convinced there is a
commercial market application for this product. There can be no assurance that a
favorable determination with respect to the Company's 510(k) Notification will
be obtained. See "Item 1. Business -- Government Regulation."
The OmniFilter
The Company is developing a percutaneous temporary filter which is mounted
on a guide wire and is used to prevent stroke-causing blood clots from reaching
various organs of the human body. The filter is deployed remotely, opened within
a vessel and then remotely closed, safely and reliably removed with clots intact
within a mesh filter containing the entrapped material. The size of the filter
is such that blood flow is not significantly reduced through straining, but
embolytic debris is caught and retained by the filter. On
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December 9, 1997 the Company received US Patent No. 5,695,519 titled
Percutaneous Filter for Carotid Angioplasty.
The Company believes that the OmniFilter, which has not been submitted to
the FDA for approval, will find significant use in such emerging procedures as
percutaneous angioplasty and stenting for carotid arteries, acute lytic
procedures for limb salvage, and endoluminal stent grafting for such procedures
or endoluminal aortic abdominal aneurysm. There can be no assurances that the
product will be approved by the FDA. (See "Item 1. Business -- Government
Regulation.")
Cathlab Catheters -- General
The Company's Cathlab subsidiary has ten FDA approved balloon catheters,
seven of which are currently being marketed within the United States and abroad.
In addition, the Company has submitted a 510(k) Notification to the FDA for
approval of an infusion catheter. The 100%-silicone design of these catheters is
resistant to environmental factors, unaffected by body temperature, and more
biocompatible than latex balloons or polyvinyl chloride (PVC) tubing. The
patented one-piece balloon design eliminates glue and ties, providing superior
smoothness and preventing the possibility of balloon dislodgement.
Allergy to latex has been increasingly recognized as a cause of
life-threatening intraoperative anaphylaxis (a systemic reaction). Frequent use
of latex in patients or by health care workers can result in sensitization that
may place some individuals at risk for such a life-threatening allergic
reaction. The 100%-silicone design of Cathlab's catheters negates the potential
risk of intraoperative anaphylaxis.
Embolectomy and Bi-Lumen Catheters
Cathlab manufactures and markets an embolectomy catheter, which is used in
procedures to remove arterial blockages, generally clotted blood but also
bacteria and other substances ("emboli"). The catheter is passed through a
surgical cutting or opening in an artery (an "arteriotomy"), along the artery,
and through any suspected emboli, with the balloon deflated. The balloon is then
inflated with saline solution and the embolus is removed by withdrawing the
catheter tip through the arteriotomy.
Cathlab manufactures and markets a bi-lumen embolectomy and irrigation
catheter which is used to assist in the removal of clotted blood from inside a
vessel, as well as, to irrigate a vessel with saline or other drug solutions
during a surgical procedure.
Ahn Thrombectomy Catheter
The Company received 510(k) approval from the FDA in January 1998 for its
new, safer thrombectomy catheter for the treatment of thromboemboli, the removal
of clots from blood vessels. The product will be named after Dr. Samuel S. Ahn,
the product's developer and the Company's Chief Clinical Investigator. This
unique catheter incorporates a distal dual balloon design to more effectively
remove emboli, as well as a proximal safety balloon indicator which allows the
surgeon to visually determine inflation volume. A patent application has been
filed with the US Patent and Trademark Office for this product, and the Company
expects to launch the product in the second quarter of 1998.
Occlusion Catheter
Cathlab manufactures and markets an occlusion catheter which is used to
occlude the flow of blood in a vessel during a surgical procedure. Occlusion of
vessels during surgical procedures with a balloon catheter is much less
traumatic to the vessel than other methods of occlusion (i.e. clamps or
sutures).
Thermodilution Catheter
Cathlab manufactures and markets a thermodilution catheter which is used in
the assessment of a patient's hemodynamic condition (the efficiency of the heart
muscle) through direct intracardiac and pulmonary artery pressure monitoring and
cardiac output determination. This catheter is also used for blood sampling and
infusing solutions.
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Angiographic/Angioscopic Irrigation Catheter
Cathlab manufactures and markets an angiographic/angioscopic irrigation
catheter which is used as a sheath for insertion of an appropriate size
angioscope to visually examine the interior of circulatory vessels. The
flexibility of this catheter permits its navigation through tortuous vessels of
the circulatory system. The variety of sizes and lengths of this catheter
provide compatibility with a variety of angioscopes.
Biliary Catheter
Cathlab manufactures and markets a biliary catheter which is used for the
removal of intraductal stones and debris from the biliary tree. Cathlab is
currently developing a biliary catheter for use during laparoscopic procedures.
Cardiac-Assist Devices
Angioplasty and other therapies involving the removal or displacement of
plaque from the arteries are intended to increase blood flow but do not relieve
the heart muscle ("myocardium") from its continual job of pumping blood
throughout the circulatory system. The Company holds four issue patents on a
cardiac-assist pump for future development of cardiac-assist devices which have
the basic objective of assisting the myocardium in moving blood through the body
at a physiologically acceptable rate. The Company has no plans to develop these
pumps at the present time and is a prime candidate for divestiture.
Spinal Dissector
The Company has patented and developed prototypes of minimally invasive
devices for use in spinal surgery, which have been evaluated in vivo. In August
1994, the Company licensed its "Spinal Dissector" spinal instrument to Wright
Medical Technology, Inc. for a license fee of $300,000 plus royalties. This
device is used for both anterior and posterior lumbar disc decompression
procedures.
SCIENTIFIC ADVISORY BOARD
American BioMed, Inc. has established relationships with outside scientific
advisors and views access to such advisors as an important resource. The
advisors counsel the Company with respect to its research and development
programs, new technological advances and medical requirements. The Company's
Scientific Advisory Board was reformulated in February 1996 and the advisors
are:
SAMUEL S. AHN, M.D., F.A.C.S. -- Dr. Ahn has served as Chief Clinical
Advisor to the Company since January 1996. Dr. Ahn is Associate Clinical
Professor of Surgery at the University of California at Los Angeles. He serves
on the editorial board of the Journal of Vascular Surgery, and is a reviewer or
guest reviewer for Surgery, Arteriosclerosis, Thrombosis and Vascular Biology,
Journal of Endovascular Surgery, Annals of Vascular Surgery, Vascular Surgery,
and others. He is author or co-author of over 70 peer review articles, a
visiting professor at University of Louisville; Yonsei University, Seoul, Korea;
University of Ulm, Ulm, Germany; Ultrech Hospital, Ultrech, Netherlands; Ochsner
Clinic and others. He holds membership in the American Medical Association,
Association for Academic Surgery, American College of Surgeons (Fellow), Western
Vascular Society, Los Angeles Surgical Society, etc.
LARRY STUART-DEUTSCH, M.D. -- Dr. Deutsch is Professor and Chief of
Vascular and Interventional Radiology at the University of California at Irvine.
He is a Research Radiologist and is involved in numerous scientific projects.
DARWIN ETON, M.D., F.A.C.S. -- Dr. Eton is Associate Professor of Surgery
at the University of Southern California, Los Angeles, with major research
activities in gene therapy of intimal hyperplasia, stented vascular grafts and
approaches to less invasive aortic surgery with laparoscopic instrumentation.
LAWRENCE A. YEATMAN, M.D., F.A.C.C. -- Dr. Yeatman is Professor of
Cardiology and Chief of Cardiac CathLab at University of California at Los
Angeles Medical Center is the Company's advisor regarding coronary applications
for the OmniCath(R) and OmniStent(TM).
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DAVID A. LEE, M.D. -- Dr. Lee is Associate Professor of Ophthalmology and
Director of Tissue Culture Laboratory at University of California at Los Angeles
Medical Center, and Chief of Glaucoma Division at Jules Stein Eye Institute. For
many years he has specialized in experimental and clinical ocular pharmacology
and pharmaceutics. He will lead the investigations of molecular and cellular
reactions to the Company's products.
J. PATRICK JOHNSON, M.D. -- Dr. Johnson is Associate Professor of
Neurosurgery at the University of California at Los Angeles, and a director of
the Comprehensive Spine Center. He specializes in spine, nerve roots and the
spinal cord. Dr. Johnson advises the Company regarding its MIS Spinal Dissector
and Needlescope products.
RICHARD STOUT, M.D. -- Dr. Stout is a professional clinical and regulatory
affairs consultant in the medical device field. He reviews, comments and advises
the Company on all FDA, Enzyme Commission and other regulatory matters.
MARKETING PLANS AND ARRANGEMENTS
The Company is focused on increasing the exposure in the market place for
the Company's proprietary products and technologies. The identification and
selection of qualified distributorships, both international and domestic
markets, will be a key component to this strategy. The Company has embarked on
an ambitious search to find qualified specialty distributors with the necessary
resources to professionally promote its products in their respective geographic
territories. Since November 1997 five industry-respected specialty distributors
have been added to the domestic distributor network. The newly appointed
distributors have placed initial stocking orders and are in the process of
completing their initial product orientation and product training for the
Company's complete product portfolio. Complete geographic coverage of the
domestic market should be accomplished by August 1998.
The following summary indicates the Company's percentage of sales within
geographic regions for the years 1997, 1996 and 1995:
<TABLE>
<CAPTION>
REGION 1997 1996 1995
------ ---- ---- ----
<S> <C> <C> <C>
United States.......................................... 34.5 45.5 18.7
Italy.................................................. 16.9 18.7 24.9
South America.......................................... 12.0 17.0 -0-
Other European Countries............................... 15.7 12.1 39.6
Other.................................................. 20.9 7.7 16.8
</TABLE>
Supporting the Company's domestic distributors will be a network of
independent manufacture representatives. These representatives will be
compensated by commission on actual sales and will be the liaison and marketing
support to our rapidly growing distributor network. Management believes by
bringing the sales and marketing support to the field level, the Company will
enhance customer service support to both the distributor and to end user
customers. The Company's application engineers and clinical support personnel
will supplement the efforts of the manufacturer's sales representative and
distributors by providing all customers with in-service training and product
education. Management will continue to attend key industry symposiums and
conventions where the concentrated exposure to important decision-makers can be
achieved and enhance the marketing visibility of our products. Journal
advertising, strategic mailings, and sponsorship of academic-based research
articles are planned for 1998 to support the Company's sales efforts.
The Company selected four new international distributors during the fourth
quarter of 1997. These distributors, three in Europe and one in Japan, have
placed initial stocking orders and are currently promoting the Company's product
line in their respective countries. The addition of these distributors brings
the total number of international distributors to twelve. The Company plans to
add up to fifteen international distributorships during calendar year 1998 in
targeted global markets where the Company's products are currently not
represented.
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Augmenting the distribution strategy will be a focused effort on securing
Group Purchasing Organization ("GPO") contracts. Securing these contracts with
GPO's like the Premier Group, a GPO representing more than fifteen hundred
hospitals, is key to achieving rapid success in the marketplace. The Company is
currently in negotiations with numerous GPO's to secure contracts with these
groups because of its unique product offerings and competitive pricing.
The Company received ISO 9001 certification January 12, 1998. In February
1998 the Company entered into an OEM agreement with Polamedco, Inc. to
manufacture up to 300,000 units annually of Polamedco's nasopharyngeal airway
products in assorted sizes. Polamedco represents the Company's first OEM
contract and is a direct result of the Company's receipt of ISO 9001
certification. By securing suitable OEM arrangements, the Company hopes to
achieve greater marketing coverage while maintaining sales increases with its
distributor network. The Company is currently in discussions with other medical
manufacturers/strategic partners for OEM distribution of the Company's products.
In addition, the Company is pursuing private label opportunities to provide OEM
manufacturing for existing products and products not currently manufactured but
that capitalize on the Company's existing silicone technologies.
The Company is uncertain today that the distributors now in place will be
able to effectively market and sell the Company's core product technologies, the
OmniCath(R), OmniStent(TM) and Evert-O-Cath(TM). As such, the Company has
undertaken efforts to identify healthcare companies with similar technologies or
companies seeking new proprietary products to strengthen their existing market
position. This strategy is directed toward the formation of strategic alliances,
joint venture arrangements, licensing and distributor agreements, and research
and development agreements/projects. An integral part of this strategy is to
aggressively pursue the sale of ancillary technologies (not core technologies)
which will enable the Company to focus its resources exclusively on its core
technologies and commercial non-angioplasty balloon catheter products.
The Company has begun formulating a comprehensive marketing and sales
strategy and has determined that the most expeditious and cost-effective method
of marketing the OmniCath(R) is to ally itself with a strategic partner whose
marketing and distribution networks are global in scope and is selling to
healthcare providers who are high volume users of angioplasty, atherectomy and
stent devices. By selecting one or more strategic partners, the Company can
focus its efforts on manufacturing, product development and securing regulatory
approvals while the strategic partner or partners can focus on selling with
their existing, experienced sales organizations. The Company is currently
marketing the OmniCath(R) in selected international markets through existing
Cathlab distributors and will continue to do so until the Company gains FDA
approval for U.S. sales and/or strategic partners are selected.
However, there can be no assurance that these OEM and private label
opportunities or the Company's efforts to secure distributors and GPO contracts
will result in contracts and subsequent revenue to the Company. Many of these
potential strategic partners bring with them the added benefits of GPO contracts
and the advantage of the bundling of products to the end user, thereby
increasing the visibility of our products in the global marketplace.
GOVERNMENT REGULATION
The catheters and stent devices which have been and are being developed by
the Company (and any products intended to be researched, developed or marketed
in the future) are all medical devices subject to regulation by the FDA.
Pursuant to the Federal Food, Drug, and Cosmetic Act and regulations promulgated
thereunder (the "FDC Act"), the FDA regulates and must approve the manufacture,
distribution and promotion of medical devices in the United States. Various
states and foreign countries in which the Company's products may be sold in the
future may impose additional regulatory requirements.
If the manufacturer or distributor of medical devices can establish that a
proposed device is "substantially equivalent" to a device that is legally
marketed, the manufacturer or distributor may seek FDA marketing clearance for
the device by filing a "510(k) Notification." The 510(k) Notification and the
claim of substantial equivalence must be supported by various types of data and
materials, including test results. Following submission of the 510(k)
Notification, the manufacturer or distributor may not place the device into
commercial distribution until an order is issued by the FDA. The order is
generally sent within 90 days of
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<PAGE> 13
the submission and the order may declare the FDA's determination that the device
is substantially equivalent to another legally marketed device and allow the
proposed device to be marketed in the United States. The FDA may, however,
determine that the proposed device is not substantially equivalent, or may
require further information, such as additional test data, before the FDA is
able to make a determination regarding substantial equivalence.
If a manufacturer or distributor of medical devices cannot establish that a
proposed device is substantially equivalent, whether or not the FDA has made a
determination in response to a 510(k) Notification, the manufacturer or
distributor will have to seek "premarket approval" of the proposed device. A
premarket approval application would be submitted supported by extensive data,
including preclinical and human clinical trial data, as well as extensive
literature, to provide recommendations to the FDA. While the FDA has responded
to 510(k) Notifications and premarket approval applications ("PMAs") within the
allotted time period, reviews more often than not occur over a significantly
protracted time period, usually 12 to 18 months for a PMA, and possibly as much
as a year or more for certain 510(k) Notifications supported by clinical data. A
number of devices have never been cleared for marketing under either the PMA or
510(k) Notification process.
If human clinical trials of a proposed device are required and the device
presents significant risk, the manufacturer or distributor of the device will
have to file an Investigational Device Exemption ("IDE") application with the
FDA prior to commencing human clinical trials. The IDE application must be
supported by data, including the results of animal and mechanical testing. If
the IDE application is approved, human clinical trials may begin.
In June 1991, the Company's IDE application with respect to the OmniCath(R)
for peripheral use was approved allowing the Company to commence limited human
clinical trials with one physician investigator at one institution, who could
use the device on a total of ten patients to mechanically remove accumulations
of plaque from peripheral arteries. During 1992, an additional institution was
approved by the FDA to conduct human clinical trials. The Company concluded
Phase I of the IDE as approved by the FDA and submitted an IDE Supplement to the
FDA in August 1994. The Supplement contained the clinical data (generated on 12
patients) which demonstrated the performance of the device. The Company was
granted conditional approval by the FDA to expand the clinical trials in the
United States for peripheral vessels. To date, the OmniCath(R) device has been
used, domestically and internationally, on more than 60 patients. The Company
must accumulate case study data on at least 50 patients for the peripheral
trials and have follow-up for at least six months, before the 510(k)
Notification can be prepared and initially filed. With respect to the
OmniCath(R) for hemodialysis A-V fistula restenosis, clinical trials represent
an expansion from peripheral applications of the OmniCath(R) to include A-V
grafts. Animal studies have been completed to demonstrate safety and to provide
the basis of efficacy in debulking A-V grafts in hemodialysis patients. It is
anticipated that these clinical trials will be completed before the end of 1999
and FDA 510(k) submission is anticipated three months after completion of the
required number of clinical trial cases.
By virtue of the additional risk associated with the use of a mechanical
catheter in the arteries of the heart, the OmniCath(R) for coronary application,
presently under development, will require more extensive animal and mechanical
testing than did the peripheral OmniCath(R) before an IDE application can be
filed and human clinical trials undertaken. The Company does not intend to
pursue the coronary application until the peripheral and A-V fistula indications
are approved by the FDA.
The Evert-O-Cath(TM) was cleared to market by the FDA for certain
non-coronary applications (see previous discussion under "General"). The Company
developed prototypes during the fourth quarter of 1991 and, based on feedback
from potential users of the Evert-O-Cath(TM), the prototypes were modified to
better satisfy medical needs. The Company received clearance from the FDA to
market the Evert-O-Cath(TM) commercially in July 1994. The Company is developing
a therapeutic version of the Evert-O-Cath(TM) for angioplasty applications and
expects that mechanical, animal and human testing and follow-up will be required
under an IDE to support the filing of a premarket approval application with
respect to that version of the Evert-O-Cath(TM) (see previous discussion under
"General"). In the second quarter of 1993, the Company
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<PAGE> 14
completed mechanical testing and in the first quarter 1994 completed animal
testing of the therapeutic version of the Evert-O-Cath(TM).
The heart pumps under development by the Company would require extensive
evaluation prior to use on humans. These proposed products would ultimately
require tests on humans under an IDE, and premarket approval. Although design
and preclinical engineering has been completed, the Company will not commit
further significant resources to these products until such time as the Company
secures a strategic partner in the global healthcare industry to collaborate in
the development efforts as well as to provide the substantial funds required.
Cathlab has ten specialty products which have all received marketing
clearance via the 510(k) Notification process and one pending FDA approval. The
Company is currently marketing the embolectomy catheter, bilumen irrigation
catheter, occlusion catheter, biliary gall stone removal catheter,
thermodilution catheter and the angiographic/angioscopic catheter. The newly
approved Ahn Thrombectomy catheter is in various stages of testing and
production and is expected to be launched in the second quarter 1998 if all
manufacturing phases are completed and satisfactory to our product quality
standards. The facility housing Cathlab has been inspected by both the federal
and state FDA and has been licensed for operation as a medical device
manufacturer. The Company passed its latest FDA inspection in May 1996 and
received no 483 violations during the inspection. In addition, the Company
received ISO 9001 certification in January 1998.
Any products distributed or to be distributed by the Company are subject to
pervasive and continuing regulation by the FDA. Products must be manufactured in
registered establishments and be manufactured in accordance with "Good
Manufacturing Practices," as such term is defined under the FDC Act. Labeling
and promotional activities are subject to scrutiny by the FDA and, in certain
circumstances, by the Federal Trade Commission. The export of devices is also
subject to regulation in certain instances.
The Medical Device Reporting ("MDR") regulation obligates the Company to
provide information to the FDA on product malfunctions or injuries alleged to
have been associated with the use of the product or in connection with certain
product failures which could cause serious injury. If, as a result of FDA
inspections, MDR reports or other information, the FDA believes that the Company
is not in compliance with the law, the FDA can institute proceedings to detain
or seize products, enjoin future violations, or assess civil and/or criminal
penalties against the Company, its officers or employees. Any action by the FDA
could result in disruption of the Company's operations for an undetermined time.
In addition to the foregoing, numerous other federal and state agencies,
such as environmental, fire hazard control, working condition and other similar
regulators, have jurisdiction to take actions that could have a materially
adverse effect upon the Company's ability to do business.
THIRD PARTY REIMBURSEMENT
Hospitals, physicians and other healthcare providers that purchase medical
devices, such as the Cathlab products, OmniCath(R), OmniStent(TM) or the
Evert-O-Cath(TM), for use in furnishing care to their patients, typically rely
on third-party payers, principally Medicare, Medicaid, and private health
insurance plans, to reimburse all or part of the costs or fees associated with
the medical procedures performed with those devices, and/or of the costs of
acquiring those devices. Cost control measures adopted by third-party payers in
recent years, including the Medicare prospective payment system for inpatient
hospital patients, and reductions in Medicare payments for hospital outpatient
services and capital costs, have had and may continue to have a significant
effect on the purchasing practices of many providers, generally causing them to
be more selective in the purchase of medical devices. Limitations may be imposed
upon the conditions for which procedures may be performed or on the cost of
procedures for which third-party reimbursement is available, which may adversely
affect the market for the Company's products. In addition, if competing devices
or procedures are available, choices may be made on the basis of price. While
the Company cannot predict the cost of its devices, or the procedures to be
performed with its products, or the relative cost and efficacy of competing
products or procedures, changes in third-party payer reimbursement practices
regarding the procedures performed with
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<PAGE> 15
medical devices sold by the Company may adversely affect the Company's financial
position, results of operations, and cash flows.
While third-party payers generally make their own decision regarding which
items and services to cover, Medicaid and other third-party payers often apply
standards similar to Medicare's in determining whether to provide coverage for a
particular medical procedure. The Medicare statute prohibits payment for any
items or services that are not reasonable and necessary for the diagnosis or
treatment of illness or injury or to improve the functioning of a malformed body
member, and the Health Care Financing Administration ("HCFA"), an agency within
the Department of Health and Human Services responsible for administering the
Medicare program, has interpreted this provision to prohibit Medicare coverage
of procedures that, among other things, are not deemed safe and effective
treatments for the conditions for which they are being used, or which are still
investigational. For medical devices, FDA clearance for marketing is required,
but is not determinative of whether these prerequisites for Medicare coverage
have been met.
While a limited number of national coverage decisions are made by HCFA, in
general, the determination of whether a procedure satisfies these standards is
made by the Medicare carrier or intermediary which processes claims for
reimbursement within that carrier's or intermediary's jurisdiction. The Company
has not requested a national coverage decision with respect to procedures to be
performed using the OmniCath(R), the OmniStent(TM) or the Evert-O-Cath(TM)
because the Company believes that procedures utilizing other catheter products
are currently covered by Medicare, the Company does not intend to request a
decision. The unavailability of third-party coverage or inadequacy of
third-party reimbursement for procedures using the OmniCath(R), the
OmniStent(TM), or the Evert-O-Cath(TM) could adversely affect the Company's
ability to market those products.
The Company is unable to predict what additional legislation or
regulations, if any, may be enacted or adopted in the future relating to the
Company's business or the healthcare industry, including third-party coverage
and reimbursement, or what effect any such legislation or regulation may have on
the Company.
MANUFACTURING
The manufacturing facility received ISO 9001 certification on January 12,
1998. ISO (International Standards Organization) is an international federation
of national normalization organizations representing approximately 100
countries. ISO 9001 is a quality-assurance model that conforms to
internationally accepted guidelines on management and system elements, and is
used by companies that design, produce, inspect, test, install and service
items. Certification by the Registrar significantly validates a company's
commitment to product quality and customer service. To expand international
activities, the Company contracted with a large European Notified Body to obtain
the CE Mark for certification of product quality for its entire product line.
The European Commission currently requires CE Marking for many products sold in
the European marketplace.
The Company's primary manufacturing and research and development center
operates within the Cathlab Division. Cathlab is located in a modern, 13,000
square foot facility in Irvine, California and benefits from the close proximity
of medical research facilities associated with various universities, as well as
UCLA Medical Center and our Scientific Advisory Board. Cathlab has ten FDA
approved balloon catheters and three catheters pending FDA approval that are
used primarily in vascular surgery for the removal of embolus (blood clots). Six
of the catheters are currently being marketed within the domestic and
international marketplace. The Company's newest product, the Ahn Thrombectomy
Catheter, a dual balloon catheter, is scheduled for product launch in the second
quarter 1998.
The all-silicone catheters are designed to be resistant to environmental
factors, unaffected by body temperature and more biocompatible than latex
balloons or polyvinyl chloride (PVC) tubing. Allergy to latex has been
increasingly recognized as a cause of life threatening intraoperative
anaphylaxis, a systemic reaction. Frequent use of latex in patients or by health
care workers can result in sensitivity which may place some individuals at risk
for such a life threatening allergic reaction. The all-silicone design of
Cathlab's catheters negates the potential risk of intraoperative anaphylaxis.
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Cathlab's catheters utilize a patented one piece balloon design, thereby
eliminating glue and ties which in turn provide superior smoothness and prevent
the possibility of balloon dislodgement.
Cathlab is currently producing 30,000 embolectomy, thrombectomy (dual
balloon), bi-lumen irrigation, occlusion, angioscopy, biliary and cardiac output
catheters of advanced silicone technology. Cathlab has the capacity to
manufacture approximately 120,000 balloon catheters annually. In addition, the
OmniCath(R) is presently being manufactured in the facility for clinical trials
on a limited production basis but the plant has the capacity to manufacture
12,000 annually.
Management believes that the Company is now positioned to capitalize on its
silicone manufacturing expertise and patented minimally invasive technologies.
Since receiving ISO 9001 certification in January 1998, the Company has received
unsolicited requests to manufacture unique devices to the specifications of
third parties, indicating growth potential in the OEM market. One OEM contract
for 100,000 units per year is currently in force and another incorporating the
manufacture of nine separate product lines is being negotiated. Although there
can be no assurances, management anticipates that the OEM contracts, coupled
with a concentrated focus of its efforts on the marketing and distribution of
its FDA approved products and successful completion of its ongoing clinical
trials, will result in revenue growth in the next twelve months.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts as well as its ongoing
technical support activities were consolidated in the Irvine, California
facility in September 1996. The consolidation resulted in a better utilization
of resources, annual cost savings, improved communication and reduced product
development lead times. As a result of this decision the 4,800 square foot
facility in The Woodlands, Texas was closed and all R&D prototypes,
Computer-Aided Design (CAD), testing apparatus, ink drawing plotters and
computer simulation work stations have been consolidated in Irvine, California,
greatly improving the utilization of this equipment.
The Company's research and development efforts in interventional cardiology
are aimed at increasing the convenience, ease and speed for use of percutaneous
transluminal coronary angioplasty ("PTCA") and percutaneous transluminal
angioplasty ("PTA") devices (including balloon and atherectomy catheters) while
expanding the clinical applications for which PTCA and PTA are appropriate. The
development of superior PTCA and PTA catheters requires the resolution of
several conflicting performance parameters, including catheter profile
(diameter), trackability (the ability to follow the paths of tortuous arteries)
and pushability (the ability to push through tight strictures). Meeting these
conflicting objectives requires expertise in a number of technical disciplines
that the Company must develop and retain internally. Research and development
expenses in the fiscal years ended December 31, 1997, 1996, and 1995 were
$648,049, $640,792, and $537,962, nearly all of which was applied to the
development of the OmniCath(R), OmniStent(TM) and Evert-O-Cath(TM). Research and
development expenses decreased 1.1% in 1997 over 1996 and increased 19.1% over
1995. Research and development efforts for the foreseeable future will be
focused on the Company's core technologies which include balloon catheters,
OmniCath(R), OmniStent(TM), blood filter and Evert-O-Cath(TM) drug delivery
system. The Company anticipates that research and development expenses will
increase as products approach commercial viability and may be funded by
increased revenue generated through Cathlab Division sales, from the sale of
ancillary technology or through joint development agreements with strategic
partners. See "Item 7 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The Company has entered into agreements with various persons and entities
to conduct contract research and development and for the provision of consulting
services. These consultants are paid consulting fees plus out-of-pocket expenses
associated with their consulting efforts.
PATENTS AND PROPRIETARY INFORMATION
The medical device industry traditionally has placed considerable
importance on obtaining and maintaining patents and trade secret protection for
significant new technologies, products and processes. The Company pursues a
policy of generally obtaining patent protection in both the U.S. and abroad for
patentable subject matter in its proprietary devices. The Company has been
issued five U.S. patents and one Notice of Allowance
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<PAGE> 17
("NOA") relating to atherectomy catheters and two relating to cardiac-assist
pumps, and the Company has a 50% interest in two other U.S. patents relating to
cardiac-assist pumps. The Company has received two patents on the OmniStent(TM)
and one on the spinal dissector. In addition, the Company has received an NOA
from the US Patent and Trademark Office on its stent delivery system. The
Company has applications pending for additional U.S. patents and foreign patents
relating to the OmniCath(R) and OmniStent(TM), and has foreign applications
pending with respect to the cardiac-assist pumps.
The U.S. patents currently have terms expiring at various dates from 2001
to 2015, with the earliest of the current patents relating to the OmniCath(R)
expiring in 2008. The foreign patents expire on various dates commencing in
2009. As the Company develops modifications or improvements of existing methods
or products or develops new products or processes, it will seek additional
patents. The Company believes, although there can be no assurances, that the
patented aspects of its products enhance the functionality of its products and
suitability for their intended purposes which, in turn, may increase their
likelihood of commercial acceptance. The patents may limit, to some extent, the
ability of others to develop competing products.
In connection with the Company's acquisition of Cathlab Corporation, the
Company is now the owner of rights relating to two United States patents
concerning the method of attaching the balloon to the catheter, as well as
owning patent rights relating to the same process in the United Kingdom, Germany
and Spain. Various foreign patent applications relating to the same process are
pending.
Lawrence M. Hoffman, currently a director, stockholder and paid consultant
of the Company and formerly a Vice President, is a limited partner of Aberlyn
Capital Management Limited Partnership ("Aberlyn") and is an officer, director
and stockholder of Aberlyn Capital Management, Inc., the general partner of
Aberlyn. Effective December 31, 1992, the Company and Aberlyn entered into a
Patent Assignment and License Agreement (the "Patent and License Agreement")
pursuant to which the Company assigned patents owned by the subsidiary, Cathlab
Corporation (the "Cathlab Patents"), to Aberlyn in return for $500,000. The
Cathlab Patents were exclusively licensed back to the Company for three years
for a monthly license fee of $16,355, after which Aberlyn was required to
reassign the Cathlab Patents to the Company in exchange for $50,000. Under its
terms, if the Company declined to purchase the Cathlab Patents, the Patent and
License Agreement would automatically be extended for an additional nine months
for a monthly license fee of $17,099, after which the Cathlab Patents would
automatically revert back to the Company.
The Company and Aberlyn entered into an equipment lease effective May 13,
1993 (the "Equipment Lease") pursuant to which the Company assigned certain
equipment to Aberlyn in consideration of $205,000. The equipment was exclusively
leased back to the Company for three years for a monthly fee of $6,706, after
which Aberlyn was required to return the equipment to the Company in exchange
for $20,500. Under the terms, if the Company opted not to purchase the
equipment, the Equipment Lease would automatically be extended for an additional
three months for a monthly payment of $7,011, after which the equipment would
automatically revert back to the Company.
Effective August 13, 1993, the Company and Aberlyn entered into an
additional equipment lease (the "Second Equipment Lease") pursuant to which the
Company assigned certain equipment to Aberlyn in consideration of $100,000. The
equipment was exclusively leased back to the Company for three years for a
monthly fee of $3,271, after which Aberlyn was required to return the equipment
to the Company in exchange for $10,000. If the Company declined to purchase the
equipment, the term of the Second Equipment Lease was to be automatically
extended or an additional three months for a monthly payment of $3,420, after
which the equipment would automatically revert back to the Company.
The Company and Aberlyn entered into an agreement effective March 28, 1994
whereby the terms of the Patent and License Agreement, the Equipment Lease and
the Second Equipment Lease (the "Leases") were modified. The payment terms of
the license fee pursuant to the Patent and License Agreement were revised to
semiannual payments of $97,445 and the payment terms of the Equipment Lease were
similarly revised to semiannual payments of $39,100 and $20,281, respectively.
In consideration to Aberlyn for making these modifications, the Company issued
warrants to Aberlyn to purchase 150,000 shares of the Company's common stock at
an exercise price of $1.50 per share exercisable over a five-year period. On May
28, 1996,
16
<PAGE> 18
Aberlyn and the Company reached an agreement to restructure the Leases which
resulted in a revised schedule of lease payments over a twenty-four month
period, with the initial payment commencing on June 1, 1996. The payments were
based on an outstanding principal amount of approximately $500,000 and total
accrued interest of approximately $148,000. In addition, 115,000 shares of
common stock were issued in payment of consulting fees, investment banking
service fees and miscellaneous expenses totaling $115,728.
Effective November 1, 1997, the Company and Aberlyn entered into
modification agreements of the Leases which revised the schedule of lease
payments and extended the maturity date to October 1, 1998.
The Company believes that its future success does not depend solely upon
patents, but rather depends, to a significant extent, upon the technical
competence and creative skills of its personnel, the execution of its strategic
plan and on its significant unpatented proprietary technology. The Company has
no knowledge that it is infringing any existing patent such that it would be
liable for material damages or prevented from manufacturing or marketing its
planned products. However, competitors continue to obtain new patents and to
file applications to modify or expand claims of existing patents that could lead
to possible conflict with the Company's products or proposed products.
The Company may decide for business reasons to retain a patentable
invention as a trade secret. In that event, or if patent protection is
unobtainable, the Company must rely upon trade secrets, know-how and continuing
technological innovation to maintain its competitive position. Employees and
consultants of the Company who have access to proprietary information have
signed confidentiality agreements with the Company.
The Company has four trademarks: the OmniCath(R), the OmniStent(TM), the
Evert-O-Cath(TM), and Cathlab Corporation(R). The Company has applied to
register the OmniStent(TM); however, there can be no assurance that federal
registration will be obtained. "Cathlab Corporation(R)" and "OmniCath(R)" are
registered trademarks.
COMPETITION
Competition in the biomedical industry is intense. Cathlab's catheters
compete directly with similar products sold by a number of companies. There can
be no assurance that these products will be able to obtain or maintain a sizable
market share, if any. There are many companies and academic institutions that
are capable of developing products of similar design, and that have developed
and are capable of developing products based on other technologies, that are or
may be competitive with the Company's current and proposed products. Many of
those companies and academic institutions are well-established, have
substantially greater financial and other resources than the Company, and have
established reputations for success in the development, sale and service of
products. These companies and academic institutions may succeed in developing
competing products that are more effective than those of the Company or that
receive FDA approval more quickly than the Company's products. The Company's
ability to compete will be dependent upon its ability to get products approved
by regulatory authorities and introduced to the market, including the
arrangement of a distribution network, and to provide products with advanced
performance features, none of which can be assured.
In addition to competition from other atherectomy devices, other
angioplasty modalities, such as lasers, thermal systems (e.g. hot-tip,
hot-balloon, and spark ablation), disruptive devices (e.g., ultrasonic
angioplasty), and stents may provide competition to the OmniCath(R) and the
OmniStent(TM). The current atherectomy devices anticipated to be competitive to
the OmniCath(R) are the Simpson Atherocath (Devices for Vascular Intervention,
Inc., a division of Eli Lilly, Inc.), the Transluminal Extraction Catheter, or
"TEC" device (InterVentional Technologies, Inc.), the Auth Rotablator (Heart
Technology, Inc.), and the Kensey Catheter (Theratek International, Inc., a
division of Dow Corning Wright, a subsidiary of Dow Corning Corp.). If the
product receives regulatory approval on a timely basis, the Company believes the
OmniCath(R)'s competitive position will be enhanced by its closed aspiration
system (which eliminates down-stream debris), low cost disposability,
microangioscope capability, and conventional guidewire capability, as well as by
the positioning of its side-window which allows the rotating blade to shave
plaque from inside the catheter as opposed to from the tip of the catheter.
Competition to the Company's OmniStent(TM) is expected to come from Johnson &
Johnson, which had its Palmaz-Schatz Stent approved by the FDA in 1994, the Cook
Gianturco,
17
<PAGE> 19
from Medtronic's Wiktor Stent and from Schneider's Wallstent, neither of which
has obtained full FDA approval.
While lasers, ultrasonic angioplasty devices and other new modalities have
proliferated over the past several years, none of these technologies has yet
been shown to reduce the restenosis rate or to reduce the overall procedural
cost of angioplasty. Lasers are particularly expensive (most laser angioplasty
systems sell for $100,000 -- $300,000), and the Company believes lasers will be
accepted only if significantly better results can be shown clinically. Lasers
have been found to be damaging to the arterial wall, and non-laser versions
including thermal balloon devices, spark ablation systems, and other new
modalities are currently under development and have not reached
commercialization. The Company believes that direct removal of tissue without
thermal effect may be the most desirable approach for angioplasty, as most
thermal systems cause trauma to the arterial wall, resulting in proliferation of
fibrous tissue and early restenosis.
The Company does not know of any person or entity currently marketing a
toposcopic catheter with features similar to the Evert-O-Cath(TM).
EMPLOYEES
As of March 1, 1998, the Company had 25 full-time employees, 1 in research
and development, 2 in sales and marketing, 14 in manufacturing, 3 in quality
control and 5 in corporate management and administration. None of the Company's
employees are represented by labor unions. The Company considers its
relationship with its employees to be in good standing. The Company also employs
two paid consultants (Dr. Samuel S. Ahn and Lawrence M. Hoffman) who are paid on
a monthly basis at rates ranging from $3,125 to $12,500 per month.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information pertaining to executive officers
of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Steven B. Rash............................ 50 President, Chief Executive Officer and
Chairman of the Board
Marshall Kerr............................. 47 Vice President, Sales and Marketing
Colene Blankinship........................ 48 Controller, Chief Accounting Officer,
Secretary and Treasurer
</TABLE>
STEVEN B. RASH has served as President, Chief Executive Officer and
director of the Company since July 15, 1995 and as Chairman of the Board since
February 4, 1997. From 1994 until June 1995, Mr. Rash served as Vice President
of Operations of Blue Rhino Corporation, an industrial products manufacturer.
From 1992 to 1994, Mr. Rash served as President of the Technical Services
Division of the Maxum Health Corporation, a company engaged in providing mobile
MRI services. From 1989 to 1992, Mr. Rash served as the President of Intex
Medical Technologies, Inc., a medical equipment manufacturer. Prior thereto, Mr.
Rash held various positions with BOC Group, plc., an international manufacturer
of industrial gases and healthcare products and services. Mr. Rash holds an MBA
from Southern Illinois University and served for four years in the U.S. Army,
where he reached the rank of Captain.
MARSHALL KERR joined the Company October 10, 1997 as a sales consultant and
was appointed Vice President, Sales and Marketing December 15, 1997. From 1996
to 1997 Mr. Kerr served as Vice President, Sales and Marketing at US Medical
Instruments, Inc., a manufacturer of disposable medical products where he
established and directed both the domestic and international sales forces. He
served as Vice President Sales with ICU Medical, Inc. from 1993 to 1996 where he
directed their national sales efforts and reconstructed its distribution
network. Prior to ICU Medical Inc. Mr. Kerr was Executive Vice President of
Professional Hospital Supply from 1985 to 1993.
COLENE BLANKINSHIP, CPA joined the Company February 7, 1995 as Controller
and became the Chief Accounting Officer November 1995. She was elected
Secretary/Treasurer February 4, 1997. From 1992
18
<PAGE> 20
through 1994 Mrs. Blankinship served as Controller of Excel Resources, Inc., a
gas marketing company in Houston, Texas. She has 13 years experience in public
accounting which includes 9 years with the local firm of Tribolet, Fuller &
Associates, P.C., Humble, Texas. Mrs. Blankinship attended Texas Tech University
and North Harris County College and is a CPA. Mrs. Blankinship is a national
director of the American Society of Women Accountants, a position she has held
since July 1996.
ITEM 2. PROPERTIES
As of March 1, 1998, the Company leases approximately 2,400 square feet of
space at 10077 Grogan's Mill Road, Suite 100, The Woodlands, Texas, which houses
its corporate headquarters. The three-year lease commenced June 1, 1997. The
Company believes that this facility is adequate for its operations during the
remaining term of the lease.
In connection with the Company's acquisition of Cathlab Corporation, it now
leases approximately 13,000 square feet of space at 17991 Fitch, Irvine,
California, which houses the manufacturing, research and development, and sales
facilities. The lease commenced on September 1, 1990 and was renewed in August
1997 for an additional year. The Company subleased 3,000 square feet to an
unrelated party in January 1996 for $3,000 per month which terminated April 30,
1997 upon early notification by the lessee. The Company believes that this
facility is adequate for its operations during the remaining term of the lease.
ITEM 3. LEGAL PROCEEDINGS
On December 8, 1994, a vendor commenced a lawsuit against the Company
regarding unpaid invoices in the amount of $124,759 plus attorney fees and
accrued interest. On June 15, 1995, the parties to the lawsuit executed a
Stipulation of Settlement Agreement, a Consent Judgment and a Stipulation of
Dismissal to be held in escrow. The Company agreed to pay $125,000 to the vendor
under the settlement agreement; $25,000 was paid upon execution of this
stipulation and the balance was due on or before October 31, 1995. The amount of
$100,000 was included in accounts payable at December 31, 1995. The balance was
paid through the issuance of 116,145 shares of the Company's common stock in
1996. The vendor sold the shares for less than the amount owing under the
settlement agreement including applicable interest and legal fees. The balance
of approximately $55,000 has been properly accrued in 1997.
In May 1997, a former officer and director of the Company filed a lawsuit
alleging oppressive action toward a minority shareholder, breach of contract,
wrongful termination and unpaid debts and advances. The Company is vigorously
contesting this lawsuit. The February 1998 mediation conference, which was
mandated by the Court, did not result in a settlement agreement and the case is
scheduled for trial in 1998. The Company is unable to make a meaningful analysis
of possible or likely damages, if any.
In August 1997, a former officer and director of the Company filed a
lawsuit alleging breach of contract and is seeking specific performance and
monetary damages. The Company is vigorously contesting this lawsuit. The Company
has accrued $125,000 which is management's best estimate of the ultimate
liability, if any. The resolution of this matter may have a material adverse
impact on the Company's financial position, results of operations or cash flows.
In September 1997, a former distributor filed a lawsuit alleging the letter
agreement terminating their distribution agreement was breached by the Company
due to the non-issuance of options to purchase 437,500 shares of common stock at
$0.40 per share. These options have been properly reserved, but have not been
issued. Management believes the resolution of this matter will not have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
The Company is occasionally a party to litigation (other than that
specifically noted) arising in the ordinary course of business. Management
regularly analyzes current information and, as necessary, provides an accrual
for probable liabilities for the eventual disposition of the matter. In the
opinion of management, the ultimate outcome of these matters will not materially
impact the Company's financial position, results of operations or cash flows.
19
<PAGE> 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders (the "Annual Meeting")
on December 19, 1997. The stockholders of record on November 3, 1997 were
entitled to vote at the meeting. The following directors were elected to serve
until the next Annual Meeting or until their successors are duly elected and
qualified:
<TABLE>
<CAPTION>
FOR WITHHELD
---------- --------
<S> <C> <C>
Steven B. Rash.............................................. 12,460,809 568,342
Lawrence M. Hoffman......................................... 12,501,606 527,525
Claudio M. Guazzoni......................................... 12,503,926 525,225
Richard S. Serbin........................................... 12,514,626 514,525
</TABLE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock traded on the Nasdaq Small-Cap Market under the
symbol ABMI from October 22, 1991 through October 13, 1994. On October 13, 1994,
the Company was delisted from NASDAQ because the Company's equity fell below the
required $1,000,000 on June 30, 1994. The following table sets forth, for the
periods indicated, the range of high and low bid prices for the Common Stock as
reported by OTC Bulletin Board(R). The quotes represent "Inter-dealer" prices
without adjustment or markups, markdowns or commissions and do not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
COMMON
STOCK
------------------
HIGH LOW
------- -------
<S> <C> <C>
YEAR ENDING DECEMBER 31, 1996
First Quarter............................................. .78125 .375
Second Quarter............................................ 2.8125 .625
Third Quarter............................................. 2.25 1
Fourth Quarter............................................ 2 .875
YEAR ENDING DECEMBER 31, 1997
First Quarter............................................. 1.625 1
Second Quarter............................................ 1.09375 .6875
Third Quarter............................................. .71875 .40625
Fourth Quarter............................................ .59 .21
</TABLE>
As of November 3, 1997 there were approximately 328 holders of record and
approximately 3,000 additional beneficial shareholders of the Company's common
stock. The closing Inter-dealer prices for the Company's common stock on March
30, 1998 was $0.61.
To date the Company has not paid any dividends on its common stock. The
payment of future dividends, if any, is within the discretion of the Board of
Directors and will depend on the Company's earnings, its capital requirements
and financial condition, as well as, other relevant factors. The Company does
not intend to declare any dividends in the foreseeable future, but instead
intends to retain all earnings, if any, for use in the Company's business
operations.
20
<PAGE> 22
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below has been derived from the
consolidated financial statements of the Company (A Development Stage
Enterprise). The Company declared no common stock dividends during any period
presented. The operating results of Freedom Machine, Inc. and Cathlab
Corporation since the respective dates of acquisition are included in the
selected operating statement data below. This data should be read in conjunction
with the consolidated financial statements included elsewhere herein.
SELECTED OPERATING STATEMENT DATA:
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL FISCAL FISCAL INCEPTION,
YEAR YEAR YEAR YEAR YEAR SEPT. 4, 1984
ENDED ENDED ENDED ENDED ENDED THROUGH
DEC. 31, 1997 DEC. 31, 1996 DEC. 31, 1995 DEC. 31, 1994 DEC. 31, 1993 DEC. 31, 1997
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sales, Net................. $ 545,473 $ 579,533 $ 660,770 $ 637,375 $ 826,590 $ 3,860,120
Cost of Sales.............. (482,360) (420,838) (649,355) (782,729) (960,232) (3,715,266)
Interest Income............ 44,200 4,252 7,239 902 23,663 153,934
Other Income (Expense)..... 25,766 (114,762) 1,561,203(2) (56,209)(1) 1,353 1,942,550
Interest Expense........... (183,538) (313,914) (276,688) (182,606) (1,261,203) (2,878,976)
Research & Devel.
Expense.................. (648,049) (640,792) (537,962) (1,167,773) (2,397,405) (7,898,042)
Selling, General & Admin.
Expense.................. (2,075,695) (1,718,595) (2,169,591) (2,235,116) (4,381,165) (17,532,630)
Distributor Settlement..... -- -- -- -- -- (1,080,915)
----------- ----------- ----------- ----------- ----------- ------------
Net Loss................... (2,774,203) (2,625,116) (1,404,384) (3,786,156) (8,148,399) (27,149,225)
Less Preferred Stock
Dividends................ -- (1,183,413) -- -- -- (1,183,413)
----------- ----------- ----------- ----------- ----------- ------------
Net Loss Available to
Common Shareholders...... $(2,774,203) $(3,808,529) $(1,404,384) $(3,786,156) $(8,148,399) $(28,332,638)
=========== =========== =========== =========== =========== ============
Net Loss per Common Share.. $ (.18) $ (.34) $ (0.15) $ (0.46) $ (1.62)
=========== =========== =========== =========== ===========
Average Number of Common
Shares Outstanding....... 15,528,231 11,310,592 9,362,198 8,188,980 5,041,698
=========== =========== =========== =========== ===========
</TABLE>
- ---------------
(1) Other expense in December 31, 1994 includes the write-off of the Superstat
assets. See "Notes to Financial Statements."
(2) Other income in December 31, 1995 includes $1,000,000 forfeited escrow
deposit received from USSC and sale of OmniCath(R) EPO patent to Guerbet.
See "Item 7 -- Management Discussion and Analysis of Financial Condition
and Results of Operations ."
SELECTED BALANCE SHEET DATA:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Working Capital (Deficit)................ $ (627,151) $ (256,206) $ (3,827,287) $ (3,246,020) $ (1,057,831)
Total Assets............................. 1,945,056 3,069,151 1,883,278 2,445,076 4,000,345
Long-Term Debt, Net of Current
Maturities............................. 71,855 110,472 -- 611 2,784
Capital Lease Obligations, Net of Current
Maturities............................. -- 302,766 7,095 18,033 485,580
Total Liabilities........................ 1,847,905 2,940,556 4,685,133 4,002,192 2,761,942
Preferred Stock.......................... 2 3 -- -- --
Deficit Accumulated During the
Development Stage...................... (27,149,225) (24,375,022) (21,749,906) (20,345,522) (16,559,366)
Total Stockholders' Equity (Deficit)..... 97,151 128,595 (2,801,855) (1,557,116) (1,238,403)
</TABLE>
21
<PAGE> 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The Company is in the development stage and has had limited operating
revenues since its inception on September 4, 1984. From September 4, 1984
through December 31, 1997, the Company had an accumulated deficit of
$27,149,225.
Year Ended December 31, 1997 Compared With Year Ended December 31, 1996
During 1997 the Company focused on productivity improvements, ISO 9001
certification, CE Mark certification process, product development and clinical
investigational programs. The addition of domestic distributors became the focus
during the fourth quarter of 1997 and continues to receive priority in 1998.
Net sales decreased 5.9% for 1997 compared to 1996. The decline is due to
the ineffectiveness of the Company's sales team during the first nine months of
1997. Corrective action was taken and new sales staff was added in October
resulting in fourth quarter 1997 net sales of $184,852 compared to $162,336
fourth quarter 1996 net sales. Foreign export net sales increased to 65.5% in
1997 compared to 54.5% in 1996. Four new domestic distributors were added during
the fourth quarter 1997. The first will concentrate its sales efforts in
California, Nevada and Arizona; the second will focus its efforts in
Pennsylvania, Ohio and Indiana markets; the third serves the Northwestern U.S.
market, primarily Oregon, Washington, Montana and Idaho; and the fourth will
concentrate its efforts in the Southwest and Rocky Mountain regions.
Cost of sales percentage is 88.4% of 1997 net sales as compared to 72.6% of
1996 net sales. The increase in cost of sales percentage is due primarily to a
year-end adjustment to inventory standard cost as well as to the increased sales
of one of the Company's least profitable items.
During 1997 total selling, general and administrative expenses increased to
$2,075,695 from $1,718,595. The overall increase is due to several factors.
First, the sublease of 3,000 square feet of the Cathlab facility for $3,000 per
month which began in January 1996 terminated April 30, 1997 upon proper
notification by the lessee. Sales and marketing expenses increased approximately
$19,000 primarily due to salaries and payroll-related expenses. Other salaries
and payroll-related expenses increased approximately $239,000 due to the hiring
of two additional corporate personnel and a quality assurance manager, as well
as salary and benefit increases. Two other areas increased significantly. Legal
and accounting expenses increased approximately $35,000 or 25.3% and insurance
increased approximately $34,000 or 49.8%. Product liability insurance was added
during the third quarter 1997 as the Company became more proactive in risk
management. The Company began the ISO 9001 certification process in the fourth
quarter of 1996 and the CE Mark certification process in the second quarter
1997. Expenses related to the two certification processes during 1997 were
approximately $54,000.
Research and development expenses for 1997 increased 1.1% compared to the
same period in 1996.
Interest expense decreased 41.5% to $183,538 in 1997 compared to $313,914
in 1996 due to the decrease of over $1 million in notes payable and capital
lease obligations.
For the period from inception to December 31, 1997, the Company's other
income of $1,942,550 consisted primarily of $1 million received in connection
with a forfeited option fee from United States Surgical Corporations ("USSC"),
approximately $495,000 realized gain from the sale of the European patent for
the OmniCath(R) atherectomy catheter to Guerbet S.A. of France ("Guerbet") for a
purchase price of $500,000 cash, $400,000 received from Guerbet in 1991 in
connection with the development of certain of the Company's products, and
$200,000 amortization of the license fee received from Wright Medical
Technologies, Inc.
Year Ended December 31, 1996 Compared With Year Ended December 31, 1995
During the year the Company made substantial investments in five key areas.
First, the Company consolidated all manufacturing operations into our Irvine,
California facility, enabling it to increase manufac-
22
<PAGE> 24
turing capabilities and efficiencies. Secondly, investments were made in the
manufacturing infrastructure resulting in productivity improvements. Third, the
Company invested in product development and clinical investigational programs to
further the advancement of its core product technologies. Fourth, the Company
invested in the expansion of its sales and marketing efforts by implementing new
marketing programs. Finally, considerable time and effort was invested in
reshaping the Company's balance sheet via a debt to equity conversion and the
raising of additional equity capital via private placements.
Net sales decreased $81,237 or 12.3% for 1996 compared to 1995. The decline
is due to delays encountered in product registrations in international markets
by the Company's newly appointed international distributors, discontinued
product lines and limited international OmniCath(R) sales due to U.S.
OmniCath(R) clinical trial needs. Foreign export net sales decreased to 54.5% in
1996 compared to 81% in 1995. The Company appointed twenty-two (22) new
international distributors in 1995. After an international distributor is
appointed, the distributor must comply with the applicable country regulations
before products can be imported and sold in a particular country. Depending upon
the country, the registration period can take from as little as a few weeks to
over nine months, causing delays in product sales while the distributor awaits
approval to sell the product. The Company believes that its revised distribution
network will result in increased product sales, primarily in Western Europe,
South America, Japan and the Pacific Rim countries. The Company discontinued its
hole punch operations during the fourth quarter of 1995. The hole punch
operations provided approximately $30,000 or 4.5% of net sales during 1995 with
related cost of goods sold of approximately $26,000.
Gross profit margins increased to 27.4% in 1996 compared to 1.7% in 1995.
This increase is due primarily to better inventory management, decrease in
factory overhead and increased productivity of the plant. In order to improve
inventory management the Company instituted restocking procedures to take
advantage of bulk order discounts and computerized inventory management, as well
as shipping and receiving information. The better tracking system enabled the
Company to avoid having any expired inventory during 1996. In February 1996 the
Company hired a director of manufacturing to assess the inefficiencies in the
current system and to ready the plant for increased production. The Company
negotiated a more favorable rental rate resulting in decreased facility rent, a
portion of which is allocated to plant overhead, introduced energy saving
operating techniques, reduced scrap rates and improved batch yields. Higher
recruitment standards, improved training for production employees and revised
salary structures to reduce personnel turnover were instituted. Since the
manufacturing process is labor intensive, these changes resulted in increased
productivity as well as reducing costs.
Total selling, general and administrative expenses decreased during 1996 to
$1,718,595 from $2,169,591. The overall decrease is due to several factors. The
Company subleased 3,000 square feet of the Cathlab facility to an unrelated
party in January 1996 and downsized the corporate headquarters and consolidated
all manufacturing activities, technical support and research and development in
the Irvine, California facility. In addition, the Company renegotiated the
Cathlab facility lease in August 1996 for an additional $16,000 in savings in
1996 and an annual savings of $48,000.
Research and development expenses increased 19.1% to $640,792 in 1996
compared to $537,962 in 1995. The increase is primarily attributed to the
Company's efforts to initiate U.S. clinical trials for the OmniCath(R). These
expenses are expected to increase in the future as the Company's products
approach commercial viability and will be funded by increased revenue generated
through Cathlab Division sales or from the sale of ancillary technologies or
through joint development agreements with strategic partners.
Interest expense increased 13.5% to $313,914 in 1996. This is primarily due
to the obligation due USSC. The Note, originally due January 20, 1996, was
extended to March 15, 1996 and subsequently extended to September 1996. Monthly
payments were made from March through August 1996, and the remaining balance
paid in September 1996 with proceeds received from promissory notes. These
promissory notes were repaid in full in November 1996.
Other income (expenses) decreased $1,675,965 in 1996 as compared to 1995.
This is primarily due to the Company's receipt in 1995 of a $1 million forfeited
option fee from USSC and a realized gain of approximately $495,000 from the sale
of a European patent to Guerbet.
23
<PAGE> 25
LIQUIDITY AND CAPITAL RESOURCES
The Company had a working capital deficiency as of December 31, 1997 of
$627,151 and cash and cash equivalents of $82,789.
The net cash used by operating activities in 1997 of $2.3 million was 38%
more than in 1996. In 1996 the cash flow was favorably impacted by the
negotiations of debt to equity conversions of approximately $1.5 million with
various stockholders, vendors and a bank. In addition, two consultants were paid
in stock rather than cash.
Cash flows of $452,145 were provided by investing activities in 1995 as
compared to cash used by investing activities of $185,046 and $76,923 in 1997
and 1996, respectively. Cash flows were favorably impacted in 1995 by the sale
of technology and assets of the Company's hole punch operations.
Capital expenditures were $142,206 and $46,773 in 1997 and 1996,
respectively. Additions in 1996 included new computers and leasehold
improvements to the Cathlab facility to facilitate the relocation of the
research and development activities from Texas. During 1997 the Company
purchased additional computers, accounting software upgrades, manufacturing
equipment and molds. The vendor upgrades made to each of the Company's
computer-based applications accommodates the millenium change. In addition, the
Company continues to invest in the development of its patents as evidenced by
the use of funds of $44,356, $31,414 and $51,877 for the years ended December
31, 1997, 1996 and 1995, respectively. Since inception, the Company has expended
$481,344 on internally developed patents.
Cash flows of $1,371,414, $2,906,223 and $1,019,504 were provided by
financing activities for the years ended December 31, 1997, 1996, and 1995,
respectively. Since inception, financing activities have provided net cash of
$20,516,280. Financing activities consist of note proceeds and repayments,
capital lease obligations and repayments, proceeds from the sale of debentures,
preferred stock, common stock and warrants, proceeds from the exercise of
warrants and options, related offering and financing costs, cash dividends on
preferred stock and the acquisition of treasury stock.
In March 1997 the Company raised $2.5 million capital pursuant to an
offering of the Company's equity securities. Offering costs of $287,590 were
paid from the proceeds of this transaction.
In February 1996, the Company and Zanett, a financial consulting firm,
signed an agreement whereby Zanett agreed to assist the Company in raising
capital pursuant to an offering of the Company's equity securities. (See
"Related Party Transactions"). Funds of approximately $1.7 million were raised
in the first offering. An additional $1.5 million was received pursuant to an
offering of the Company's securities in November 1996. As a result of Securities
and Exchange Commission guidance issued in early 1997 with respect to beneficial
conversion features in connection with the issuance of convertible preferred
stock, the Company was deemed to recognize noncash preferred stock dividends
totaling approximately $1.2 million in fiscal year 1996. This amount is
equivalent to the discount from the fair market value of the common stock given
to the purchasers of the Series A and B calculated as of the date of the sale of
such stock.
On May 28, 1996, Aberlyn and the Company reached an agreement to
restructure the Leases which resulted in a revised schedule of lease payments
over a twenty-four month period, with the initial payment commencing on June 1,
1996. In addition, 115,000 shares of common stock were issued in payment of
consulting fees, investment banking service fees and accumulated miscellaneous
expenses totaling $115,728. Effective November 1, 1997, the Company and Aberlyn
entered into modification agreements of the Leases which revised the schedule of
lease payments and extended the maturity date to October 1, 1998.
In June 1996, the Company executed an installment note payable to a vendor
in the amount of $157,263, payable in monthly installments of $3,858 including
interest, beginning September 1, 1996 and maturing August 1, 2000. The note
bears interest at 8.25% per year and is uncollateralized.
24
<PAGE> 26
During 1997 the Company received cash proceeds of $3,750 from the exercise
of options and $320,033 from the exercise of warrants. Cash proceeds of $97,000
from the exercise of options, $391,325 from the exercise of warrants and $3,231
from the purchase of stock by individuals were received in 1996.
In December 1996, the Company received proceeds of $1 million from a 30-day
note payable to bridge any potential funding shortfalls (regarding clinical
trial costs) until such time as warrants were exercised or new equity funding
was received. The note was paid in full in January 1997 and the interest was
paid by the issuance of 11,722 shares of common stock.
From January 26 through March 16, 1998, the Company issued 920,696 shares
of common stock through private placements to accredited investors. The share
price ranges from $0.34-$0.43 for a total of $331,000. The Company believes that
its current sources of liquidity (cash on hand and funds provided by operations)
are sufficient to fund its operations for the next four to six months. The
Company is actively seeking additional financial, including the potential sale
of equity and debt securities, as well as possible sales of ancillary technology
and strategic partnering relationships.
The Company requires significant additional funds to enable it to complete
development and, subject to obtaining required regulatory approvals,
commercialization of the OmniCath(R) for peripheral and A-V fistula use, to
enter into marketing and distribution arrangements for the OmniCath(R), to
commence and continue the development of other products which include the
OmniStent(TM), Evert-O-Cath(TM), and other products as well as product
enhancements to its existing 100%-silicone balloon catheters, the OmniCath(R),
Evert-O-Cath(TM) and OmniStent(TM) and to expand its manufacturing and
distribution abilities with respect to the Cathlab products. Research and
development expenditures for 1998, including amounts for clinical affairs, are
expected to be approximately $1.2 million. If the Company experiences delays in
the introduction, manufacturing or sale of the OmniCath(R), or if the
OmniCath(R) does not achieve market acceptance for any reason, substantial
additional financing may be required by the Company to continue its operations,
and to improve, complete the development of, obtain regulatory approvals for,
and manufacture or market products. The Company receives some revenues and
expects to continue to receive revenues from the sale of Cathlab's products. The
Company anticipates that Cathlab's revenues should increase during 1998;
however, this increase will not be sufficient to satisfy the Company's funding
needs.
There can be no assurance that the Company will be able to obtain
additional funding on acceptable terms or in time to fund any necessary or
desirable expenditures. In the event such funding is not obtained, the Company's
research and development projects will be delayed or scaled back. Failure to
obtain additional financing will have material adverse effect on the Company's
operations. In order to continue as a going concern, the Company must raise
additional funds as noted above and ultimately must achieve profitable
operations.
Though still a developmental stage company engaged in the development,
manufacture and marketing of medical devices, the Company has ten products
presently available to market and has a comprehensive business strategy which it
believes will enable it to capitalize on its technologies and on developing
trends in the healthcare industry. The Company's strategic plan consists of
focusing on increased market penetration of its ten existing FDA-approved
products, continuing to revamp its distribution network, continuing to focus on
the commercialization of its core technologies by pursuing US and international
regulatory approval, aggressively pursuing the sale of ancillary technology to
meet future cash requirements and to validate the proprietary nature of its
technologies and continuation of efforts to identify and pursue strategic
alliances.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements and Financial Statement
Schedule on page F-1 herein.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
25
<PAGE> 27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information pertaining to executive officers
of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Steven B. Rash......................... 50 President and Chief Executive Officer
Chairman of the Board
Lawrence M. Hoffman.................... 54 Director
Claudio Guazzoni....................... 35 Director
Richard S. Serbin...................... 53 Director
Marshall Kerr.......................... 47 Vice President Sales & Marketing
Colene Blankinship..................... 48 Controller, Chief Accounting Officer,
Secretary and Treasurer
</TABLE>
STEVEN B. RASH has served as President, Chief Executive Officer and
director of the Company since July 15, 1995. Mr. Rash was appointed Chairman of
the Board on February 4, 1997. From 1994 until June 1995, Mr. Rash served as
Vice President of Operations of Blue Rhino Corporation, an industrial products
manufacturer. From 1992 to 1994, Mr. Rash served as President of the Technical
Services Division of the Maxum Health Corporation, a company engaged in
providing mobile MRI services. From 1989 to 1992, Mr. Rash served as the
President of Intex Medical Technologies, Inc., a medical equipment manufacturer.
Prior thereto, Mr. Rash held various positions with BOC Group, PLC, an
international manufacturer of industrial gases and healthcare products and
services. Mr. Rash holds an MBA from Southern Illinois University and served for
four years in the U.S. Army, where he reached the rank of Captain.
LAWRENCE M. HOFFMAN has served as a director of the Company since April
1991 and as Vice President of Corporate Relations from July 1990 to December
1991, when he was appointed Vice President of Business Development, a position
he held until June 28, 1995. From March 28, 1995 until June 28, 1995, Mr.
Hoffman served as the interim Treasurer. Mr. Hoffman is also President and Chief
Executive Officer of Aberlyn Group, Inc., a financial consulting firm that he
founded in 1989. Prior to founding Aberlyn Group, Inc., Mr. Hoffman was employed
as Director of Corporate Finance at Monmouth Investments, a New Jersey-based
securities brokerage firm. From January 1986 to May 1988, Mr. Hoffman served as
Chairman of Nicholas, Lawrence & Co., a securities brokerage firm specializing
in institutional trading and biotechnology companies. Mr. Hoffman holds a B.S.
in Economics from New York University.
CLAUDIO M. GUAZZONI has served as a director of the Company since March 7,
1996. Mr. Guazzoni is the President and Chief Executive Officer of Zanett
Capital, Inc. ("Zanett") and has served in that capacity since 1993. He is
engaged in the business of providing financial and strategic consulting services
to business entities. Prior to his service at Zanett, Mr. Guazzoni was a Money
Manager with Delphi Capital Management, Inc. in 1992 and an associate with
Salomon Brothers, Inc. from 1985 to 1991.
RICHARD S. SERBIN has served as a director of the Company since July 17,
1996. Since 1991, Mr. Serbin has served as Executive Vice President and a
director of Bio-Imaging Technologies, Inc. which provides specialized consulting
services to pharmaceutical and biotechnology companies. From January 1991 to
March 1992, Mr. Serbin was Chairman of the Board of Radius Scientific, Inc., a
medical communications company which he founded. From June 1989 to January 1990,
he served as President of Bradley Pharmaceuticals, Inc. and from September 1988
to May 1989, held the position of Senior Vice President of Lifetime Corporation,
a holding company whose major asset, Kimberly Quality Care, is a provider of
home healthcare and temporary nursing services. Mr. Serbin is a registered
patent attorney, registered pharmacist, member of the Board of Trustees of the
Mountainside Hospital, and a member of the Board of Health of Roseland, New
Jersey. Mr. Serbin holds a B.S. from Rutgers College of Pharmacy, a J.D. from
Seton Hall Law School and a LL.M in Trade Regulation from New York University
School of Law.
26
<PAGE> 28
MARSHALL KERR joined the Company October 10, 1997 as a sales consultant and
was appointed Vice President, Sales and Marketing December 15, 1997. From 1996
to 1997 Mr. Kerr served as Vice President, Sales and Marketing at US Medical
Instruments, Inc., a manufacturer of disposable medical products where he
established and directed both the domestic and international sales forces. He
served as Vice President Sales with ICU Medical, Inc. from 1993 to 1996 where he
directed their national sales efforts and reconstructed its distribution
network. Prior to ICU Medical Inc. Mr. Kerr was Executive Vice President of
Professional Hospital Supply from 1985 to 1993.
COLENE BLANKINSHIP, CPA joined the Company February 7, 1995 as Controller
and became the Chief Accounting Officer November 1995. She was elected Secretary
and Treasurer on February 4, 1997. From 1992 through 1994, Ms. Blankinship
served as Controller of Excel Resources, Inc., a gas marketing company in
Houston, Texas. She has 13 years experience in public accounting which includes
9 years with the local firm of Tribolet, Fuller & Associates, P.C., Humble,
Texas. Ms. Blankinship attended Texas Tech University and North Harris County
College and is a CPA. Ms. Blankinship is a national director of the American
Society of Women Accountants, a position she has held since July 1996.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
To the Company's best knowledge, upon its review of Forms 3, 4 and 5 and
any amendments thereto furnished to the Company pursuant to Section 16 of the
Securities Act of 1934, as amended, all required reports for fiscal year 1997
have been filed on a timely basis by reporting persons except for Messrs.
Hoffman, Guazzoni and Serbin who were late in filing their Form 5 and Mr. Kerr
who has not filed his Form 3.
ITEM 11. EXECUTIVE COMPENSATION
The following summary compensation table sets forth the aggregate
compensation paid or accrued by the Company to the Chief Executive Officer and
to executive officers whose annual compensation exceeded $100,000 for the fiscal
year ended December 31, 1997, for services during the fiscal years ended
December 31, 1997, 1996 and 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
--------------------------------------------
ANNUAL COMPENSATION AWARDS
- ------------------------------------------------------------------- ---------------------
PAYOUTS
(E) ----------
OTHER (F) (G) (I)
ANNUAL RESTRICTED SHARES/ (H) ALL
(A) (C) (D) COMPEN- STOCK OPTIONS/ LTP OTHER
NAME AND (B) SALARY BONUS SATION AWARD(S) SARS PAYOUTS COMPEN-
PRINCIPAL POSITION YEAR ($) ($) ($)(1) ($) (#) ($) SATION
------------------ ---- ------- ----- ------- ---------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Steven B. Rash................. 1997 165,000 9,600 927,000(4)(5)
President, Chief Executive
Officer 1996 141,875 7,496
1995 61,875(2) 19,941(3) 600,000(4)
</TABLE>
- ---------------
(1) Cost of life insurance and auto allowance.
(2) Annual compensation of $135,000 prorated from July 16, 1995, when Mr. Rash
began his service with the Company.
(3) Includes relocation expenses paid in the amount of $19,745.
(4) Represents options issued in connection with a three-year employment
agreement, vesting on various dates during the term of the agreement. See
"Employment Agreements."
(5) Includes options to purchase 27,000 shares of common stock received as
director.
The following table sets forth certain information with respect to stock
options granted during the fiscal year ended December 31, 1997 to each of the
named executive officers.
27
<PAGE> 29
STOCK OPTIONS GRANTED
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE PER SHARE AT
ASSUMED RATES OF
% OF STOCK APPRECIATION
TOTAL CLOSING BID FOR OPTION TERM
DATE OF NO. OF OPTIONS PRICE PER ON DATE OF --------------------
NAME GRANT SHARES GRANTED SHARE GRANT(4) 5% 10%
---- ------- ------- ------- --------- ----------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Steven B. Rash.......... 5/19/97 900,000 $.6875 .6$875 $.43 $1.10
*1/1/97 15,000 1.00 .9375 .20 .51
2/4/97 2,000 1.3125 1.3125 .36 .80
3/17/97 2,000 1.21875 1.21875 .34 .74
4/17/97 2,000 .96875 .96875 .27 .59
7/17/97 2,000 .46875 .46875 .13 .29
9/8/97 2,000 .53 .53 .15 .32
9/23/97 2,000 .47 .47 .13 .29
</TABLE>
- ---------------
* Granted 11/22/96, agreement dated 1/1/97
The following table sets forth certain information with respect to each
exercise of stock options during the fiscal year ended December 31, 1997 by each
of the named executive officers and the number and value of unexercised options
held by such named executive officers as of December 31, 1997.
AGGREGATED OPTION EXERCISES IN 1997 FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES FISCAL YEAR-END FISCAL YEAR-END
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
NAME (#) ($) (#) ($)
---- ----------- -------- ----------------- ---------------
<S> <C> <C> <C> <C>
Steven B. Rash.......................... 1,527,000 0 527,000/1,000,000 0/0
</TABLE>
EMPLOYMENT AGREEMENTS
Steven B. Rash entered into a three-year employment agreement (the
"Agreement") with the Company dated July 15, 1995. Pursuant to the Agreement,
Mr. Rash is employed as President and Chief Executive Officer of the Company.
The Agreement provides for a salary of $135,000 per year with annual increases
plus bonuses of up to 50% and an option to purchase 600,000 shares of common
stock. In 1997 Mr. Rash's agreement was extended to December 31, 1999. The base
salary was increased to $165,000 per year, with a cash bonus of $30,000 to be
paid should the Company's revenues exceed $2 million in 1997. Options to
purchase an additional 900,000 shares of common stock at $.6875 per share were
granted.
Effective December 15, 1997, Marshall Kerr entered into a two-year
employment agreement with the Company. The employment agreement provides for a
salary of $80,000 per year through January 31, 1998 and $108,000 annually
thereafter with annual increases as determined by the Board of Directors and
annual bonuses of up to 50% of the base salary. In addition, the Company granted
options to purchase 300,000 shares of common stock; 100,000 shares at $0.50 per
share and 200,000 shares at $.42 per share.
COMPENSATION COMMITTEES INTERLOCKS AND INSIDER PARTICIPATION
Until June 1995, the Company did not have a Compensation Committee.
Compensation matters were determined by the Board of Directors. In June 1995,
the Board created and appointed a Compensation Committee. Effective November 26,
1996 the Board of Directors elected Messrs. Hoffman and Guazzoni to serve on the
Compensation Committee. Mr. Hoffman is a consultant of the Company and was Vice
President of Corporate Relations from July 1990 to December 1991 and from
December 1991 to June 28, 1995 served as
28
<PAGE> 30
Vice President of Business Development. In addition, Mr. Hoffman served as the
Company's interim Treasurer from March 28, 1995 until June 28, 1995. (See Item
13, "Certain Relationship and Related Transactions.")
COMPENSATION OF DIRECTORS
It has been the Company's policy to compensate the directors only for their
reasonable travel expenses in relation to in-person board meetings and
stockholder meetings. Effective November 22, 1996 the directors each received an
option to purchase 12,000 shares of common stock at an exercise price of $1.00
per share, to be vested November 22, 1997. For each board meeting attended,
either telephonically or in person, the directors received options to purchase
2,000 shares of common stock. The Chairman of the Board received an option to
purchase 15,000 shares of common stock vested upon issuance. At December 31,
1996 no one had been elected Chairman of the Board. New officers were elected
February 4, 1997 at which time Mr. Rash became Chairman.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of March 2, 1998,
regarding the beneficial ownership of the common stock by (i) each person or
group known to the Company to beneficially own more than 5% of the outstanding
common stock, (ii) each director of the Company, (iii) certain executive
officers, individually, and (iv) all directors and officers as a group. As of
March 2, 1998, the Company had issued and outstanding 19,732,351 shares of
common stock.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF
BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP(2)(3) PERCENT OF CLASS
------------------- -------------------------- ----------------
<S> <C> <C>
Steven B. Rash.................................. 528,900(4) 2.6%
Lawrence M. Hoffman............................. 1,275,674(5) 6.3%
701 Mohican Court
Morganville NJ
Claudio Guazzoni................................ 975,306(6) 4.7%
10 E. 76th Street
New York, NY
All Directors and Officers as a Group (6
persons)...................................... 2,807,880(7) 12.6%
</TABLE>
- ---------------
(1) Unless otherwise specified, the address of each beneficial owner is American
BioMed, Inc., 10077 Grogan's Mill Road, Suite 100, The Woodlands, Texas
77380.
(2) Unless otherwise noted, the Company believes that all persons named in the
table have sole voting and investment power with respect to all shares of
common stock beneficially owned by them.
(3) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days upon the exercise of options or
warrants or other convertible securities.
(4) Includes 527,000 shares which may be acquired within 60 days upon the
exercise of vested options. Excludes options to purchase 1,000,000 shares
not vested.
(5) Includes 425,000 shares issuable upon the exercise of warrants held by
Aberlyn Capital Management ("Aberlyn Partnership"). Mr. Hoffman owns a
limited partnership interest in Aberlyn Partnership, and is an officer,
director and stockholder of Aberlyn Capital Management, Inc., which is a
general partner of Aberlyn Partnership. Also, includes 547,000 shares which
may be acquired within 60 days upon the exercise of options by Mr. Hoffman.
(6) Includes 953,306 shares issuable upon the exercise of warrants held by
Zanett Capital or its assigns. Mr. Guazzoni is President and Chief Executive
Officer of Zanett Capital, Inc.
(7) Includes 2,498,306 shares which may be acquired within 60 days upon the
exercise of options or warrants.
29
<PAGE> 31
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For the period from inception, September 4, 1984, to December 31, 1997, the
Company made payments for legal, engineering and consulting services and
products and supplies provided by certain stockholders which amounted to
$1,089,869. Of this amount, $7,797, $37,500, and $50,000 related to the years
ended December 31, 1997, 1996 and 1995, respectively.
On August 23, 1995 the Company sold its proprietary OmniCath(R) atherectomy
EPA patent to Guerbet, a stockholder of the Company, for $500,000 cash.
Steven B. Rash entered into a three-year employment agreement with the
Company, dated as of July 15, 1995 (the "Agreement"). Pursuant to the Agreement,
Mr. Rash is employed as President and Chief Executive Officer of the Company.
The Agreement provides for a salary of $135,000 per year with annual increases,
plus bonuses of up to fifty percent, and options to purchase 600,000 shares of
common stock. In 1997 Mr. Rash's agreement was extended to December 31, 1999.
The base salary was increased to $165,000 per year, with a cash bonus of $30,000
to be paid should the Company's revenues exceed $2 million in 1997. Options to
purchase an additional 900,000 shares of common stock at $.6875 per share were
granted.
Lawrence M. Hoffman, currently a director, stockholder and paid consultant
of the Company and formerly a Vice President, is a limited partner of Aberlyn
Capital Management Limited Partnership ("Aberlyn") and is an officer, director
and stockholder of Aberlyn Capital Management, Inc., the general partner of
Aberlyn. Effective December 31, 1992, the Company and Aberlyn entered into a
Patent Assignment and License Agreement (the "Patent and License Agreement")
pursuant to which the Company assigned patents owned by the subsidiary, Cathlab
Corporation (the "Cathlab Patents"), to Aberlyn in return for $500,000. The
Cathlab Patents were exclusively licensed back to the Company for three years
for a monthly license fee of $16,355, after which Aberlyn was required to
reassign the Cathlab Patents to the Company in exchange for $50,000. Under its
terms, if the Company declined to purchase the Cathlab Patents, the Patent and
License Agreement would automatically be extended for an additional nine months
for a monthly license fee of $17,099, after which the Cathlab Patents would
automatically revert back to the Company.
The Company and Aberlyn entered into an equipment lease effective May 13,
1993 (the "Equipment Lease") pursuant to which the Company assigned certain
equipment to Aberlyn in consideration of $205,000. The equipment was exclusively
leased back to the Company for three years for a monthly fee of $6,706, after
which Aberlyn was required to return the equipment to the Company in exchange
for $20,500. Under the terms, if the Company opted not to purchase the
equipment, the Equipment Lease would automatically be extended for an additional
three months for a monthly payment of $7,011, after which the equipment would
automatically revert back to the Company.
Effective August 13, 1993, the Company and Aberlyn entered into an
additional equipment lease (the "Second Equipment Lease") pursuant to which the
Company assigned certain equipment to Aberlyn in consideration of $100,000. The
equipment was exclusively leased back to the Company for three years for a
monthly fee of $3,271, after which Aberlyn was required to return the equipment
to the Company in exchange for $10,000. If the Company declined to purchase the
equipment, the term of the Second Equipment Lease was to be automatically
extended or an additional three months for a monthly payment of $3,420, after
which the equipment would automatically revert back to the Company.
The Company and Aberlyn entered into an agreement effective March 28, 1994
whereby the terms of the Patent and License Agreement, the Equipment Lease and
the Second Equipment Lease were modified. The payment terms of the license fee
pursuant to the Patent and License Agreement were revised to semiannual payments
of $97,445 and the payment terms of the Equipment Lease were similarly revised
to semiannual payments of $39,100 and $20,281, respectively. In consideration to
Aberlyn for making these modifications, the Company issued warrants to Aberlyn
to purchase 150,000 shares of the Company's common stock at an exercise price of
$1.50 per share exercisable over a five-year period. On May 28, 1996, Aberlyn
and the Company reached an agreement to restructure the Leases which resulted in
a revised schedule of lease payments over a twenty-four month period, with the
initial payment commencing on June 1, 1996. The payments were based on an
outstanding principal amount of approximately $500,000 and total accrued
interest
30
<PAGE> 32
of approximately $148,000. In addition, 115,000 shares of common stock were
issued in payment of consulting fees, investment banking service fees and
accumulated miscellaneous expenses totaling $115,728.
Effective November 1, 1997, the Company and Aberlyn entered into
modification agreements of the Leases which revised the schedule of lease
payments and extended the maturity date to October 1, 1998.
On February 18, 1996, the Company and Zanett Capital, Inc. ("Zanett"), a
financial consulting firm, signed an agreement whereby Zanett agreed to help the
Company raise capital pursuant to an offshore private placement of equity.
Claudio M. Guazzoni, a member of the Company's Board of Directors, is Zanett's
President and Chief Executive Officer. As a retainer for availability of
services by Zanett, the Company agreed to grant Zanett warrants to purchase
shares of common stock at a rate of 1 for every 10 shares of common stock or
warrants issued in connection with equity and bridge financings raised by
Zanett. Each of the warrants will be exercisable at an exercise price of $0.50
per share for five years from the date it is granted, which shall be the date of
the closing of the particular equity or bridge financing in question. During
1996 through the efforts of Zanett, the Company sold 1,250,001 shares of common
stock, 1,390 shares of Series A Preferred and 1,500 shares of Series B Preferred
pursuant to Regulation S of the Securities Act of 1933, as amended. In
connection with these placements, the Company issued warrants to purchase
811,310 shares of common stock to unrelated third-parties upon assignment of
such warrants by Zanett. In addition a 10% placement fee of approximately
$319,000 has been paid to Zanett or their designated representative in
connection with the sale of the Series A and Series B Preferred.
In September 1996, Zanett was granted a warrant to purchase 25,000 shares
of common stock at $.9375 in connection with the placement of bridge financing.
The warrants are exercisable for five years.
The Company does not have a policy against employing relatives. During the
years ended December 31, 1997, 1996 and 1995, the Company paid salaries and
wages to relatives of officers of the Company amounting to $7,797, $22,692, and
$51,600, respectively.
31
<PAGE> 33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a. and d. Financial Statements and Financial Statement Schedule See Index
to Consolidated Financial Statements and Consolidated Financial Statement
Schedule on Page F-1 herein.
b. Reports on Form 8-K
None.
c. Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
2.1 -- Agreement and Plan of Merger among American BioMed, Inc.,
ABI Acquisition, Inc. and Cathlab Corporation dated March
30, 1992(3)
3.1 -- Certificate of Incorporation.(1)
3.2 -- By-laws.(1)
3.3 -- Certificate of Designations, Preferences and Rights of
1996 Series A Convertible Preferred Stock(5)
3.4 -- Certificate of Designations, Preferences and Rights of
1996 Series B Convertible Preferred Stock(5)
3.5 -- Certificate of Designations, Preferences and Rights of
1997 Series C Convertible Preferred Stock(8)
4.2 -- Specimen Common Stock Certificate(1)
10.17 -- Summers Note, dated September 1990, between the Company
and David P. Summers, as amended(1)
10.28 -- 1992 Stock Option Plan of the Company and forms of
incentive stock option agreement and non-qualified stock
option agreement(2)
10.57 -- Patent License, Research & Development Agreement between
Wright Medical Technology, Inc. and American BioMed,
Inc.(2)
10.69 -- Stipulation of Settlement, Scott Printing Corporation v.
American BioMed, Inc.(4)
10.70 -- Employment contract with Steven B. Rash(4)
10.71 -- Purchase of Technology Agreement, Guerbet, S.A.(4)
10.80 -- 1996 Incentive Stock Option Plan(6)
10.81 -- Aberlyn Schedule No. 3 to Master Lease Agreement No.
0001E and Patent Schedule No. 2 to Patent Assignment and
License Agreement No. 0001P, effective June 1, 1996(7)
10.82 -- Securities Purchase Agreement, dated February 20, 1996,
between the Company and certain investors relating to the
issuance and sale of Common Stock and 200 shares of the
1996 Series A Convertible Preferred Stock(8)
10.83 -- Securities Purchase Agreement, dated February 20, 1996,
between the Company and certain investors relating to the
issuance and sale of 1,190 shares of the 1996 Series A
Convertible Preferred Stock(8)
10.84 -- Form of Registration Rights Agreement, dated February 20,
1996, between the Company and holders of the 1996 Series
A Convertible Preferred Stock(8)
</TABLE>
32
<PAGE> 34
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.85 -- Securities Purchase Agreement, dated November 7, 1996,
between the Company and certain investors relating to the
issuance and sale of the 1996 Series B Convertible
Preferred Stock(8)
10.86 -- Form of Registration Rights Agreement, dated November 7,
1996, between the Company and holders of the 1996 Series
B Convertible Preferred Stock(8)
10.87 -- Securities Purchase Agreement, dated March 21, 1997,
between the Company and certain investors relating to the
issuance and sale of the 1997 Series C Convertible
Preferred Stock(8)
10.88 -- Registration Rights Agreement, dated March 21, 1997,
between the Company and holders of the 1997 Series C
Convertible Preferred Stock(8)
10.89 -- Lease Agreement dated June 19, 1997 between the Company
and Woodlands Office Equities -- '95 Limited
10.90 -- Modification Agreement -- Patent Schedule No. 002 between
Aberlyn Capital Management Co., Inc. and the Company
10.91 -- Modification Agreement -- Lease Schedule No. 003 between
Aberlyn Capital Management Co., Inc. and the Company
10.92 -- Employment agreement with Marshall Kerr
11 -- Computation of (Loss) per Common Share
21 -- Subsidiaries of the Registrant(7)
23 -- Consent of Coopers & Lybrand L.L.P.
27 -- Financial Data Schedule
</TABLE>
- ---------------
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended, File No. 33-424372, dated August 4, 1992.
(2) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994.
(3) Incorporated by reference to the Company's Current Report on Form 8-K for
April 30, 1992.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
(5) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996.
(6) Incorporated by reference to the Company's Proxy Statement for the November
22, 1996 Annual Meeting.
(7) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
(8) Incorporated by reference to the Company's Annual Report on Form 10-K/A-1
for the year ended December 31, 1996.
33
<PAGE> 35
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND CONSOLIDATED FINANCIAL STATEMENT
SCHEDULE
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants......................... F-2
Consolidated Balance Sheets at December 31, 1997 and
1996................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 and for the period
from inception, September 4, 1984, to December 31,
1997................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) for the period from inception to December 31,
1993, for the years ended December 31, 1997, 1996, and
1995 and 1994 and for the period from inception,
September 4, 1984, to December 31, 1997................ F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995....................... F-7
Notes to Consolidated Financial Statements................ F-8
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Report of Independent Accountants......................... F-29
Schedule II -- Valuation and Qualifying Accounts.......... F-30
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission, which are not
presented, are not required under the related instructions or are inapplicable,
and therefore have been omitted.
F-1
<PAGE> 36
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
American BioMed, Inc.:
We have audited the accompanying consolidated balance sheets of American
BioMed, Inc. and Subsidiaries (the "Company") (a development stage enterprise)
as of December 31, 1997 and 1996, and the related consolidated statements of
operations, changes in stockholders' equity (deficit) and cash flows for the
years ended December 31, 1997, 1996 and 1995 and for the period from inception,
September 4, 1984, to December 31, 1997. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of American
BioMed, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the results
of its operations and its cash flows for the years ended December 31, 1997, 1996
and 1995, and for the period from inception, September 4, 1984, to December 31,
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 1 and 18 to the consolidated financial statements, the Company has
operated as a development stage enterprise since its inception by devoting
substantially all of its efforts to financial planning, raising capital,
research and development and developing markets for its products. Consequently,
as shown in the accompanying consolidated financial statements through December
31, 1997, the Company had a cumulative loss of $27,149,225 since its inception
and had a working capital deficit of ($627,151) at December 31, 1997. The above
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Accordingly, the Company's continued existence is dependent upon
its ability to obtain additional working capital, to develop and market its
products and, ultimately, upon its ability to attain profitable operations. The
consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
COOPERS & LYBRAND L.L.P
Houston, Texas
March 31, 1998
F-2
<PAGE> 37
AMERICAN BIOMED, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 82,789 $ 1,183,613
Accounts receivable, trade, net of Allowance for doubtful
accounts of $57,167 and $57,500 for 1997 and 1996,
respectively............................................ 158,724 168,359
Accounts receivable, other................................ 13,716 19,848
Inventories............................................... 648,957 462,097
Other current assets...................................... 144,713 277,195
------------ ------------
Total current assets............................... 1,048,899 2,111,112
Property and equipment, net................................. 167,991 81,315
Patents, net of accumulated amortization of $920,330 and
$870,014 in 1997 and 1996, respectively................... 158,695 164,655
Goodwill, net of accumulated amortization of $697,475 and
$574,391 in 1997 and 1996, respectively................... 533,361 656,444
Other assets................................................ 36,110 55,625
------------ ------------
Total assets....................................... $ 1,945,056 $ 3,069,151
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to stockholders and others.................. $ 300,976 $ 1,278,485
Current maturities of long-term debt...................... 41,694 38,404
Current maturities of capital lease obligations........... 416,901 266,078
Accounts payable.......................................... 254,234 301,184
Accrued liabilities....................................... 662,245 483,167
------------ ------------
Total current liabilities.......................... 1,676,050 2,367,318
Long-term debt, net of current maturities................... 71,855 110,472
Capital lease obligations, net of current maturities........ -- 302,766
Deferred revenue............................................ 100,000 160,000
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $.001 par value, 2,000,000 shares
authorized,
Series A: Convertible preferred stock, 1,390 shares
authorized, 1,390 shares issued and outstanding at
December 31, 1997 and 1996, $1,000 per share or
$1,390,000 aggregate liquidation preference............. 1 1
Series B: Convertible preferred stock, 2,500 shares
authorized, 500 and 1,500 shares issued and outstanding
at December 31, 1997 and 1996, $1,000 per share or
$500,000 and $1,500,000 aggregate liquidation preference
plus an additional 10% per year from the date of
issuance................................................ 1 2
Series C: Convertible preferred stock, 125 shares
authorized, 112 shares issued and outstanding at
December 31, 1997, $20,000 per share or $2,240,000
aggregate liquidation preference plus an additional 7%
per year from the date of issuance...................... -- --
Common stock, $.001 par value, 50,000,000 shares authorized
in 1997 and 1996, 18,457,426 and 13,544,019 shares issued
at December 31, 1997 and 1996, respectively, of which
68,323 shares are held in treasury........................ 18,457 13,544
Additional paid-in capital.................................. 27,479,517 24,741,670
Deficit accumulated during the Development stage............ (27,149,225) (24,375,022)
Less treasury stock at cost, 68,323 shares.................. (251,600) (251,600)
------------ ------------
Total stockholders' equity......................... 97,151 128,595
------------ ------------
Total liabilities and stockholders' equity......... $ 1,945,056 $ 3,069,151
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 38
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
INCEPTION
ENDED ENDED ENDED SEPTEMBER 4, 1984,
DECEMBER 31, DECEMBER 31, DECEMBER 31, TO DECEMBER 31,
1997 1996 1995 1997
------------ ------------ ------------ ------------------
<S> <C> <C> <C> <C>
Sales, net......................... $ 545,473 $ 579,533 $ 660,770 $ 3,860,120
Cost of sales...................... (482,360) (420,838) (649,355) (3,715,266)
----------- ----------- ----------- ------------
Gross profit....................... 63,113 158,695 11,415 144,854
----------- ----------- ----------- ------------
Operating expenses:
Selling, general and
administrative................ (2,075,695) (1,718,595) (2,169,591) (17,532,630)
Research and development......... (648,049) (640,792) (537,962) (7,898,042)
Distributor settlement........... -- -- -- (1,080,915)
----------- ----------- ----------- ------------
(2,723,744) (2,359,387) (2,707,553) (26,511,587)
----------- ----------- ----------- ------------
Loss from operations.......... (2,660,631) (2,200,692) (2,696,138) (26,366,733)
----------- ----------- ----------- ------------
Other income (expense):
Interest income.................. 44,200 4,252 7,239 153,934
Interest expense................. (183,538) (313,914) (276,688) (2,878,976)
Other income (expense)........... 25,766 (114,762) 1,561,203 1,942,550
----------- ----------- ----------- ------------
Other income (expense), net... (113,572) (424,424) 1,291,754 (782,492)
----------- ----------- ----------- ------------
Net loss......................... $(2,774,203) $(2,625,116) $(1,404,384) $(27,149,225)
Less preferred stock dividends... -- (1,183,413) -- (1,183,413)
----------- ----------- ----------- ------------
Net loss available to common
shareholders.................. $(2,774,203) $(3,808,529) $(1,404,384) $(28,332,638)
=========== =========== =========== ============
Net loss per common share........ $ (.18) $ (0.34) $ (0.15)
=========== =========== ===========
Weighted average number of common
shares outstanding............ 15,528,231 11,310,592 9,362,198
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 39
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CHANGE IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL DURING THE
---------------- -------------------- PAID-IN DEVELOPMENT
SHARES PAR SHARES PAR CAPITAL STAGE
-------- ----- ---------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of $1 par value common stock on
September 4, 1984........................ 1,000 $ 1,000
Redemption of $1 par value common stock.... (1,000) (1,000)
Issuance of $.001 par value common stock... 1,000,000 1,000
Issuance of $.001 par value common stock at
fair market value of services rendered... 100,000 100 $ 19,900
Issuance of Series A preferred stock....... 156,250 $ 156 499,844
Issuance of common stock pursuant to a
three-for-one stock split subsequent to
December 31, 1990, retroactively
applied.................................. 2,200,000 2,200 (2,200)
Redemption of common stock pursuant to a
one-for 2.325 reverse stock split
subsequent to December 31, 1990,
retroactively applied.................... (1,880,645) (1,881) 1,881
Issuance of $.001 par value common stock in
connection with Bridge Notes............. 182,000 182 45,318
Issuance of stock purchase warrants........ 100,000
Sale of common stock, net of offering
costs.................................... 800,000 800 3,059,472
Conversion of Series A preferred stock..... (156,250) (156) 223,214 223 (67)
Conversion of $255,000 principal amount of
debenture................................ 63,750 64 254,936
Exercise of underwriter's over allotment
option, net of offering costs............ 111,700 112 483,367
Issuance of $.001 par value common stock in
connection with acquisition of Freedom
Machine, Inc............................. 60,000 60 206,940
Conversion of $385,000 principal amount of
debentures............................... 96,250 96 384,904
Issuance of $.001 par value common stock in
connection with acquisition of Cathlab
Corporation.............................. 450,000 450 2,024,550
Issuance of $.001 par value common stock in
connection with acquisition of VMS,
Inc...................................... 27,777 28 124,971
Issuance of $.001 par value common stock in
connection with 6% promissory note....... 58,576 59 263,533
Issuance of $.001 par value common stock in
connection with purchase of assets of
SuperStat, Inc........................... 18,182 18 81,801
Issuance of $.001 par value common stock in
connection with a $500,000 loan from a
bank..................................... 79,365 79 357,064
Issuance of $.001 par value common stock in
connection with Therex settlement........ 58,823 59 499,941
Issuance of Series B preferred stock, net
of offering costs........................ 287,500 288 2,545,858
Exercise of stock purchase warrants........ 678,717 679 2,800,341
Issuance of $.001 par value common stock in
connection with Therex settlement........ 77,000 77 (77)
Issuance of $.001 par value common stock in
connection with consulting agreement..... 50,000 50 174,950
Exercise of stock options.................. 166,880 167 38,795
Reacquire $.001 par value common stock
originally issued in connection with
Therex settlement........................
Treasury stock reissued, 67,500 common
shares at cost........................... 1,600
Issuance of 193,500 warrants in connection
with 9% promissory notes................. 574,176
Dividend requirement on Series B preferred
stock.................................... (135,209)
Conversion of Series B preferred stock into
$.001 par value common stock............. (287,500) (288) 1,268,465 1,268 134,091
Sale of common stock for cash, net of
offering costs........................... 1,500,000 1,500 3,501,299
Net loss for the period.................... $(16,559,366)
-------- ----- ---------- ------- ----------- ------------
Balance, December 31, 1993................. -- -- 7,390,054 $ 7,390 $18,041,979 $(16,559,366)
-------- ----- ---------- ------- ----------- ------------
<CAPTION>
TREASURY STOCK
--------------------
SHARES COSTS TOTAL
-------- --------- ------------
<S> <C> <C> <C>
Issuance of $1 par value common stock on
September 4, 1984........................ $ 1,000
Redemption of $1 par value common stock.... (1,000)
Issuance of $.001 par value common stock... 1,000
Issuance of $.001 par value common stock at
fair market value of services rendered... 20,000
Issuance of Series A preferred stock....... 500,000
Issuance of common stock pursuant to a
three-for-one stock split subsequent to
December 31, 1990, retroactively
applied.................................. -0-
Redemption of common stock pursuant to a
one-for 2.325 reverse stock split
subsequent to December 31, 1990,
retroactively applied.................... -0-
Issuance of $.001 par value common stock in
connection with Bridge Notes............. 45,500
Issuance of stock purchase warrants........ 100,000
Sale of common stock, net of offering
costs.................................... 3,060,272
Conversion of Series A preferred stock..... -0-
Conversion of $255,000 principal amount of
debenture................................ 255,000
Exercise of underwriter's over allotment
option, net of offering costs............ 483,479
Issuance of $.001 par value common stock in
connection with acquisition of Freedom
Machine, Inc............................. 207,000
Conversion of $385,000 principal amount of
debentures............................... 385,000
Issuance of $.001 par value common stock in
connection with acquisition of Cathlab
Corporation.............................. 2,025,000
Issuance of $.001 par value common stock in
connection with acquisition of VMS,
Inc...................................... 124,999
Issuance of $.001 par value common stock in
connection with 6% promissory note....... 263,592
Issuance of $.001 par value common stock in
connection with purchase of assets of
SuperStat, Inc........................... 81,819
Issuance of $.001 par value common stock in
connection with a $500,000 loan from a
bank..................................... 357,143
Issuance of $.001 par value common stock in
connection with Therex settlement........ 500,000
Issuance of Series B preferred stock, net
of offering costs........................ 2,546,146
Exercise of stock purchase warrants........ 2,801,020
Issuance of $.001 par value common stock in
connection with Therex settlement........ -0-
Issuance of $.001 par value common stock in
connection with consulting agreement..... 175,000
Exercise of stock options.................. 38,962
Reacquire $.001 par value common stock
originally issued in connection with
Therex settlement........................ (135,823) $(500,000) (500,000)
Treasury stock reissued, 67,500 common
shares at cost........................... 67,500 248,400 250,000
Issuance of 193,500 warrants in connection
with 9% promissory notes................. 574,176
Dividend requirement on Series B preferred
stock.................................... (135,209)
Conversion of Series B preferred stock into
$.001 par value common stock............. 135,071
Sale of common stock for cash, net of
offering costs........................... 3,502,799
Net loss for the period.................... (16,559,366)
-------- --------- ------------
Balance, December 31, 1993................. (68,323) $(251,600) $ 1,238,403
-------- --------- ------------
</TABLE>
F-5
<PAGE> 40
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CHANGE IN STOCKHOLDERS'
EQUITY (DEFICIT) -- (CONTINUED)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL DURING THE
---------------- -------------------- PAID-IN DEVELOPMENT
SHARES PAR SHARES PAR CAPITAL STAGE
-------- ----- ---------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of shares in connection with
private placements....................... 684,395 $ 684 $ 566,734
Issuance of shares in connection with
Officer subscription..................... 40,000 40 31,460
Issuance of shares to an officer in
connection with private placement........ 15,000 15 2,985
Exercise of stock options.................. 400,000 400 224,600
Issuance of shares to employees in lieu of
salary................................... 11,500 12 11,738
Issuance of shares previously paid for but
not issued............................... 8,548 9 (9)
Conversion of shareholder loan............. 111,111 111 49,889
Issuance of shares in payment of
expenses................................. 117,812 118 70,396
Issuance of shares for services............ 524,554 524 55,726
Additional accrual of expenses related to
1993 offering............................ (24,795)
Net loss for the year...................... $ (3,786,156)
-------- ----- ---------- ------- ----------- ------------
Balance, December 31, 1994................. -- -- 9,302,974 9,303 19,030,703 (20,345,522)
-------- ----- ---------- ------- ----------- ------------
Issuance of shares in connection with
officer loan............................. 2,000 2
Issuance of shares to an officer in lieu of
salary................................... 15,000 15 6,161
Issuance of shares in payment of
expenses................................. 34,300 34 47,239
Issuance of shares in connection with
private placement........................ 151,000 151 60,349
Issuance of options........................ 37,500
Issuance of warrants....................... 8,400
Other...................................... (206)
Net loss for the year...................... (1,404,384)
-------- ----- ---------- ------- ----------- ------------
Balance, December 31, 1995................. -- -- 9,505,274 9,505 19,190,146 (21,749,906)
-------- ----- ---------- ------- ----------- ------------
Issuance of shares in connection with
private placements, net of offering
costs.................................... 2,890 $ 3 1,250,001 1,250 2,870,066
Exercise of stock options.................. 197,000 197 142,220
Exercise of warrants....................... 744,165 744 390,581
Issuance of options........................ 237,087
Issuance of shares in payment of certain
liabilities.............................. 1,245,579 1,246 1,545,263
Issuance of shares for services............ 600,000 600 366,900
Issuance of shares to individuals.......... 2,000 2 3,229
Other...................................... (3,822)
Net loss for the year...................... (2,625,116)
-------- ----- ---------- ------- ----------- ------------
Balance, December 31, 1996................. 2,890 3 13,544,019 13,544 24,741,670 (24,375,022)
-------- ----- ---------- ------- ----------- ------------
Issuance of shares in connection with
private placements, net of offering
costs.................................... 125 2,212,410
Exercise of stock options.................. 20,000 20 3,730
Exercise of warrants....................... 802,583 803 319,230
Conversion of preferred stock.............. (1,013) (1) 3,881,102 3,881 (3,880)
Issuance of shares in payment of certain
liabilities.............................. 172,222 172 178,114
Issuance of shares for services............ 37,500 37 28,243
Net loss for the year...................... (2,774,203)
-------- ----- ---------- ------- ----------- ------------
Balance, December 31, 1997................. 2,002 $ 2 18,457,426 $18,457 $27,479,517 $(27,149,225)
======== ===== ========== ======= =========== ============
<CAPTION>
TREASURY STOCK
--------------------
SHARES COSTS TOTAL
-------- --------- ------------
<S> <C> <C> <C>
Issuance of shares in connection with
private placements....................... $ 567,418
Issuance of shares in connection with
Officer subscription..................... 31,500
Issuance of shares to an officer in
connection with private placement........ 3,000
Exercise of stock options.................. 225,000
Issuance of shares to employees in lieu of
salary................................... 11,750
Issuance of shares previously paid for but
not issued...............................
Conversion of shareholder loan............. 50,000
Issuance of shares in payment of
expenses................................. 70,514
Issuance of shares for services............ 56,250
Additional accrual of expenses related to
1993 offering............................ (24,795)
Net loss for the year...................... (3,786,156)
-------- --------- ------------
Balance, December 31, 1994................. (68,323) $(251,600) (1,557,116)
-------- --------- ------------
Issuance of shares in connection with
officer loan............................. 2
Issuance of shares to an officer in lieu of
salary................................... 6,176
Issuance of shares in payment of
expenses................................. 47,273
Issuance of shares in connection with
private placement........................ 60,500
Issuance of options........................ 37,500
Issuance of warrants....................... 8,400
Other...................................... (206)
Net loss for the year...................... (1,404,384)
-------- --------- ------------
Balance, December 31, 1995................. (68,323) (251,600) (2,801,855)
-------- --------- ------------
Issuance of shares in connection with
private placements, net of offering
costs.................................... 2,871,319
Exercise of stock options.................. 142,417
Exercise of warrants....................... 391,325
Issuance of options........................ 237,087
Issuance of shares in payment of certain
liabilities.............................. 1,546,509
Issuance of shares for services............ 367,500
Issuance of shares to individuals.......... 3,231
Other...................................... (3,822)
Net loss for the year...................... (2,625,116)
-------- --------- ------------
Balance, December 31, 1996................. (68,323) (251,600) 128,595
-------- --------- ------------
Issuance of shares in connection with
private placements, net of offering
costs.................................... 2,212,410
Exercise of stock options.................. 3,750
Exercise of warrants....................... 320,033
Conversion of preferred stock.............. --
Issuance of shares in payment of certain
liabilities.............................. 178,286
Issuance of shares for services............ 28,280
Net loss for the year...................... (2,774,203)
-------- --------- ------------
Balance, December 31, 1997................. (68,323) $(251,600) $ 97,151
======== ========= ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 41
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
INCEPTION,
SEPTEMBER 4,
YEAR ENDED YEAR ENDED YEAR ENDED 1984, TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(2,774,203) $(2,625,116) $(1,404,384) $(27,149,225)
----------- ----------- ----------- ------------
Adjustments to reconcile net loss to cash used by
operating activities
Depreciation and amortization........................... 237,633 334,012 660,539 3,013,200
Write off of goodwill................................... 120,000 120,000
Expenses paid by transfer of equipment.................. 3,380 37,134
Loss (gain) on sale of assets........................... 24,972 (501,043) (476,071)
Interest expense recorded upon issuance of common stock
and warrants in connection with notes payable......... 1,250,907
Issuance of common stock and warrants for services...... 604,587 53,245 1,066,347
Write off of note receivable from officer............... 25,000
Noncash compensation.................................... 45,900 45,900
Gain on sale of investment securities................... (4,190)
Distributor settlement.................................. 625,915
Write off of investment in joint venture................ 227,256
Write off of patents.................................... 600 79,167
Write off of obsolete inventory......................... 43,325 367,688
Changes in operating assets and liabilities:
Accounts receivable, net................................ 15,767 2,570 (97,115) (114,882)
Inventories............................................. (186,860) (91,967) (74,007) (1,111,084)
Other assets............................................ 181,378 51,145 (57,495) 168,432
Accounts payable........................................ (33,460) (135,640) (203,921) 971,348
Accrued liabilities..................................... 332,553 239,973 (12,142) 1,135,847
Deferred revenue........................................ (60,000) (60,000) (60,000) 100,000
----------- ----------- ----------- ------------
Total adjustments................................... 487,011 970,252 (79,334) 7,527,914
----------- ----------- ----------- ------------
Net cash used by operating activities............... (2,287,192) (1,654,864) (1,483,718) (19,621,311)
----------- ----------- ----------- ------------
Cash flows from investing activities:
Capital expenditures...................................... (142,206) (46,773) (1,076) (577,432)
Issuance of notes receivable.............................. (85,000)
Proceeds from repayment of notes receivable............... 35,000
Investments in patents.................................... (44,356) (31,414) (51,877) (481,344)
Investment in joint venture............................... (2,015) (229,271)
Organization costs........................................ (1,000)
Purchase of investment securities......................... (4,391)
Proceeds from sale of investment securities............... 8,581
Proceeds from sale of assets.............................. 1,516 1,264 507,113 509,893
Cash acquired in acquisition of Freedom Machine........... 6,338
Cash acquired in acquisition of Cathlab Corporation....... 6,446
----------- ----------- ----------- ------------
Net cash provided (used) by investing activities.... (185,046) (76,923) 452,145 (812,180)
----------- ----------- ----------- ------------
Cash flows from financing activities:
Cash dividends on preferred stock......................... (138)
Offering costs............................................ (287,590) (322,859) (940,243)
Financing costs........................................... (59,309)
Proceeds from notes payable to banks...................... 2,333,880
Proceeds from notes payable to stockholders............... 34,750 1,225,921
Proceeds from notes payable to others..................... 116,250 1,835,576 1,688,560 5,858,587
Repayments of notes payable to bank....................... (5,000) (2,070,000)
Repayments of notes payable to stockholders............... (286,260) (822,992)
Repayments of notes payable to others..................... (1,129,086) (1,932,618) (614,145) (5,904,103)
Proceeds from patent assignment and leaseback............. 500,000
Proceeds from equipment assignment and leaseback.......... 305,000
Principal payments under capital lease obligations........ (151,943) (99,278) (115,411) (782,110)
Proceeds from sale of debentures.......................... 640,000
Proceeds from sale of preferred stock..................... 2,500,000 2,890,356 8,436,502
Proceeds from sales of common stock and exercise of
unregistered warrants................................... 320,033 694,556 60,500 9,054,350
Proceeds from exercise of stock options................... 3,750 97,000 339,917
Treasury stock acquired................................... (500,000)
Proceeds from issuance of registered stock purchase
warrants................................................ 100,000
Proceeds from exercise of registered stock purchase
warrants................................................ 2,801,018
----------- ----------- ----------- ------------
Net cash provided by financing activities........... 1,371,414 2,906,223 1,019,504 20,516,280
----------- ----------- ----------- ------------
Net increase (decrease) in cash and cash equivalents........ (1,100,824) 1,174,436 (12,069) 82,789
Cash and cash equivalents at beginning of period............ 1,183,613 9,177 21,246
----------- ----------- ----------- ------------
Cash and cash equivalents at end of period.................. $ 82,789 $ 1,183,613 $ 9,177 $ 82,789
=========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-7
<PAGE> 42
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
American BioMed, Inc. (the "Company") was incorporated on September 4,
1984, for the purpose of developing, manufacturing and marketing medical,
surgical and diagnostic devices. The Company markets its products to health care
providers that are high volume users of angioplasty, atherectomy and stent
devices, to third-party distributors and to independent representatives that are
both geographically located in, and sell in North and South America, Western
Europe, the Middle East, the Far East and Southeast Asia. Domestic and foreign
export sales comprise approximately 34.5% and 65.5%, respectively, of the
Company's sales. The percentage of sales by geographic region is as follows:
34.5% in the United States, 16.9% in Italy, 15.7% in other European countries,
12.0% in South America, and 20.9% in other countries. The Company faces
competition from primarily two other companies. The Company has operated as a
development stage enterprise since its inception by devoting substantially all
of its efforts to research and development, developing markets for its products
and raising capital to support these efforts. The following is a summary of the
Company's significant accounting policies.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Cathlab Corporation and Freedom Machine,
Inc., after elimination of all intercompany accounts and transactions. Effective
September 30, 1996, the Company dissolved Freedom Machine, Inc. and all
remaining assets were transferred to the Company. The Company operates in a
single segment, which accounts for in excess of 90% of the Company's total
revenues, loss and identifiable assets.
The Company's financial statements have been prepared using accounting
principles applicable to a going concern, which contemplates the realization of
assets and liquidation of liabilities in the ordinary course of business. The
financial statements do not include any adjustments relating to the
recoverability and classifications of recorded assets and liabilities that might
be necessary should the Company be unable to continue in existence.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid instruments purchased with an original maturity date of three
months or less to be cash equivalents. The Company primarily invests its excess
cash in deposits with major banks and other financial institutions, and at
times, these deposits may exceed federally insured limits. The Company has not
experienced any losses in such accounts. The Company selects depository
institutions based upon management's review of the financial stability of the
institution. For these short-term instruments, the carrying amount approximates
estimated fair value.
Inventories
Inventories are stated at the lower of cost or market value. Cost is
determined using the first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are recorded at cost. Maintenance and repairs that
do not improve or extend the life of the assets are expensed as incurred.
Expenditures for renewals and betterments are capitalized. The cost of assets
retired and the related accumulated depreciation are removed from the accounts
and any gain or loss is included in the results of operations when incurred.
Depreciation for property and equipment is calculated
F-8
<PAGE> 43
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
using the straight-line method over the estimated useful lives of the assets
(one to seven years) for financial reporting purposes and the modified
accelerated cost recovery system for tax reporting purposes.
Technology and Patents
Patents represent the cost of obtaining the rights to utilize and develop
certain atherectomy catheters, heart-assist pumps and related devices. The costs
of the patents are amortized using the straight-line method over the estimated
useful lives of the patents (5 years). The market for the Company's products is
characterized by rapidly changing technology, evolving industry standards and
changing customer needs. The Company believes that its future success will
depend, in part, upon its ability to change, identify and develop technical
innovations and apply them to new products designed for specific applications.
The Company's success depends, in part, on its ability to continue to have
patent protection for its products, maintain trade secret protection and operate
without infringing on the proprietary rights of others. The Company intends to
vigorously defend its patents against any infringements. The Company has been
issued several patents and several others are pending, all of which were
internally developed.
Goodwill
Goodwill represents the excess of the purchase price of acquired companies
over the estimated fair value of the net assets at the date of acquisition and
is being amortized using the straight-line method over ten years. The purchase
price is allocated to assets and liabilities based upon their fair values.
Amounts allocated to intangible assets are the same for financial and tax
reporting purposes. The Company periodically compares the carrying value of its
goodwill to the anticipated undiscounted future operating income from the
businesses whose acquisition gave rise to the goodwill and for 1997 no
impairment is indicated or expected.
Long-Lived Assets
In fiscal year 1996 the Company adopted the Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 121
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Based on the review of the Company's long-lived assets, adoption of
SFAS 121 did not have a material impact on its financial position, results of
operations or cash flows.
Other Assets
Other assets consist of membership fees and long-term deposits.
The Company has adopted Financial Accounting Standards Board ("FASB" )
Statement of Financial Accounting Standards No. 129, "Disclosure of Information
about Capital Structure" ("SFAS 129"). SFAS 129 requires all entities, public
and nonpublic that have issued securities which provide evidence of debt or
ownership or a related right to adequately disclose within the financial
statement, information regarding the Company's capital structure and is
effective for financial statements issued for periods ending after December 15,
1997.
Revenue Recognition
Revenue is recognized when products are shipped.
F-9
<PAGE> 44
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Research and Development
Research and development costs are expensed as incurred.
Loss Per Share
The Company has adopted Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS
128). SFAS 128 specifies the computation, presentation and disclosure
requirements for earnings per share. Basic earnings per share is computed based
on the weighted average number of shares of common stock and common stock
equivalents outstanding during the periods. Diluted earnings per share includes
the number of shares issuable upon exercise of stock options, less the number of
shares that could have been repurchased with the exercise proceeds, using the
treasury stock method. The effect of the computation is antidilutive due to
continuing losses, therefore only basic earnings per share is presented.
Concentration of Credit Risk
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral on its trade receivables. Reserves are
maintained for potential credit losses, and such losses have been within
management's expectations.
Estimates
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 dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Regulation
The Company's medical equipment is subject to review by the United States
Food and Drug Administration (the "FDA"). The FDA regulates and must approve the
manufacture, distribution and promotion of medical devices in the United States.
Various states and foreign countries in which the Company's products may be sold
impose additional regulatory requirements. Certain of the Company's products
have received marketing clearance from the FDA through the 510(k) Notification
process, other products are pending FDA approval, and other products are being
evaluated.
Third-Party Reimbursement
The Company sells its products to distributors, hospitals, physicians and
other health care providers for use in furnishing care to their patients.
Substantially all except the distributors rely on third-party payors,
principally Medicare, Medicaid, and private health insurance plans, to reimburse
all or part of the costs or fees associated with the medical procedures
performed. While the Company cannot predict the cost of its devices, or the
procedures to be performed with its products, or the relative cost and efficacy
of competing products or procedures, changes in third-party payor reimbursement
practices regarding the procedures performed with medical devices sold by the
Company may adversely affect the Company.
F-10
<PAGE> 45
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Millennium Change
The Company installed vendor upgrades for each of its computer-based
applications that will accommodate the millennium change. The Company does not
believe that the millennium change will have an adverse impact on its
operations.
Recent Pronouncements
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 established standards for reporting and display of comprehensive
income and its components in a financial statement that is displayed with the
same prominence as other financial statements. It requires the items of other
comprehensive income be classified by their nature and the accumulated balance
of other comprehensive income be displayed separately from retained earnings and
additional paid-in capital in the equity section. SFAS 130 is effective for
fiscal years beginning after December 15, 1997 and application is to be adopted
at the beginning of the fiscal year. The Company has not yet determined the
impact that the adoption of SFAS 130 will have on its presentation of financial
information.
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information ("SFAS 131") which is effective for fiscal
years beginning after December 15, 1997. SFAS 131 establishes standards
requiring public business enterprises to report information about operation
segments in annual financial statements on the basis that is used internally for
evaluating segment performance and allocating resources, and requires selected
information be reported in interim financial reports. It also establishes
standards for related disclosures about products and services, geographic areas,
and major customers.
2. INVENTORIES:
Inventories consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Raw materials............................................... $225,340 $178,762
Work in process............................................. 169,657 157,114
Finished Goods.............................................. 253,960 126,221
-------- --------
$648,957 $462,097
======== ========
</TABLE>
3. PROPERTY AND EQUIPMENT, NET:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
--------- ---------
<S> <C> <C>
Furniture and fixtures...................................... $ 72,887 $ 51,133
Machinery and equipment..................................... 733,577 627,917
Leasehold improvements...................................... 28,949 15,673
Equipment under capital lease agreements.................... 24,243 24,243
--------- ---------
859,656 718,966
Less accumulated depreciation and amortization.............. (691,665) (637,651)
--------- ---------
$ 167,991 $ 81,315
========= =========
</TABLE>
F-11
<PAGE> 46
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Included in accumulated depreciation and amortization at December 31, 1997
and 1996 is $23,865 and $22,195, respectively, of accumulated amortization on
equipment acquired under capital lease agreements. Depreciation expense for the
years ended December 31, 1997, 1996 and 1995 was approximately $54,000, $133,000
and $191,000, respectively.
4. GOODWILL
In November 1995 the Company sold certain assets and the associated
customer base of the catheter hole punch operations to a related party.
Accordingly, the Company wrote off approximately $120,000 of goodwill associated
with these assets.
5. DEFERRED REVENUE
On August 26, 1994, the Company signed a Patent License, Research &
Development Agreement with Wright Medical Technologies, Inc. (WMT) in which the
Company licensed to WMT the world-wide manufacturing and distribution rights to
the "spinal dissector". The Company received a $300,000 license fee and will
receive 5% royalty from sales by WMT through the life of the patent. The Company
granted to WMT a stock purchase warrant for 150,000 shares with an exercise
price of $2.00. The warrant is exercisable through August 1999. The contract
called for the Company to continue to develop the spinal dissector on behalf of
WMT and granted the Company the first right of refusal for the manufacturing of
the spinal dissector. The Company performed and received additional fees for
development services of $2,400 during the year ended December 31, 1995. No
development fees were included in revenues for the year ended December 31, 1997
and 1996. The $300,000 license fee is being amortized over five years, the life
the Company uses to amortize patents. The unamortized balance of $100,000 and
$160,000 is reflected as deferred revenue as of December 31, 1997 and 1996,
respectively.
F-12
<PAGE> 47
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. NOTES PAYABLE AND LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
-------- ----------
<S> <C> <C>
Notes payable to stockholders and others consisted of the
following:
Uncollateralized promissory note to stockholder, bearing
interest at 10%, payable quarterly with principal due on
demand.................................................... $242,450 $ 242,450
Note payable to an insurance company bearing interest at
8.7% per year payable in monthly installments of $5,298
including interest, maturing August 8, 1997............... -- 36,035
Note payable to an insurance company bearing interest at
8.7% per year, payable in monthly installments of $5,298
including interest, maturing August 8, 1998............... 41,035 --
Note payable to an insurance company bearing interest at
7.75% per year payable in monthly installments of $4,213
including interest, maturing January 1, 1998.............. 4,186 --
Note payable to an insurance company payable in non-interest
bearing quarterly installments of $5,733, maturing April
9, 1998................................................... 10,319 --
Note payable to an insurance company payable in non-interest
bearing quarterly installments of $1,493, maturing April
14, 1998.................................................. 2,986 --
Uncollateralized note payable to a company bearing interest
at 12% per year, maturing January 27, 1997................ -- 1,000,000
-------- ----------
$300,976 $1,278,485
======== ==========
Long-term debt consisted of the following:
Note payable to a law firm bearing interest at 8.25% per
year payable in monthly installments of $3,858 including
interest, maturing August 1, 2000......................... $113,549 $ 148,876
Less current maturities..................................... (41,694) (38,404)
-------- ----------
$ 71,855 $ 110,472
======== ==========
</TABLE>
The Company has failed to make monthly payments to the law firm when due.
Under the terms of the note agreement, the law firm can elect to impose an
interest rate of 18%. The law firm has not made this election.
Future maturities of notes payable and long term debt are as follows:
<TABLE>
<S> <C>
1998...................................................... $342,670
1999...................................................... 41,927
2000...................................................... 29,928
--------
$414,525
========
</TABLE>
F-13
<PAGE> 48
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. ACCRUED LIABILITIES:
Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1997 1996
-------- --------
<S> <C> <C>
Accrued interest payable.................................... $208,007 $133,129
Accrued payroll and related taxes........................... 122,306 132,672
Accrued offering costs...................................... 102,000 102,000
Other....................................................... 229,932 115,366
-------- --------
$662,245 $483,167
======== ========
</TABLE>
8. COMMITMENTS AND CONTINGENCIES:
Lease Obligations
The Company leases certain patents and equipment under agreements
classified as capital leases. In addition, the Company leases its office space
and other properties under noncancelable operating leases through November 2002.
Future minimum payments under the capital leases and noncancelable operating
leases with initial or remaining terms of one year or more consisted of the
following at December 31, 1997:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
1998........................................................ $470,259 $146,906
1999........................................................ 55,850
2000........................................................ 27,026
2001........................................................ 5,640
2002........................................................ 3,488
-------- --------
Total minimum lease payments................................ 470,259 $238,910
========
Amounts representing interest............................... (53,358)
--------
Present value of future lease payments...................... 416,901
Less current maturities..................................... (416,901)
--------
$ -0-
========
</TABLE>
Rental expense under operating leases for the years ended December 31,
1997, 1996 and 1995 and for the period from inception, September 4, 1984, to
December 31, 1997 amounted to $151,705, $157,972, $243,881, and $1,282,835,
respectively.
Litigation
On December 8, 1994, a vendor commenced a lawsuit against the Company
regarding unpaid invoices in the amount of $124,759 plus attorney fees and
accrued interest. On June 15, 1995, the parties to the lawsuit executed a
Stipulation of Settlement, a Consent Judgment and a Stipulation of Dismissal to
be held in escrow. The Company agreed to pay $125,000 to the vendor under the
settlement agreement; $25,000 was paid upon execution of this stipulation and
the balance was due on or before October 31, 1995. The amount of $100,000 is
included in accounts payable at December 31, 1995. The balance was paid through
the issuance of 116,145 shares of the Company's common stock in 1996. The vendor
sold the shares for less than the amount owing under the settlement agreement
including applicable interest and legal fees. The balance of approximately
$55,000 has been properly accrued in 1997.
F-14
<PAGE> 49
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In May 1997, a former officer and director of the Company filed a lawsuit
alleging oppressive action toward a minority shareholder, breach of contract,
wrongful termination and unpaid debts and advances. The Company is vigorously
contesting this lawsuit. The February 1998 mediation conference, which was
mandated by the Court, did not result in a settlement agreement and the case is
scheduled for trial in 1998. The Company is unable to make a meaningful analysis
of possible or likely damages, if any.
In August 1997, a former officer and director of the Company filed a
lawsuit alleging breach of contract and is seeking specific performance and
monetary damages. The Company is vigorously contesting this lawsuit. The Company
has accrued $125,000 which is management's best estimate of the ultimate
liability, if any. The resolution of this matter may have a material adverse
impact on the Company's financial position, results of operations or cash flows.
In September 1997, a former distributor filed a lawsuit alleging the letter
agreement terminating their distribution agreement was breached by the Company
due to the non-issuance of options to purchase 437,500 shares of common stock at
$0.40 per share. These options have been properly reserved, but have not been
issued. Management believes the resolution of this matter will not have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
The Company is occasionally a party to litigation (other than that
specifically noted) arising in the ordinary course of business. Management
regularly analyzes current information and, as necessary, provides accrual for
probable liabilities for the eventual disposition of the matter. In the opinion
of management, the ultimate outcome of these matters will not materially affect
the Company's financial position, results of operations or cash flows.
9. FEDERAL INCOME TAXES:
At December 31, 1997, the Company had net operating loss (NOL) and research
and development (R&D) credit carryforwards available to offset future taxable
income approximately as follows:
<TABLE>
<CAPTION>
YEAR EXPIRES N O L R & D
------------ ----------- --------
<S> <C> <C>
2003.............................................. $ 71,500
2004.............................................. 14,300
2005.............................................. 450,300 $ 7,635
2006.............................................. 1,462,000 50,550
2007.............................................. 3,122,800 143,632
2008.............................................. 7,432,100 163,052
2009.............................................. 2,181,300 73,637
2010.............................................. 925,000 34,286
2011.............................................. 3,409,000 41,669
2012.............................................. 2,456,000 33,400
----------- --------
$21,524,300 $547,861
=========== ========
</TABLE>
Net operating loss carryforwards for financial reporting purposes and
alternative minimum tax reporting purposes are approximately the same as those
under the regular tax method. Special limitations exist under the tax law which
may restrict the utilization of the regular tax and alternative minimum tax net
operating loss carryforwards. The amount of this restriction, if any, has not
been determined.
F-15
<PAGE> 50
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company adopted the liability method of accounting for income taxes
pursuant to Statement of Financial Accounting Standards No. 109 (SFAS 109)
"Accounting For Income Taxes". Under this method, deferred income taxes are
recorded to reflect the tax consequences on future years of temporary
differences between the tax basis of assets and liabilities and their financial
amounts at year-end. The Company provides a valuation allowance to reduce
deferred tax assets to their net realizable value. The tax-effected components
of deferred tax assets at December 31, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Total deferred tax assets
Net operating losses and other............................ $ 8,827,000 $ 7,995,000
Valuation allowance....................................... (8,827,000) (7,995,000)
----------- -----------
$ -0- $ -0-
=========== ===========
</TABLE>
The Company has significant net operating loss carryforwards for which
realization of tax benefits is uncertain and therefore all deferred tax assets
have been fully reserved at December 31, 1997 and 1996, respectively. The change
in the total valuation allowance for the year ended December 31, 1997 and 1996
was a net increase of approximately $832,000 and $1,159,000, respectively.
Contributing primarily to this change were operating losses incurred during
1997.
10. RELATED PARTY TRANSACTIONS:
For the period from inception, September 4, 1984, to December 31, 1997, the
Company made payments for legal, engineering and consulting services and
products and supplies provided by certain stockholders which amounted to
$1,089,869. Of this amount, $7,797, $37,500, and $50,000 related to the years
ended December 31, 1997, 1996 and 1995, respectively.
On August 23, 1995 the Company sold its proprietary OmniCath(R) atherectomy
EPO patent to Guerbet S.A., a stockholder of the Company, of Paris, France for
$500,000 cash.
Steven B. Rash entered into a three-year employment agreement with the
Company, dated as of July 15, 1995 (the "Agreement"). Pursuant to the Agreement,
Mr. Rash is employed as President and Chief Executive Officer of the Company.
The Agreement provides for a salary of $135,000 per year with annual increases,
plus bonuses of up to fifty percent, and options to purchase 600,000 shares of
common stock at $0.50 per share. The options vest at varying times during the
term of Mr. Rash's three-year employment agreement. In 1997 Mr. Rash's agreement
was extended to December 31, 1999. The base salary was increased to $165,000 per
year, with a cash bonus of $30,000 to be paid should the Company's revenues
exceed $2 million in 1997. Options to purchase an additional 900,000 shares of
common stock at $.6875 per share were granted.
A director, stockholder and paid consultant of the Company and formerly a
Vice President, is a limited partner of Aberlyn Capital Management Limited
Partnership ("Aberlyn") and is an officer, director and stockholder of Aberlyn
Capital Management, Inc., the general partner of Aberlyn. Effective December 31,
1992, the Company and Aberlyn entered into a Patent Assignment and License
Agreement (the "Patent and License Agreement") pursuant to which the Company
assigned patents as collateral which are owned by the subsidiary, Cathlab
Corporation (the "Cathlab Patents"), to Aberlyn in return for $500,000. The
Cathlab Patents were exclusively licensed back to the Company for three years
for a monthly license fee of $16,355, after which Aberlyn was required to
reassign the Cathlab Patents to the Company in exchange for $50,000. Under its
terms, if the Company declined to purchase the Cathlab Patents, the Patent and
License Agreement would automatically be extended for an additional nine months
for a monthly license fee of $17,099, after which the Cathlab Patents would
automatically revert back to the Company.
F-16
<PAGE> 51
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company and Aberlyn entered into an equipment lease effective May 13,
1993 (the "Equipment Lease") pursuant to which the Company assigned certain
equipment as collateral to Aberlyn in consideration of $205,000. The equipment
was exclusively leased back to the Company for three years for a monthly fee of
$6,706, after which Aberlyn was required to return the equipment to the Company
in exchange for $20,500. Under the terms, if the Company opted not to purchase
the equipment, the Equipment Lease would automatically be extended for an
additional three months for a monthly payment of $7,011, after which the
equipment would automatically revert back to the Company.
Effective August 13, 1993, the Company and Aberlyn entered into an
additional equipment lease (the "Second Equipment Lease") pursuant to which the
Company assigned certain equipment to Aberlyn in consideration of $100,000. The
equipment was exclusively leased back to the Company for three years for a
monthly fee of $3,271, after which Aberlyn was required to return the equipment
to the Company in exchange for $10,000. If the Company declined to purchase the
equipment, the term of the Second Equipment Lease was to be automatically
extended or an additional three months for a monthly payment of $3,420, after
which the equipment would automatically revert back to the Company.
The Company and Aberlyn entered into an agreement effective March 28, 1994
whereby the terms of the Patent and License Agreement, the Equipment Lease and
the Second Equipment Lease were modified. The payment terms of the license fee
pursuant to the Patent and License Agreement were revised to semiannual payments
of $97,445 and the payment terms of the Equipment Lease were similarly revised
to semiannual payments of $39,100 and $20,281, respectively. In consideration to
Aberlyn for making these modifications, the Company issued warrants to Aberlyn
to purchase 150,000 shares of the Company's common stock at an exercise price of
$1.50 per share exercisable over a five-year period. On May 28, 1996, Aberlyn
and the Company reached an agreement to restructure the Leases which resulted in
a revised schedule of lease payments over a twenty-four month period, with the
initial payment commencing on June 1, 1996. The payments were based on an
outstanding principal amount of approximately $500,000 and total accrued
interest of approximately $148,000. In addition, 115,000 shares of common stock
were issued in payment of consulting fees, investment banking service fees and
accumulated miscellaneous expenses totaling $115,728.
Effective November 1, 1997, the Company and Aberlyn entered into
modification agreements of the Leases which revised the schedule of lease
payments and extended the maturity date to October 1, 1998.
On February 18, 1996, the Company and Zanett Capital, Inc. ("Zanett"), a
financial consulting firm, signed an agreement whereby Zanett agreed to help the
Company raise capital pursuant to an offshore private placement of equity.
Zanett's President and Chief Executive Officer is a member of the Company's
Board of Directors. As a retainer for availability of services by Zanett, the
Company agreed to grant Zanett warrants to purchase shares of common stock at a
rate of 1 for every 10 issued at an exercise price of $0.50 per share,
exercisable for five years from date of grant. Date of grant is the date of each
closing. During 1996 through the efforts of Zanett, the Company sold 1,250,001
shares of common stock, 1,390 shares of Series A preferred and 1,500 shares of
Series B preferred stock pursuant to Regulation S of the Securities Act of 1933,
as amended. In connection with these placements, the Company issued warrants to
purchase 811,310 shares of common stock to unrelated parties. In addition, a 10%
placement fee of approximately $319,000 has been paid to Zanett or their
designated representative.
In September 1996, Zanett was issued a restricted exercise warrant to
purchase 25,000 shares of common stock at $.9375 in connection with the
placement of bridge financing.
The Company does not have a policy against employing relatives. During the
years ended December 31, 1997, 1996 and 1995, the Company paid salaries and
wages to relatives of officers of the Company amounting to $7,797, $22,692, and
$51,600, respectively.
F-17
<PAGE> 52
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. CAPITAL STOCK:
Common Stock
Pursuant to Regulation S of the Securities Act, in February 1996 the
Company sold 1,250,001 shares of common stock at a purchase price of $0.24 per
share to a group of foreign investors.
On November 22, 1996 the shareholders approved the increase in authorized
shares of the Company's common stock from 25,000,000 to 50,000,000.
Preferred Stock
In December 1992, the Company created a new class of preferred stock, the
"Series B preferred stock", with an offering price of $10 per share, consisting
of 350,000 shares. As of December 31, 1992, the Company had sold 10,000 shares
of Series B preferred stock and had received gross proceeds of $100,000. During
the first quarter of 1993, an additional 277,500 shares of the Series B
preferred stock were sold netting $2,456,145. Annual cumulative 10% dividends
were payable quarterly commencing April 1, 1993.
Pursuant to the Certificate of Incorporation, as amended, during the period
July 1993 through October 22, 1993 (the date of a public offering), all the
287,500 shares of the Series B preferred stock outstanding were converted into
1,202,773 shares of common stock. The accrued dividends thereon were converted
into 65,693 shares of common stock, and $138 was paid in cash.
Pursuant to Regulation S of the Securities Act, in February 1996 the
Company sold 1,390 shares of its Series A convertible preferred stock, par value
$.001 per share ("Series A Preferred"), at a purchase price of $1,000 per share,
to a group of foreign investors (the "Investors"). The Series A Preferred, which
bears no dividends and confers no voting rights, is senior in priority to the
Company's other equity securities (except with the consent of a majority of the
holders of the Series A Preferred) and is convertible at any time after October
30, 1996 at the option of the holders into such number of Common Shares (the
"Series A Conversion Shares") as is equal to $1,000 divided by the lesser of (i)
$.24 or (ii) 80% of the average of closing bid price of the common stock for the
five consecutive days ending two days prior to the day the election to convert
is made (the "Conversion Price"). The number of Conversion Shares is subject to
adjustment from time to time upon the occurrence of stock splits, reverse stock
splits, and similar events. In July 1999 any outstanding shares of the Series A
Preferred will be automatically converted based on the Conversion Price then in
effect. In addition, registration rights were granted to the Investors for the
common stock issuable upon conversion of the Series A Preferred. The term of the
registration rights is three years and includes three demand registration rights
and unlimited piggyback rights. In the event that the Company conducts an
underwritten offering during such term, the number of shares offered by the
holders pursuant to a piggyback registration may be cut back on a pro rata basis
at the discretion of the managing underwriter.
Pursuant to Regulation S of the Securities Act, in November 1996 the
Company issued units consisting of (i) 1,500 of its 1996 Series B convertible
preferred stock, par value $.001 per share (the "Series B Preferred"), and (ii)
an equal number of warrants to purchase common stock (the "Warrants") to a group
of foreign investors (the "Series B Investors") for a total purchase price of
$1,500,000, or $1,000 per unit. The proceeds of the sale were used to pay off
notes in the amount of $835,576, with the balance to be used to fund clinical
trials and for general working capital.
The Series B Preferred, which bears no dividends and confers no voting
rights, is of equal priority to the Series A Preferred and senior in priority to
the Company's other equity securities (except with the consent of a majority of
the holders of the Series B Preferred) and is convertible at any time at the
option of the holders into a number of shares of common stock (the "Series B
Conversion Shares") based on the lesser of (i) the average of the market price
for the common stock for the ten consecutive days prior to the sixtieth day
after
F-18
<PAGE> 53
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the closing date of the Series B issuance, i.e., $1.40 per share or (ii) between
70% and 86% (depending on the length of time since the closing date of the
Series B issuance) of the average of the market price for the five consecutive
days prior to the day the election to convert is made (the "Series B Conversion
Price"). The number of Series B Conversion Shares is subject to adjustment from
time to time upon the occurrence of stock splits, and similar events. In
November 1998, any outstanding shares of the Series B Preferred will be
automatically converted based on the Series B Conversion Price then in effect.
Each Warrant entitles the holder to the number of shares of common stock equal
to the quotient of $1,000 divided by the market price of the common stock on the
closing date of the Series B issuance. The exercise price of the Warrants is
equal to the average of the market price for the common stock for the ten
consecutive days prior to the sixtieth day after the closing date of the Series
B issuance. The Warrants terminate five years after issuance and the exercise
price of the warrants and the number of shares of common stock underlying the
Warrants are both subject to adjustment upon the occurrence of stock splits,
reverse stock splits, the issuance of below-market securities, and other events.
In addition to the Series B Preferred and the Warrants, the Series B Investors
were given registration rights with respect to the shares of common stock
issuable upon conversion of the Series B Preferred and exercise of the Warrants.
The term of the registration rights is three years and includes three demand
registration rights and unlimited piggyback rights. In the event the Company
conducts an underwritten offering during such term, the number of shares offered
by the holders pursuant to a piggyback registration may be cut back on a pro
rata basis at the discretion of the managing underwriter.
As a result of Securities and Exchange Commission guidance issued in early
1997 with respect to beneficial conversion features in connection with the
issuance of convertible preferred stock, the Company was deemed to recognize
noncash preferred stock dividends totaling approximately $1.2 million in fiscal
year 1996. This amount is equivalent to the discount from the fair market value
of the common stock given to the purchasers of the Series A and B calculated as
of the date of the sale of such stock.
Pursuant to Section 4(2) of the Securities Act, in March 1997 the Company
issued 125 shares of its Series C convertible preferred stock, par value $.001
per share (the "Series C Preferred") to Nelson Partners, an unaffiliated
investor, for a total purchase price of $2,500,000 or $20,000 per share. The
proceeds of the sale will be used to fund clinical trials, research and
development projects and general working capital. The Series C Preferred, which
bears no dividends and confers no voting rights, is of equal rank with shares of
the Series A Preferred and the Series B Preferred and senior to the Company's
other equity securities (except with the consent of the majority of the holders
of Series C Preferred). The Series C Preferred is convertible at any time on or
after 120 days after the initial date of issuance at the option of the holder
into a number of shares of common stock (the "Series C Conversion Shares") based
on a formula as defined in the purchase agreement.
The Series C conversion price is the lesser of (i) $1.75 (adjusted if there
is a lock up in effect) or (ii) the average of the closing bid price for the
common stock for the five consecutive trading days immediately preceding the
date the election to convert is made (the "Series C Conversion Price"). The
number of Series C Conversion Shares is subject to adjustment from time to time
upon the occurrence of stock splits, reverse stock splits, and similar events.
On March 1, 2000 any outstanding shares of the Series C Preferred will be
automatically converted based on the Series C Conversion Price then in effect.
Registration rights were conferred upon the Series C Preferred requiring
the Company to file an S-3 Registration Statement ("Registration Statement")
covering the resale of the Series C Conversion Shares on or before the ninetieth
day following the issuance date ("Scheduled Effective Date"). The Registration
Statement became effective July 25, 1997 which was after the Scheduled Effective
Date.
The Company may at its option at any time after the 180th day and prior to
the 361st day following the issuance of the Series C Preferred, prohibit holders
of the Series C Preferred from exercising any conversion rights granted (the
"Lock-Up") when certain conditions are met. In the event the Company effects a
lock-up,
F-19
<PAGE> 54
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
each holder of the Series C Preferred will be entitled to a warrant (the
"Lock-Up Warrant") exercisable for that number of shares of common stock equal
to ( 1/2) one-half of the number of shares of common stock which would have been
issuable had such holder converted, and on the last day of the lock-up period
will be entitled to an additional Lock-Up Warrant exercisable for that number of
shares of common stock equal to one-half of the number of shares of common stock
which would have been issuable had such holder converted. The exercise price of
the Lock-Up Warrant is the fixed conversion price ($1.75) that is in effect at
the time of issuance of the Lock-Up warrant, but not subject to any adjustments.
The Company has reserved 7,642,857 shares of common stock for issuance (i)
upon conversion of the Series C Preferred, (ii) upon exercise of the warrants
and (iii) the placement warrants.
During 1997 1,000 shares of Series B Preferred and 13 shares of Series C
Preferred were converted into 3,112,780 and 768,322 shares of common stock,
respectively.
The board of directors is authorized to determine, prior to issuing any
such series of preferred stock and without any vote or action by the
shareholders, the rights, preferences, privileges and restrictions of the shares
of such series, including dividend rights, voting rights, terms of redemption,
the provisions of any purchase, retirement or sinking fund to be provided for
the shares of any series, conversion and exchange rights, the preferences upon
any distribution of the assets of the Company, including in the event of
voluntary or involuntary liquidation or dissolution of the Company, and the
preferences and relative rights among each series of preferred stock.
Loss per share
Basic loss per share and diluted loss per share for the years ended
December 31, 1997, 1996 and 1995 are the same due to the antidilutive effect the
conversion of warrants and options have on loss per share.
12. STOCK PURCHASE WARRANTS:
Under the terms of the agreement with Aberlyn Capital Management Limited
Partnership (See Note 10), the Company issued Aberlyn and Aberlyn Holdings
Company, Inc., an affiliate of Aberlyn, warrants to purchase 15,000 and 60,000
shares of common stock, respectively, at $7.50 per share. The warrants expire in
January 1998.
In September and October 1993 the Company issued warrants to purchase a
total of 193,500 shares of its common stock. These warrants are exercisable at
any time during the five-year period from date of issue at a per share price of
$1.00. During 1996 warrants for 2,500 shares were exercised.
In July 1993 the Company issued stock purchase warrants to the holders of
the Series B preferred stock to purchase an aggregate of 288,203 shares of the
Company's common stock at an exercise price of $6.65 per share. The warrants
expire in June 1998.
In August 1993 the Company issued warrants to purchase 848,002 shares of
common stock at an exercise price of $2.16 per share in connection with a 30-day
lock-up agreement upon the conversion of the Series B preferred stock on October
22, 1993. The warrants expire in 1998.
In connection with the offering of 1,500,000 shares in October 1993, the
Company issued warrants to its underwriters to purchase 150,000 shares of common
stock at prices ranging from $2.50 to $3.60 per share. The warrants are
exercisable for five years.
In March 1994, the Company issued warrants to purchase 20,000 shares of
common stock at $1.00 per share in connection with a loan guarantee. In June
1994, the Company issued an additional 50,000 warrants to
F-20
<PAGE> 55
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purchase common stock in connection with the renewal and extension of the note
which is due when the Company raises a minimum of $1,000,000 in new equity. The
warrants are exercisable for five years.
In connection with the modification of the lease terms with Aberlyn in May
1996, the Company issued warrants to purchase 150,000 shares of common stock at
$1.50 per share. The warrants are exercisable for five years.
In connection with the private placement of 552,042 shares of common stock
in January and February, 1994, the Company issued warrants to purchase 224,139
shares of common stock at $1.35 per share. The warrants are exercisable for five
years.
In June 1994, the Company issued warrants to purchase 282,634 shares of
common stock at prices ranging from $1.00 per share to $3.60 per share. These
warrants were issued as a result of transactions during 1993 in connection with
various bridge loans and are exercisable for five years. Warrants for 8,333
shares and 105,665 shares were exercised during 1997 and 1996, respectively. One
warrant was underexercised by one share in 1996 which is thereby forfeited.
In August 1994, in connection with a licensing agreement with Wright
Medical Technologies (See Note 5), the Company issued warrants to purchase
150,000 shares of common stock at $2.00 per share. The warrants are exercisable
for five years.
In October 1994, the Company granted to one of its investment bankers, in
consideration for past services performed, warrants to purchase 100,000 shares
of common stock at $2.50 per share. The warrants are exercisable for five years.
During February through April 1995, in connection with a bridge loan, the
Company issued warrants to purchase 1,374,250 shares of common stock at $.40 per
share. The warrants are exercisable for two years and were registered on an S-3
Registration Statement effective August 23, 1996. In 1997 and 1996,
respectively, 754,250 shares and 620,000 shares, have been issued in connection
with the exercise of these warrants.
On June 16, 1995, the Board authorized warrants to Aberlyn Capital
Management Limited Partnership in order to induce Aberlyn to not accelerate the
repayment of loans in the amount of $455,298. The warrants are to purchase
100,000 shares of common stock at $.1875 per share and 100,000 shares of common
stock at $.50 per share and are exercisable for five years. An expense of
$37,500 was recorded in 1995 for the difference between the fair market value of
the stock and the warrant prices.
In connection with the early exercise of warrants issued for bridge loans,
the Company issued warrants to purchase 132,000 shares at $.25 per share in
September 1995. Warrants for 40,000 shares were exercised in 1997 and in 1996,
respectively. The remaining warrant for 12,000 shares expired September 1997.
Warrants to purchase 20,000 shares of common stock at an exercise price of
$.50 per share were issued in connection with the settlement of litigation in
September 1995, exercisable for two years. The warrant expired in 1997.
In connection with the issuance of promissory notes in September 1996, the
Company issued warrants to purchase an aggregate of 250,000 shares of the
Company's common stock (the "Bridge Warrants") and certain registration rights
in connection with such stock. The Bridge Warrants, issued pursuant to
Regulation S of the Securities Act, have a term of five years from the date of
issuance and an exercise price equal to the lowest market price for the common
stock during the period beginning on the day prior to the date of issuance and
ending on the earlier of (i) 180 days thereafter or (ii) the day prior to the
date of exercise. The exercise price of the Bridge Warrants and the number of
shares of common stock underlying the Bridge Warrants are both subject to
adjustment upon the occurrence of stock splits, reverse stock splits, the
issuance of below-market securities, and other events. In addition, the lenders
were given registration rights with
F-21
<PAGE> 56
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
respect to the shares of common stock issuable upon exercise of the Bridge
Warrants. The term of the registration rights is three years and includes three
demand registration rights and unlimited piggyback rights. In the event the
Company conducts an underwritten offering during such term, the number of shares
offered by the holders pursuant to a piggyback registration may be cut back on a
pro rata basis at the discretion of the managing underwriter.
In connection with a consulting agreement, the Company issued warrants to
purchase 836,310 shares of common stock at prices ranging from $0.50 to $1.40
for fees in connection with the Series A Preferred, Series B Preferred and
bridge loan financing and are exercisable for five years from date of grant.
Warrants to purchase 1,209,677 shares at $1.40 were issued in connection with
the issuance of Series B Preferred Stock, exercisable for five years.
In December 1996 warrants to purchase 25,000 shares of common stock at
$1.50 per share were issued for fees in connection with a short-term loan. The
warrants are exercisable for five years.
Cumulative shares issuable under warrants and their expiration dates as of
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
EXPIRATION NUMBER OF EXERCISE
GRANT DATE DATE SHARES PRICE
---------- ---------- --------- --------
<S> <C> <C> <C>
January 1993........................................ 1998 75,000 $ 7.50
June - October 1993................................. 1998 329,064 $ 1.00
July 1993........................................... 1998 288,203 $ 6.65
October 1993........................................ 1998 848,002 $ 2.16
October 1993........................................ 1998 135,571 $ 3.60
October 1993........................................ 1998 45,000 $ 2.50
January - February 1994 ............................ 1999 224,139 $ 1.35
March 1994.......................................... 1999 150,000 $ 1.50
March - June 1994................................... 1999 70,000 $ 1.00
August 1994......................................... 1999 150,000 $ 2.00
October 1994........................................ 1999 100,000 $ 2.50
June 1995........................................... 2000 100,000 $0.1875
June 1995........................................... 2000 100,000 $ 0.50
February 1996....................................... 2001 704,167 $ 0.50
September 1996...................................... 2001 275,000 $0.9375
November 1996....................................... 2001 1,209,677 $ 1.40
November 1996....................................... 2001 107,143 $ 1.40
December 1996....................................... 2001 25,000 $ 1.50
---------
4,935,966
=========
</TABLE>
F-22
<PAGE> 57
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. STOCK OPTIONS:
At December 31, 1997, the Company had two stock-based compensation plans
which are described below. Additionally, the Company has issued options that are
not part of these plans to various employees and consultants (the "Other Plan").
The Company applies APB Opinion 25 and related interpretations in accounting for
options issued to employees and directors. Options issued to consultants and
other non-employees are recorded at fair market value. The compensation cost
that has been charged against income for its stock option plans was
approximately $122,781, $238,000 and $98,000 for 1997, 1996 and 1995,
respectively. Had compensation cost for the Company's two stock-based
compensation plans and Other Plan been determined consistent with Financial
Accounting Standards Board Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," the Company's net income and earnings
per share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR 1997 1996 1995
---- ----------- ----------- -----------
<S> <C> <C> <C>
Net loss
As reported............................... $(2,774,203) $(2,625,116) $(1,404,384)
Pro forma................................. $(3,172,810) $ 3,052,824 $(1,866,595)
Net loss available to common shareholders
As reported............................... $(2,774,203) $(3,808,529) (1,404,384)
Pro forma................................. $(3,172,810) $(4,236,237) (1,866,595)
Net loss per common share
As reported............................... $ (.18) $ (.34) $ (.15)
Pro forma................................. $ (.20) $ (.37) $ (.20)
</TABLE>
The Company's fixed option plans include the 1996 Incentive Stock Option
Plan (the "1996 Plan"), the 1994 Stock Option Plan (the "1994 Plan") and the
Other Plan. Effective June 30, 1997 the Board terminated the 1990 and the 1992
Stock Option Plans. There were no outstanding options at the time of
termination. Options under the plans, except the Other Plan, generally vest 20%
per year over five years after one year of service and have a maximum term of
ten years. Options under the Other Plan vest over various periods ranging from
immediate to three years.
The 1996 Plan provides for the grant of (i) stock options, including
incentive stock options and non-qualified stock options, (ii) shares of
restricted stock, (iii) performance awards payable in cash or common stock, (iv)
shares of phantom stock, (v) stock bonuses, and (vi) cash bonuses (collectively,
the "Incentive Awards"). As of December 31, 1997, 78,000 shares of common stock
and options to purchase 330,000 shares have been granted to consultants and
options to purchase 905,000 shares have been granted to employees. The number of
shares of common stock subject to the 1996 Plan is 1,500,000 and is effective
October 10, 1996 as approved by the stockholders at the annual meeting held
November 22, 1996. The 1996 Plan will terminate October 10, 2006 unless earlier
terminated by the Company.
Under the 1994 Plan, options to purchase an aggregate of 1,500,000 shares
are available for grants to employees and consultants of the Company and its
subsidiaries. The 1994 Plan will terminate on April 8, 2004 unless terminated
earlier by the Company.
In April 1995, in consideration for termination of a distribution
agreement, the Company granted a distributor an option to purchase 437,500
shares at $.40 per share.
In connection with his employment in 1995 as President and CEO, the Company
granted Steven B. Rash options to purchase 600,000 shares of common stock at
$.50 per share vesting at various times during his three-year contract. The
options are exercisable through 2002.
F-23
<PAGE> 58
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with a consulting agreement, the Company issued options to
purchase 100,000 shares at $.001 per share and 300,000 shares at $.56 per share
to a medical consultant in December 1995, exercisable for ten years. The options
are exercisable through 2005.
In connection with their employment in 1996, the Company granted hiring
options to three employees for a total of 115,000 at exercise prices ranging
from $.50 to 1.25 which equaled fair market value at the time of issuance.
During 1997 options to purchase 30,000 shares were forfeited due to termination
of employment and failure to exercise within the required time frame. The
options are exercisable for five years.
In connection with settlement agreements, the Company granted options to
purchase 225,000 shares of common stock to Lawrence M. Hoffman and 150,000
shares of common stock to a former officer at an exercise price of $.6875. The
options are exercisable through 1999 and 1998, respectively.
In connection with a consulting agreement, the Company issued options to
purchase 60,000 shares of stock at $1.00 exercisable for two years.
The Company granted options to purchase common stock totaling 93,000 shares
as a retainer to each of its four directors and for attendance at the Board of
Directors meetings during 1997. The options are exercisable for five years at an
exercise price ranging from $0.46875 o $1.3125 which equaled fair market value
at the time of issuance.
In connection with his employment agreement in December 1997 as Vice
President, Sales and Marketing, the Company granted Marshall Kerr options to
purchase 100,000 shares at $.50 and 200,000 shares at $0.42 vesting at various
times during his two-year contract and expiring December 2000.
F-24
<PAGE> 59
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's stock options granted to employees
as of December 31, 1997, December 31, 1996 and December 31, 1995 and the changes
during the year ended on these dates is presented below:
<TABLE>
<CAPTION>
EMPLOYEE STOCK OPTIONS
------------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
# SHARES OF AVERAGE # SHARES OF AVERAGE # SHARES OF AVERAGE
UNDERLYING EXERCISE UNDERLYING EXERCISE UNDERLYING EXERCISE
OPTIONS PRICES OPTIONS PRICES OPTIONS PRICES
----------- -------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of the
year................ 1,165,476 $0.98 2,872,194 $0.78 2,354,984 $0.88
Granted
at-a-discount....... 381,000 $1.67 15,000 $0.67 663,110 $0.42
Granted-at-the-money... 912,000 $0.52 0 n/a 500,000 $0.36
Granted-at-a-premium... 5,000 $0.96 110,000 $0.55 0 n/a
Total options
granted............. 1,298,000 $0.65 125,000 $0.93 1,163,110 $0.48
Exercised............. 20,000 $0.19 101,000 $1.00 0 n/a
Forfeited............. 31,200 $1.04 1,410,618 $0.21 145,900 $1.00
Expired............... 412,276 $1.69 320,100 $2.53 500,000 $0.50
Outstanding at end of
year................ 2,000,000 $0.63 1,165,476 $0.98 2,872,194 $0.78
Exercisable at end of
year................ 389,180 $0.69 645,476 $1.31 1,983,312 $0.63
Weighted-average FV of
options granted
at-a-discount....... $0.55 $0.66 $0.42
Weighted-average FV of
options granted
at-the-money........ $0.52 n/a $0.36
Weighted-average FV of
options granted
at-a-premium........ $0.96 $0.55 n/a
Weighted-average FV of
all options
granted............. $0.52 $0.57 $0.39
</TABLE>
The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
ASSUMPTION 1997 1996 1995
---------- ------ ------- -------
<S> <C> <C> <C>
Expected Term......................................... 4.82 3.18 3.45
Expected Dividend Yield............................... 0.00% 0.00% 0.00%
Expected Volatility................................... 95.00% 109.48% 109.48%
Risk-Free Interest Rate............................... 6.29% 6.01% 5.88%
</TABLE>
F-25
<PAGE> 60
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about employee stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------------
WEIGHTED OPTIONS EXERCISABLE
AVERAGE -----------------------------
NUMBER WEIGHTED REMAINING NUMBER WEIGHTED
RANGE OF OUTSTANDING AVERAGE CONTRACTUAL EXERCISABLE AVERAGE
EXERCISE PRICES AT 12/31/97 EXERCISE PRICE LIFE AT 12/31/97 EXERCISE PRICE
--------------- ----------- -------------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.42 to $0.99........ 1,850,000 $0.58 7.79 291,980 $0.51
$1.00 to $2.99........ 145,000 $1.04 3.79 93,200 $1.06
$3.00 to $5.00........ 5,000 $5.00 5.20 4,000 $5.00
--------- ----- ---- ------- -----
$0.42 to $5.00........ 2,000,000 $0.63 7.49 389,180 $0.69
</TABLE>
NON-EMPLOYEES STOCK OPTIONS
A summary of the status of the Company's stock options granted to
non-employees as of December 31, 1997, December 31, 1996, and December 31, 1995
and the changes during the year ended on these dates is presented below:
STOCK OPTIONS -- CONSULTANTS
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
# SHARES OF AVERAGE # SHARES OF AVERAGE # SHARES OF AVERAGE
UNDERLYING EXERCISE UNDERLYING EXERCISE UNDERLYING EXERCISE
OPTIONS PRICES OPTIONS PRICES OPTIONS PRICES
----------- -------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of the
year........................... 1,572,500 $1.70 1,790,167 $1.03 957,667 $1.60
Granted at-a-discount.......... 60,000 $1.00 435,000 $0.73 537,500 $0.33
Granted at-the-money........... 0 n/a 0 n/a 5,000 $0.25
Granted at-a-premium........... 270,000 $1.00 0 n/a 300,000 $0.56
Total options granted............ 330,000 $1.00 435,000 $0.73 842,500 $0.41
Exercised........................ 0 n/a 96,000 $1.00 0 n/a
Forfeited........................ 0 n/a 0 n/a 0 n/a
Expired.......................... 0 n/a 556,667 $1.70 10,000 $4.00
Outstanding at end of year....... 1,902,500 $0.76 1,572,500 $1.70 1,790,167 $1.03
Exercisable at end of year....... 1,722,500 $0.73 1,422,500 $0.72 1,490,167 $1.12
Weighted-average FV of options
granted at-a-discount.......... $0.81 $0.67 $0.29
Weighted-average FV of options
granted at-the-money........... n/a n/a $0.16
Weighted-average FV of options
granted at-a-premium........... $0.34 n/a $0.35
Weighted-average FV of all
options granted................ $0.42 $0.67 $0.31
</TABLE>
F-26
<PAGE> 61
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about non-employees stock
options outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------
WEIGHTED OPTIONS EXERCISABLE
AVERAGE ----------------------------
NUMBER WEIGHTED REMAINING NUMBER WEIGHTED
OUTSTANDING AVERAGE CONTRACTUAL EXERCISABLE AVERAGE
RANGE OF EXERCISE PRICES AT 12/31/97 EXERCISE PRICE LIFE AT 12/31/97 EXERCISE PRICE
------------------------ ----------- -------------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.01 to $0.99............ 1,212,500 $0.50 3.89 1,212,500 $ 0.50
$1.00 to $3.00............ 690,000 $1.22 5.30 510,000 $ 1.29
--------- ----- ---- --------- ---------
$0.01 to $3.00............ 1,902,500 $0.76 4.40 1,722,500 $ 0.73
</TABLE>
The fair value of each non-employee stock option granted is estimated on
the date of grant using the Black-Sholes option-pricing model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
ASSUMPTION 1997 1996 1995
---------- ----- ------ ------
<S> <C> <C> <C>
Expected Term............................................. 5.00 1.26 3.69
Expected Dividend Yield................................... 0.00% 0.00% 0.00%
Expected Volatility....................................... 95.00% 109.48% 109.48%
Risk-Free Interest Rate................................... 6.15% 5.61% 6.10%
</TABLE>
F-27
<PAGE> 62
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SUPPLEMENTAL INFORMATION FOR CONSOLIDATED STATEMENT OF CASH FLOWS:
<TABLE>
<CAPTION>
INCEPTION
YEAR YEAR YEAR SEPTEMBER 4,
ENDED ENDED ENDED 1984, TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest Paid............................ $108,660 $ 392,580 $178,156 $1,255,538
Noncash investing and financing
activities:
Equipment acquired through capital
lease Agreements.................... 266,539
Equipment and leasehold improvements
Acquired through notes payable...... 35,775
Conversion of accrued interest payable to
Principal on notes payable to
Stockholders........................... 26,800 105,170
Conversion of Series A and Series B
Preferred stock to common stock........ 444
Conversion of 1996 Series B and Series C
Preferred stock to common stock........ 1,260,000 1,260,000
Conversion of debentures to common
stock.................................. 640,000
Deferred offering costs incurred in prior
year charged against offering
proceeds............................... 41,000
Issuance of common stock in connection
with Purchase of assets of VMS, Inc.... 124,999
Issuance of common stock in connection
with Purchase of assets of Superstat,
Inc.................................... 81,819
Conversion of notes payable to common
Stock.................................. 488,671 538,671
Common stock and warrants issued in lieu
of Interest............................ 58,139 1,387,300
Patent assignment and leaseback.......... 500,000
Issuance of common stock in connection
with Therex settlement................. 77
Transfer of note receivable from
officer................................ 25,000
Write-up of property and equipment on
Cathlab due to sale and leaseback
Agreement.............................. 221,616
Issuance of common stock and warrants for
Services............................... 28,280 367,500 56,412 1,035,707
Issuance of common stock for certain
Liabilities............................ 178,114 1,546,509 1,724,623
</TABLE>
15. SALES INFORMATION:
During the year ended December 31, 1997 sales to one customer represented
16.9% of the Company's total net sales. The remainder of net sales to any one
customer were less than 10%. Sales to three customers during the year ended
December 31, 1996 represented 18.7%, 18.2% and 12.9% of net sales while sales to
three customers during 1995 represented 24.8%, 20.2% and 19.4% of net sales. The
loss of any of these major accounts would be material to the Company's overall
results of operations, financial position and cash flows.
Foreign export net sales for 1997, 1996 and 1995 were approximately 62%,
55% and 81%, respectively.
F-28
<PAGE> 63
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. ACQUISITION AND PURCHASE AGREEMENTS:
During October 1992, the Company acquired the assets of SuperStat, Inc.
("SuperStat") in exchange for 18,182 shares of the Company's common stock,
valued at $81,819. Superstat has developed a patented modified collagen
hemostatic sponge for use to control bleeding in vascular and general surgery.
In March 1995, under an agreement with SuperStat, the Company transferred
the license agreement to BioCell, Inc. and was relieved of the obligation to pay
royalties in consideration of receiving a .5% royalty on future product sales by
BioCell, Inc.
17. SUBSEQUENT EVENT:
From January 26 through March 16, 1998 the Company issued 920,696 shares of
common stock through private placements to accredited investors. The share price
ranges from $0.34-$0.43 for a total of $331,000.
18. OPERATIONS:
The Company has incurred recurring operating losses and negative cash flow.
In order to continue as a going concern, the Company must raise additional
capital and ultimately achieve profitable operations. Though still a
developmental stage company engaged in the development, manufacture and
marketing of medical devices, the Company has ten products presently available
to market and has comprehensive business strategy which it believes will enable
it to capitalize on its technologies and developing trends in the healthcare
industry. Management believes it will be able to raise the capital necessary to
fund the commercialization of its existing technologies and current working
capital for the foreseeable future by "unbundling" its core technologies and
identifying a strategic partner for each technology and product in a specific
international market.
The Company's strategic plan consists of focusing on increased market
penetration of its ten existing FDA-approved products, continuing to revamp its
distribution network, continuing to focus on the commercialization of its core
technologies by pursuing US and international regulatory approval, aggressively
pursuing the sale of ancillary technology to meet future cash requirements and
to validate the proprietary nature of its technologies and continuation of
efforts to identify and pursue strategic alliances.
Management believes that the Company is now positioned to capitalize on its
silicone manufacturing expertise and patented minimally invasive technologies.
Since receiving ISO 9001 certification in January 1998, the Company has received
unsolicited requests to manufacture unique devices to the specifications of
third parties, indicating growth potential in the OEM market. One OEM contract
for 100,000 units per year is currently in force and another incorporating the
manufacture of nine separate product lines is being negotiated.
In addition, during 1997, management has undertaken efforts to identify
healthcare companies with similar technologies or companies seeking new
proprietary products to strengthen their existing market position. This strategy
is directed toward the formation of strategic alliances, joint venture
arrangements, licensing and distribution agreements, and research and
development agreements and projects. An integral part of this on-going strategy
is to aggressively pursue the sale of all ancillary technology which will enable
the Company to focus its resources exclusively on its core technologies and
commercial non-angioplasty balloon catheter products. Although there can be no
assurances, the Company does not foresee any risks associated with these
initiatives.
F-29
<PAGE> 64
AMERICAN BIOMED, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
American BioMed, Inc.
Our report on the consolidated financial statements of American BioMed,
Inc. and Subsidiaries (a development stage enterprise), which refers to
substantial doubt regarding the Company's ability to continue as a going
concern, is included on Page F-2 in this Form 10-K. In connection with our
audits of such consolidated financial statements, we have also audited the
related consolidated financial statement schedule listed in the index on Page
F-1 of this Form 10-K.
In our opinion, the consolidated financial statement schedule referred to
above, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information required to be included therein.
COOPERS & LYBRAND L.L.P.
Houston, Texas
March 31, 1998
F-30
<PAGE> 65
SCHEDULE II
AMERICAN BIOMED, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
ADDITIONS
--------------------------
(2)
BALANCE AT (1) CHARGED TO
BEGINNING CHARGED TO OTHER BALANCE AT
OF COSTS ACCOUNTS- DEDUCTIONS- END OF
DESCRIPTION PERIOD AND EXPENSES DESCRIBE DESCRIBE PERIOD
----------- ---------- ------------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1995
Allowance for doubtful
accounts............... $ 17,588 $ 51,919 $24,027(1) $ 45,480
Allowance for deferred tax
assets................. 6,522,000 314,000 6,836,000
DECEMBER 31, 1996
Allowance for doubtful
accounts............... 45,480 13,238 1,218(1) 57,500
Allowance for deferred tax
assets................. 6,836,000 1,159,000 7,995,000
DECEMBER 31, 1997
Allowance for doubtful
accounts............... 57,500 68,721 69,054(1) 57,167
Allowance for deferred tax
assets................. 7,995,000 832,000 8,827,000
</TABLE>
- ---------------
(1) Write-off of bad debts.
F-31
<PAGE> 66
SIGNATURES
Pursuant to the Requirements of the 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, in the City of The
Woodlands, State of Texas, on the 31st day of March, 1998.
AMERICAN BIOMED, INC.
By: /s/ STEVEN B. RASH
----------------------------------
Steven B. Rash
Chairman of the Board
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<C> <S> <C>
/s/ STEVEN B. RASH Chairman of the Board, March 31, 1998
- ----------------------------------------------------- President and Chief Executive
Steven B. Rash Officer
/s/ COLENE BLANKINSHIP Controller (Principal March 31, 1998
- ----------------------------------------------------- Financial and Accounting
Colene Blankinship Officer)
/s/ LAWRENCE M. HOFFMAN Director March 25, 1998
- -----------------------------------------------------
Lawrence M. Hoffman
Director March , 1998
- -----------------------------------------------------
Richard Serbin
/s/ CLAUDIO GUAZZONI Director March 30, 1998
- -----------------------------------------------------
Claudio Guazzoni
</TABLE>
<PAGE> 67
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
2.1 -- Agreement and Plan of Merger among American BioMed, Inc.,
ABI Acquisition, Inc. and Cathlab Corporation dated March
30, 1992(3)
3.1 -- Certificate of Incorporation(1)
3.2 -- By-laws(1)
3.3 -- Certificate of Designations, Preferences and Rights of
1996 Series A Convertible Preferred Stock(5)
3.4 -- Certificate of Designations, Preferences and Rights of
1996 Series B Convertible Preferred Stock(5)
3.5 -- Certificate of Designations, Preferences and Rights of
1997 Series C Convertible Preferred Stock
4.2 -- Specimen Common Stock Certificate(1)
10.17 -- Summers Note, dated September 1990, between the Company
and David P. Summers, as amended(1)
10.28 -- 1992 Stock Option Plan of the Company and forms of
incentive stock option agreement and non-qualified stock
option agreement(2)
10.57 -- Patent License, Research & Development Agreement between
Wright Medical Technology, Inc. and American BioMed,
Inc.(2)
10.69 -- Stipulation of Settlement, Scott Printing Corporation v.
American BioMed, Inc.(4)
10.70 -- Employment contract with Steven B. Rash(4)
10.71 -- Purchase of Technology Agreement, Guerbet, S.A.(4)
10.80 -- 1996 Incentive Stock Option Plan(6)
10.81 -- Aberlyn Schedule No. 3 to Master Lease Agreement No.
0001E and Patent Schedule No. 2 to Patent Assignment and
License Agreement No. 0001P, effective June 1, 1996(7)
10.82 -- Securities Purchase Agreement, dated February 20, 1996,
between the Company and certain investors relating to the
issuance and sale of Common Stock and 200 shares of the
1996 Series A Convertible Preferred Stock(8)
10.83 -- Securities Purchase Agreement, dated February 20, 1996,
between the Company and certain investors relating to the
issuance and sale of 1,190 shares of the 1996 Series A
Convertible Preferred Stock(8)
10.84 -- Form of Registration Rights Agreement, dated February 20,
1996, between the Company and holders of the 1996 Series
A Convertible Preferred Stock(8)
10.85 -- Securities Purchase Agreement, dated November 7, 1996,
between the Company and certain investors relating to the
issuance and sale of the 1996 Series B Convertible
Preferred Stock(8)
10.86 -- Form of Registration Rights Agreement, dated November 7,
1996, between the Company and holders of the 1996 Series
B Convertible Preferred Stock(8)
10.87 -- Securities Purchase Agreement, dated March 21, 1997,
between the Company and certain investors relating to the
issuance and sale of the 1997 Series C Convertible
Preferred Stock(8)
10.88 -- Registration Rights Agreement, dated March 21, 1997,
between the Company and holders of the 1997 Series C
Convertible Preferred Stock(8)
10.89 -- Lease Agreement dated June 19, 1997 between the Company
and Woodlands Office Equities -- '95 Limited
10.90 -- Modification Agreement -- Patent Schedule No. 002 between
Aberlyn Capital Management Co., Inc. and the Company
</TABLE>
<PAGE> 68
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.91 -- Modification Agreement -- Lease Schedule No. 003 between
Aberlyn Capital Management Co., Inc. and the Company
10.92 -- Employment agreement with Marshall Kerr
11.1 -- Computation of (Loss) per Common Share
21.1 -- Subsidiaries of the Registrant(7)
23.1 -- Consent of Coopers & Lybrand L.L.P.
27 -- Financial Data Schedule
</TABLE>
- ---------------
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended, File No. 33-424372, dated August 4, 1992.
(2) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994.
(3) Incorporated by reference to the Company's Current Report on Form 8-K for
April 30, 1992.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
(5) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996.
(6) Incorporated by reference to the Company's Proxy Statement for the November
22, 1996 Annual Meeting.
(7) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
(8) Incorporated by reference to the Company's Annual Report on Form 10-K/A-1
for the year ended December 31, 1996.
<PAGE> 1
EXHIBIT 10.89
LEASE AGREEMENT
PARKWOOD BUILDING
10077 GROGAN'S MILL ROAD, SUITE 100
THE WOODLANDS, MONTGOMERY COUNTY, TEXAS
THIS LEASE AGREEMENT (the "Lease") is made and entered into on this
the 19th day of June, 1997, between WOODLANDS OFFICE EQUITIES-'95 LIMITED, a
Texas limited partnership, ("Lessor"), and AMERICAN BIOMED, a Delaware
Corporation, ("Lessee").
1. Premises. Upon the terms, provisions and conditions
hereinafter set forth, Lessor does hereby lease, demise and let to Lessee, and
Lessee does hereby lease and take from Lessor 2,883 net rentable square feet of
floor space ("Premises"), together with all appurtenances thereto in the
building known as the Parkwood Building which has been constructed by Lessor at
10077 Grogan's Mill Road, The Woodlands, Montgomery County, Texas ("Building").
The building is located on a tract of land containing 3.1065 acres, being the
same tract as described and conveyed by that certain General Warranty Deed
filed of record under County Clerk's File No. 8210172 of the Official Public
Records of Real Property of Montgomery County, Texas ("Land"). The Premises is
shown on the floor plan attached hereto as Exhibit "A". Lessee shall also have
the right to park 8 automobiles in the parking garage ("Parking Garage")
located on the Land and on adjoining land north of the Land ("Adjoining Land")
and to use the driveways located on the Land and on Adjoining Land for access
to the Parking Garage.
2. Term. The term of this Lease ("Term") shall commence on the
date ("Commencement Date") which is the earlier of (a) June 1, 1997 or (b) the
day upon which Lessee takes occupancy of the Premises, and shall expire on the
last day of the Thirty-sixth (36th) full calendar month following the
Commencement Date, subject to earlier termination as hereinafter provided.
Notwithstanding any provision to the contrary contained herein, if Lessor has
not tendered to Lessee possession of the Premises with all work to be performed
by Lessor pursuant to the tenant improvement letter ("Tenant Improvement
Letter") attached hereto as Exhibit "B" substantially completed by the date set
forth in (a) above, then the Commencement Date of the Lease shall be the date
Lessor has tendered to Lessee possession of the Premises with all work to be
performed by Lessor pursuant to the Tenant Improvement Letter substantially
completed. Lessor shall not be liable or responsible for any claims, damages or
liabilities of any nature whatsoever in connection with or by reason of any
delayed occupancy. Within 15 days following Lessee's receipt from Lessor of a
memorandum of this Lease specifying the Commencement Date and date of
expiration of the Term, Lessee agrees to execute the memorandum.
3. Use. Lessee shall use the entire Premises solely for office
purposes, and for no other use.
<PAGE> 2
4. Security Deposit. Lessee contemporaneously with the execution
of this Lease has deposited with Lessor the sum of $3,964.13 receipt of which
is hereby acknowledged by Lessor, said security deposit being given to secure
the faithful performance by Lessee of all of the terms, covenants and
conditions of this Lease to be kept and performed by Lessee. If Lessee shall
fail to pay the rent herein reserved promptly when due or if Lessee violates
any of the other terms, covenants or conditions of this Lease, said security
deposit may, at the option of Lessor, be applied to any rent due and unpaid or
to any damages suffered by Lessor as a result of Lessee's default. Nothing
contained in this Section shall in any way diminish or be construed as waiving
any of Lessor's other remedies as provided elsewhere in this Lease or at law or
in equity. Should the entire security deposit or any portion thereof be applied
by Lessor for the payment of sums due and payable to Lessor hereunder, Lessee
shall, on the written demand of Lessor, remit to Lessor a sufficient amount in
cash to restore said security deposit to its original amount. Should Lessee
comply with all of the terms, covenants and conditions of this Lease and
promptly pay all of the rental herein provided for as it falls due, (including
any additional rental due at the end of the Fiscal Year, which term is defined
in Section 6 below, during which the Term expires or terminates), and all other
sums payable by Lessee to Lessor hereunder, said security deposit shall be
returned in full to Lessee. Lessor shall have the right to commingle the
security deposit with other funds of Lessor, and any interest earned shall be
the property of Lessor. Lessor may deliver the security deposit to any
purchaser of Lessor's interest in the Premises, and thereupon be discharged
from further liability with respect to such deposit.
5. Base Rent. The Base Rent, which Lessee hereby agrees to pay to
Lessor monthly, in advance, at Lessor's address stated above, shall be the sum
of $3,964.13 per month, due and payable on the first day of each calendar month
during the Term hereof, without offset or deduction, with a pro rata portion
being due and payable in advance for any partial month occurring at the
beginning of the Term. A late charge of 10% shall be added to any payment of
Base Rent or Additional Rent which is more than 10 days past due.
6. Additional Rent. Lessor agrees to pay all Operating Expenses
(as defined in Section 7 below) up to a maximum amount of $7.00 per year for
each square foot of rentable floor area in the Building ("Operating Cost
Allowance"). In the event the Operating Expenses shall, in any Fiscal Year
exceed the Operating Cost Allowance (prorated for any partial Fiscal Year at
the beginning or end of the Term), Lessee agrees to pay to Lessor, as
Additional Rent, Lessee's pro rata share of any such excess ("Excess Operating
Expenses"). The term "Fiscal Year", as used herein, shall mean Lessor's fiscal
year for accounting purposes which currently is the 12-month period beginning
January 1 and ending December 31. Lessor shall have the right to change the
Fiscal Year, from time to time, and, in such event, Lessor shall notify Lessee
in writing of such change. Lessee's pro rata share shall be determined by
multiplying the Excess Operating Expenses by a fraction, the numerator of which
shall be the number of net rentable square feet in the Premises, and the
denominator of which shall be the net rentable square footage in the Building,
which may change from time to time utilizing BOMA (Building Owners and Managers
Association) standards. Within 90 days following the completion of each Fiscal
Year, Lessor will provide to Lessee a statement showing in reasonable detail
the Operating Expenses for the preceding Fiscal Year, the
2
<PAGE> 3
Additional Rent due with regard to Lessee's share of the Excess Operating
Expenses, and Lessor's reasonable estimate of Excess Operating Expenses for the
then current Fiscal Year. Lessee shall, on or before 30 days following receipt
of said statement, pay to Lessor the amount of Additional Rent due as provided
herein, less the amount of Additional Rent paid in advance (if any) during the
preceding Fiscal Year. Any overpayment will be credited by Lessor to Lessee's
pro rata share of the estimated Excess Operating Expenses for the then current
Fiscal Year. Lessee agrees to pay Additional Rent each month thereafter, in
addition to Base Rent, in an amount necessary to amortize the estimated Excess
Operating Expenses for the then current Fiscal Year (or the pro rata portion
thereof, if applicable) over a period equal to the lesser of (i) the number of
months remaining in the Term or (ii) the number of months remaining in the
current Fiscal Year. Notwithstanding that the Term has expired or been
terminated, Lessee shall remain liable for and agrees to pay to Lessor within
30 days following receipt of an invoice therefor, its pro rata portion of
Excess Operating Expenses for the Fiscal Year (or portion thereof) during which
the Term expired or was terminated. Lessee shall have the right, at its expense
and at a reasonable time, to audit Lessor's books relevant to the Additional
Rent due under this Section. Lessee also agrees to pay to Lessor, as
Additional Rent, a management fee ("Management Fee") of 5% of the annual Base
Rent. Lessee agrees to pay the Management Fee each month, in addition to other
Additional Rent and Base Rent, during each Fiscal Year in an amount necessary
to amortize the Management Fee for the then current Fiscal Year over a 12 month
period. For the Fiscal Year in which the Term begins or ends, Lessee shall only
be responsible for the amortized Management Fee for the months of each such
Fiscal Year that the Lease is in force.
7. Operating expenses. The term "Operating Expenses" means all of
Lessor's costs, expenses and disbursements (but not acquisition of capital
investment items, except as hereinafter expressly provided or specific costs
billed to specific lessees) to operate and maintain the Land, the Building, and
all improvements thereon from time to time (to the extent and only to the
extent same are Lessor's obligation to pay or furnish under the other
provisions of this Lease), including, but not limited to, Lessor's costs of
providing heating, air conditioning and utilities; wages, salaries, and other
compensations of any kind or nature paid to Lessor's employees at the grade of
director of property management and below and any related overhead,
administrative and general office expenses other than the Management Fee
provided for in the Lease; janitorial services and supplies; refuse removal;
courtesy guard services; landscaping, including irrigation; parking area
maintenance and lighting; and general maintenance and repairs, including, but
not limited to, repairs to roof surface and preventive maintenance, elevator
maintenance, parking area restriping, exterior painting and other activities.
Operating Expenses shall also include a reasonable amortization charge on
account of any capital expenditure incurred to effect a reduction of Operating
Expenses and a reasonable charge for amortization of all capital items Lessor
installs (a) to reduce Operating Expenses, or (b) to promote safety, or (c)
which Lessor is required to install on or for the benefit of the Building by
any governmental law, code or regulation passed or enacted on or after the
Commencement Date, or (d) which is a replacement (as opposed to additions or
new improvements) of items located in the common areas adjacent to the
Building, the parking area and other facilities used in connection with the
Building, or involving the exterior of the Building, including, but not limited
to, the roof and structural elements. Additionally, Operating Expenses shall
include all ad valorem taxes or
3
<PAGE> 4
assessments, and Annual Assessments of The Woodlands Community Association,
Inc., which accrue against the Building or the Land during the Term, together
with all insurance premiums which Lessor is required to pay or deems necessary
to pay with respect to the Building or the Land, including, but not limited to,
casualty insurance and liability insurance. Further, Operating Expenses shall
include 48% of Lessor's costs to operate and maintain both the portion of the
Parking Garage on the Adjoining Land and the driveways on the Adjoining Land.
Notwithstanding anything contained herein to the contrary, it is agreed that in
the event not more than 95% of the rentable area in the Building is occupied
during any Fiscal Year or in the event not more than 95% of the rentable area
in the Building is provided with building standard services during any Fiscal
Year, an adjustment shall be made in computing the Operating Expenses for such
year so that the Operating Expenses shall be computed for such year as though
the Building had been 95% occupied during such year and as though 95% of the
Building had been provided with building standard services during such year.
8. Services to be Furnished by Lessor. Lessor covenants and
agrees to provide and pay for the following:
A. Electrical facilities to furnish sufficient power for
typewriters, voice writers, calculating machines, photocopying machines,
personal computers, laser printers, facsimile machines, and other machines of
similar low electrical consumption, but not including electricity required for
electronic data processing equipment, special lighting in excess of building
standard, or any item of electrical equipment (whether listed above or not)
which consumes more than 0.5 kilowatts per hour at rated capacity, or requires
a voltage other than 120 volts single phase;
B. Hot and cold water at those points of supply
specified in the building plans and specifications and in the tenant finish
work plans and specifications;
C. Central heat and air conditioning in season, from 7
A.M. to 6 P.M. Monday through Friday, and 8 A.M. to 2 P.M. on Saturday,
exclusive of Holidays, said times being referred to herein as normal Building
operating hours. "Holidays", as used herein, shall mean New Year's Day,
Memorial Day, July 4, Labor Day, Thanksgiving Day and Christmas Day.
D. Janitor and waste disposal service five days a week,
exclusive of Holidays (provided, however, if Lessee's floor covering is other
than building standard (see Exhibit "C"), Lessee shall pay any additional
cleaning costs attributable thereto, plus 15% overhead, as Additional Rent due
with the next payment of Base Rent);
E. Except as otherwise expressly stipulated herein,
Lessor shall make, do and perform all maintenance or repairs of any kind or
character on the Land, parking areas, the Building and all building machinery
and components, which shall include the painting and repair of walls, floors,
corridors, windows and other structures and equipment serving the Premises, and
such repairs and maintenance thereto as may be necessary because of damage or
negligence by persons other than Lessee, its agents, employees, invitees,
licensees or visitors; and
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F. Maintenance upon request by Lessee, exclusive of
Holidays, of Lessee's special leasehold improvements (see Exhibit "C"), for a
sum equal to Lessor's actual cost of such maintenance plus 15% overhead.
Failure by Lessor to any extent to furnish these defined services or
any cessation thereof which results from causes beyond the control of Lessor
shall not render Lessor liable in any respect for damages to either person or
property, nor be construed as an eviction of Lessee, nor work an abatement of
rent, nor relieve Lessee from fulfillment of any covenant or agreement herein.
In the event of any such interruption, however, Lessor shall use reasonable
diligence during normal business hours to restore such service in any
circumstance in which such restoration is within the reasonable control of
Lessor.
9. Peaceful Enjoyment. Lessee shall and may peacefully have, hold
and enjoy the Premises for the Term, subject to the terms and conditions of
this Lease, provided that Lessee pays the rentals and other sums herein recited
and performs all of its covenants and agreements herein contained. It is
understood and agreed that this covenant and any and all other covenants of
Lessor contained in this Lease shall be binding upon Lessor and its successors
and assigns, but only with respect to breaches occurring during its and their
respective ownership of Lessor's interest hereunder.
10. Covenants of Lessee.
A. Payment. Lessee shall pay all rent and other sums
provided to be paid to Lessor hereunder at the time and in the manner herein
provided.
B. Repairs by Lessee. Lessee shall pay to Lessor all of
Lessor's actual costs and expenses, plus 15% overhead, to repair or replace any
damage or injury done to the Building or any part thereof, caused by Lessee or
Lessee's agents, employees, invitees, licensees or visitors. Said sums shall
constitute Additional Rent due with the next payment of Base Rent.
C. Waste or Damage. Lessee shall not commit or allow any
waste or damage to be committed to any portion of the Building or the Land, and
at the termination of this Lease by lapse of time or otherwise, shall deliver
up the Premises to Lessor in as good condition as of the Commencement Date,
ordinary wear and tear excepted.
D. Alterations, Additions and Improvements. Lessee shall
not make or allow to be made any alterations or physical additions in or to the
Premises without first obtaining the written consent of Lessor. Lessor shall
not be liable as a result of any such consent for completeness, design
sufficiency, or compliance with any law, ordinance, order, rule, or regulation
and Lessee shall indemnify, defend and hold Lessor harmless from all claims,
demands, damages, causes of action or litigation, arising out of or resulting
from such consent. Any and all alterations, additions or improvements, other
than that portion of the initial tenant improvements which are to be provided
by Lessor pursuant to the terms of Exhibit "B" hereto, shall be made at
Lessee's sole expense. All such alterations, additions or improvements shall,
upon completion, become the property of Lessor
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and shall be surrendered to Lessor upon the termination of this Lease by lapse
of time or otherwise; provided, however this clause shall not apply to
removable equipment or furniture owned by Lessee and which can be removed
without damage to the Building or the Premises, provided there is no default by
Lessee in any of the terms and conditions of the Lease.
E. Lessee's Duty to Provide Security. Lessee, at
Lessee's own cost and expense, at all times during the Term, agrees to provide
and be responsible for the safety and security of the Premises.
F. Use and Insurance Rates. Lessee shall not use or
permit the Premises to be used for any other purpose than that stated in
Section 3 hereof, or occupy, use or permit any portion of the Premises to be
occupied or used for any business or purpose which is unlawful, disreputable or
deemed to be extrahazardous on account of fire, or permit anything to be done
which would in any way increase the rate of fire insurance on the Building or
its contents. If an increase in the fire and extended coverage insurance
premiums paid by Lessor for the Building is caused by Lessee's use and
occupancy of the Premises, then Lessee shall pay as Additional Rent due with
the next payment of Base Rent, the full amount of such increase, in addition to
all other sums due hereunder.
G. Laws. Lessee shall comply, at Lessee's cost and
expense, with all recorded restrictive covenants encumbering the Land and all
present and future laws, ordinances, orders, rules, regulations and
requirements of all federal, state, and municipal governments, including all
municipal and road utility districts and municipal utility districts, and all
departments, commissions, boards and officers thereof, and any other body
exercising similar functions, which now or hereafter may be applicable to the
Premises, the improvements in the Premises, or to the use or manner of use of
the Premises or the improvements, including but not limited to, all
environmental laws and the Americans With Disabilities Act. In the event of a
violation of any environmental law by Lessee, and cleanup of contamination is
required, in addition to all other remedies of Lessor under this Lease or at
law or in equity, Lessee shall conduct a Standard 1 cleanup so that there is a
total and complete removal of all contaminates from the Premises. No such
cleanup shall be subject to a risk reduction standard and no deed recordation
notice shall be recorded by Lessee against the Premises.
H. Rules and Regulations. Lessee will comply with the
Rules and Regulations of the Building, a copy of which are attached hereto as
Exhibit "C". Lessor may amend said Rules and Regulations, from time to time, if
reasonably necessary for the safety, care or cleanliness of the Building,
provided that no amendment shall alter any covenant or provision contained in
this Lease. Lessee agrees to comply with any amendment which is made to said
Rules and Regulations in compliance with the terms of this subsection.
I. Entry by Lessor. Lessee shall permit Lessor or
Lessor's agents, representatives, or employees to enter upon the Premises at
reasonable times, and upon having given Lessee reasonable advance notice, (a)
to inspect the Premises, to determine whether Lessee is in compliance with the
terms of this Lease; (b) to show the Premises to prospective purchasers,
lessees, mortgagees, beneficiaries under trust deeds, or insurers (but as to
prospective lessees only during the last 7 months
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<PAGE> 7
of the Term), and (c) to make repairs, improvements, additions and alterations
thereto, as Lessor is permitted to make according to the terms of the Lease.
Any inspections of the Premises pursuant to this subsection shall be at Lessor's
cost and expense; provided, however, in the event it is determined by Lessor
that an environmental study should be conducted on the Premises and said
environmental study determines that Lessee has not complied with all then
existing environmental laws, Lessee shall reimburse Lessor for the cost of the
study within 15 days after receipt of an invoice setting forth the cost, and
Lessee shall promptly take all action necessary, at Lessee's sole expense, to
remedy any noncompliance by Lessee discovered by such study in accordance with
subsection G. hereinabove.
J. Nuisance. Lessee shall conduct its business and
control its agents, employees, invitees and visitors in such a manner as not to
create a nuisance or interfere with, annoy or disturb any other tenant in the
Building or Lessor in its management of the Building. Smoking in the Premises
and in the common areas of the Building is expressly prohibited.
11. Liens. In the event that any mechanic's, materialmen's, or
other lien shall at any time be filed against the Premises, the Building or the
Land purporting to be for work, labor, services or materials performed for or
furnished to Lessee or anyone holding the Premises through or under Lessee, or
arising out of any alleged act or omission of Lessee, Lessee shall forthwith
cause the same to be properly bonded or released. If Lessee shall fail to cause
such lien to be bonded or released within 15 days after being notified of the
filing thereof, then, in addition to any other right or remedy of Lessor,
Lessor may, but shall not be obligated to, discharge the same by posting a bond
or paying the amount claimed to be due, and the amount so paid by Lessor, and
all costs and expenses incurred by Lessor in procuring the discharge of such
lien, including reasonable attorney's fees, shall be due and payable by Lessee
to Lessor as Additional Rent on the first day of the next succeeding month.
Lessor shall not be liable for any labor or materials furnished to Lessee upon
credit, and that no mechanics', materialmen's or other liens for any such labor
or materials shall attach to or affect the estate or interest of Lessor in and
to the Land or Building.
12. Subordination. Lessee agrees that this Lease is and shall be
subordinate to any mortgage or deed of trust which may now or hereafter
encumber the Building or the Land, and to all renewals, modifications,
consolidations, replacements and extensions thereof, provided, however, that
the holder of any such mortgage or deed of trust shall agree that Lessee shall
not be disturbed in its possession of the Premises or its rights hereunder
terminated or amended by the mortgagee, any purchaser at or in lieu of
foreclosure or other party so long as Lessee is not in default under this
Lease. In confirmation of such subordination, Lessee shall at Lessor's request
execute promptly any appropriate certificate or instrument that Lessor may
reasonably request. In the event of the enforcement by the trustee or the
beneficiary under a mortgage or deed of trust of the remedies provided for by
law or by such mortgage or deed of trust, Lessee will, upon request of any
person or party succeeding to the interest of Lessor as a result of such
enforcement, automatically become the lessee of such successor in interest
without change in the terms or other provisions of this Lease; provided,
however, that such successor in interest shall not be bound by (i) any payment
of Base Rent or Additional Rent for more than one month in advance except
prepayments in the nature of security for the performance by Lessee of its
obligations under this Lease; (ii) any amendment or
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<PAGE> 8
modifications under this Lease made without the written consent of such
trustee, beneficiary, or successor in interest; (iii) any default by the prior
owner or landlord in the observance or performance of any of its covenants or
obligations hereunder any right of offset which Lessee may have had against the
prior owner or landlord. Upon request by any successor in interest, Lessee
shall execute and deliver an instrument or instruments confirming the
attornment herein provided for.
Within 15 days after Lessor's request, Lessee agrees to execute an
estoppel certificate or other agreement certifying to Lessor and/or any
mortgagee of the Building such facts and agreeing to such reasonable notice
provisions as such mortgagee may request in connection with Lessor's financing,
subject, however, to the non-disturbance rights of Lessee above-described. If
Lessee fails or refuses to give a certificate hereunder within the time period
herein specified, then the information contained in such certificate as
submitted by Lessor shall be deemed correct for all purposes, and all notice
provisions and other matters in the certificate shall be deemed agreed to, but
Lessor shall have the right to treat such failure or refusal as a default by
Lessee.
This Lease and all rights of Lessee hereunder are further subject and
subordinate to the extent that the same relate to the Premises to all ground or
underlying leases covering the Land/or any part thereof which may now or
hereinafter affect the Land or the Building, and any renewals or modifications
thereof; provided, however that the holder of any ground lease or underlying
leases covering the Land or the Building shall agree that Lessee shall not be
disturbed in its possession of the Premises or its rights hereunder terminated
or amended by such holder as long as Lessee is not in default under this Lease.
13. Condemnation. If the whole or any part of the Premises shall
be taken under the power of eminent domain, this Lease shall terminate as to
the part so taken on the date Lessee is required to yield possession thereof to
the condemning authority. Lessor shall make such repairs and alterations as may
be necessary in order to restore the part not taken to a useful condition, and
the Base Rent shall be reduced proportionately to the portion of the Premises
so taken. If the amount of the Premises so taken substantially impairs the
usefulness of the Premises for the purposes set forth in Section 3, either
party may terminate this Lease within 30 days after Lessee is dispossessed,
effective as of the date when Lessee is required to yield possession. All
compensation awarded for any taking shall belong to and be the property of
Lessor.
14. Fire and Casualty. In the event of a fire or other casualty in
the Premises, Lessee shall immediately give notice thereof to Lessor. If the
Premises, through no fault or neglect of Lessee, its agents, employees,
invitees, licensees or visitors, shall be destroyed by fire or other casualty
so as to render the Premises untenantable, the rental herein shall be reduced
proportionally to the portion of the Premises rendered untenantable until such
time as the Premises are made tenantable by Lessor. If from such cause the same
shall be so damaged that Lessor shall decide not to rebuild, then all rent and
other sums owed hereunder up to the time of such destruction or casualty shall
be paid by Lessee, and thenceforth this Lease shall cease and come to an end.
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<PAGE> 9
15. Casualty Insurance. Lessor shall, at all times during the
Term, maintain a policy or policies of insurance with the premiums thereon
fully paid in advance, issued by and binding upon some solvent insurance
company, insuring Lessor's interest in the Building against loss or damage by
fire and other hazards within the coverage of a Texas standard form of fire and
extended coverage policy, for the full replacement value thereof, with payments
for losses thereunder payable solely to Lessor or its designee. Lessee shall
maintain in force a like policy insuring Lessee's interest in any furniture,
equipment, machinery, goods or supplies which Lessee may bring or obtain upon
the Premises, or any improvements which Lessee may construct thereon.
16. Liability Insurance. Lessee shall maintain, at its expense, at
all times during the Term, a policy or policies of commercial general liability
insurance, with the premiums thereon fully paid in advance, issued by (i) an
insurance company or companies rated "A-" or higher under the most current
edition of A.M. Best's Key Rating Guide, (ii) a Lloyds of London underwriter,
or (iii) an insurance company agreed to by Lessor. All insurers must be
licensed to do business in the State of Texas. The insurance shall afford
protection of not less than $1,000,000 combined single limit bodily injury and
property damage per occurrence. The policy or policies shall name Lessor as an
additional insured. As to any injury or damage occurring in or on the Premises,
Lessee's insurance shall be primary, Lessee's policy shall contain an agreement
by the insurer that such policy, or policies may not be cancelled or materially
modified without 30 days' prior notice to Lessor. Lessee shall provide Lessor a
copy of the required policy or policies, or a certificate evidencing the
required coverage, before beginning any work in the Premises or taking
occupancy of same. Additionally, Lessee shall provide Lessor evidence of the
renewal of each policy at least 30 days before the expiration of the policy.
17. RELEASE OF CLAIMS; WAIVER OF SUBROGATION. ANYTHING IN THIS
LEASE TO THE CONTRARY NOTWITHSTANDING, LESSOR AND LESSEE EACH WAIVE ANY AND ALL
RIGHT OF RECOVERY, CLAIM, ACTION OR CAUSE OF ACTION AGAINST THE OTHER AND ITS
PARTNERS (IF ANY), AND THE AGENTS, OFFICERS, AND EMPLOYEES OF THE OTHER PARTY
OR ITS PARTNERS, FOR ANY LOSS OR DAMAGE:
(i) TO THE PREMISES, THE BUILDING, OR ANY IMPROVEMENTS
THERETO, OR ANY PERSONAL PROPERTY OF SUCH PARTY
THEREIN, BY REASON OF FIRE, THE ELEMENTS OR ANY OTHER
CAUSE WHICH COULD HAVE BEEN INSURED AGAINST UNDER A
TEXAS STANDARD FORM OF FIRE AND EXTENDED COVERAGE
INSURANCE POLICY, OR
(ii) ARISING OUT OF ANY BUSINESS INTERRUPTION, INCLUDING
BUT NOT LIMITED TO LOSS OF PROFITS, BY REASON OF
FIRE, THE ELEMENTS OR ANY OTHER CAUSE,
REGARDLESS OF CAUSE OR ORIGIN, INCLUDING THE SOLE OR CONCURRENT NEGLIGENCE OF
THE OTHER PARTY OR ITS PARTNERS, OR THE AGENTS, OFFICERS, OR EMPLOYEES OF THE
OTHER PARTY OR ITS PARTNERS. LESSOR AND LESSEE COVENANT THAT NO INSURER SHALL
HOLD ANY RIGHT OF SUBROGATION AGAINST THE OTHER PARTY FOR LOSSES WHICH MUST BE
INSURED AGAINST BY THE TERMS OF THIS LEASE. THIS SECTION SHALL SURVIVE THE
TERMINATION OF THIS LEASE.
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18. RELEASE AND INDEMNIFICATION BY LESSEE. SUBJECT TO SECTION 17
ABOVE, LESSEE RELEASES AND AGREES TO DEFEND, INDEMNIFY AND HOLD LESSOR AND ITS
PARTNERS, AND THE AGENTS, OFFICERS AND EMPLOYEES OF LESSOR OR ITS PARTNERS,
HARMLESS FROM AND AGAINST ALL CLAIMS OR CAUSES OF ACTION FOR DAMAGE OR INJURY
OR DEATH TO PERSONS OR PROPERTY OCCURRING ON OR IN THE PREMISES, INCLUDING, BUT
NOT LIMITED TO, ANY CLAIMS OR CAUSES OF ACTION CAUSED BY OR RESULTING FROM (i)
THE SOLE OR CONCURRENT NEGLIGENCE, BUT NOT THE GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT OF LESSOR OR ITS PARTNERS, OR THE AGENTS, OFFICERS, OR EMPLOYEES OF
LESSOR OR ITS PARTNERS, OR (ii) STRICT LIABILITY OR PRODUCT LIABILITY. THIS
SECTION SHALL SURVIVE THE TERMINATION OF THIS LEASE.
19. Holding Over. In the event of holding over by Lessee after the
expiration or termination of the Term and without the written consent of
Lessor, Lessee shall be a tenant at will and shall pay monthly rent equal to
double the amount of all Base Rent and Additional Rent payable during the last
month of the Term. Further, Lessee shall indemnify Lessor against all claims
for damages by any other lessee to whom Lessor may have leased all or any part
of the Premises. Lessor may terminate the tenancy by giving written notice to
Lessee. No holding over by Lessee with the consent and acquiescence of Lessor
shall operate to extend the Lease for a longer period than 1 month. Any holding
over with the consent of Lessor in writing shall thereafter constitute this
Lease a lease from month to month.
20. Default by Lessee. If (a) Lessee fails to timely pay any sum
to be paid by Lessee under this Lease; (b) Lessee fails to perform any of its
other duties or obligations under this Lease and such default continues for 20
days after Lessor delivers written notice to Lessee or deposits written notice
in the U. S. Mail addressed to Lessee's address above; (c) any of the following
actions occur and Lessee fails to vigorously contest and cause same to be
removed, dismissed, or vacated within 30 days from the date of entry or filing:
(i) Lessee's interest under this Lease is levied on under execution or other
legal process, or (ii) any petition is filed by or against Lessee to declare
Lessee a bankrupt or to delay, reduce or modify Lessee's debts or obligations,
or (iii) any petition under the Bankruptcy Code is filed or other action taken
to reorganize or modify Lessee's capital structure, or (iv) Lessee is declared
insolvent according to law, or (v) any general assignment of Lessee's property
is made for the benefit of creditors, or (vi) a receiver or trustee is
appointed for Lessee or its property; (d) Lessee vacates or abandons the
Premises; (e) if Lessee is a corporation, Lessee ceases to exist as a
corporation in good standing in the State of Texas; or (f) if Lessee is a
partnership or other entity, Lessee is dissolved or otherwise liquidated, then
Lessor may treat the occurrence of any one or more of the foregoing events as a
breach of this Lease. Upon the occurrence of any of the foregoing events, at
Lessor's option, Lessor shall have any one or more of the following described
remedies, in addition to all other rights and remedies provided at law or in
equity:
A. Lessor may terminate this Lease and forthwith
repossess the Premises and recover damages in a sum of money equal to the total
of (i) the cost of recovering the Premises, including the cost of the removal
and storage of any of Lessee's possessions left within the Premises, (ii) the
unpaid Base Rent and Additional Rent earned at the time of termination, plus
interest thereon at the lesser of 18% or the then maximum interest rate
permitted to be charged by applicable law ("Interest") from the due date until
paid, (iii) the balance of the Base Rent and Additional Rent for the remainder
of
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the Term, discounted to its present value at the rate of 6% per annum, less the
fair market rental value (allowing a reasonable period for reletting) of the
Premises for said period (provided said sum shall not be less than zero), and
(iv) any other sum of money and damages owed by Lessee to Lessor.
B. Without terminating this Lease, Lessor may-terminate
Lessee's right of possession and repossess the Premises by forcible detainer
suit or otherwise, without demand or notice of any kind to Lessee. If Lessor
pursues this remedy, Lessor may, but shall not be obligated to, relet the
Premises for Lessee's account, for such rent and upon such terms and conditions
as Lessor deems satisfactory. For the purpose of such reletting, Lessor is
authorized to decorate or to make any repairs, changes, alterations or
modifications in or to the Premises as it deems necessary to prepare the
Premises to relet at Lessee's expense. If Lessor fails to relet the Premises,
then Lessee shall pay to Lessor as damages a sum equal to the amount of the
Base Rent and Additional Rent provided for in this Lease for such period or
periods. If Lessor relets the Premises and fails to realize a sufficient sum
from such reletting after deducting (a) the due and unpaid Base Rent and
Additional Rent, (b) the accrued Interest thereon, (c) the cost of recovering
possession, (d) the costs and expenses of all decorations, repairs, changes,
alteration and modifications, and (e) the expense of such reletting and the
collection of the rent accruing therefrom, then Lessee shall pay to Lessor any
such deficiency upon demand from time to time. Lessor may file one or more
suits to recover any sums falling due under this Section from time to time. Any
reletting shall not be an election by Lessor to terminate this Lease unless
Lessor gives a written notice of such intention to Lessee. Notwithstanding any
such reletting without termination, Lessor may at any time thereafter elect to
terminate this Lease for such previous default.
C. Lessor may change the locks on the Premises and not
return the new key to the Lessee unless the Lessee cures the default(s). The
Lessor will not have to give the Lessee a new key unless the Lessee cures the
default(s); the new key will be provided only during Lessor's regular business
hours.
21. Waiver. Failure of Lessor to declare any default immediately
upon occurrence thereof, or delay in taking any action in connection therewith,
shall not waive such default, but Lessor shall have the right to declare any
such default at any time and take such action as might be lawful or authorized
hereunder, either in law or at equity.
22. Lien for Rent. Lessee hereby grants to Lessor a lien on all
property of Lessee now or hereafter placed in or upon the Premises (except such
part of any property as may be exchanged, replaced or sold from time to time in
the ordinary course of business, operation or trade), and such property shall
be and remain subject to such lien of Lessor for payment of all rent and other
sums agreed to be paid by Lessee herein. This Lease shall constitute a security
agreement under the Texas Uniform Commercial Code ("TUCC") so that Lessor shall
have and may enforce a security-interest on all property of Lessee now or
hereafter placed in or on the Premises, including but not limited to all
fixtures, machinery, equipment, furnishings and other articles of personal
property now or hereafter placed in or upon the Premises by Lessee. Lessee
agrees to execute as debtor such financing statement or statements as Lessor
may now or hereafter reasonably request in order that
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such security interest or interests may be perfected pursuant to the TUCC.
Lessor may at its election at any time file a copy of this Lease as a financing
statement. Lessor, as secured party, shall be entitled to all of the rights and
remedies afforded a secured party under the TUCC, which rights and remedies
shall be in addition to and cumulative of the landlord's liens and rights
provided by law or by the other terms and provisions of this Lease.
23. Assignment by Lessor. Lessor shall have the right to sell,
transfer or assign, in whole or in part, all of its rights and obligations
hereunder and in the Building and the Land. In such event and upon the
assumption by such transferee of Lessor's obligations hereunder, no further
liability or obligation shall thereafter accrue against Lessor hereunder.
24. Assignment by Lessee. Lessee shall not assign this Lease or
any interest therein, nor sublet the Premises or any part thereof or any right
or privilege appurtenant thereto, nor permit any other person, firm or entity
to occupy or use the Premises or any portion thereof without first obtaining
the written consent of Lessor. Lessor shall have the right, at its option, to
terminate this Lease as to any portion of the Premises covered by a proposed
assignment or sublease, or to approve any such assignment or sublease only upon
the condition that (a) all rentals paid by the assignee or sublessee in excess
of the rentals due from Lessee hereunder, shall be paid directly to Lessor, (b)
the proposed assignee or sublessee is financially capable of assuming Lessee's
obligations hereunder, in the sole judgment of Lessor, (c) the rental to be
paid by the proposed assignee or sublessee is equivalent to the then market
rental for similar space in The Woodlands, and (d) the proposed assignee or
sublessee agrees to use the Premises only for the uses permitted by Lessee
under this Lease, and to comply with all of the other terms and conditions of
this Lease. Otherwise, Lessor's consent to any proposed sublease or assignment
shall not be unreasonably withheld. Consent by Lessor to one assignment,
subletting, occupation or use by another person shall not be deemed to be a
consent to any subsequent assignment, subletting, occupation or use by the same
or another person. Consent to an assignment or sublease shall not release
Lessee from liability for the continued performance of the terms and provisions
to be kept and performed by Lessee hereunder, unless Lessor specifically and in
writing releases Lessee from said liability. In addition, an amendment,
modification or extension of the Lease after the assignment or sublease shall
not release Lessee from liability for the continued performance of the terms
and provisions to be performed by Lessee hereunder. Any assignment or
subletting by operation of law or otherwise, (including without limitation, a
transfer of controlling interest in Lessee to any other person, firm or entity)
without the prior written consent of Lessor, shall be void and shall, at the
option of Lessor, terminate this Lease. Lessee covenants and agrees that when
the prior written consent of Lessor is obtained, and in the event the
subletting or assignment is to be arranged through public advertisement or
listing of any kind, Lessee will treat all applications for sublease or
assignment in a uniform manner and will award leases according to objective
standards. No decision on any application shall be made on the grounds of the
applicant's race, color, religion, sex, handicap, familial status, or national
origin.
Notwithstanding anything contained herein to the contrary, Lessor
shall not be obligated to entertain or consider any request by Lessee to
consent to any proposed assignment of this Lease or sublease of all or any part
of the Premises unless each request by Lessee is accompanied by a
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nonrefundable fee payable to Lessor in the amount of $500.00 to cover Lessor's
administrative, legal, and other costs and expenses incurred in processing each
of Lessee's requests. Neither Lessee's payment nor Lessor's acceptance of the
foregoing fee shall be construed to impose any obligation whatsoever upon
Lessor to consent to Lessee's request.
25. Transfer of Control. If Lessee is a corporation, and if at any
time during the term of this Lease, corporate shares of Lessee shall be
transferred by sale, assignment, bequest, inheritance, operation of law or
other disposition so as to result in a change in the present control of said
corporation by the person or persons now owning a majority of said corporate
shares, Lessee shall be in default of this Lease and Lessor may exercise its
rights in respect of default hereunder.
26. Notices. Any notice required or permitted to be given pursuant
to the terms of this Lease shall be sent by certified or registered U.S. mail
to Lessor at 2201 Timberloch Place, The Woodlands, Texas 77380, Attn: Property
Management, and to Lessee at 2201 Timberloch Place, Suite 100, The Woodlands,
Texas 77380, Attn: Steven B. Rash. The place to which such notices shall be sent
may be changed by either party giving notice of such change to the other party
in the manner hereinabove provided. A notice shall be deemed given and received
on the 3rd business day following deposit in the U. S. Mail as provided above.
27. Severability. If any of the provisions of this Lease shall
contravene or be invalid under the laws of the particular state, county, or
jurisdiction where applied, such contravention or invalidity shall not
invalidate the Lease or any other portions thereof and the remainder of this
Lease or the application thereof to other persons or circumstances shall not be
affected thereby.
28. Corporate Authority. If Lessee signs as a corporation, each of
the persons executing this Lease on behalf of Lessee represents and warrants
that Lessee is a duly organized and existing corporation, that Lessee has and
is qualified to do business in Texas, that the corporation has full right and
authority to enter into this Lease, and that all persons signing on behalf of
the corporation were authorized to do so by appropriate corporate actions.
29. Title. This Lease is subject to all matters of record in the
Real Property Records of Montgomery County, Texas. Lessee understands that the
Land is or will be subject to a Parking Agreement with the Cynthia Woods
Mitchell Center for the Performing Arts ("Center") wherein the Center is given
rights to use parking spaces in the Parking Garage outside of the normal
Building operating hours. The hours of Center use are as follows:
<TABLE>
<CAPTION>
Day Hours
- -------------------------- --------------------------
<S> <C>
Monday - Friday 6:00 P.M. - 12:00 A.M.
Saturday 2:00 P.M. - 12:00 A.M.
Sunday 12:00 P.M. - 12:00 A.M.
</TABLE>
13
<PAGE> 14
By execution of the Lease, Lessee consents to all plats and replats of the
Land, if any, in compliance with all applicable laws.
30. Not an Offer. The submission of this Lease to Lessee shall not
be construed as an offer, nor shall Lessee have any rights with respect
thereto, unless Lessor executes a copy of this Lease and delivers the same to
Lessee.
31. Exhibits, Riders and Addenda. This Lease also includes and
incorporates herein for all purposes all attached Exhibits, Riders, and
Addenda, if any.
32. Joint and Several Tenancy. If more than one person executes
this Lease as Lessee, their obligations hereunder are joint and several, and
any act or notice of or to, or refund to, or the signature of, any one or more
of them, in relation to the renewal or termination of this Lease, or under or
with respect to any of the terms hereof shall be fully binding on each and all
of the persons executing this Lease as a Lessee.
33. Binding Effect. This Lease shall be binding upon and inure to
the benefit of the heirs, successors or assigns of Lessor and Lessee, subject
to the limitation on subleasing and assignment herein contained.
34. Entire Agreement. This Lease shall constitute the sole and
only agreement of Lessor and Lessee with regard to the lease of the Premises,
and shall supercede any prior or contemporaneous oral or written agreements.
This Lease may not be altered, changed or amended, except by an instrument in
writing, signed by both parties hereto.
35. Pronouns. Pronouns which refer to either Lessor or Lessee
shall be construed to mean the appropriate number and gender intended.
36. Force Majeure. If either party shall be delayed or prevented
from the performance of any act required hereunder by reason of acts of God,
strikes, lockouts, labor troubles, inability to procure materials, restrictive
governmental laws or regulations or other cause without fault and beyond the
control of the party obligated (Lessee's financial inability, such as inability
to obtain financing or lack of capital, excepted), performance of such act
shall be excused for the period of the delay, and the period for the
performance of any such act shall be extended by a period equal to the period
of such delay; provided, however, nothing in this Section shall excuse Lessee
from the prompt payment of any rental or other charge required of Lessee
hereunder, except as may be expressly provided elsewhere in this Lease.
37. General. Time is of the essence of this Lease. All rights and
remedies of Lessor and Lessee under this Lease shall be cumulative and none
shall exclude any other rights or remedies allowed by law. This Lease shall be
declared to be a Texas lease, and all of the terms hereof shall be construed
according to the laws of the State of Texas. Said Lease shall be performable
only in
14
<PAGE> 15
Montgomery County, Texas, and venue for any action hereunder shall be
exclusively in Montgomery County, or in the Southern District of Texas, Houston
Division, as appropriate.
IN TESTIMONY WHEREOF, the parties hereto have executed this Lease in
duplicate counterparts, each of which shall constitute an original but
collectively shall constitute only one document, such execution to be effective
on the date first above written.
LESSOR
WOODLANDS OFFICE EQUITIES-'95 LIMITED
By: The Woodlands Office Equities, Inc.,
Its General Partner
Date: June 19, 1997 By: /s/ ERIC H. WOJNER
----------------------- ------------------------------------------
Name: Eric H. Wojner
----------------------------------------
Title: Vice President/Investment Properties
---------------------------------------
Originator
----------
Legal
----------
Financial
----------
LESSEE
AMERICAN BIOMED
----------------------------------------------
Date: June 9, 1997 By: /s/ STEVEN B. RASH
----------------------- ------------------------------------------
Name: Steven B. Rash
----------------------------------------
Title: President & CEO
---------------------------------------
15
<PAGE> 16
PARKWOOD I
OFFICE BUILDING
FIRST FLOOR
10077 GROGANS MILL ROAD
[DIAGRAM OF OFFICE SITE]
EXHIBIT A
---------
Suite 100
2,883 RSF
INITIALS
SBR/EHW
JUNE 20, 1996
<PAGE> 17
EXHIBIT B
American BioMed
Re: Leasehold improvements for 2,882 rentable square feet (2,506 usable square
feet) of space in a building known as ________________ in The Woodlands,
Texas.
Gentlemen:
Lessor is pleased to quote for your approval the cost of work necessary to
construct the proposed leasehold improvements in the above referenced space.
The cost of work is based upon the attached drawings dated TBD.
<TABLE>
<S> <C>
Total Cost of Work $ To be determined
------------------
Lessor Allowance ($ 9,800.00)
------------------
Total Amount Due from Lessee $ To be determined
==================
</TABLE>
If Lessor further agrees to perform, at your request, any additional or
non-standard work over and above that specified on the attached plans, such
work shall be performed by Lessor, at your sole expense, as a tenant extra.
Prior to commencing any such work requested by you, Lessor will submit to you
written estimates of the cost of any such work. Within one (1) week from the
date of submission thereof by Lessor, you shall either provide written approval
of the estimate for construction, submit to Lessor revisions in the plans and
specifications, or notify Lessor that the work is no longer requested. You agree
to pay Lessor promptly upon being billed therefore, the cost of all such work,
together with fifteen percent (15%) of the cost for Lessor's overhead. You
agree that in the event of default in payment thereof, Lessor shall (in
addition to all other remedies) have the same rights as in the event of
default of payment of rent under the Lease.
It is agreed that, notwithstanding the date provided in the Lease for the
commencement of the lease Term, your obligation for the payment of rental
thereunder shall not commence until Lessor has substantially completed all work
to be performed by Lessor pursuant to this agreement; provided, however, that
if Lessor shall be delayed in substantially completing the work as required
hereunder as a result of:
*If the Total Cost of work should exceed the Lessor Allowance of $9,800.00,
Lessee agrees to pay to Lessor in cash the overage at move-in or reduce the
scope of work.
INITIALS
SBR/EHW
<PAGE> 18
Leasehold Improvements
Page 2
(a) Your failure to timely furnish the information and approval as and
when required;
(b) Your request for materials, finishes or installations other than
specified on plans attached;
(c) Your changes in approved plans or specifications; or
(d) The performance by a person, firm or corporation employed by you and
the completion of said work by said person, firm or corporation,
then the commencement of the term of the Lease ad the payment of rent
thereunder shall be accelerated by the number of days of such delay.
All monies due from you for leasehold improvements must be paid to Lessor
prior to your occupancy of your space.
Upon your approval as indicated below, Lessor will begin construction of
your leasehold improvements and estimate construction completion within 3 weeks
of commencement of construction.
Sincerely,
/s/ STEVEN B. RASH June 9, 1997 By: GERALD D. IRONS
- ------------------ ---------------- -----------------------------
Tenant Acceptance Date Sales Director
[ILLEGIBLE]
-----------------------------
Director of
Tenant Improvements
<PAGE> 19
EXHIBIT C
TO LEASE AGREEMENT
RULES AND REGULATIONS
PASSAGE WAY OBSTRUCTION
The sidewalks, entries, passages, courts, corridors and stairways shall not be
obstructed by any Lessee, its employees, contractors or agents, or used by them
for other purposes than for ingress and egress to and from their respective
suites.
UPKEEP OF PREMISES
All glass, locks and trimmings in or about the doors and windows, and all
electric globes and shades belonging to the Building shall be kept whole, and
whenever broken by the Lessee or its agents or invitees, shall be immediately
replaced or repaired and put in order by Lessee under the direction and to the
satisfaction of Lessor, and on removal shall be left whole and in good repair.
SKYLIGHTS AND WINDOWS
No floors, skylights or windows that reflect or admit light into the corridors
or passage-ways, or to any other place in the Building, shall be covered or
obstructed by any lessee. If Lessee desires blinds or window coverings, they
must be of such shade, color, material and make as shall be prescribed by
Lessor(and any awning proposed may be prohibited by Lessor).
SIGNAGE
No sign, advertisement, display, notice, or other lettering shall be exhibited,
inscribed, painted or affixed on any part of the outside of the Premises, or
inside, if visible from the outside of the Building, unless Lessor has
approved in writing the color, size, style, and location thereof in the
Building. There shall be no duty on Lessor to allow any sign, advertisement or
notice to be inscribed, painted or affixed on any part of the inside or outside
of the Building unless provided for in the Lease. In addition, no symbol,
design, mark, or insignia adopted by Lessor for The Woodlands, or any part
thereof, shall be used in connection with the conduct of Lessee's business in
the Premises or elsewhere, without the prior written consent of Lessor. Signs
on doors will be placed for Lessee by a tradesman appointed by Lessor, the cost
to be paid by Lessee. A directory in a conspicuous place, with names of the
lessees, will be provided by Lessor; any necessary revision in this will be
made by Lessor within a reasonable time after notice from Lessee of the error
or change making the revision necessary. No furniture shall be placed in front
of the Building or in any lobby or corridor without written consent of Lessor.
Lessor shall have the right to remove all such signs and furniture without
notice to Lessee, at the expense of Lessee.
1
<PAGE> 20
NOISE
No person shall disturb the occupants of the Building by the use of any musical
instruments, the making of unseemly noises, by the emission of odors or in any
other way. No dogs or other animals shall be allowed in the Building, except
for guide animals of disabled persons. Guide animals, however, must not bother,
threaten, or harm persons unless provoked.
USE OF PREMISES
No portion of the Building shall be used for living, sleeping, residential or
lodging purposes, or for any immoral or unlawful purposes.
FIRE PROTECTION
Lessee shall not do or permit anything to be done in the Premises or the common
areas of the Building, or bring or keep anything therein, which might
invalidate or increase the rate of or make inoperative fire insurance on the
Building or property kept therein, or any other insurance policy carried by
Lessor on the Building or any part thereof, or obstruct or interfere with the
rights of other lessees, or in any way injure or annoy them, or conflict with
the laws relating to fire, or with any regulations of the fire department, or
conflict with any of the rules or ordinances of any city, county, state or
federal authority. Lessee shall not be permitted to use or keep in the Premises
or any portion of the Building any kerosene, camphene or other burning or
flammable fluids or explosives without the prior approval of Lessor.
PARKING
All vehicles will be parked within striped lanes. Parking across the stripes or
in unmarked areas, blocking of walkways, loading areas, entrances or driveways
will not be permitted. Unauthorized cars will not be allowed in the reserved
parking areas. Should such a situation exist, Lessor, at its option, shall have
the right to tow such vehicle away at the owner's expense.
BICYCLES
No bicycles or similar vehicles will be allowed in the Building.
JANITORIAL SERVICE
No Lessee shall employ any person or persons other than the janitor of the
Lessor for the purpose of cleaning or taking care of the premises leased,
without the written consent of Lessor. Lessor shall be in no way responsible to
any Lessee for any loss of property from the leased premises, however occurring,
or for any damage done to the furniture by the janitor or any of its employees,
or by any other person or person whomsoever. Any person or persons employed by
Lessee, with the written consent of Lessor, must be subject to and under the
control and direction of the janitor of the Building at all times while working
in the Building. The janitor of the Building may at all times keep a pass key.
The janitor and other agents of Lessor shall at all times be allowed admittance
to said leased premises.
2
<PAGE> 21
NON-STANDARD CLEANING AND MAINTENANCE
If Lessee requires cleaning or maintenance of specialty equipment or
non-standard tenant improvement furnishings (i.e., glass panels, special art
decor, non-standard floor coverings, non-standard lighting and specialized
equipment) as determined by Lessor, Lessee shall pay any additional cost
attributable thereto, plus 15% overhead.
EXCESS TRASH DISPOSAL
In the event Lessee must dispose of crates, boxes, etc., which will not fit
into office waste paper baskets, it will be the responsibility of Lessee to
dispose of same. In no event will Lessee set such items in the public areas of
the Building.
DEBRIS
Nothing shall be thrown out of the windows of the Building, or down the
stairways or other passages.
CARPET DAMAGE
Lessee will be responsible for any damage to carpeting and flooring as a result
of rust or corrosion of file cabinets, water staining from planters, excessive
wearing by roller chairs and metal objects.
MOVES
Movement in or out of the Building of furniture, equipment or materials which
requires use of elevators or stairways, or movement through the Building
entrances or lobby, shall be under the supervision of, and shall be restricted
to hours designated by Lessor. Such movement shall be carried out in the manner
agreed upon between Lessee and Lessor by prearrangement before performance. At
the time of such prearrangement, Lessor will set time, method and routing of
movement as well as limitations imposed by safety or other concerns which may
prohibit any item from being brought into the Building. Lessee assumes, and
shall indemnify Lessor against, all risks and claims of damage to persons
and/or properties arising in connection with any said movement.
Moves are to be scheduled, unless otherwise provided, for after 5:00 pm Monday
through Friday, and from 8:00 am to 6:00 pm on Saturdays and Sundays, legal
holidays excepted.
HEAVY EQUIPMENT
All safes or other heavy articles shall be carried up or into the premises only
at such times and in such manner as shall be prescribed by Lessor, and Lessor
shall in all cases have the right to specify the proper weight and position of
any such safe or other heavy article. Any damage done to the Building by taking
in or removing any safe or from overloading any floor in any way shall be paid
by Lessee. Defacing or injuring in any way any part of the Building by Lessee,
its agents or servants, shall be paid for by Lessee.
3
<PAGE> 22
BUILDING HOURS
Lessor designated the following hours during which the Building will be in
operation: 7:00 am to 6:00 pm Monday through Friday, and 8:00 am to 2:00 pm on
Saturday, exclusive of Holidays. "Holidays", as used herein, shall mean New
Year's Day, Memorial Day, July 4, Labor Day, Thanksgiving and Christmas.
PROTECTION OF PREMISES
Lessee shall have the responsibility for protecting the Premises from theft,
robbery and pilferage.
AFTER HOURS AIR CONDITIONING AND HEATING
In the event Lessee desires air conditioning or heading service other than
during standard operating hours, the request must be made to Lessor within a
reasonable length of time prior to the need for service. This service will be
made available at Lessor's then prevailing rate established on an hourly basis.
NON-STANDARD USAGE OF UTILITIES AND SUPPLIES
Lessor reserves the right to sub-meter and charge at cost plus 15% overhead any
non-standard use of electricity, natural gas, water and other supplies of the
Building as determined by Lessor.
WATER USAGE
The water closets and other water fixtures shall not be used for any purpose
other than those for which they were intended, and any damage resulting to them
from misuse, or the defacing or injury of any part of the Building shall be
borne by the person who shall occasion it. No person shall waste water by
interfering with the faucets or otherwise.
LOCKS AND KEYS
Lessor agrees to furnish Lessee two keys for the doors entering the Building,
Lessee's suite and each entry door therein. Any additional keys will be
furnished at a charge by Lessor equal to its cost plus 15% overhead. No
additional locks shall be placed upon any doors without the written consent of
Lessor, nor shall any duplicate keys be made. All necessary keys shall be
furnished by Lessor, and the same shall be surrendered upon the termination of
this lease, and Lessee shall then give to Lessor or its agents explanation of
the combination of all locks upon the doors of vaults.
ELECTRICAL AND TELEPHONE SERVICE
If Lessee desires telegraphic, telephonic or other electric connections, Lessor
or its agents will direct the electricians as to where and how the wires may be
introduced, and without such direction no boring or cutting for wires will be
permitted. Access to any mechanical, electrical or telephone rooms must be
approved by Lessor.
4
<PAGE> 23
ALTERATIONS AND CONTRACTOR APPROVAL
All contractors and/or technicians performing any alterations for Lessee within
the Building must be referred to Lessor for approval and shall, prior to
commencement, execute proper lien waivers.
ANTENNAE AND AERIALS
No aerial or antenna, including but not limited to, a satellite dish, shall be
erected on the roof or exterior walls of the Premises or Building in which the
Premises is a part without, in each instance, the prior written consent of
Lessor. Any aerial or antenna so installed without such written consent shall
be subject to removal by Lessor without notice at any time.
ADDITIONAL RULES AND REGULATIONS
Lessor reserves the right to make such other and further reasonable rules and
regulations as in its judgment may from time to time by necessary for the
safety, care and cleanliness of the Building and its occupants and for the
preservation of good order therein.
/s/ STEVEN B. RASH
------------------------------------
LESSEE
/s/ F. EARL HIGGINS, JR.
------------------------------------
F. Earl Higgins, Jr.
Vice President, Property Management
5
<PAGE> 1
EXHIBIT 10.90
MODIFICATION AGREEMENT
This Modification Agreement (the "Agreement") is entered into this 10TH day
of FEBRUARY, 1998 and is effective as of NOVEMBER 1, 1997 by and between
American BioMed, Inc. ("ABI") and Cathlab Corporation and Aberlyn Capital
Management Limited Partnership ("Aberlyn").
Reference is made to that certain Patent Assignment and License Agreement
NO. 0001P dated DECEMBER 31, 1992, as modified, and Patent Schedule NO. 002
dated JUNE 1, 1996 (the "Contract") by and between American BioMed, Inc. and
Cathlab Corporation (the "Licensee") and Aberlyn Capital Management Limited
Partnership or its' assignee (the "Company")
For good and valuable consideration, receipt of which is hereby
acknowledged, the Contract, and all documents executed in connection therewith,
are hereby modified as follows:
1. Patent Schedule NO. 002 to the Patent Assignment and License Agreement:
A. The Base Royalty section under Schedule B is hereby modified as follows:
FROM: TO:
<TABLE>
<CAPTION>
Royalty Payment Royalty Payment Royalty Payment Royalty Payment
- --------------- --------------- --------------- ---------------
Nos. Amount Nos. Amount
---- ------ ---- ------
<S> <C> <C> <C>
1-5 $ 8,388.00 1-5 $ 8,388.00
6 $ 27,961.00 6 $ 27,961.00
7-11 $ 8,388.00 7-11 $ 8,388.00
12 $ 27,961.00 12 $ 27,961.00
13-17 $ 8,388.00 13-17 $ 8,388.00
18 $ 69,903.00 *18 $ 8,388.00
19-23 $ 13,981.00 19 $ 13,981.00
24 $ 120,233.00 20-24 $ 2,796.00
25-28 $ 8,388.00
29 $ 215,100.00
</TABLE>
* Commencing on November 1, 1997
B. The Term is modified to Twenty-Nine (29) months.
C. The Last Base Royalty Payment Date is modified to October 1, 1998.
D. The Purchase Option Date is modified to November 1, 1998.
The Licensee agrees that, except as in the above-specified instance(s), all
other terms and provisions of the Contract shall remain in full force and
effect.
Page 1 of 2
<PAGE> 2
IN WITNESS WHEREOF, Licensee and Company have caused this Agreement to be
executed as of the day and year written below.
Licensee: Company:
AMERICAN BIOMED, INC. ABERLYN CAPITAL MANAGEMENT
LIMITED PARTNERSHIP
BY ITS: GENERAL PARTNER
ABERLYN CAPITAL MANAGEMENT COMPANY, INC.
By: /s/ STEVEN B. RASH By: /s/ DIANA M. SPANO
-------------------------------- ------------------------------------
Name: Steven B. Rash Name: Diana M. Spano
----------------------------- ---------------------------------
Title: President & CEO Title: VP & COO
----------------------------- ---------------------------------
Date: February 10, 1998 Date: February 10, 1998
----------------------------- ---------------------------------
CATHLAB CORPORATION
By: /s/ STEVEN B. RASH
--------------------------------
Name: Steven B. Rash
-----------------------------
Title: President & CEO
-----------------------------
Date: February 10, 1998
-----------------------------
Page 2 of 2
<PAGE> 1
EXHIBIT 10.91
MODIFICATION AGREEMENT
This Modification Agreement (the "Agreement") is entered into this 10TH
day of FEBRUARY, 1998 and is effective as of NOVEMBER 1, 1997 by and between
American BioMed, Inc. ("ABI") and Aberlyn Capital Management Limited
Partnership ("Aberlyn").
Reference is made to that certain Master Lease Agreement No. 0001E dated
JANUARY 4, 1993, as modified, and Lease Schedule No. 003 dated JUNE 1, 1996,
(the "Contract") by and between American BioMed, Inc. (the "Lessee") and
Aberlyn Capital Management Limited Partnership or its' assignee (the "Lessor").
For good and valuable consideration, receipt of which is hereby
acknowledged, the Contract, and all documents executed in connection therewith,
are hereby modified as following:
1. Lease Schedule No. 003 to the Master Lease Agreement:
A. The Rent under section 3(b) is hereby modified as follows:
<TABLE>
<CAPTION>
FROM: TO:
Rent Payment Rent Payment Rent Payment Rent Payment
Nos. Amount Nos. Amount
------------ ------------ ------------ ------------
<S> <C> <C> <C>
1-5 $ 6,612.00 1-5 $ 6,612.00
6 $ 22,039.00 6 $ 22,039.00
7-11 $ 6,612.00 7-11 $ 6,612.00
12 $ 22,039.00 12 $ 22,039.00
13-17 $ 6,612.00 13-17 $ 6,612.00
18 $ 55,097.00 *18 $ 6,612.00
19-23 $ 11,019.00 19 $ 11,019.00
24 $ 94,767.00 20-24 $ 2,204.00
25-28 $ 6,612.00
29 $169,500.00
</TABLE>
*Commencing on November 1, 1997
B. The Term is modified to Twenty-Nine (29) months.
C. The Last Rent Payment Date is modified to October 1, 1998.
D. The Purchase Option Date is modified to November 1, 1998.
The Lessee agrees that, except as in the above-specified instance(s), all other
terms and provisions of the Contract shall remain in full force and effect.
Page 1 of 2
<PAGE> 2
IN WITNESS WHEREOF, Lessee and Lessor have caused this Agreement to be
executed as of the day and year written below.
Lessee: Lessor:
American BioMed, Inc. Aberlyn Capital Management
Limited Partnership
By Its: General Partner
Aberlyn Capital Management Company, Inc.
By: /s/ STEVEN B. RASH By: /s/ DIANA M. SPANO
--------------------------------- ------------------------------------
Name: Steven B. Rash Name: Diana M. Spano
------------------------------- ----------------------------------
Title: President & CEO Title: Vice President & COO
------------------------------ ---------------------------------
Date: February 10, 1998 Date: February 10, 1998
------------------------------- ---------------------------------
Page 2 of 2
<PAGE> 1
EXHIBIT 10.92
EMPLOYMENT AGREEMENT
This Employment Agreement made as of the 15th day of December, 1997,
by and between AMERICAN BIOMED, INC., a Delaware corporation (the "Company"),
and MARSHALL KERR, an individual residing at 3975 Alta Vista Drive, Fallbrook
CA 92028 (the "Employee").
WHEREAS, the Company wishes to employ the Employee and the Employee
desires to work for the Company upon the terms and conditions set forth in this
Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual
premises hereinafter set forth, the Company and the Employee agree as follows:
1. EMPLOYMENT. The Company hereby agrees to employ the Employee
and the Employee hereby agrees to work for the Company upon the terms and
conditions set forth herein.
2. TERM OF EMPLOYMENT. Subject to Section 6. hereof this
Agreement shall have a term of two (2) years commencing December 15, 1997 (the
"Initial Term"). Thereafter, this Agreement shall continue in effect on a
year-to-year basis unless terminated in accordance with Section 6. hereof
3. SCOPE OF DUTIES; REPRESENTATIONS AND WARRANTIES.
a. The Employee shall be employed by the Company as its
Vice President Sales and Marketing. At all times, the Employee shall serve
under the direction of the President and Chief Executive Officer of the Company
and shall perform such services as the President and Chief Executive Officer in
his discretion shall deem appropriate.
b. So long as he is employed by the Company, the
Employee shall devote his skill, energy and best efforts to the faithful
discharge of his duties as an employee of the Company. The Employee agrees that
in the provision of all services to the Company, he will comply with and
follow all directives, policies, standards and regulations from time to time
established by the Board of Directors of the Company.
c. The Employee represents and warrants that he is under
no contractual or other restrictions or obligations which will in any way limit
his activities on behalf of the Company.
4. COMPENSATION.
a. During the first year of this Agreement, the Company
shall pay the Employee a base salary, payable monthly in arrears, in equal
installments at a rate equal to $80,000 per annum, (effective 2-1-98 108,000 per
annum). The
<PAGE> 2
annual salary may be adjusted from time to time based upon performance and the
Company's financial condition. In each subsequent year of this Agreement, the
Company shall pay to the Employee a salary equal to the greater of (i) his
salary for the immediately preceding year or (ii) a salary determined by the
Board of Directors following its annual salary and performance review. The
Company shall pay an annual bonus pursuant to an annual incentive compensation
plan up to 50% of the Employee's base salary, based upon Employee attaining
mutually agreed upon goals.
b. All payments of salary and other compensation to the
Employee shall be made after deduction of any taxes which are required to be
withheld with respect thereto under applicable federal and state laws.
c. The Company hereby agrees to grant to the Employee a
non-qualified stock option for 300,000 shares of common stock in the Company
("Option Shares"). The exercise price per share shall be the fair market value
of the shares of common stock of the Company based on the market price of the
common stock at the date of employment. The Employee shall have seven (7) years
in which to exercise those options which have vested. The stock option shall
vest as follows:
(1) 100,000 shares shall vest over two years as
follows: 50,000 upon the employment of the Employee pursuant to this Agreement;
25,000 on the first anniversary of employment and 25,000 on the second
anniversary of employment;
(2) an additional 200,000 shares shall vest after
the date of this Agreement as follows: 50,000 on the first anniversary of
employment and 150,000 on the second anniversary of employment.
The stock options shall be exercisable as to the vested portion by the Employee
for one year following termination of his employment by the Company for any
reason, except that, in the event of the death of the Employee, his estate
shall have the right to exercise the vested portion of the stock option at the
time of the Employee's death for a two-year period following the date of the
Employee's death. In the event the Employee is terminated by the Company
without cause, all shares (in addition to the already vested portion of the
option) shall immediately vest.
d. If there should occur a change in control of the
Company, or the Company is otherwise sold, merged or consolidated, any stock
options, vested or unvested, shall become immediately exercisable by the
Employee, and shall remain exercisable for a period of ten years.
Page 2
<PAGE> 3
5. FRINGE BENEFITS; EXPENSES.
a. So long as the Employee is employed by the Company,
the Employee shall participate in all employee benefit plans sponsored by the
Company for its executive employees, including but not limited to health
insurance, dental insurance; provided, however, that the nature, amount and
limitations of such plans shall be determined from time to time by the Board of
Directors of the Company.
b. The Company will reimburse the Employee for all
reasonable business expenses incurred by the Employee in the scope of his
employment.
6. TERMINATION.
a. During the Initial Term, the Employee's employment by
the Company may be terminated only for cause. "Cause" for this purpose shall
mean gross and continued dereliction of duty or willful misconduct in the
performance of the duties specified herein or conviction of a felony involving
moral turpitude. Following such period, the Employee's employment by the
Company may be terminated by either party at any time, with or without Cause,
by sixty (60) days' written notice to the other party. If the Company
terminates the Employee's employment under this Agreement during the Initial
Term other than for Cause, then the Company shall pay to the Employee (or his
estate or representative, as appropriate) an amount equal to the amount of his
then-current monthly salary times the number of months remaining in the Initial
Term, in a lump sum payment, and shall continue to provide benefits in the kind
and amounts provided up to the date of termination for the remaining period in
the Initial Term, including, without limitation, continuation of any
Company-paid benefits as described in Section 5.a. for the Employee and his
family. Under no circumstances shall Employee be entitled to any compensation
under this Agreement for any period of time following his date of termination
if his termination is for Cause.
7. CONFIDENTIALITY. The Employee understands and agrees that his
employment by the Company creates a relationship of confidence and trust
between himself and the Company with respect "Confidential Information" and
"Inventions". As used herein, the term "Confidential Information" shall mean
and include any and all scientific records, computer programs, data, patent
applications, trade secrets, proprietary information, technology or other
information of any kind or expressed or recorded on any medium arising out of,
concerning or acquired in connection with the research, development and
commercialization activities of the Company; but does not include information
(i) rightfully in the possession of the Employee prior to its disclosure by the
Company; (ii) coming into the Employee's
Page 3
<PAGE> 4
possession from another party who is under no obligation to the Company to keep
the information confidential, (iii) generally known or available, through no
fault of the Employee or (iv) later furnished to the Company without disclosure
restrictions; and the term "Inventions" shall mean any discovery, concept or
idea, whether or not patentable or copyrightable, made during the course of the
Employee's employment, including but not limited to apparatus, processes,
methods, software, formulas, substances and techniques, improvements thereof
and know-how relating thereto, which is made, conceived or reduced to practice,
in whole or in part, during the course of the Employee's employment. In
consideration of his employment by the Company and the compensation received
from the Company from time to time, the Employee agrees that all Confidential
Information and Inventions shall be the sole property of the Company and its
assigns, and the Company and its assigns shall be the sole owners of all
patents and other rights in connection therewith. The Employee hereby assigns
to the Company any rights which he may have or acquire in such Confidential
Information or Inventions. At all times, both during his employment by the
Company and for a period of three years thereafter, the Employee will keep in
confidence and trust all Confidential Information and Inventions and will not
use or disclose any Confidential Information or Inventions or anything relating
thereto without the prior written consent of the Company, except as may be
necessary in the ordinary course of performing his duties for the Company. The
Employee agrees that the remedy at law for any breach of any provision of this
Section 7 will be inadequate and that the Company will be entitled to
injunctive relief for any such breach.
8. NON-COMPETITION
a. So long as the Employee is employed by the Company
and for three years thereafter, the Employee shall not directly or indirectly
engage in, manage, operate, join, control or participate in the ownership,
management, operation or control of, or be employed or engaged in any manner by,
any business competing with that of the Company in the continental United
States. For purposes of this Section 8, a business shall be deemed to be
competing with the business of the Company if such other business is
principally engaged in the development, marketing or distribution of products
and/or technology (whether patented or otherwise) involving atherectomy
catheters, heart pumps, or any other technology developed by the Company during
the term of this Agreement, their derivatives or functional substitutes which
are based on technology or information similar thereto.
b. The Employee has carefully read and considered the
provisions of this Section 8. and, having done so, agrees that the restrictions
set forth in such paragraph, including the time period, scope of activity to be
restrained, and the geographical scope, are fair and reasonable and are
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<PAGE> 5
reasonably required for the protection of the interests of the Company, its
officers, directors, employees and shareholders.
c. In the event, notwithstanding the foregoing, that any
of the provisions of this Section 8. shall be held to be invalid or
unenforceable, the remaining provisions thereof shall nevertheless continue to
be valid and enforceable as though the invalid or unenforceable parts had not
been included therein. In the event any provision of Section 8.a. relating to
the time period and/or the areas of restriction shall be declared by a court of
competent jurisdiction to exceed the maximum time period or areas such court
deems reasonable and enforceable, the time period and/or areas of restriction
deemed reasonable and enforceable by such court shall become and thereafter be
the maximum time period and/or areas.
The Employee agrees that the remedy at law for any breach of
any provision of this Section 8. will be inadequate and that the Company will
be entitled to injunctive relief for any such breach.
9. NOTICE. All notices, requests, demands and other communications
required by or permitted under this Agreement shall be in writing and shall be
sufficiently delivered if delivered by hand, by courier service, or sent by
registered or certified mail, postage prepaid, to the parties at their
respective addresses listed below:
a. If to the Employee, to the address set out in the
beginning of this Agreement;
b. If to the Company:
Attention: Board of Directors
American BioMed, Inc.
10077 Grogans Mill Road
Suite 100
The Woodlands, TX 77380
Either party may change such party's address by such notice to the other
parties.
10. ASSIGNMENT. This Agreement is personal to the Employee, and he
shall not assign any of his rights or delegate any of his duties hereunder
without the prior written consent of the Company.
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<PAGE> 6
The Company shall have the right to assign this Agreement to a successor in
interest in connection with a merger, sale of substantially all assets, or the
like.
11. SURVIVAL. This provisions of this Agreement shall survive the
termination of the Employee's employment hereunder in accordance with their
terms.
12. GOVERNING LAW. This Agreement shall be governed by, and
construed and enforced in accordance with, the laws of the State of Texas.
13. BINDING UPON SUCCESSORS. This Agreement shall be binding upon,
and shall inure to the benefit of, the parties hereto and their respective
heirs, legal representatives, successors and permitted assigns.
14. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement between the Company and the Employee with respect to the terms of
employment of the Employee by the Company and supersedes all prior agreements
and understandings, whether written or oral, between them concerning such terms
of employment.
15. WAIVER AND AMENDMENTS; CUMULATIVE RIGHTS AND REMEDIES.
a. This Agreement may be amended, modified or
supplemented, and any obligation hereunder may be waived only by a written
instrument executed by the parties hereto. The waiver by either party or a
breach of any provision of this Agreement shall not operate as a waiver of any
subsequent breach.
b. No failure on the part of any part to exercise, and
no delay in exercising, any right or remedy hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any such right or remedy by
such party preclude any other or further exercise thereof or the exercise of
any other right or remedy. All rights and remedies hereunder are cumulative and
are in addition to all other rights and remedies provided by law, agreement or
otherwise.
c. The Employee's obligations to the Company and the
Company's rights and remedies hereunder are in addition to all other
obligations of the Employee and rights and remedies of the Company created
pursuant to any other agreement.
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<PAGE> 7
16. SEPARABILITY. In the event any provision or provisions of this
Agreement is held to be invalid or unenforceable by any court of law or
otherwise, the remaining provisions of this Agreement shall nevertheless
continue to be valid and enforceable as though the invalid or unenforceable
parts had not been included therein.
IN WITNESS WHEREOF, the Company and the Employee have executed this
Agreement on the date first above written.
AMERICAN BIOMED, INC.
[C]
By: /s/ STEVEN B. RASH /s/ MARSHALL KERR
------------------------ ------------------------
Name: Steven B. Rash Marshall Kerr
Title: President and CEO
Company Employee
Page 7
<PAGE> 1
EXHIBIT 11.1
AMERICAN BIOMED, INC.
COMPUTATION OF (LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Computation of basic (loss)
per common share:
Net (loss) $ (2,774,203) $ (2,625,116) $ (1,404,384)
Less Preferred stock dividends -- (1,183,413) --
------------- ------------- -------------
Net loss available to common
Shareholders $ (2,774,203) $ (3,808,529) $ (1,404,384)
============= ============= =============
Weighted average number of common
Shares outstanding 15,528,231 11,310,592 9,362,198
============= ============= =============
Basic (loss) per common share $ (0.18) $ (0.34) $ ( .15)
============= ============= =============
Computation of (loss) per common
share assuming full dilution:
Weighted average number
of shares outstanding 15,528,231 11,310,592 9,362,187
============= ============= =============
(Loss) per common share
assuming full dilution $ (0.18) $ (0.34) $ ( .15)
============= ============= =============
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the application of our report which includes an explanatory
paragraph concerning the Company's ability to continue as a going concern,
dated March 31, 1998, included in the Annual Report on Form 10-K for the year
ended December 31, 1997. We also consent to the incorporation by reference of
our report in the Company's registration statements on Form S-8 (File No.
333-03612, Form S-8 (File No. 333-25789, Form S-3 (File No. 333-3903), and
Form S-3 (File No. 333-24979).
COOPERS & LYBRAND L.L.P.
Houston, Texas
March 31, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 82,789
<SECURITIES> 0
<RECEIVABLES> 215,891
<ALLOWANCES> 57,167
<INVENTORY> 648,957
<CURRENT-ASSETS> 1,048,899
<PP&E> 859,656
<DEPRECIATION> 691,665
<TOTAL-ASSETS> 1,945,056
<CURRENT-LIABILITIES> 1,676,050
<BONDS> 0
0
2
<COMMON> 18,457
<OTHER-SE> 78,692
<TOTAL-LIABILITY-AND-EQUITY> 1,945,056
<SALES> 545,473
<TOTAL-REVENUES> 545,473
<CGS> 482,360
<TOTAL-COSTS> 482,360
<OTHER-EXPENSES> 2,723,744
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 183,538
<INCOME-PRETAX> (2,774,203)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,774,203)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,774,203)
<EPS-PRIMARY> (.18)
<EPS-DILUTED> (.18)
</TABLE>
