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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, 1998
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)
Delaware 76-0136574
(State of other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
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 May 27, 1999, was $5,827,499.
The number of outstanding shares of Common Stock, $.001 par value, of the
registrant was 40,115,375 shares as of May 27, 1999.
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TABLE OF CONTENTS
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PART I
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ITEM 1. Business...................................................... 1
ITEM 2. Properties.................................................... 19
ITEM 3. Legal Proceedings............................................. 20
ITEM 4. Submission of Matters to a Vote of Security Holders........... 21
PART II
ITEM 5. Market For Registrant's Common Stock and Related Stockholder
Matters...................................................... 21
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................... 27
ITEM 9. Disagreements on Accounting and Financial Disclosure.......... 27
PART III
ITEM 10. Directors and Executive Officers of the Registrant............ 27
ITEM 11. Executive Compensation........................................ 29
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management................................................... 31
ITEM 13. Certain Relationships and Related Transactions................ 31
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
We believe that certain statements contained in this Annual Report on Form
10-K constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements
involve known and unknown risks, uncertainties and other factors that may
cause our actual results, performance or achievements, or industry results, to
vary materially from our predicted results, performance or achievements, or
those of the industry. Our factors include, among others, the following:
. General economic and business conditions;
. Changes in political, social and economic conditions and local
regulations, particularly in Europe and Asia;
. Changes in, or failure to comply with government regulations;
. Demographic changes;
. Changes in sales mix;
. Maintaining current pricing levels;
. The reduction in sales to, or loss of, any significant customers;
. Maintaining ISO 9001 and CE Mark certification;
. Changes in methods of distribution and technology;
. Competition; availability of silicone;
. Changes in business strategy or development plans;
. The research or development of particular products or technologies;
. The anticipated results of research and development activities, related
clinical trials and required regulatory approvals;
. Availability of liquidity sufficient to meet the Company's need for
capital;
. Availability of qualified personnel; and
. Various other factors referenced in this Annual Report on Form 10-K.
We will not update the forward-looking information to reflect actual results
or changes in the factors affecting the forward-looking information.
The forward-looking information referred to above includes, but is not
limited to:
(a) order backlog information;
(b) expectations regarding sales growth, sales mix, gross margins,
manufacturing productivity and selling, general and administrative
expenses;
(c) the availability and utilization of net operating loss carry-forwards
and other deferred tax assets for income tax purposes;
(d) expectations regarding the company's financial condition and liquidity,
as well as future cash flows;
(e) the ability to obtain substantial additional funds;
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(f) the ability to obtain and maintain all necessary patents or licenses;
(g) the ability to meet applicable regulatory standards and receive
required regulatory approvals;
(h) expectations regarding capital expenditures; and
(i) expectations regarding the cost of research and development.
General
American BioMed, Inc. ("Parent Company") develops, manufactures and markets
medical, surgical and diagnostic devices. The Parent Company was incorporated
September 4, 1984 and closed its initial public offering in October 1991. In
1992 the Parent Company acquired Cathlab Corporation ("Cathlab"). Unless
otherwise described herein, references to "The Company" are to American BioMed
Inc. and its subsidiary.
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 from which the
Company currently derives the majority of its revenue, 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 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 were
temporarily suspended as the Company filed an amended protocol with the FDA
for the peripheral indication. The amended protocol was approved on May 8,
1998. The Company expects to resume the clinical trials by mid-1999 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 1999.
In addition, the Company plans to amend its Investigative Device Exemption
(IDE) with the FDA in 1999 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 late 1999. These
clinical trials will be conducted in parallel with the ongoing peripheral
clinical trials. The Company anticipates completion of these trials before the
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end of 2000 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 OmniFilter. (See "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 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 over stretching 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
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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. Currently, industry sources estimate
the worldwide stent market to be between $1.6--1.9 billion.
Products
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), 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. The Company is currently developing other
versions of its bi-lumen catheters utilizing its dual balloon technology. (See
Ahn Thrombectomy Catheter.)
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 is 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 launched product sales during the second quarter of
1998.
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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.
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.
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 1/3 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 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
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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
"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 II on August 1, 1996 at the University of California at
Los Angeles. However, the clinical trials were temporarily suspended as the
Company filed an amended protocol with the FDA which was approved on May 8,
1998. The Company expects to resume the clinical trials in mid-1999 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 1999.
The Company intends to shift its emphasis on Omnicath(R) Clinical Trials for
peripheral use to A-V Fistula use as the Company believes A-V Fistula use has
greater market opportunities for the Omnicath(R). The Company is amending its
Investigational Device Exemption (IDE) with the FDA to conduct human clinical
trials for the Omnicath(R) for hemodialysis A-V Fistula restinosis and expects
to receive FDA approval to start the trials in late 1999. Submission of the
clinical trial data to the FDA is anticipated to be 18 months after FDA
approval to initiate the clinical trials is received by the Company.
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 "Business--Government Regulation.") The Company
received from the U.S. Patent and Trademark Office its sixth patent for the
OmniCath(R) on March 17, 1998.
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 December 9, 1997 the Company received U.S. 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
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aortic abdominal aneurysm. There can be no assurances that the product will be
approved by the FDA. (See "Business--Government Regulation.")
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
relatively conventional manner for angioplasty. The lesion is crossed with a
conventional guide wire, and the lesion is pre-dilated 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 photo etching which
significantly reduces cost and production error.
The Company's stent technology is protected by three patents, U.S. Patent
No. 5,342,387 issued August 30, 1994 titled Artificial Support for a Blood
Vessel, and U.S. Patent No. 5,607,445 issued March 4, 1997 titled Method and
Apparatus for Making a Stent and U.S. Patent No. 5,772,668 issued June 30,
1998 titled Method and Apparatus for Placing and Endoprosthesis. 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,
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and high blood compatibility. In addition, when used as a substrate, the
coating bonds easily with various anti-coagulant 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 (such as the Schneider Wallstent). When coiled,
according to the reversible arurate sections (the preferred embodiment in U.S.
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, 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 impassable. 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.
8
<PAGE>
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 "Business--Government Regulation.")
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.
Regulatory Status of Products
As of December 31, 1998
<TABLE>
<CAPTION>
510(k)* FDA Revenue
Product Number Status Y/N
------- ------- ---------------- -------
<S> <C> <C> <C>
Arterial Embolectomy Catheter (3Fr--7Fr)..... K881455 Approved 4/6/88 Y
Bi-lumen Irrigation Catheter (5Fr--7Fr)...... K893680 Approved 8/1/89 Y
Bi-lumen Irrigation Catheter (3Fr--4Fr)...... K897184 Approved 3/14/90 Y
Foley Urological Catheter.................... K862124 Approved 8/14/86 N
Thermodilution Catheter...................... K893435 Approved 5/2/89 Y
Arterial Embolectomy Catheter (2Fr).......... K905139 Approved 2/5/91 Y
Angioscopic/Angiographic Irrigation Catheter
(6Fr--8Fr).................................. K897051 Approved 3/16/90 N
Biliary Catheter............................. K910917 Approved 8/2/91 Y
Occlusion Catheter........................... K910916 Approved 6/24/91 Y
Thrombectomy Catheter (dual balloon)......... K972572 Approved 1/13/98 Y
Evert-O-Cath(TM) Catheter (drug delivery).... K922455 Approved 7/7/94 N
OmniCath(R).................................. N/A IDE Filed** Y
OmniFilter Guidewire Micro Filter............ N/A Development N
OmniStent(TM)................................ N/A Development N
Spinal Dissector............................. N/A Development N
Heart Assist Pump............................ N/A Development N
Needle Scope................................. N/A Development N
</TABLE>
- --------
* See "Business--Government Regulations"
** Investigational Device Exemption ("IDE")
9
<PAGE>
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).
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, is a
key component to this strategy. Currently the Company has ten North American
and thirty international distributors.
Sales to Sorin BioMedica ("Sorin"), (based in Italy), and K's Projects,
(based in Japan), represented 13.3% and 10.5% of the Company's total 1998 net
sales, respectively. Revenues from Original Equipment Manufacturing ("OEM")
for Polamedco, (based in California), represented 15.6% of the Company's total
1998 net sales. The remainder of net sales to any one customer were less than
10%. Sorin, K's Projects and Polamedco are not affiliated with the Company.
The loss of these major accounts would be material to the Company's overall
results of operations, financial position and cash flow.
10
<PAGE>
The following summary indicates the Company's percentage of sales within
geographic regions for the years 1998, 1997, and 1996:
<TABLE>
<CAPTION>
Region 1998 1997 1996
------ ---- ---- ----
<S> <C> <C> <C>
United States........................... 45.3 34.5 45.5
Italy................................... 13.3 16.9 18.7
South America........................... 1.5 12.0 16.0
Japan................................... 11.3 9.1 1.3
Other European Countries................ 19.3 15.7 12.1
Other (1)............................... 9.3 11.8 6.4
</TABLE>
- --------
(1) Includes India, Mexico, Latin America, and Canada
A network of independent manufacture representatives will support the
Company's domestic distributors commencing in late 1999. These representatives
will be compensated by commission on actual sales and will be the liaison and
marketing support to our rapidly growing distributor network. The continual
focusing of distributor sales people is paramount to a successful distributor
based marketing program. Management believes that 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 1999 to support the Company's sales efforts.
The Company continues to add additional international distributors to its
distributor network. These distributors aid in the completion of the
regulatory procedures needed to gain approval to sell the Company's products
in a given geographical area. In 1998 regulatory approval was granted for the
Company's silicone balloon catheter products in the countries of Japan, Korea,
and Australia. The registration process is continuing in China and Brazil. In
addition, the regulatory process continues on the Company's OmniCath(R)
atherectomy catheter product in Japan, Korea, and those countries utilizing CE
Mark. The Company plans to add up to twenty international distributorships
during calendar year 1999 in targeted global markets where the Company's
products are currently not represented.
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 its 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 balloon
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
11
<PAGE>
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 100%-silicone balloon catheters, atherectomy catheters, guidewire
microfilter 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. For
example, the countries of Japan, Korea, India, China and Australia have
Ministries of Health and have an approval process that may take as much as
nine months to gain import sales approval. European countries (comprising the
European Union) now require the CE Mark on medical devices before they can be
imported. Other countries require administrative product registration which is
a process that takes approximately three weeks.
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 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
12
<PAGE>
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
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. The Company is currently
marketing the embolectomy catheter, bi-lumen irrigation catheter, occlusion
catheter, biliary gall stone removal catheter, thermodilution catheter and the
angiographic/angioscopic catheter.
13
<PAGE>
The new Ahn Thrombectomy catheter was launched in the second quarter 1998. 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, EN46001 certification in September 1998 and
successfully registered the above named products for the CE Mark.
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 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.
14
<PAGE>
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. On September 7, 1998 the Company received
the CE Mark along with certification to EN46001.
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 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, was launched 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.
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. On March 26, 1999, the Company entered into a
strategic manufacturing alliance with Manufacturing & Research, Inc. ("MRI")
and will relocate its manufacturing facility to Tucson, Arizona. The facility
will be managed and operated by MRI (See "Subsequent Events.")
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, and CE Mark
certification in September 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 other product lines is being discussed.
15
<PAGE>
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. As a result of the MRI strategic
alliance, all research and development for silicone balloon catheters will be
conducted in MRI's Tucson facility utilizing the Company's ISO 9001 and CE
Mark specifications. Research and development activities for other products
will be subcontracted to outside development organizations under the Company's
oversight.
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, 1998, 1997, and 1996 were $471,724, $648,049, and $640,792,
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 27.2% in 1998 over 1997 and increased 1.1% in 1997 over 1996.
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), OmniFilter 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 "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 ("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.
16
<PAGE>
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, 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 leases are
currently being restructured.
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
17
<PAGE>
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 including
Baxter, Applied Vascular and Ideas for Medicine. 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, 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.
18
<PAGE>
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 31, 1999, the Company had 25 full-time employees, 1 in research
and development, 1 in sales and marketing, 1 in regulatory affairs, 14 in
manufacturing, 2 in quality control and 6 in corporate management and
administration. None of the Company's employees are represented by labor
unions. As of April 30, 1999 the Company will relocate its manufacturing
operation to Arizona and close the California facility. The facility will be
staffed and managed by the Company's new strategic partner. (See Subsequent
Events.)
Executive Officers of the Registrant
The following table sets forth information pertaining to executive officers
of the Company:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Steven B. Rash...... 51 President, Chief Executive Officer and Chairman of
the Board
Marshall Kerr....... 48 Vice President, Sales and Marketing
Colene Blankinship.. 49 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 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 the national secretary
of the American Society of Women Accountants, a position she has held since
July 1998 and has been a national board member since July 1996.
Item 2. Properties
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.
19
<PAGE>
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 beginning in
September 1998, the lease is on a month-to-month basis. Currently the plant is
utilizing 90% of the available floor space and is operating at approximately
40% of capacity for one shift and will add employees as the demand for product
increases. The Company will relocate its manufacturing facility on April 30,
1999 to its strategic manufacturing partner's facility in Tucson, Arizona. The
Company's strategic manufacturing partner, Manufacturing & Research, Inc.
("MRI"), will staff and manage the facility and will manufacture the Company's
products under a licensing agreement. (See Subsequent Events.) The Company's
Irvine facility will be closed once it transitions to MRI's facility.
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.
Item 3. Legal Proceedings
In May 1997, a former Chairman and Chief Scientific Officer and director of
the Company filed a lawsuit in the State District Court of Harris County,
Texas seeking an unspecified amount of damages and alleging oppressive action
toward a minority shareholder, breach of contract, failure of consideration
for the assignment of certain patent rights, wrongful termination and unpaid
debts and advances. The February 1998 mediation conference, which was mandated
by the Court, did not result in a settlement agreement. The case came to trial
in October 1998 and was settled on terms favorable to the Company. The Company
agreed to give the plaintiff an agreed judgment totaling $400,000, which may
not be executed until after February 15, 1999 with post judgment interest at
the rate of 10% per year. In addition, the Company agreed that upon the sale
of its guidewire micro-filter patent (the OmniFilter), the plantiff will be
entitled to payment totaling $200,000. In the event of a licensing agreement,
the plaintiff will receive 5% of the licensing agreement revenues until a
total of $200,000 has been paid. The payment of $200,000 is secured by the
OmniFilter patent and such security interest will be subordinated to any
lender requesting the OmniFilter patent as collateral. At the Company's
discretion the security interest in the OmniFilter may be moved to the stent
patent with the same stipulation as to subordination. The judgment was paid in
April 1999.
In August 1997, a former Chief Financial Officer, Secretary and Treasurer
and director of the Company filed a lawsuit in the State District Court of
Harris County, Texas alleging breach of contract with respect to a letter
agreement executed in connection with his employment separation and
resignation from the Board of the Company and is seeking specific performance
and monetary damages of approximately $307,000. On August 24, 1998 the parties
reached a settlement through mediation. The Company agreed to (a) pay $2,800
in cash in 45 days; (b) issue at no cost the plaintiff's stock options to
purchase 150,000 shares of common stock at an exercise price of $0.6875; and
(c) execute an agreed judgment in the amount of $85,000 at 10% interest
payable November 1, 1999.
In September 1997, a former distributor filed a lawsuit in the State
District Court of Harris County, Texas 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. On May 1, 1998 the Company reached an agreement to settle
this lawsuit with the issuance of options to purchase 225,000 shares for an
exercise price of $0.40 per share, exercisable for six months with
registration requirements. The former distributor attempted to void the
agreement and continue the pending litigation. The case was finally resolved
by extending the exercise period to three years from the date the new option
agreement was signed by the Company. Compensation expense of approximately
$56,250 was recorded to reflect the value of the options granted.
In January 1999, a former distributor filed a lawsuit in the State District
Court of Georgia alleging breach of contract and is seeking $34,000 plus pre-
judgment interest. 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.
20
<PAGE>
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 these matters. 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.
Item 4. Submission of Matters to a Vote of Security Holders
None
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, 1997
First Quarter........................................ $1.62500 $1.00000
Second Quarter....................................... 1.09375 0.68750
Third Quarter........................................ 0.71875 0.40625
Fourth Quarter....................................... 0.59000 0.21000
Year Ending December 31, 1998
First Quarter........................................ 0.82000 0.31000
Second Quarter....................................... 0.95000 0.50000
Third Quarter........................................ 0.58000 0.27000
Fourth Quarter....................................... 0.30000 0.16000
</TABLE>
As of March 4, 1999 there were 335 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 4, 1999 was $0.19.
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.
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 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.
21
<PAGE>
Selected Operating Statement Data:
<TABLE>
<CAPTION>
Inception,
Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year September 4,
Ended Ended Ended Ended Ended 1984 To
December 31, December 31, December 31, December 31, December 31, December 31,
1998 1997 1996 1995 1994 1998
------------ ------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Sales, net.............. $ 550,717 $ 545,473 $ 579,533 $ 660,770 $ 637,375 $ 4,410,837
Cost of sales........... (546,409) (482,360) (420,838) (649,355) (782,729) (4,261,675)
Interest income......... 2,429 44,200 4,252 7,239 902 156,363
Other income (expense).. (36,499) 25,766 (114,762) 1,561,203(2) (56,209)(1) 1,906,051
Interest expense........ (144,774) (183,538) (313,914) (276,688) (182,606) (3,023,750)
Research and development
expense................ (471,724) (648,049) (640,792) (537,962) (1,167,773) (8,369,766)
Selling, general and
administrative
expense................ (1,983,824) (2,075,695) (1,718,595) (2,169,591) (2,235,116) (19,516,454)
Distributor settlement.. -- -- -- -- -- (1,080,915)
------------ ------------ ------------ ------------ ------------ -------------
Net loss................ (2,630,084) (2,774,203) (2,625,116) (1,404,384) (3,786,156) (29,779,309)
Less preferred stock
dividends.............. ( 170,031) -- (1,183,413) -- -- (1,353,444)
------------ ------------ ------------ ------------ ------------ -------------
Net loss available to
common shareholders.... $ (2,800,115) $ (2,774,203) $ (3,808,529) $ (1,404,384) $ (3,786,156) $ (31,132,753)
============ ============ ============ ============ ============ =============
Net loss per common
share.................. $ (0.11) $ (0.18) $ (0.34) $ (0.15) $ (0.46)
============ ============ ============ ============ ============
Average number of common
shares outstanding..... 26,302,790 15,528,231 11,310,592 9,362,198 8,188,980
============ ============ ============ ============ ============
</TABLE>
- --------
(1) Other expense in December 31, 1994 includes the write-off of the Superstat
assets.
(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.
Selected Balance Sheet Data:
<TABLE>
<CAPTION>
December 31
---------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Working capital
(deficit).............. $(1,852,718) $ (627,151) $ (256,206) $(3,827,287) $(3,246,020)
Total assets............ 1,615,469 1,945,056 3,069,151 1,883,278 2,445,076
Long-term debt, net of
current maturities..... 29,928 71,855 110,472 -- 611
Capital lease
obligations, net of
current maturities..... 2,274 -- 302,766 7,095 18,033
Total liabilities....... 2,817,701 1,847,905 2,940,556 4,685,133 4,002,192
Preferred stock......... 42 2 3 -- --
Deficit accumulated
during the development
stage.................. (29,779,309) (27,149,225) (24,375,022) (21,749,906) (20,345,522)
Total stockholders'
equity (deficit)....... (1,202,232) 97,151 128,595 (2,801,855) (1,557,116)
</TABLE>
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 its inception through
December 31, 1998, the Company had an accumulated deficit of $29,779,309.
During 1998 the Company focused on CE Mark certification, product development,
launch of the Ahn thrombectomy catheter and continuing the addition of North
American distributors, as well as securing distributors in key international
markets. The Company achieved full sales coverage for North America for the
first time in the Company's existence.
22
<PAGE>
Year Ended December 31, 1998 Compared With Year Ended December 31, 1997
During the year ended December 31, 1998, the Company's net sales increased
1.0% to $550,717 compared with net sales of $545,473 for the same period in
1997. Year to date domestic sales increased 32.4% to $249,397 from $188,391,
while foreign export net sales decreased 15.6% for the year to $301,320 from
$357,083. Foreign export sales decreased primarily due to the requirement by
the European Union that all medical device products sold in the European Union
after mid-June 1998 must bear the CE Mark. The Company received CE Mark
certification in September 1998 resulting in interrupted sales to our European
distributors for approximately four months. Revenues for other services and
projects for the year ended 1998, which are included in domestic sales,
increased to $119,857 from $40,083 or 199.0% compared to the same period in
1997. This is primarily attributable to Original Equipment Manufacturing
("OEM") contracts.
Cost of sales represented 99.2% and 88.4% of net sales for the years ended
1998 and 1997, respectively. The higher percentage in 1998 is due primarily to
the cost of implementing ISO 9001 and CE Marking procedures as well as start-
up costs associated with the OEM contracts and the Ahn thrombectomy catheter
launch. In addition the Company sold samples to distributors for use in
training at reduced prices and has increased sales of products whose gross
margins are lower than the majority of its existing products.
Selling, general and administrative expenses decreased 4.4% to $1,983,824
during 1998, compared to $2,075,695 in 1997. Selling expenses increased 41.7%
to $255,072 as compared to $180,057 for 1997, while general and administrative
expenses decreased 8.8% to $1,728,753 as compared to $1,895,638 in 1997. Sales
and marketing personnel expenses increased approximately $25,000, sales-
related travel increased approximately $35,400 and approximately $22,000 more
samples were distributed at no charge in 1998. Administrative personnel costs
decreased approximately $185,000 due to several factors. Salary and related
compensation expense was reduced because of a favorable settlement of a
lawsuit, approximately $34,000 was reclassed to cost of goods sold and changes
in staff during 1998. Expenses related to the CE Mark and to ISO 9001
increased by approximately $75,000 during 1998 as compared to 1997. In
addition, the Company incurred substantial legal and accounting fees related
to ongoing litigation and SEC filings required by the Series D and Series E
agreements.
Research and development expenses totaled $471,724 during 1998, a decrease
of 27.2% from the 1997 total of $648,049. Most research and development
activities have been significantly reduced until the Company receives funding
to ensure that, once initiated, projects can be completed as scheduled. It is
anticipated that research and development expenses will increase once funding
is received and the Company focuses on development of its OmniFilter and
expanded Phase II OmniCath(R) clinical trials. As the OmniCath(R) Peripheral
Atherectomy and A-V Fistula catheters proceed through clinical trials,
management estimates that the market is approximately $250 million for both
uses of this device. The market for the OmniFilter is estimated by management
to be $500 million.
Interest expense decreased 21.1% to $144,774 for 1998, compared to $183,538
for 1997. During 1997 the Company recorded approximately $57,000 for lawsuit
settlements offset by interest on debt acquired during the latter part of
1998. The Company earned approximately $2,400 from interest-bearing checking
accounts.
Other income for 1998 includes $367 for royalty income, approximately
$22,000 from net gain on sale of machine shop equipment and $60,000
amortization of the license fee received from Wright Medical Technologies,
Inc. for the spinal dissector transaction in 1994. Compensation expense of
$82,119 was recorded for the issuance of options and warrants to purchase
common stock.
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.
23
<PAGE>
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. Quotas were not met, leads were not diligently pursued and customer
service deteriorated. Corrective action was taken and the sales staff was
replaced 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. Standard costs increased
due to vendor changes for some items, a change in standard quantities
purchased, and normal price increases for component parts that had not been
reflected in pricing for more than two years.
During 1997 total selling, general and administrative expenses increased
20.8% 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 Corporation ("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.
Liquidity and Capital Resources
During 1998 the Company raised equity capital via private placements and
continues to convert trade debt to common stock to improve the Company's
financial position and cash flows. The Company had a working capital
deficiency as of December 31, 1998 of $1,852,718, and cash and cash
equivalents of $36,463 compared to a deficiency of $627,151 and cash and cash
equivalents of $82,789 as of December 31, 1997.
The net cash used by operating activities of $1,588,625 for 1998 was
approximately $700,000 less than during the same period in 1997. This is due
in part to improved accounts receivable collection procedures. In addition,
because of cash shortages the Company has increased payment time to vendors
from 30 to 45 days to 90 to 120 days. Purchases were also reduced and lead
time decreased. During 1998 the cash flow was favorably
24
<PAGE>
impacted by the negotiations of debt to equity conversions of $122,333. In
addition, the sale of machine shop equipment provided total cash of $26,000.
Financing activities, consisting of note proceeds and repayments, capital
lease obligations and repayments and proceeds from sale of common stock and
warrants, provided cash of $1,579,758. This includes proceeds from private
placements of $468,000 and from the issuance of Series D and E of $675,000
less $89,503 offering costs.
The net cash used by operating activities in 1997 of approximately $2.3
million was 38.2% 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 $37,459 were used by investing activities in 1998 as compared
to cash used by investing activities of $185,046 and $76,923 in 1997 and 1996,
respectively. In 1998 capital expenditures were reduced pending additional
funding; capital expenditures were $35,161, $142,206 and $46,773 in 1998, 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. The Company is,
however, in the process of identifying any current suppliers who are not
prepared to offer assurances that their systems will be Year 2000 compliant.
In addition, the Company continues to invest in the development and
maintenance of its patents as evidenced by the expenditure of $28,298,
$44,356, and $31,414 for the years ended December 31, 1998, 1997 and 1996,
respectively. Since inception, the Company has expended $509,642 on internally
developed patents.
Cash flows of $1,579,758, $1,371,414, and $2,906,223 were provided by
financing activities for the years ended December 31, 1998, 1997, and 1996,
respectively. Since inception, financing activities have provided net cash of
$22,096,038. Financing activities consist of proceeds from and repayments of
notes, capital lease obligations and repayments, proceeds from the sale of
debentures, preferred stock, common stock, warrants and options, 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.
The Company is currently in default on the lease payments and is negotiating a
restructure agreement to include all of its patents and equipment in a
sale/leaseback arrangement.
25
<PAGE>
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. The Company is
currently in arrears. Under terms of the note agreement, the vendor can elect
to impose an interest rate of 18%. The vendor has not made this election.
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.
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 1999, 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 1999; however, this increase will not be sufficient to satisfy
the Company's funding needs.
The Company has experienced significant cash flow problems in the past.
Since its inception, the Company has operated at a loss and is dependent upon
equity investments and issuance of debt instruments to meet its obligations.
The Company has not always received funding from financing and operations in a
timely manner and has, in the past, been delinquent on notes and accounts
payable. The Company has also satisfied certain debts with equity and has been
able to renegotiate terms of payment on others, such as the Aberlyn lease
obligations. However, 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 receive additional financing will have a 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 U.S. 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.
26
<PAGE>
Subsequent Events
On March 3, 1999, the Company and an investor entered into a securities
purchase agreement for a Series 1999-A Nine Percent (9%) Redeemable
Convertible Debenture (the "Debenture") in the amount of $400,000. Offering
costs of $47,500 were incurred in this transaction. The Debenture matures
December 31, 2001 with interest payable quarterly. The Company granted the
holder a security interest in the OmniCath(R) and the Evert-O-Cath(TM). As
additional consideration a warrant to purchase 40,000 shares of common stock
at an exercise price of $0.175 per share, which is equal to 125% of the
closing bid price for the common stock on March 3, 1999. The warrant is
exercisable for three years.
The Debenture is convertible into common stock at a conversion price equal
to the lesser of $0.15 per share or 75% of the lowest of the closing bid
prices for the five business days immediately preceding the conversion date.
As a part of the agreement registration rights were granted regarding the
warrant, the conversion shares, the interest shares and the security shares,
and the Company must make reasonable efforts to file a registration statement
within 45 days after closing.
The Company has a right to redeem all or a portion of the Debenture at any
time prior to receiving a notice of conversion. The cash redemption amount
shall be equal to:
. 115% of the face amount to be redeemed if redeemed within the first
thirty days;
. 120% of the face amount to be redeemed if redeemed between thirty-one and
sixty-one days; or
. 125% of the face amount to be redeemed if redeemed after 60 days.
On March 26, 1999, the Company entered into an exclusive license agreement
with MRI for its Cathlab(R) patents. Pursuant to such license agreement, the
Company relocated its manufacturing facility to MRI's facility in Tucson,
Arizona. MRI will staff and manage the facility and will manufacture the
Company's Cathlab and balloon cardiovascular products under the licensing
agreement. Management anticipates this will save the Company approximately
$600,000 in operating, production and engineering costs. This license
agreement provides for a one-time license fee in the amount of $25,000. In
addition, MRI shall pay a royalty interest on the net amount received from all
sales to their customers under the licensing agreement that utilizes the
Company's proprietary technology.
The Company entered into an exclusive worldwide, royalty-bearing license
agreement on April 14, 1999 with IntraTherapeutics, Inc. for its OmniFilter
technology, a percutaneous guidewire micro-filter to be used in carotid
angioplasty procedures. The Company will receive a one-time license fee of
$1,000,000 and a 5% royalty fee for the life of the patents. The license term
is the later of the expiration of all patents, including patent applications,
or ten years from the first commercial sale of the licensed product.
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.
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.......... 51 President and Chief Executive Officer Chairman of the Board
Lawrence M. Hoffman..... 55 Director
Richard S. Serbin....... 54 Director
Marshall Kerr........... 48 Vice President Sales & Marketing
Colene Blankinship...... 49 Controller, Chief Accounting Officer Secretary and Treasurer
</TABLE>
27
<PAGE>
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.
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.
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 the national secretary
of the American Society of Women Accountants, a position she has held since
July 1998, and has served on the national board since July 1996.
28
<PAGE>
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 1998
have been filed on a timely basis by reporting persons except for Ms.
Blankinship who was late in filing her Form 4 and Messrs. Hoffman and Serbin
who were late in filing their Form 5.
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 $100,000 for the
fiscal year ended December 31, 1998, for services during the fiscal years
ended December 31, 1998, 1997 and 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term Compensation
-------------------------------------------------
Annual Compensation Awards Payouts
- ----------------------------------------------------------- -------------------------- --------------------
(f)
(e) Restricted (g) (h)
(a) (c) (d) Other Annual Stock Shares/Options/ LTP (i)
Name and (b) Salary Bonus Compensation Awards(s) SARs Payouts All Other
Principal Position Year ($) ($) ($)(1) ($) (#) ($) Compensation
------------------ ---- ------- ----- ------------ ---------- --------------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Steven B. Rash.......... 1998 165,000 -- 9,600 -- -- -- --
President, Chief 1997 165,000 -- 9,600 -- 927,000(2)(3) -- --
Executive Officer 1996 141,875 -- 7,496 -- -- -- --
Marshall Kerr........... 1998 105,667 -- -- -- -- -- --
Vice President 1997 20,000(4) -- -- -- 400,000 -- --
Sales and Marketing
</TABLE>
- --------
(1) Cost of auto allowance.
(2) Represents options issued in connection with a three-year employment
agreement, vesting on various dates during the term of the agreement. See
"Employment Agreement."
(3) Includes options to purchase 27,000 shares of common stock received as
director.
(4) Annual compensation of $80,000 prorated from October 1997, when Mr. Kerr
began his service with the Company.
The following table sets forth certain information with respect to each
exercise of stock options during the fiscal year ended December 31, 1998 by
each of the named executive officers and the number and value of unexercised
options held by such named executive officers as of December 31, 1998.
AGGREGATED OPTION/SAR EXERCISES IN 1998 FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number Of Value Of
Securities Unexercised
Underlying in-the-Money
Unexercised Options
Shares Options/SARs At Year-End
Acquired on Value At Year-End Exercisable/
Exercise Realized Exercisable/ Unexercisable
Name (#) ($) Unexercisable (#) ($)
---- ----------- -------- ----------------- -------------
<S> <C> <C> <C> <C>
Steven B. Rash............. 0 0 1,227,000/300,000 0/0
Marshall Kerr.............. 0 0 125,000/175,000 0/0
</TABLE>
29
<PAGE>
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. Options to purchase an
additional 900,000 shares of common stock at $.6875 per share were granted. In
December 1998 the Board extended his contract to December 31, 2000.
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. In December 1998 the
Board extended his contract to December 31, 2000.
Compensation Committee's Interlocks and Insider Participation
Effective November 26, 1996 the Board of Directors elected Mr. Hoffman and
Claudio Guazzoni to serve on the Compensation Committee. In December 1998, Mr.
Guazzoni resigned from the Board of Directors and Mr. Hoffman became the sole
member of this 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 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
Relationships and Related Transactions.)
Audit Committee
The Audit Committee assists the Board in fulfilling its responsibilities to
stockholders and other matters relating to the corporate accounting and
reporting practices of the Company and the quality and integrity of the
financial reports of the Company. From January 1, 1996 to November 26, 1996
Mr. Hoffman served as the sole member of the Audit Committee. Effective
November 26, 1996 Messrs. Hoffman and Serbin were elected to serve on the
Audit Committee.
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 1997 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. The
options are exercisable for five years at an exercise price ranging from
$0.46875 to $1.3125 which equaled fair market value at the time of 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.
No compensation or options were paid to directors for 1998.
30
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information, as of March 31, 1999,
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 31, 1999, the Company had issued and outstanding 36,626,440 shares of
common stock.
<TABLE>
<CAPTION>
Amount and
Nature of
Beneficial Percent of
Name and Address of Beneficial Owner(1) Ownership(2)(3) Class
--------------------------------------- --------------- -----------
<S> <C> <C>
Steven B. Rash............................ 1,228,900(4) 3.3%
Marshall Kerr............................. 125,000(6) .3%
Lawrence M. Hoffman....................... 1,275,674(5) 3.4%
701 Mohican Court
Morganville NJ
Richard Serbin............................ 22,000(6) Less than 1%
61 Monroe Ave.
Roseland, NJ 07068
All Directors and Officers as a Group
(6 persons).............................. 2,671,574(7) 6.9%
</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 1,227,000 shares which may be acquired within 60 days upon the
exercise of vested options. Excludes options to purchase 300,000 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) These shares may be acquired upon the exercise of options.
(7) Includes 2,352,000 shares which may be acquired within 60 days upon the
exercise of options or warrants.
Item 13. Certain Relationships and Related Transactions
For the period from inception, September 4, 1984, to December 31, 1998, the
Company made payments for legal, engineering and consulting services and
products and supplies provided by certain stockholders which amounted to
$1,157,072. Of this amount, $37,500 related to each of the years ended
December 31, 1998, 1997 and 1996, respectively.
On August 23, 1995 the Company sold its proprietary OmniCath(R) atherectomy
EPO patent to Guerbet, 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. In 1997 Mr. Rash's
31
<PAGE>
agreement was extended to December 31, 1999. The base salary was increased to
$165,000 per year. Options to purchase an additional 900,000 shares of common
stock at $.6875 per share were granted vesting equally over three years. In
December 1998 the Board extended his contract to December 31, 2000.
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. In December 1998 the
Board extended his contract to December 31, 2000.
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 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.
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 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.
32
<PAGE>
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 leases are
currently being restructured.
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 from March
1996 to December 1998, 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. The terms of all the related party transactions in
this section are no less favorable to the Company than could be obtained from
non-affiliated parties.
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(7)
3.4 --Certificate of Designations, Preferences and Rights of 1996 Series B
Convertible Preferred Stock(7)
3.5 --Certificate of Designations, Preferences and Rights of 1997 Series C
Convertible Preferred Stock(10)
3.6 --Certificate of Designations, Preferences, Limitations and Relative
Rights of 1998 Series D Convertible Preferred Stock(12)
3.7 --Certificate of Designations, Preferences, Limitations and Relative
Rights of 1998 Series E Convertible Preferred Stock(12)
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
4.2 --Specimen Common Stock Certificate(13)
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.(4)
10.69 --Stipulation of Settlement, Scott Printing Corporation v. American
BioMed, Inc.(6)
10.70 --Employment contract with Steven B. Rash(6)
10.71 --Purchase of Technology Agreement, Guerbet, S.A.(6)
10.80 --1996 Incentive Stock Option Plan(8)
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(9)
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(10)
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(10)
10.84 --Form of Registration Rights Agreement, dated February 20, 1996,
between the Company and holders of the 1996 Series A Convertible
Preferred Stock(10)
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(10)
10.86 --Form of Registration Rights Agreement, dated November 7, 1996,
between the Company and holders of the 1996 Series B Convertible
Preferred Stock(10)
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(10)
10.88 --Registration Rights Agreement, dated March 21, 1997, between the
Company and holders of the 1997 Series C Convertible Preferred
Stock(10)
10.89 --Lease Agreement dated June 19, 1997 between the Company and
Woodlands Office Equities--'95 Limited(11)
10.90 --Modification Agreement--Patent Schedule No. 002 between Aberlyn
Capital Management Co., Inc. and the Company(11)
10.91 --Modification Agreement--Lease Schedule No. 003 between Aberlyn
Capital Management Co., Inc. and the Company(11)
10.92 --Employment agreement with Marshall Kerr(11)
10.93 --Securities Purchase Agreement, dated April 29, 1998, Series D
Preferred and Series E Preferred Stock(12)
10.96 --Registration Rights Agreement of Series D Preferred and Series E
Preferred(12)
10.97 --Augustine Fund, L.P. Warrant dated April 29, 1998 to purchase 60,000
shares of Common Stock(12)
10.98 --1994 Stock Option Plan of the Company(5)
10.99 --Securities Purchase Agreement, dated March 3, 1999, Series 1999-A,
9% Redeemable Convertible Debentures
10.100 --Registration Rights Agreement, dated March 3, 1999, between the
Company and holders of the Series 1999-A 9% Redeemable Convertible
Debentures
10.101 --License Agreement, dated March 26, 1999, between the Company and
Manufacturing & Research, Inc.
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
21 --Subsidiaries of the Registrant(9)
23.1 --Consent of Karlins, Arnold & Corbitt, PC
27 --Financial Data Schedule
All schedules are omitted because they are not applicable or because
the required information is contained in the financial statements or
notes thereto.
</TABLE>
- --------
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended, File No. 33-42472, dated October 22, 1991.
(2) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1991.
(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, 1994.
(5) Incorporated by reference to the Company's Proxy Statement for the April
27, 1994 Annual Meeting.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
(7) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996.
(8) Incorporated by reference to the Company's Proxy Statement for the
November 22, 1996 Annual Meeting.
(9) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
(10) Incorporated by reference to the Company's Annual Report on Form 10-K/A-1
for the year ended December 31, 1996.
(11) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
(12) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998.
(13) Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended, File No. 333-52301, dated September 11, 1998.
35
<PAGE>
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, 1998 and 1997............... F-3
Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996 and for the period from inception, September 4,
1984, to December 31, 1998............................................. F-5
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for
the period from inception to December 31, 1993, for the years ended
December 31, 1998, 1997, 1996, 1995 and 1994 and for the period from
inception, September 4, 1984, to December 31, 1998..................... F-6
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997, and 1996, and for the period from inception, September 4,
1984, to December 31, 1998............................................. F-9
Notes to Consolidated Financial Statements.............................. F-11
Consolidated Financial Statement Schedule
Report of Independent Accountants....................................... F-33
Schedule II--Valuation and Qualifying Accounts.......................... F-34
</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>
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 Subsidiary (the "Company") (a development stage enterprise)
as of December 31, 1998 and 1997, and the related consolidated statements of
operations, changes in stockholders' equity (deficit) and cash flows for each
of the three years in the period ended December 31, 1998. 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. The financial statements of the Company for
the period from inception, September 4, 1984 to December 31, 1996, were
audited by other auditors whose report dated March 21, 1997 on those
statements included an explanatory paragraph that described the ability of the
Company to continue as a going-concern as discussed in Notes 1 and 17 to the
consolidated financial statements.
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 Subsidiary as of December 31, 1998 and 1997, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Notes 1 and 17 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, 1998, the Company had a cumulative loss of $29,779,309
since its inception and had a working capital deficit of ($1,852,718) at
December 31, 1998. 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.
KARLINS ARNOLD & CORBITT, P.C.
The Woodlands, Texas
March 26, 1999
F-2
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
------ ---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................. $ 36,463 $ 82,789
Accounts receivable, trade, net of allowance for
doubtful accounts of $40,000 and $57,167 for 1998 and
1997, respectively.................................... 128,844 158,724
Accounts receivable, other............................. 11,850 13,716
Inventories............................................ 569,209 648,957
Other current assets................................... 146,415 144,713
---------- ----------
Total current assets................................. 892,781 1,048,899
Property and equipment, net.............................. 131,446 167,991
Patents, net of accumulated amortization of $960,862 and
$920,330 in 1998 and 1997, respectively................. 145,526 158,695
Goodwill, net of accumulated amortization of $820,559 and
$697,475 in 1998 and 1997, respectively................. 410,277 533,361
Other assets............................................. 35,439 36,110
---------- ----------
Total assets......................................... $1,615,469 $1,945,056
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Current liabilities:
Notes payable to stockholders and others........... $ 616,309 $ 300,976
Current maturities of long-term debt............... 51,881 41,694
Current maturities of capital lease obligations.... 414,845 416,901
Accounts payable................................... 640,572 254,234
Accrued liabilities................................ 1,021,892 662,245
----------- -----------
Total current liabilities........................ 2,745,499 1,676,050
Long-term debt, net of current maturities............ 29,928 71,855
Capital lease obligations, net of current
maturities.......................................... 2,274 --
Deferred revenue..................................... 40,000 100,000
----------- -----------
Total liabilities................................ 2,817,701 1,847,905
----------- -----------
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, 683 and 1,390 shares issued and
outstanding at December 31, 1998 and 1997,
respectively, $1,000 per share or $683,000 and
$1,390,000 aggregate liquidation preference....... 1 1
Series B: Convertible preferred stock, 2,500 shares
authorized, 500 shares issued and outstanding at
December 31, 1997, $1,000 per share or $500,000
aggregate liquidation preference plus an
additional 10% per year from the date of
issuance.......................................... -- 1
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.. -- --
Series D: Convertible preferred stock, 60,000
shares authorized, 34,000 shares issued and
outstanding at December 31, 1998, $10 per share or
$340,000 aggregate liquidation preference
increasing 8% per year from date of issuance...... 34 --
Series E: Convertible preferred stock, 500,000
shares authorized, 7,500 shares issued and
outstanding at December 31, 1998, $10 per share or
$75,000 aggregate liquidation preference
increasing at 8% per year from date of issuance... 7 --
Common stock, $.001 par value, 50,000,000 and
25,000,000 shares authorized in 1998 and 1997
respectively, 32,648,075 and 18,457,426 shares
issued at December 31, 1998 and 1997,
respectively...................................... 32,648 18,457
Additional paid-in capital......................... 28,544,387 27,479,517
Deficit accumulated during the development stage... (29,779,309) (27,149,225)
Less treasury stock at cost, 68,323 shares......... -- (251,600)
----------- -----------
Total stockholders' equity (deficit)............. (1,202,232) 97,151
----------- -----------
Total liabilities and stockholders' equity
(deficit)....................................... $ 1,615,469 $ 1,945,056
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Inception
Year Ended Year Ended Year Ended September 4, 1984
December 31, December 31, December 31, to December 31,
1998 1997 1996 1998
------------ ------------ ------------ -----------------
<S> <C> <C> <C> <C>
Sales, net.............. $ 550,717 $ 545,473 $ 579,533 $ 4,410,837
Cost of sales........... (546,409) (482,360) (420,838) (4,261,675)
----------- ----------- ----------- ------------
Gross profit............ 4,308 63,113 158,695 149,162
----------- ----------- ----------- ------------
Operating expenses:
Selling, general and
administrative....... (1,983,824) (2,075,695) (1,718,595) (19,516,454)
Research and
development.......... (471,724) (648,049) (640,792) (8,369,766)
Distributor
settlement........... -- -- -- (1,080,915)
----------- ----------- ----------- ------------
(2,455,548) (2,723,744) (2,359,387) (28,967,135)
----------- ----------- ----------- ------------
Loss from
operations......... (2,451,240) (2,660,631) (2,200,692) (28,817,973)
----------- ----------- ----------- ------------
Other income (expense):
Interest income....... 2,429 44,200 4,252 156,363
Interest expense...... (144,774) (183,538) (313,914) (3,023,750)
Other income
(expense)............ (36,499) 25,766 (114,762) 1,906,051
----------- ----------- ----------- ------------
Other income
(expense), net....... (178,844) (113,572) (424,424) (961,336)
----------- ----------- ----------- ------------
Net loss.............. (2,630,084) (2,774,203) (2,625,116) (29,779,309)
Less preferred stock
dividends............ (170,031) -- (1,183,413) (1,353,444)
----------- ----------- ----------- ------------
Net loss available to
common shareholders.. $(2,800,115) $(2,774,203) $(3,808,529) $(31,132,753)
=========== =========== =========== ============
Net loss per common
share................ $ (0.11) $ (0.18) $ (0.34)
=========== =========== ===========
Weighted average
number of common
shares outstanding... 26,302,790 15,528,231 11,310,592
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CHANGE IN STOCKHOLDER'S EQUITY DEFICIT
<TABLE>
<CAPTION>
Deficit
Preferred Accumulated
Stock Common Stock Additional During the Treasury Stock
-------------- ------------------ Paid-In Development ------------------
Shares Par Shares Par Capital Stage Shares Costs Total
-------- ---- ---------- ------ ---------- ------------ -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of $1 par value
common stock on
September 4, 1984....... 1,000 $1,000 $ 1,000
Redemption of $1 par
value common stock...... (1,000) (1,000) (1,000)
Issuance of $.001 par
value common stock...... 1,000,000 1,000 1,000
Issuance of $.001 par
value common stock at
fair market value of
services rendered....... 100,000 100 $ 19,900 20,000
Issuance of Series A
preferred stock......... 156,250 $156 499,844 500,000
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 45,500
Issuance of stock
purchase warrants....... 100,000 100,000
Sale of common stock,
net of offering costs... 800,000 800 3,059,472 3,060,272
Conversion of Series A
preferred stock......... (156,250) (156) 223,214 223 (67)
Conversion of $255,000
principal amount of
debenture............... 63,750 64 254,936 255,000
Exercise of
underwriter's over
allotment option, net of
offering costs.......... 111,700 112 483,367 483,479
Issuance of $.001 par
value common stock in
connection with
acquisition of Freedom
Machine, Inc............ 60,000 60 206,940 207,000
Conversion of $385,000
principal amount of
debentures.............. 96,250 96 384,904 385,000
Issuance of $.001 par
value common stock in
connection with
acquisition of Cathlab
Corporation............. 450,000 450 2,024,550 2,025,000
Issuance of $.001 par
value common stock in
connection with
acquisition of VMS,
Inc..................... 27,777 28 124,971 124,999
Issuance of $.001 par
value common stock in
connection with 6%
promissory notes........ 58,576 59 263,533 263,592
Issuance of $.001 par
value common stock in
connection with purchase
of assets of SuperStat,
Inc..................... 18,182 18 81,801 81,819
Issuance of $.001 par
value common stock in
connection with a
$500,000 loan from a
bank.................... 79,365 79 357,064 357,143
Issuance of $.001 par
value common stock in
connection with Therex
settlement.............. 58,823 59 499,941 500,000
Issuance of Series B
preferred stock, net of
offering costs ......... 287,500 288 2,545,858 2,546,146
Exercise of stock
purchase warrants....... 678,717 679 2,800,341 2,801,020
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 50 174,950 175,000
</TABLE>
(Table continued on following page)
F-6
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CHANGE IN STOCKHOLDER'S EQUITY DEFICIT--Continued
<TABLE>
<CAPTION>
Deficit
Preferred Accumulated
Stock Common Stock Additional During the Treasury Stock
--------------- ---------------- Paid-In Development -------------------
Shares Par Shares Par Capital Stage Shares Costs Total
-------- ----- --------- ------ ---------- ------------ -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Exercise of stock
options................. 166,880 $ 167 $ 38,795 $ 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.................... 1,600 67,500 248,400 250,000
Issuance of 193,500
warrants in connection
with 9% promissory
notes................... 574,176 574,176
Dividend requirement on
Series B preferred
stock................... (135,209) (135,209)
Conversion of Series B
preferred stock into
$.001 par value common
stock................... (287,500) $(288) 1,268,465 1,268 134,091 135,071
Sale of common stock for
cash, net of offering
costs................... 1,500,000 1,500 3,501,299 3,502,799
Net loss for the
period.................. $(16,559,366) (16,559,366)
-------- ----- --------- ------ ---------- ------------ -------- --------- ------------
Balance, December 31,
1993.................... -- -- 7,390,054 7,390 18,041,979 (16,559,366) (68,323) (251,600) 1,238,403
-------- ----- --------- ------ ---------- ------------ -------- --------- ------------
Issuance of shares in
connection with private
placements.............. 684,395 684 566,734 567,418
Issuance of shares in
connection with officer
subscription............ 40,000 40 31,460 31,500
Issuance of shares to an
officer in connection
with private placement.. 15,000 15 2,985 3,000
Exercise of stock
options................. 400,000 400 224,600 225,000
Issuance of shares to
employees in lieu of
salary.................. 11,500 12 11,738 11,750
Issuance of shares
previously paid for but
not issued.............. 8,548 9 (9)
Conversion of
shareholder loan........ 111,111 111 49,889 50,000
Issuance of shares in
payment of expenses..... 117,812 118 70,396 70,514
Issuance of shares for
services................ 524,554 524 55,726 56,250
Additional accrual of
1993 offering expenses.. (24,795) (24,795)
Net loss for the year... (3,786,156) (3,786,156)
-------- ----- --------- ------ ---------- ------------ -------- --------- ------------
Balance, December 31,
1994.................... -- -- 9,302,974 9,303 19,030,703 (20,345,522) (68,323) (251,600) (1,557,116)
-------- ----- --------- ------ ---------- ------------ -------- --------- ------------
Issuance of shares in
connection with officer
loan.................... 2,000 2 2
Issuance of shares to an
officer in lieu of
salary.................. 15,000 15 6,161 6,176
Issuance of shares in
payment of expenses..... 34,300 34 47,239 47,273
Issuance of shares in
connection with private
placement............... 151,000 151 60,349 60,500
Issuance of options..... 37,500 37,500
Issuance of warrants.... 8,400 8,400
Other................... (206) (206)
Net loss for the year... (1,404,384) (1,404,384)
-------- ----- --------- ------ ---------- ------------ -------- --------- ------------
Balance, December 31,
1995.................... -- -- 9,505,274 $9,505 19,190,146 $(21,749,906) (68,323) $(251,600) $ (2,801,855)
-------- ----- --------- ------ ---------- ------------ -------- --------- ------------
</TABLE>
(Table continued on following page)
F-7
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CHANGE IN STOCKHOLDER'S EQUITY DEFICIT--Continued
<TABLE>
<CAPTION>
Deficit
Preferred Accumulated
Stock Common Stock Additional During the Treasury Stock
------------ ------------------- Paid-In Development ------------------
Shares Par Shares Par Capital Stage Shares Costs Total
------- --- ---------- ------- ----------- ------------ ------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of shares in
connection with private
placements, net of
offering costs.......... 2,890 $ 3 1,250,001 $ 1,250 $ 2,870,066 $ 2,871,319
Exercise of stock
options................. 197,000 197 142,220 142,417
Exercise of warrants.... 744,165 744 390,581 391,325
Issuance of options..... 237,087 237,087
Issuance of shares in
payment of certain
liabilities............. 1,245,579 1,246 1,545,263 1,546,509
Issuance of shares for
services................ 600,000 600 366,900 367,500
Issuance of shares to
individuals............. 2,000 2 3,229 3,231
Other................... (3,822) (3,822)
Net loss for the year... $ (2,625,116) (2,625,116)
------- --- ---------- ------- ----------- ------------ ------- --------- -----------
Balance, December 31,
1996.................... 2,890 3 13,544,019 13,544 24,741,670 (24,375,022) (68,323) $(251,600) 128,595
------- --- ---------- ------- ----------- ------------ ------- --------- -----------
Issuance of shares in
connection with private
placements, net of
offering costs.......... 125 2,212,410 2,212,410
Exercise of stock
options................. 20,000 $ 20 3,730 3,750
Exercise of warrants.... 802,583 803 319,230 320,033
Conversion of preferred
stock................... (1,013) (1) 3,881,102 3,881 (3,880)
Issuance of shares in
payment of certain
liabilities............. 172,222 172 178,114 178,286
Issuance of shares for
services................ 37,500 37 28,243 28,280
Net loss for the year... (2,774,203) (2,774,203)
------- --- ---------- ------- ----------- ------------ ------- --------- -----------
Balance, December 31,
1997.................... 2,002 2 18,457,426 18,457 27,479,517 (27,149,225) (68,323) $(251,600) 97,151
------- --- ---------- ------- ----------- ------------ ------- --------- -----------
Issuance of shares in
connection with private
placement net of
offering costs.......... 67,500 67 1,171,844 1,172 1,052,259 1,053,498
Conversion of preferred
stock................... (27,319) (27) 12,562,128 12,562 (12,535)
Issuance of shares in
payment of certain
liabilities............. 400,000 400 121,934 122,334
Issuance of options and
warrants................ 82,119 82,119
Issuance of shares for
services................ 125,000 125 72,625 72,750
Retire treasury shares.. (68,323) (68) (251,532) 68,323 251,600
Net loss for the year... (2,630,084) (2,630,084)
------- --- ---------- ------- ----------- ------------ ------- --------- -----------
Balance, December 31,
1998.................... 42,183 $42 32,648,075 $32,648 $28,544,387 $(29,779,309) 0 $ 0 $(1,202,232)
======= === ========== ======= =========== ============ ======= ========= ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-8
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CHANGE IN CASH FLOWS
<TABLE>
<CAPTION>
Inception,
September 4,
Year Ended Year Ended Year Ended 1984, to
December 31, December 31, December 31, December 31,
1998 1997 1996 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss................. $(2,630,084) $(2,774,203) $(2,625,116) $(29,779,309)
----------- ----------- ----------- ------------
Adjustments to reconcile
net loss to cash used by
operating activities
Depreciation and
amortization........... 232,061 237,633 334,012 3,245,261
Write off of goodwill... 120,000
Expenses paid by
transfer of equipment.. 37,134
Loss (gain) on sale of
assets................. (21,804) 24,972 (497,875)
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............... 72,750 604,587 1,139,097
Write off of note
receivable from
officer................ 25,000
Noncash compensation.... 82,120 128,020
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.............. 367,688
Changes in operating
assets and liabilities:
Accounts receivable,
net.................... 31,746 15,767 2,570 (83,136)
Inventories............. 79,749 (186,860) (91,967) (1,031,335)
Other assets............ (1,031) 181,378 51,145 167,401
Accounts payable........ 471,653 (33,460) (135,640) 1,443,001
Accrued liabilities..... 154,215 332,553 239,973 1,290,062
Deferred revenue........ (60,000) (60,000) (60,000) 40,000
----------- ----------- ----------- ------------
Total adjustments...... 1,041,459 487,011 970,252 8,569,373
----------- ----------- ----------- ------------
Net cash used by
operating activities.. (1,588,625) (2,287,192) (1,654,864) (21,209,936)
----------- ----------- ----------- ------------
Cash flows from investing
activities:
Capital expenditures..... (35,161) (142,206) (46,773) (612,593)
Issuance of notes
receivable.............. (85,000)
Proceeds from repayment
of notes receivable..... 35,000
Investments in patents... (28,298) (44,356) (31,414) (509,642)
Investment in joint
venture................. (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.................. 26,000 1,516 1,264 535,893
Cash acquired in
acquisition of Freedom
Machine................. 6,338
Cash acquired in
acquisition of Cathlab
Corporation............. 6,446
----------- ----------- ----------- ------------
Net cash used by
investing activities.. (37,459) (185,046) (76,923) (849,639)
----------- ----------- ----------- ------------
</TABLE>
(Table continued on following page)
F-9
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CHANGE IN CASH FLOWS--Continued
<TABLE>
<CAPTION>
Inception,
September 4,
Year Ended Year Ended Year Ended 1984, to
December 31, December 31, December 31, December 31,
1998 1997 1996 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from financing
activities:
Cash dividends on
preferred stock......... $ (138)
Offering costs........... $ (89,503) $ (287,590) $ (322,859) (1,029,746)
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....... 722,209 116,250 1,835,576 6,580,796
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....... (192,217) (1,129,086) (1,932,618) (6,096,320)
Proceeds from patent
assignment and
leaseback............... 500,000
Proceeds from equipment
assignment and
leaseback............... 305,000
Principal payments under
capital lease
obligations............. (3,731) (151,943) (99,278) (785,841)
Proceeds from sale of
debentures.............. 640,000
Proceeds from sale of
preferred stock......... 675,000 2,500,000 2,890,356 9,111,502
Proceeds from sales of
common stock and
exercise of unregistered
warrants................ 468,000 320,033 694,556 9,522,350
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.. 1,579,758 1,371,414 2,906,223 22,096,038
---------- ---------- ---------- -----------
Net increase (decrease) in
cash and cash
equivalents.............. (46,326) (1,100,824) 1,174,436 36,463
Cash and cash equivalents
at beginning of period... 82,789 1,183,613 9,177
---------- ---------- ---------- -----------
Cash and cash equivalents
at end of period......... $ 36,463 $ 82,789 $1,183,613 $ 36,463
========== ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-10
<PAGE>
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 45.3% and 54.7%, respectively, of
the Company's sales. The percentage of sales by geographic region is as
follows: 45.3% in the United States, 13.3% in Italy, 19.3% in other European
countries, 11.3% in Japan and 10.8% 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 subsidiary, Cathlab Corporation after elimination of all
intercompany accounts and transactions. 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 using the straight-line
method over the estimated useful lives of the assets for financial reporting
purposes and the modified accelerated cost recovery system for tax reporting
purposes.
F-11
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Revenue Recognition
Revenue is recognized when products are shipped, based upon the accrual
method of accounting.
Research and Development
Research and development costs are expensed as incurred.
Loss Per Share
The Company has adopted FASB Standards No. 128, "Earnings per Share" ("SFAS
128"). SFAS 128 specifies the computation, presentation and disclosure
requirements for earnings (loss) per share. Basic earnings (loss) 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 (loss)
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
F-12
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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 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. The adoption of SFAS 129 did not impact its presentation of
financial information
The 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 was adopted at the beginning of the
fiscal year. The adoption of SFAS 130 did not impact its presentation of
financial information.
The 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
F-13
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. The Company operates in only one segment, thus SFAS 131 is not
applicable.
2. Inventories:
Inventories consisted of the following:
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1997
-------- --------
<S> <C> <C>
Raw materials........................................... $206,800 $225,340
Work in process......................................... 120,188 169,657
Finished goods.......................................... 242,221 253,960
-------- --------
$569,209 $648,957
======== ========
</TABLE>
3. Property and Equipment, net:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Furniture and fixtures.............................. $ 74,777 $ 72,887
Machinery and equipment............................. 644,336 733,577
Leasehold improvements.............................. 34,872 28,949
Equipment under capital lease agreements............ 7,123 24,243
--------- ---------
761,108 859,656
Less accumulated depreciation and amortization...... (629,662) (691,665)
--------- ---------
$ 131,446 $ 167,991
========= =========
</TABLE>
Included in accumulated depreciation and amortization at December 31, 1998
and 1997 is $1,068 and $23,865, respectively, of accumulated amortization on
equipment acquired under capital lease agreements. Depreciation expense for
the years ended December 31, 1998, 1997 and 1996 was approximately $68,000,
$54,000, and $133,000, respectively.
4. 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 $300,000 license fee is being
amortized over five years, the life the Company uses to amortize patents. The
unamortized balance of $40,000 and $100,000 is reflected as deferred revenue
as of December 31, 1998 and 1997, respectively.
F-14
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Notes Payable and Long-Term Debt:
<TABLE>
<CAPTION>
December 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
Notes payable and long-term debt consisted of the
following:
Uncollateralized promissory note to individual, bearing
interest at 10.0%, payable quarterly with principal due
on demand................................................ $242,450
Notes payable to insurance companies with varying interest
rates up to 8.9% per year maturing at various dates
through 1999............................................. $ 36,509 58,526
Uncollateralized thirty day discounted notes payable to
officers bearing default interest of 10.0% per year,
matured in 1998.......................................... 19,800
Uncollateralized promissory note, bearing interest at
10.0%, maturing November, 1999........................... 50,000
Note payable bearing interest at 15.0% per year, maturing
October 1999 secured by guaranty......................... 150,000
Note payable to an individual, bearing interest at 20.0%,
maturing in December 1999 with interest payable monthly,
secured by officer options to purchase 1,527,000 shares
of common stock.......................................... 260,000
Note payable to an individual, bearing interest at 20.0%,
maturing in December 1999 with interest payable
quarterly, secured by officer options to purchase
1,527,000 shares of common stock......................... 100,000
-------- --------
$616,309 $300,976
======== ========
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 2000, unsecured................ $ 81,809 $113,549
Less current maturities................................... (51,881) (41,694)
-------- --------
$ 29,928 $ 71,855
======== ========
</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>
1999............................................................. $668,190
2000............................................................. 29,928
--------
$698,118
========
</TABLE>
6. Accrued Liabilities:
Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
December 31
-------------------
1998 1997
---------- --------
<S> <C> <C>
Accrued interest payable............................. $ 67,901 $208,007
Accrued payroll and related taxes.................... 4,849 122,306
Accrued offering costs............................... 109,500 102,000
Accrued consulting fees.............................. 222,375 60,000
Accrued settlement................................... 555,173 125,000
Other................................................ 62,094 44,932
---------- --------
$1,021,892 $662,245
========== ========
</TABLE>
F-15
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. 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, 1998:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-------- ---------
<S> <C> <C>
1999.................................................. $458,924 $ 62,908
2000.................................................. 2,154 28,414
2001.................................................. 180 5,640
2002.................................................. 3,488
-------- --------
Total minimum lease payments.......................... 461,258 $100,450
========
Amounts representing interest......................... (44,139)
--------
Present value of future lease payments................ 417,119
Less current maturities............................... 414,845
--------
$ 2,274
========
</TABLE>
Rental expense under operating leases for the years ended December 31, 1998,
1997 and 1996 and for the period from inception, September 4, 1984, to
December 31, 1998 amounted to $218,398, $166,480, $157,972, and $1,516,008,
respectively.
Litigation
In May 1997, a former Chairman and Chief Scientific Officer and director of
the Company filed a lawsuit in the State District Court of Harris County,
Texas seeking an unspecified amount of damages and alleging oppressive action
toward a minority shareholder, breach of contract, failure of consideration
for the assignment of certain patent rights, wrongful termination and unpaid
debts and advances. The February 1998 mediation conference, which was mandated
by the Court, did not result in a settlement agreement. The case came to trial
in October 1998 and was settled on terms favorable to the Company. The Company
agreed to give the plaintiff an agreed judgment totaling $400,000, which may
not be executed until after February 15, 1999 with post judgment interest at
the rate of 10% per year. In addition, the Company agreed that upon the sale
of its guidewire micro-filter patent (the OmniFilter), the plaintiff will be
entitled to payment totaling $200,000. In the event of a licensing agreement,
the plaintiff will receive 5% of the licensing agreement revenues until a
total of $200,000 has been paid. The payment of $200,000 is secured by the
OmniFilter patent and such security interest will be subordinated to any
lender requesting the OmniFilter patent as collateral. At the Company's
discretion the security interest in the OmniFilter may be moved to the stent
patent with the same stipulation as to subordination. The judgment was paid in
April 1999.
In August 1997, a former Chief Financial Officer, Secretary and Treasurer
and director of the Company filed a lawsuit in the State District Court of
Harris County, Texas alleging breach of contract with respect to a letter
agreement executed in connection with his employment separation and
resignation from the Board of the Company and is seeking specific performance
and monetary damages of approximately $307,000. On August 24, 1998 the parties
reached a settlement through mediation. The Company agreed to (a) pay $2,800
in cash within 45 days; (b) issue at no cost the plaintiff's stock options to
purchase 150,000 shares of common stock at an
F-16
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
exercise price of $0.6875; and (c) execute an agreed judgment in the amount of
$85,000 at 10% interest payable November 1, 1999.
In September 1997, a former distributor filed a lawsuit in the State
District Court of Harris County, Texas 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. On May 1, 1998 the Company reached an agreement to settle
this lawsuit with the issuance of options to purchase 225,000 shares for an
exercise price of $0.40 per share, exercisable for six months with
registration requirements. The former distributor attempted to void the
agreement and continue the pending litigation. The case was finally resolved
by extending the exercise period to three years from the date the new option
agreement was signed by the Company. Compensation expense of approximately
$56,250 was recorded in 1998 to reflect the value of the options granted.
In January 1999, a former distributor filed a lawsuit in the State District
Court of Georgia alleging breach of contract and is seeking $34,000 plus pre-
judgment interest. In the opinion of management, the ultimate outcome of this
matter will not materially affect 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.
8. Federal Income Taxes:
At December 31, 1998, 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 NOL 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 36,000
2013................................................. 2,249,000 18,000
----------- --------
$23,773,300 $568,461
=========== ========
</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-17
<PAGE>
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 "Accounting
For Income Taxes" ("SFAS 109"). 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, 1998 and 1997, are as
follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Total deferred tax assets:
Net operating losses and other................ $ 9,660,000 $ 8,827,000
Valuation allowance........................... (9,660,000) (8,827,000)
----------- -----------
$ -- $ --
=========== ===========
</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, 1998 and 1997, respectively. The
change in the total valuation allowance for the year ended December 31, 1998
and 1997 was a net increase of approximately $833,000 and $832,000,
respectively. Contributing primarily to this change were operating losses
incurred during 1998 and 1997.
9. Related Party Transactions:
For the period from inception, September 4, 1984, to December 31, 1998, the
Company made payments for legal, engineering and consulting services and
products and supplies provided by certain stockholders which amounted to
$1,157,072. Of this amount, $37,500 related to each of the years ended
December 31, 1998, 1997 and 1996, 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 and the base salary
increased to $165,000 per year. In addition, options to purchase an additional
900,000 shares of common stock at $.6875 per share were granted. In December
1998 the Board extended his contract to December 31, 2000.
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. In December 1998 the
Board extended his contract to December 31, 2000.
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.
F-18
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 the 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 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. The leases are
currently being restructured.
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 from March
1996 through December 1998, 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 stork or warrants issued in connection with equity
and bridge financings raised by Zanett.
F-19
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Each of the warrants will be exercisable at an exercise price of $0.50 per
share for five years from the date it was 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 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 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 restricted exercise 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 and 1996, the Company paid salaries and wages to
relatives of officers of the Company amounting to $7,797, and $22,692,
respectively. No relatives of officers were employed in 1998.
10. Capital Stock:
Common Stock
The Company is authorized to issue 50,000,000 shares of common stock, $.001
par value per share. The holders of outstanding shares of common stock are
entitled to share ratably on a share-for-share basis with respect to any
dividends when, as and if declared by the Board of Directors out of funds
legally available therefor. Each holder of common stock is entitled to one
vote for each share held of record. The common stock is not entitled to
conversion or preemptive rights and is not subject to redemption. Upon
liquidation, dissolution or winding up of the Company, the holders of common
stock are entitled to share ratably in the net assets legally available for
distribution.
Preferred Stock
The Company is authorized to issue 2,000,000 shares of preferred stock with
such designation, rights and preferences as may be determined from time to
time by the Board of Directors. Accordingly, the Board of Directors is
empowered, without stockholder approval, to issue preferred stock with
dividend, liquidation, conversion, voting or other rights which could
adversely affect the voting power or other rights of the holders of the
Company's common stock. In the event of issuance, the preferred stock could be
utilized, under certain circumstances, as a method of discouraging, delaying
or preventing a change in control of the Company.
In February 1996 the Company sold 1,390 shares of its Series A convertible
preferred stock, of which 683 shares are outstanding at December 31, 1998, 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
F-20
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. In the event of the dissolution or winding up of the Company, the
holders of Series A Preferred shall have a liquidation preference equal to the
stated value of $1,000 per share. The Series A Preferred is subject to
mandatory redemption at the option of the holders of at least 50% of then
outstanding shares of Series A Preferred if the Company fails to issue shares
of common stock, fails to transfer shares of common stock or fails to remove
any restrictive legend on any certificate or any shares of common stock upon
the exercise of the conversion rights by the holders of the Series A
Preferred.
In November 1996 the Company issued units consisting of (i) 1,500 of its
1996 Series B convertible preferred stock of which none are outstanding, 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 Series B Preferred was fully converted into a total of
4,191,853 shares of common stock. 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. The Series B Investors
were given registration rights with the respect to the shares of common stock
issuable upon conversion of the Series B Preferred and exercise of the
Warrants and was included in the 1997 registration statement.
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
non-cash 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.
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 Series C Preferred was fully converted
into a total of 6,471,954 shares of common stock. Registration rights were
conferred upon the Series C Preferred requiring the Company to file a
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 Series D preferred convertible stock (the "Series D Preferred") and
Series E preferred convertible stock (the "Series E Preferred"), which bear no
dividends and confer no voting rights, rank equal with each other, rank junior
to the Series A Preferred, Series B Preferred and Series C Preferred and rank
senior to the Company's other securities (except with the consent of the
majority of the holders of Series D Preferred or the consent of the majority
of the holders of Series E Preferred respectively). In the event of the
dissolution or winding up of the Company, the holders of Series D Preferred
and Series E Preferred shall have liquidation preferences of $10 per share
plus any accumulated but unpaid dividends, and no more, before any payment or
distribution of assets of the Company is made to or set apart from the holders
of the common stock. The Series D Preferred shall not be redeemable at any
time prior to September 30, 1999. After that date, the Company may, at its
option and at any time prior to notice of the Series D Preferred at the time
issued and outstanding for an amount in cash equal to $11.75 per share plus
any accumulated and unpaid dividends. If less than all the Series
F-21
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
D Preferred are to be redeemed, then such redemption shall be pro rata based
on the number of Series D Preferred owned of record by each preferred
shareholder. The Series E Preferred shall not be redeemable at any time prior
to September 30, 2001. After that date, the Company may, at its option and at
any time prior to notice of conversion of the Series E Preferred by the holder
thereof, redeem all or any part of the Series E Preferred at the time issued
and outstanding for an amount in cash equal to $11.75 per share plus any
accumulated and unpaid dividends. If less than all the Series E Preferred are
to be redeemed, then such redemption shall be pro rata based on the number of
shares of Series E Preferred owned of record by each preferred shareholder.
The Company authorized 60,000 shares of Series D Preferred and 500,000
shares of Series E Preferred on April 29, 1998. Both Series D Preferred and
Series E Preferred have a stated value of $10 per share and 8% cumulative
dividends payable in either cash or stock at the option of the Company. At
December 31, 1998, 34,000 shares of Series D Preferred and 7,500 shares of
Series E Preferred are issued and outstanding. Each share of the Series D is
convertible based upon a conversion price that is equal to the lesser of (a)
110% of the closing bid price five day average preceding the date of purchase
of the Series D by the holder; or (b) 80% of the closing bid price five day
average preceding the date such conversion is made. The Series D and Series E,
which confer no voting rights, rank equal with each other, rank junior to the
Series A, B and C convertible preferred stock and senior to the Company's
other securities (except with the consent of the majority of the holders of
Series D or the consent of the majority of the holders of Series E,
respectively). In the event of the dissolution or winding up of the Company,
the holders of Series D and Series E shall have liquidation preferences of $10
per share plus any accumulated but unpaid dividends, and no more, before any
payment or distribution of assets of the Company is made to or set apart for
the holders of the Common Stock.
Each share of the Series E Preferred are convertible any time after issuance
at 82.5% of the five day average of the closing bid prices for the five
trading days preceding the date such conversion is made. The conversion ratio
for Series D Preferred and Series E Preferred is subject to adjustment from
time to time upon the occurrence of stock splits, reverse stock splits and
similar events. No additional shares of Series E may be issued due to the
interpretations of the SEC regarding equity lines of credit.
The Company received $600,000 less offering costs for the issuance of 60,000
shares of Series D on April 29, 1998 and $75,000 less offering costs for the
issuance of 7,500 shares of Series E on July 27, 1998. Due to the beneficial
conversion features in connection with the issuance of Series D and Series E,
the Company was deemed to recognize noncash preferred stock dividends totaling
approximately $170,000. This amount is equivalent to the discount from the
fair market value of the common stock given to the purchasers of the Series D
and Series E calculated as of the date of the sale of such stock.
11. Stock Purchase Warrants:
Under the terms of the agreement with Aberlyn Capital Management Limited
Partnership (See Note 9), 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 expired
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. The remainder
expired in 1998.
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
expired in June 1998.
F-22
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 expired 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
expired in 1998.
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 purchase common
stock in connection with the renewal and extension of the note. 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 under exercised by one share in 1996 and is
therefore forfeited. The remaining warrants for 168,635 shares expired in
1998.
In August 1994, in connection with a licensing agreement with Wright Medical
Technologies (See Note 4), 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.
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 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 of $0.9375. In addition, the lenders were given
registration rights with 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.
F-23
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
In connection with the private placement of 1,171,844 shares of common stock
during January through April 1998, the Company granted warrants to purchase
317,000 shares of common stock at exercise prices ranging from $0.34 to $0.69
per share. The warrants are exercisable for two years.
In February 1998 the Company issued a warrant to purchase 125,000 shares of
common stock to Aberlyn Capital Management Limited Partnership as an
inducement to enter into a modification agreement on the repayment of an
existing lease agreement. The warrant is exercisable for five years at an
exercise price of $0.44 per share.
In connection with private placement of preferred stock, the Company issued
to the investor a warrant to purchase 60,000 shares of common stock at an
exercise price of $0.85 per share exercisable for three years. In addition,
warrants to purchase 200,000 shares of common stock were issued to consultants
as part of a finders fee agreement.
In September 1998, the Company issued a warrant to purchase 50,000 shares of
common stock for an exercise price of $0.35 per share exercisable for two
years. The warrants were issued in connection with a bridge loan. In December
1998, warrants to purchase 10,000 shares of common stock at an exercise price
of $0.35 were issued due to the late payment of the note. The additional
warrants are also exercisable for two years. Warrants to purchase 200,000
shares at an exercise price of $0.55 exercisable for five years were issued to
consultants as part of a finders fee agreement for this transaction.
In September 1998, the Company issued a warrant to purchase 500,000 shares
at an exercise price of $0.35 to a consultant in connection with a consulting
agreement.
In connection with bridge financing during October and December 1998, the
Company issued warrants to purchase 374,000 shares of common stock at an
exercise price ranging from $0.195 to $0.225 per share exercisable for two
years.
F-24
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Cumulative shares issuable under warrants and their expiration dates as of
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Expiration Number Exercise
Grant Date Date of Shares Price
---------- ---------- --------- --------
<S> <C> <C> <C>
January-February 1994....................... 1999 224,139 $1.3500
March 1994.................................. 1999 150,000 $1.5000
March-June 1994............................. 1999 70,000 $1.0000
August 1994................................. 1999 150,000 $2.0000
October 1994................................ 1999 100,000 $2.5000
June 1995................................... 2000 100,000 $0.1875
June 1995................................... 2000 100,000 $0.5000
February 1996............................... 2001 704,167 $0.5000
September 1996.............................. 2001 275,000 $0.9375
November 1996............................... 2001 1,209,677 $1.4000
November 1996............................... 2001 107,143 $1.4000
December 1996............................... 2001 25,000 $1.5000
January 1998................................ 2000 200,000 $0.3700
February 1998............................... 2003 125,000 $0.4400
March 1998.................................. 2000 22,000 $0.3400
March 1998.................................. 2000 5,000 $0.4200
April 1998.................................. 2000 40,000 $0.3400
April 1998.................................. 2000 50,000 $0.6900
April 1998.................................. 2001 60,000 $0.8500
April 1998.................................. 2003 200,000 $0.8500
September 1998.............................. 2000 50,000 $0.3500
September 1998.............................. 2003 200,000 $0.5500
September 1998.............................. 2003 500,000 $0.3500
October 1998................................ 2000 4,000 $0.2250
October 1998................................ 2000 10,000 $0.2000
October 1998................................ 2000 100,000 $0.1950
November 1998............................... 2000 10,000 $0.3500
December 1998............................... 2000 260,000 $0.1950
---------
5,051,126
=========
</TABLE>
F-25
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Stock Options:
At December 31, 1998, 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 $59,250, $122,800, and $238,000 for 1998, 1997 and
1996, 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 1998 1997 1996
---- ----------- ----------- -----------
<S> <C> <C> <C>
Net loss
As reported....................... $(2,630,084) $(2,774,203) $(2,625,116)
Pro forma......................... $(2,764,781) $(3,084,982) $(2,814,845)
Net loss available to common
shareholders
As reported....................... $(2,800,115) $(2,774,203) $(3,808,529)
Pro forma......................... $(2,934,812) $(3,084,982) $(3,998,258)
Net loss per common share
As reported....................... $ (.11) $ (.18) $ (.34)
Pro forma......................... $ (.11) $ (.20) $ (.35)
</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, 1998, 215,000
shares of common stock and options to purchase 330,000 shares have been
granted to consultants, and 25,000 shares of common stock 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
$0.40 per share. In settlement of litigation on May 1, 1998 these options were
replaced with options to purchase 225,000 shares at $0.40 per share,
exercisable for six months with registration requirements. In 1999 the final
resolution of the case resulted in the exercise period being extended to three
years from the date a new agreement was signed by the Company.
F-26
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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 which are exercisable through 1999 to
Lawrence M. Hoffman and 150,000 shares of common stock to a former officer at
an exercise price of $.6875. The former officer exercised his options in 1998
as part of a litigation settlement.
In connection with a consulting agreement, the Company issued options to
purchase 60,000 shares of stock at $1.00 exercisable for two years. These
options expired in 1998.
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 to $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 2004.
F-27
<PAGE>
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, 1998, December 31, 1997 and December 31, 1996 and the
changes during the year ended on these dates is presented below:
<TABLE>
<CAPTION>
Employee Stock Options
- -------------------------------------------------------------------------------------
1998 1997 1996
------------------- ------------------- -------------------
# Shares Weighted # Shares Weighted # Shares Weighted
of Average of Average 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............ 2,295,000 $0.73 1,465,476 $1.09 2,972,194 $0.89
Granted at-a-discount... 0 n/a 59,000 $0.94 15,000 $0.75
Granted at-the-money.... 0 n/a 1,134,000 $0.67 0 n/a
Granted at-a-premium.... 0 n/a 105,000 $0.55 110,000 $0.95
Total options granted... 0 n/a 1,298,000 $0.67 125,000 $0.93
Exercised............... 0 n/a 20,000 $0.19 101,000 $1.00
Forfeited............... 0 n/a 30,000 $1.04 1,253,418 $0.24
Expired................. 0 n/a 418,476 $1.73 277,300 $2.77
Outstanding at end of
year................... 2,295,000 $0.73 2,295,000 $0.73 1,465,476 $1.09
Exercisable at end of
year................... 1,514,000 $0.79 886,000 $0.90 542,000 $1.14
Weighted-average FV of
options granted at-a-
discount............... n/a $0.79 $0.67
Weighted-average FV of
options granted at-the-
money.................. n/a $0.49 n/a
Weighted-average FV of
options granted at-a-
premium................ n/a $0.34 $0.55
Weighted-average FV of
all options granted.... n/a $0.49 $0.56
</TABLE>
The following table summarizes information about stock options for employees
and directors outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- --------------------
Weighted Weighted
Number Average Weighted Average Number Average
Outstanding Exercise Remaining Exercisable Exercise
Range of Exercise Prices at 12/31/98 Price Contractual Life at 12/31/98 Price
- ------------------------ ----------- -------- ---------------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.42 to $0.99.......... 1,850,000 $0.58 5.70701 1,069,000 $0.55221
$1.00 to $2.99.......... 370,000 $1.02 1.51130 370,000 $1.01537
$3.00................... 75,000 $3.00 0.58000 75,000 $3.00000
--------- ---------
$0.42 to $3.00.......... 2,295,000 $0.73 4.86303 1,514,000 $0.78666
</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 1998 1997 1996
---------- ----- ----- ------
<S> <C> <C> <C>
Expected Term....................................... n/a 4.82 3.18
Expected Dividend Yield............................. 0.00% 0.00% 0.00%
Expected Volatility................................. 96.87% 95.00% 109.45%
Risk-Free Interest Rate............................. 6.50% 6.29% 6.01%
</TABLE>
F-28
<PAGE>
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 non-
employees as of December 31, 1998, December 31, 1997 and December 31, 1996 and
the changes during the year ended on these dates is presented below:
<TABLE>
<CAPTION>
Non-Employee Stock Options
- -------------------------------------------------------------------------------------
1998 1997 1996
------------------- ------------------- -------------------
# Shares Weighted # Shares Weighted # Shares Weighted
of Average of Average 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............ 1,602,500 $0.62 1,272,500 $0.52 1,690,167 $0.84
Granted at-a-discount... 225,000 $0.40 60,000 $1.00 435,000 $0.73
Granted at-the-money.... 0 n/a 0 n/a 0 n/a
Granted at-a-premium.... 100,000 $0.70 270,000 $1.00 0 n/a
Total options granted... 325,000 $0.49 330,000 $1.00 435,000 $0.73
Exercised............... 150,000 $0.69 0 n/a 96,000 $1.00
Forfeited............... 437,500 $0.40 0 n/a 616,667 $0.19
Expired................. 60,000 $1.00 0 n/a 140,000 $6.21
Outstanding at end of
year................... 1,280,000 $0.63 1,602,500 $0.62 1,272,500 $0.52
Exercisable at end of
year................... 1,280,000 $0.63 1,602,500 $0.62 1,122,500 $0.50
Weighted-average FV of
options granted at-a-
discount............... $0.31 $0.81 $0.68
Weighted-average FV of
options granted at-the-
money.................. n/a n/a n/a
Weighted-average FV of
options granted at-a-
premium................ $0.37 $0.34 n/a
Weighted-average FV of
all options granted.... $0.33 $0.42 $0.68
</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 1998 1997 1996
---------- ----- ----- ------
<S> <C> <C> <C>
Expected Term....................................... 1.12 5.00 1.26
Expected Dividend Yield............................. 0.00% 0.00% 0.00%
Expected Volatility................................. 96.87% 95.00% 109.45%
Risk-Free Interest Rate............................. 6.50% 6.15% 5.61%
</TABLE>
The following summarizes information about fixed stock options for
employees, directors and non-employees outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Weighted Average Weighted
Number Average Remaining Number Average
Outstanding Exercise Contractual Exercisable Exercise
Range of Exercise Prices at 12/31/98 Price Life at 12/31/98 Price
- ------------------------ ----------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.001 to $0.99.......... 950,000 $0.50820 3.59673 950,000 $0.50820
$1.00 to $2.99........... 330,000 $1.00000 8.65909 330,000 $1.00000
$0.001 to $2.99.......... 1,280,000 $0.63499 4.90187 1,280,000 $0.63499
</TABLE>
F-29
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Supplemental Information for Consolidated Statement of Cash Flows:
<TABLE>
<CAPTION>
Inception
September 4,
Year Ended Year Ended Year Ended 1984, to
December 31, December 31, December 31, December 31,
1998 1997 1996 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest paid............. $ 113,161 $ 108,660 $ 392,580 $1,368,699
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.. 105,170
Conversion of Series A and
Series B preferred stock
to common stock.......... 444
Conversion of 1996 Series
A and B, 1997 Series C,
and 1998 Series D
preferred stock to common
stock.................... 3,280,579 1,260,000 4,540,579
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................. 72,750 28,280 367,500 1,108,457
Issuance of common stock
for certain liabilities.. 122,334 178,286 1,546,509 1,847,129
</TABLE>
14. Sales Information:
During the year ended December 31, 1998 sales to three customers represented
15.6%, 13.3% and 10.5% of the Company's total net sales. The remainder of net
sales to any one customer was less than 10%. Sales to one customer during the
year ended December 31, 1997 represented 16.9% of net sales while sales to
three customers during 1996 represented 18.7%, 18.2% and 12.9% 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 1998, 1997 and 1996 were approximately 55%, 62% and 55%,
respectively.
15. 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. The Company received royalties in the amount of $367 in
1998.
F-30
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
16. Subsequent Event:
On March 3, 1999, the Company and an investor entered into a securities
purchase agreement for a Series 1999-A Nine Percent (9%) Redeemable
Convertible Debenture (the "Debenture") in the amount of $400,000. Offering
costs of $47,500 were incurred in this transaction. The Debenture matures
December 31, 2001 with interest payable quarterly. The Company granted the
holder a security interest in the OmniCath(R) and the Evert-O-Cath(TM). As
additional consideration a warrant to purchase 40,000 shares of common stock
at an exercise price of $0.175 per share, which is equal to 125% of the
closing bid price for the common stock on March 3, 1999. The warrant is
exercisable for three years.
The Debenture is convertible into common stock at a conversion price equal
to the lesser of $0.15 per share or 75% of the lowest of the closing bid
prices for the five business days immediately preceding the conversion date.
As a part of the agreement registration rights were granted regarding the
warrant, the conversion shares, the interest shares and the security shares,
and the Company must make reasonable efforts to file a registration statement
within 45 days after closing.
The Company has a right to redeem all or a portion of the Debenture at any
time prior to receiving a notice of conversion. The cash redemption amount
shall be equal to:
. 115% of the face amount to be redeemed if redeemed within the first
thirty days;
. 120% of the face amount to be redeemed if redeemed between thirty-one and
sixty-one days; or
. 125% of the face amount to be redeemed if redeemed after 60 days.
On March 26, 1999, the Company entered into an exclusive license agreement
with Manufacturing & Research, Inc. ("MRI") for its Cathlab(R) patents.
Pursuant to such license agreement, the Company will relocate its
manufacturing facility to MRI's facility in Tucson, Arizona. MRI will staff
and manage the facility and will manufacture the Company's Cathlab and balloon
cardiovascular products under the licensing agreement. Management anticipates
this will save the Company approximately $600,000 annually in operating,
production and engineering costs. This license agreement provides for a one-
time license fee in the amount of $25,000. In addition, MRI shall pay a
royalty interest on the net amount received from all sales to their customers
under the licensing agreement that utilizes the Company's proprietary
technology.
The Company entered into an exclusive worldwide, royalty-bearing license
agreement on April 14, 1999 with IntraTherapeutics, Inc. for its OmniFilter
technology, a percutaneous guidewire micro-filter to be used in carotid
angioplasty procedures. The Company will receive a one-time license fee of
$1,000,000 and a 5% royalty fee for the life of the patents. The license term
is the later of the expiration of all patents, including patent applications,
or ten years from the first commercial sale of the licensed product.
17. 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 eleven products presently
available to market and has a 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 eleven existing FDA-approved products, continuing to
upgrade and expand its distribution network, continuing to focus on the
commercialization of its core technologies by pursuing US and international
regulatory approval, aggressively
F-31
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 and CE Mark
Certification in September 1998, the Company has received unsolicited requests
to manufacture unique devices to the specifications of third parties,
indicating growth potential as an OEM manufacturer. One OEM contract for
100,000 units per year is currently in force and other OEM contracts are in
the discussion phase.
In addition, during 1998, 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-32
<PAGE>
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 Subsidiary (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.
KARLINS ARNOLD & CORBITT, P.C.
The Woodlands, Texas
March 26, 1999
F-33
<PAGE>
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
--------------------
(1) (2)
Balance Charged Charged
at to costs to other Balance
Beginning and accounts-- Deductions-- at end of
Description of Period expenses describe describe period
----------- --------- -------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
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
December 31, 1998
Allowance for doubtful
accounts.............. 57,167 17,167(1) 40,000
Allowance for deferred
tax assets............ 8,827,000 833,000 9,660,000
</TABLE>
- --------
(1) Write-off of bad debts.
F-34
<PAGE>
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 2nd day of June, 1999.
AMERICAN BIOMED, INC.
/s/ Steven B. Rash
By:__________________________________
Steven B. Rash
Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, to this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<S> <C> <C>
</TABLE>
/s/ Steven B. Rash Chairman of the Board, June 2, 1999
- ----------------------------------- President and Chief
Steven B. Rash Executive Officer
/s/ Colene Blankinship Controller (Principal June 2, 1999
- ----------------------------------- Financial and
Colene Blankinship Accounting Officer)
/s/ Lawrence M. Hoffman Director June 2, 1999
- -----------------------------------
Lawrence M. Hoffman
Director
- -----------------------------------
Richard Serbin
F-35
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<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(7)
3.4 --Certificate of Designations, Preferences and Rights of 1996 Series B
Convertible Preferred Stock(7)
3.5 --Certificate of Designations, Preferences and Rights of 1997 Series C
Convertible Preferred Stock(10)
3.6 --Certificate of Designations, Preferences and Relative Rights of 1998
Series D Convertible Preferred Stock(12)
3.7 --Certificate of Designations, Preferences and Relative Rights of 1998
Series E Convertible Preferred Stock(12)
4.2 --Specimen Common Stock Certificate(13)
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.(4)
10.69 --Stipulation of Settlement, Scott Printing Corporation v. American
BioMed, Inc.(6)
10.70 --Employment contract with Steven B. Rash(6)
10.71 --Purchase of Technology Agreement, Guerbet, S.A.(6)
10.80 --1996 Incentive Stock Option Plan(8)
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(9)
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(10)
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(10)
10.84 --Form of Registration Rights Agreement, dated February 20, 1996,
between the Company and holders of the 1996 Series A Convertible
Preferred Stock(10)
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(10)
10.86 --Form of Registration Rights Agreement, dated November 7, 1996,
between the Company and holders of the 1996 Series B Convertible
Preferred Stock(10)
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(10)
10.88 --Registration Rights Agreement, dated March 21, 1997, between the
Company and holders of the 1997 Series C Convertible Preferred
Stock(10)
10.89 --Lease Agreement dated June 19, 1997 between the Company and
Woodlands Office Equities--'95 Limited(11)
</TABLE>
F-36
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.90 --Modification Agreement--Patent Schedule No. 002 between Aberlyn
Capital Management Co., Inc. and the Company(11)
10.91 --Modification Agreement--Lease Schedule No. 003 between Aberlyn
Capital Management Co., Inc. and the Company(11)
10.92 --Employment agreement with Marshall Kerr(11)
10.93 --Securities Purchase Agreement, dated April 29, 1998, Series D
Preferred and Series E Preferred Stock(12)
10.96 --Registration Rights Agreement of Series D Preferred and Series E
Preferred(12)
10.97 --Augustine Fund, L.P. Warrant dated April 29, 1998 to purchase 60,000
shares of Common Stock(12)
10.98 --1994 Stock Option Plan of the Company(5)
10.99 --Securities Purchase Agreement, dated March 3, 1999, Series 1999-A,
9% Redeemable Convertible
10.100 --Registration Rights Agreement, dated March 3, 1999, between the
Company and holders of the Series 1999-A 9% Redeemable Convertible
Debentures
10.101 --License Agreement, dated March 26, 1999, between the Company and
Manufacturing & Research, Inc.
21.1 --Subsidiaries of the Registrant(9)
23.1 --Consent of Karlins, Arnold & Corbitt, PC
27 --Financial Data Schedule
</TABLE>
- --------
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended, File No. 33-42472, dated October 22, 1991.
(2) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1991.
(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, 1994.
(5) Incorporated by reference to the Company's Proxy Statement for the April
27, 1994 Annual Meeting.
(6) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
(7) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996.
(8) Incorporated by reference to the Company's Proxy Statement for the
November 22, 1996 Annual Meeting.
(9) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
(10) Incorporated by reference to the Company's Annual Report on Form 10-K/A-1
for the year ended December 31, 1996.
(11) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
(12) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998.
(13) Incorporated by reference to the Company's Registration Statement on Form
S-1, as amended, File No. 333-52301, dated September 11, 1998.
F-37
<PAGE>
EXHIBIT 10.99
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT (this "Agreement"), is made as of
March 3, 1999, by and between American Biomed, Inc., a corporation organized
under the laws of the State of Delaware, U.S.A., with headquarters located at
10077 Grogan's Mill Road, Suite 100, The Woodlands, Texas 77380 (the "Company")
and the buyer set forth on the execution page hereof (the "Buyer").
RECITALS
A. The Company and the Buyer are executing and delivering this Agreement
in reliance upon the exemption from securities registration afforded by the
provisions of Regulation D ("Regulation D") as promulgated by the United States
Securities and Exchange Commission (the "SEC") under the Securities Act of 1933,
as amended (the "1933 Act");
B. The Buyer desires to purchase from the Company, and the Company desires
to sell to the Buyer, for the amounts and upon the terms and conditions stated
in this Agreement, in a closing (the "Closing") as herein described, certain of
the Company's convertible debentures as listed in Recital B(i) immediately
below, along with certain warrants of the Company as listed in Recital B(ii)
below.
(i) At the Closing, the Company's Series 1999-A Nine Percent (9%)
Redeemable Convertible Debentures (the "Debentures"), which may
be converted into common stock of the Company, $.001 par value
per share ("Common Stock"), upon the terms hereof and upon the
terms of the Debentures. The form of the Debentures is as shown
on Exhibit A attached hereto. The aggregate principal face amount
of the Debentures to be issued and sold by the Company is Four
Hundred Thousand United States Dollars (US$400,000.00).
(ii) At the Closing, as additional consideration for Buyer's purchase
of the Debentures, a warrant (each a "Warrant" and collectively
the "Warrants") to purchase Common Stock at a purchase price
equal to one hundred twenty-five percent (125%) of the closing
bid price for the Common Stock on the date of such Closing, which
Warrants must be exercised if at all within three (3) years after
the date of issuance. The Warrants shall be substantially in the
form attached hereto as Exhibit B. The number of shares of Common
Stock into which each Warrant shall be exercisable shall be equal
to one share for each ten dollars ($10.00) in face amount of
Debentures purchased by the Buyer.
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The Common Stock into which Debentures may be convertible, in accordance
with their terms, shall be referred to herein as the "Conversion Shares." The
Common Stock received upon exercise of the Warrants shall be referred to as the
"Warrant Shares." Certain shares of Common Stock may (at the Company's option as
described in the Debentures) be issued to the Buyer in payment of interest (the
"Interest Shares"). The Conversion Shares, the Warrant Shares, the Interest
Shares (if any), and the Security Shares (defined below) may be collectively
referred to herein as the "Securities."
C. Contemporaneously with the execution and delivery of this
Agreement, the parties hereto are executing and delivering a Registration Rights
Agreement (the "Registration Rights Agreement") substantially in the form of
Exhibit C attached hereto pursuant to which the Company has agreed to provide
certain registration rights under the 1933 Act and the rules and regulations
promulgated thereunder, and applicable state securities laws.
AGREEMENTS
NOW, THEREFORE, in consideration of their respective promises contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged by the parties, the Company and the Buyer hereby
agree as follows:
1. PURCHASE AND SALE OF SECURITIES.
a. Purchase. The Buyer hereby agrees to purchase from the Company,
and the Company agrees to sell to the Buyer, at the Closing, Debentures in the
aggregate principal amount of US$400,000.00. The purchase price for the
Debentures purchased by the Buyer (the "Purchase Price") shall be equal to the
face amount of such Debentures, and shall be paid in full at the Closing.
b. The Closing. The date of the Closing shall be March 5, 1999,
or on such earlier or later date as is mutually agreed to in writing by the
Company and the Buyer. The Purchase Price for the Securities being purchased at
the Closing shall be delivered to the Escrow Agent (as defined in the Escrow
Agreement substantially in the form of Exhibit D attached hereto (the "Escrow
Agreement")) on behalf of the Company on or before the date specified herein for
such Closing. At the Closing, the Company shall deliver the Debentures and the
Warrants being sold at such Closing, duly issued and executed by the authorized
officers on behalf of the Company, to the Escrow Agent (as defined in the Escrow
Agreement) on behalf of the Buyer.
c. Form of Payment. The Buyer shall pay the Purchase Price for the
Debentures and Warrants purchased at the Closing by wire transfer of immediately
available funds in United States Dollars, to be deposited into the Escrow
Account as defined in the Escrow Agreement, against delivery to the Escrow Agent
of duly executed Debentures and Warrants being purchased by the Buyer hereunder
at such Closing. The Escrow Agent shall be responsible for delivery of the
Purchase Price to the Company and the Debentures and Warrants to the Buyer in
accordance with the terms of the Escrow Agreement and with the instructions of
the said parties.
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2. BUYER'S REPRESENTATIONS AND WARRANTIES.
The Buyer understands, agrees with, and represents and warrants to the
Company with respect to its purchase hereunder, that:
a. Investment Purposes; Compliance With 1933 Act. The Buyer is
purchasing the Securities for its own account for investment only and not with a
view towards, or in connection with, the public sale or distribution thereof,
except pursuant to sales registered under or exempt from the 1933 Act. The
Buyer is not purchasing the Securities for the purpose of covering short sale
positions in the Common Stock established on or prior to the date of the
relevant Closing. The Buyer agrees to offer, sell or otherwise transfer the
Securities only (i) in accordance with the terms of this Agreement and the
Debentures, as applicable, and (ii) pursuant to registration under the 1933 Act
or to an exemption from registration under the 1933 Act and any other applicable
securities laws. The Buyer does not by its representations contained in this
Section 2(a) agree to hold the Securities for any minimum or other specific term
and reserves the right to dispose of the Securities at any time pursuant to a
registration statement or in accordance with an exemption from registration
under the 1933 Act, in all cases in accordance with applicable state and federal
securities laws. The Buyer understands that it shall be a condition to the
issuance of the Conversion Shares, the Warrant Shares and the Interest Shares
(if any) that the Conversion Shares, the Warrant Shares and the Interest Shares
(if any) be and are subject to the representations set forth in this Section
2(a).
b. Accredited Investor Status. The Buyer is an "accredited investor" as
that term is defined in Rule 501 (a) of Regulation D. The Buyer has such
knowledge and experience in financial and business matters that it is capable of
evaluating the merits and risks of an investment made pursuant to this
Agreement. The Buyer is aware that it may be required to bear the economic risk
of an investment made pursuant to this Agreement for an indefinite period of
time, and is able to bear such risk for an indefinite period.
c. Reliance on Exemptions. The Buyer understands the Securities are
being offered and sold to it in reliance on specific exemptions from the
registration requirements of the applicable United States federal and state
securities laws and that the Company is relying upon the truth and accuracy of,
and the Buyer's compliance with, the representations, warranties,
acknowledgments, understandings, agreements and covenants of the Buyer set forth
herein in order to determine the availability of such exemptions and the
eligibility of the Buyer to acquire the Securities.
d. Information. The Buyer and its advisors, if any, have been furnished
with all materials relating to the business, finances and operations of the
Company and materials relating to the offer and sale of the Securities which
have been requested by the Buyer, and specifically (but without limitation) the
Company's 1997 Form 10-K as filed with the SEC for the fiscal year ended
December 31, 1997, and the Company's Form 10-Q as filed with the SEC for the
quarter ended September 30, 1998 (collectively, the "1998 Filings"). The Buyer
and its advisors, if any, have been afforded the opportunity to ask all such
questions of the Company as they have in their discretion
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deemed advisable. The Buyer understands that its investment in the Securities
involves a high degree of risk. The Buyer has sought such accounting, legal and
tax advice as it has considered necessary to an informed investment decision
with respect to the investment made pursuant to this Agreement.
e. No Government Review. The Buyer understands that no United States
federal or state agency or any other government or governmental agency has
passed on or made any recommendation or endorsement of the Securities or the
fairness or suitability of the investment in the Securities, nor have such
authorities passed upon or endorsed the merits of the offering of the
Securities.
f. Transfer or Resale. The Buyer understands that: (i) except as
provided in the Registration Rights Agreement, the Securities have not been and
are not being registered under the 1933 Act or any state securities laws, and
may not be offered for sale, sold, assigned or transferred unless either (a)
subsequently registered thereunder or (b) the Buyer shall have delivered to the
Company an opinion by counsel reasonably satisfactory to the Company, in form,
scope and substance reasonably satisfactory to the Company, to the effect that
the securities to be sold, assigned or transferred may be sold, assigned or
transferred pursuant to an exemption from such registration, (ii) any sale of
such securities made in reliance on Rule 144 (as hereafter defined) may be made
only in accordance with the terms of Rule 144 and further, if Rule 144 is not
applicable, any resale of such securities under circumstances in which the
seller (or the person though whom the sale is made) may be deemed to be an
underwriter (as that term is defined in the 1933 Act) may require compliance
with some other exemption under the 1933 Act or the rules and regulations of the
SEC thereunder, and (iii) neither the Company nor any other person is under any
obligation to register such securities under the 1933 Act or any state
securities laws or to comply with the terms and conditions of any exemption
thereunder (in each case, other than pursuant to this Agreement or the
Registration Rights Agreement).
g. Legend. The Buyer understands that the Debentures, and until such
time as the Conversion Shares, the Warrant Shares, the Security Shares and the
Interest Shares (if any) (collectively, the "Registrable Securities"), have been
registered under the 1933 Act as contemplated by the Registration Rights
Agreement or otherwise may be sold by the Buyer pursuant to Rule 144 (as
amended, or any applicable rule which operates to replace said Rule) promulgated
under the 1933 Act ("Rule 144"), the stock certificates representing the
Registrable Securities will bear a restrictive legend (the "Legend") in
substantially the following form:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), OR APPLICABLE STATE SECURITIES LAWS
(COLLECTIVELY, THE "LAWS"). THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT
AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF
EITHER (I) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE
LAWS, OR (II) AN OPINION OF COUNSEL PROVIDED TO THE ISSUER IN FORM, SUBSTANCE
AND SCOPE REASONABLY ACCEPTABLE TO THE ISSUER TO THE EFFECT THAT REGISTRATION
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IS NOT REQUIRED UNDER THE LAWS DUE TO AN AVAILABLE EXCEPTION TO OR EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF THE LAWS.
The Legend shall be removed and the Company will issue certificates without
the Legend to the holder of the Debentures or any Registrable Securities upon
which the Legend is stamped, in accordance with Section 5(b).
h. Authorization; Enforcement. This Agreement, the Registration Rights
Agreement and the Escrow Agreement have been duly and validly authorized,
executed and delivered by the Buyer and are each and collectively valid and
binding agreements of the Buyer enforceable in accordance with their terms,
subject as to enforceability to general principles of equity and to bankruptcy,
insolvency, moratorium, and other similar laws affecting the enforcement of
creditors' rights generally. Buyer (and Buyer's counsel) has examined this
Agreement and is satisfied in its sole discretion that this Agreement and the
accompanying Exhibits, Schedules and the Addenda, if any, are in accordance with
Regulation D and are effective to accomplish the purposes set forth herein and
therein.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company understands, agrees with, and represents and warrants to the
Buyer that:
a. Organization and Qualification: Reporting Company Status. The Company
and its subsidiaries are corporations duly organized and existing in good
standing under the laws of the respective jurisdictions in which they are
incorporated, except as would not have a Material Adverse Effect (as defined
below), and have the requisite corporate power to own their properties and to
carry on their business as now being conducted. Each of the Company and its
subsidiaries is duly qualified as a foreign corporation to do business and is in
good standing in every jurisdiction in which the nature of the business
conducted by it makes such qualification necessary and where the failure so to
qualify would have a Material Adverse Effect. "Material Adverse Effect" means
any material adverse effect on the operations, properties or financial condition
of the Company and its subsidiaries taken as a whole. The Company has registered
its Common Stock pursuant to Section 12 of the 1934 Act, and the Common Stock is
eligible for trading on the OTC Bulletin Board Market. The Company has received
no notice, either written or oral, with respect to the continued eligibility of
the Common Stock for such eligibility for trading, and the Company has
maintained all applicable requirements for the continuation of such eligibility
for trading, and the Company does not reasonably anticipate that the Common
Stock will be declared ineligible to trade on the OTC Bulletin Board Market for
the foreseeable future. Seller shall use its best efforts to continue to keep
its stock eligible for trading on the OTC Bulletin Board Market or a comparable
stock market or exchange. The Company has complied with all applicable
requirements (if any) of the National Association of Securities Dealers and the
OTC Bulletin Board Market with respect to the issuance of the Securities.
b. Authorization; Enforcement. (i) The Company has the requisite
corporate power and authority to enter into and perform this Agreement, the
Registration Rights Agreement and the
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Escrow Agreement, to issue and sell the Debentures and the Registrable
Securities in accordance with the terms hereof, and to perform its obligations
under the Debentures and the Warrants in accordance with the requirements of the
same, (ii) the execution, delivery and performance of this Agreement, the
Registration Rights Agreement and the Escrow Agreement by the Company and the
consummation by it of the transactions contemplated hereby and thereby have been
duly authorized by the Company's Board of Directors and no further consent or
authorization of the Company, its Board of Directors, or its stockholders is
required, (iii) this Agreement, the Registration Rights Agreement, the Escrow
Agreement and, on the date of the Closing, the Debentures and Warrants sold at
such Closing, have been duly and validly authorized, executed and delivered by
the Company, (iv) the Debentures and the Warrants have been duly authorized by
the Company's Board of Directors to be issued and sold, to the extent such
authorization is necessary under the Company's By-laws (defined below) or
applicable law, and (v) this Agreement, the Registration Rights Agreement and
the Escrow Agreement constitute the valid and binding obligations of the Company
enforceable against the Company in accordance with their respective terms,
except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation or similar laws relating to,
or affecting, generally, the enforcement of creditors' rights and remedies or by
other equitable principles of general application. The Company (and its legal
counsel) has examined this Agreement and is satisfied in its sole discretion
that this Agreement and the accompanying Exhibits, Schedules and the Addenda, if
any, are in accordance with Regulation D and are effective to accomplish the
purposes set forth herein and therein.
c. Capitalization. As of December 31, 1998, the authorized capital
stock of the Company consists of 50,000,000 shares of Common Stock of which
32,648,075 shares were issued and outstanding. All of such outstanding shares
have been validly issued and are fully paid and nonassessable. Except as
disclosed in Schedule 3(c), no shares of Common Stock are subject to preemptive
rights or any other similar rights or any liens or encumbrances. Except as
disclosed in Schedule 3(c) attached and in the 1998 Filings, as of the effective
date of this Agreement, (i) there are no outstanding options, warrants, scrip,
rights to subscribe to, calls or commitments of any character whatsoever
relating to, or securities or rights convertible into, any shares of capital
stock of the Company or any of its subsidiaries, or arrangements by which the
Company or any of its subsidiaries is or may become bound to issue additional
shares of capital stock of the Company or any of its subsidiaries, (ii) there
are no outstanding debt securities, and (iii) there are no agreements or
arrangements under which the Company or any of its subsidiaries is obligated to
register the sale of any of its or their securities under the 1933 Act (except
as provided herein and in the Registration Rights Agreement). If requested by
the Buyer, the Company has furnished to the Buyer, and the Buyer acknowledges
receipt of same by its signature hereafter, true and correct copies of the
Company's Certificate of Incorporation, as amended, as in effect on the date
hereof ("Certificate of Incorporation"), and the Company's Bylaws, as in effect
on the date hereof (the "Bylaws").
d. Issuance of Securities. The Debentures and the Registrable Securities
are all duly authorized and reserved for issuance, and in all cases upon
issuance shall be validly issued, fully paid and non-assessable, free from all
taxes, liens and charges with respect to the issue thereof, and will not be
subject to preemptive rights or other similar rights of stockholders of the
Company.
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e. Acknowledgment Regarding Buyer's Purchase of the Securities. The
Company acknowledges and agrees that the Buyer is not acting as financial
advisor to or fiduciary of the Company (or in any similar capacity with respect
to this Agreement or the transactions contemplated hereby), that this Agreement
and the transactions contemplated hereby, and the relationship between the Buyer
and the Company, are and will be considered "arms-length" notwithstanding any
other or prior agreements or nexus between the Buyer and the Company, whether or
not disclosed, and that any statement made by the Buyer, or any of its
representatives or agents, in connection with this Agreement and the
transactions contemplated hereby is not advice or a recommendation, is merely
incidental to the Buyer's purchase of the Securities and has not been relied
upon in any way by the Company, its officers or directors. The Company further
represents to the Buyer that the Company's decision to enter into this Agreement
and the transactions contemplated hereby have been based solely upon an
independent evaluation by the Company, its officers and directors.
f. No Integrated Offering. Neither the Company, nor any of its affiliates,
nor any person acting on its or their behalf, has directly or indirectly made
any offers or sales of any security or solicited any offers to buy any security
under circumstances which would prevent the parties hereto from consummating the
transactions contemplated hereby pursuant to an exemption from registration
under the 1933 Act and specifically in accordance with the provisions of
Regulation D. The transactions contemplated hereby are exempt from the
registration requirements of the 1933 Act, assuming the accuracy of the
representations and warranties contained herein of the Buyer.
g. No Conflicts. The execution, delivery and performance of this Agreement
by the Company and the consummation by the Company of the transactions
contemplated hereby will not (i) result in a violation of the Certificate of
Incorporation or Bylaws or (ii) conflict with, or constitute a default (or an
event which with notice or lapse of time or both would become a default) under,
or give to others any rights of termination, amendment, acceleration or
cancellation of, any agreement, indenture or instrument to which the Company or
any of its subsidiaries is a party, or result in a violation of any law, rule,
regulation, order, judgment or decree (including federal and state securities
laws and regulations) applicable to the Company or any of its subsidiaries or by
which any property or asset of the Company or any of its subsidiaries is bound
or affected (except for such conflicts, defaults, terminations, amendments,
accelerations, cancellations and violations as would not, individually or in the
aggregate, have a Material Adverse Effect). Neither the Company nor any of its
subsidiaries is in violation of its Certificate of Incorporation or other
organizational documents, and neither the Company nor any of its/subsidiaries is
in default (and no event has occurred which, with notice or lapse of time or
both, would put the Company or any of its subsidiaries in default) under, nor
has there occurred any event giving others (with notice or lapse of time or
both) any rights of termination, amendment, acceleration or cancellation of, any
agreement, indenture or instrument to which the Company or any of its
subsidiaries is a party, except for possible defaults or rights as would not, in
the aggregate or individually, have a Material Adverse Effect. The business of
the Company and its subsidiaries is not being conducted, and shall not be
conducted so long as the Buyer owns any of the Securities, in violation of any
law, ordinance or regulation of any governmental entity, except for possible
violations which neither singly or in the
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aggregate would have a Material Adverse Effect. Except as specifically
contemplated by this Agreement and as required under the 1933 Act and any
applicable state securities laws, the Company is not required to obtain any
consent, authorization or order of, or make any filing or registration with, any
court or governmental agency in order for it to execute, deliver or perform any
of its obligations under this Agreement, the Registration Rights Agreement or
the Escrow Agreement in accordance with the terms hereof and thereof, or to
perform its obligations with respect to the Debentures exactly as described
herein and in the Debentures.
h. SEC Documents; Financial Statements. Since at least January 1, 1998,
the Company has timely filed all reports, schedules, forms, statements and
other documents required to be filed by it with the SEC pursuant to the
reporting requirements of the Securities Exchange Act of 1934, as amended (the
"1934 Act") (all of the foregoing filed prior to the date hereof and all
exhibits included therein and financial statements and schedules hereto and
documents (other than exhibits) incorporated by reference therein, being
hereinafter referred to as the "SEC Documents"). The Company has delivered to
the Buyer as requested by the Buyer true and complete copies of the SEC
Documents, except for such exhibits, schedules and incorporated documents. As
of their respective dates, the SEC Documents complied in all material respects
with the requirements of the 1934 Act and the rules and regulations of the SEC
promulgated thereunder applicable to the SEC Documents, and none of the SEC
Documents, at the time they were filed with the SEC, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. As of their
respective dates, the financial statements of the Company included in the SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto. Such financial statements have been prepared in accordance with
generally accepted accounting principles, consistently applied, during the
periods involved (except (i) as may be otherwise indicated in such financial
statements or the notes thereto, or (ii) in the case of unaudited interim
statements, to the extent they may exclude footnotes or may be condensed or
summary statements) and fairly present in all material respects the financial
position of the Company as of the dates thereof and the results of its
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments). No other
information provided by or on behalf of the Company to the Buyer (including the
information referred to in Section 2(d) of this Agreement) contains any untrue
statement of a material fact or omits to state any material fact necessary in
order to make the statements therein, in the light of the circumstance under
which they are or were made, not misleading. Except as set forth in the
financial statements of the Company included in the SEC Documents, the Company
has no liabilities, contingent or otherwise, other than (i) liabilities
incurred in the ordinary course of business subsequent to the date of such
financial statements and (ii) obligations under contracts and commitments
incurred in the ordinary course of business and not required under generally
accepted accounting principles to be reflected in such financial statements, in
each case of clause (i) and (ii) next above which, individually or in the
aggregate, are not material to the financial condition, business, operations,
properties, operating results or prospects of the Company. The SEC Documents
contain a complete and accurate list of all material undischarged written and
oral contracts, agreements, leases or other instruments to which
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the Company or any subsidiary is a party or by which the Company or any
subsidiary is subject (each a "Contract"). None of the Company, its subsidiaries
or, to the best of the Company's knowledge, any of the other parties thereto, is
in breach or violation of any Contract, which breach or violation would have a
Material Adverse Effect. No event, occurrence or condition exists which, with
the lapse of time, the giving of notice, or both, or the happening of any
further event or condition, would become a default by the Company or its
subsidiaries thereunder which would have a Material Adverse Effect.
i. Absence of Certain Changes. Except as disclosed in the SEC Documents or
Schedule 3(i), since December 31, 1997, there has been no material adverse
change and no material adverse development in the business, properties,
operation, financial condition, results of operations or prospects of the
Company. The Company has not taken any steps, and does not currently have any
reasonable expectation of taking any steps, to seek protection pursuant to any
bankruptcy law nor does the Company have any knowledge that its creditors intend
to initiate involuntary bankruptcy proceedings. The Company shall, at least
until Buyer no longer holds any of the Securities, maintain its corporate
existence in good standing and shall pay all taxes when due except for taxes it
reasonably disputes.
j. Absence of Litigation. Except as set forth in the SEC Documents or
Schedule 3(j), there is no action, suit, proceeding, inquiry or investigation
before or by any court, public board or body pending or, to the knowledge of the
Company, threatened against or affecting the Company, wherein an unfavorable
decision, ruling or finding would have a Material Adverse Effect or which would
adversely affect the validity or enforceability of, or the authority or ability
of the Company to perform its obligations under, this Agreement or any of the
documents contemplated herein.
k. Foreign Corrupt Practices. Neither the Company nor any of its
subsidiaries, nor any officer, director or other person acting on behalf of the
Company or any subsidiary has, in the course of his actions for or on behalf of
the Company, used any corporate funds for any unlawful contribution, gift,
entertainment or other unlawful expense relating to political activity, made any
direct or indirect unlawful payment to any foreign or domestic government
official or employee from corporate funds; violated or is in violation of any
provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended; or made
any bribe, rebate, payoff, influence payment, kickback or other unlawful payment
to any foreign or domestic government official or employee.
l. Acknowledgment of Dilution. The number of Conversion Shares issuable
upon conversion of the Debentures may increase substantially in certain
circumstances, including the circumstance wherein the trading price of the
Common Stock declines. The Company's executive officers and directors have
studied and fully understand the nature of the securities being sold hereunder
and recognize they have a potential dilutive effect. The board of directors of
the Company has concluded in its good faith business judgment that such issuance
is in the best interests of the Company. The Company acknowledges that its
obligation to issue Conversion Shares upon conversion of the Debentures and
Warrant Shares upon exercise of the Warrants is binding upon it
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and enforceable regardless of the dilution that such issuance may have on the
ownership interests of other stockholders.
m. Eligibility to File Registration Statement. The Company is currently
eligible to file a registration statement with the SEC on Form S-1 under the
1933 Act.
4. COVENANTS.
a. Best Efforts. Each party shall use its best efforts timely to satisfy
each of the conditions to be satisfied by it as provided in Sections 6 and 7 of
this Agreement.
b. Securities Laws. The Company agrees to timely file a Form D (and any
equivalent form required by applicable state law) with respect to the Securities
if and as required under Regulation D and applicable state securities laws and
to provide a copy thereof to the Buyer promptly after such filing. The Company
shall, on or before the date of the Closing, take such action as is necessary to
sell the Securities being sold to the Buyer at the Closing under applicable
securities laws of the United States, and shall if specifically so requested
provide evidence of any such action so taken to the Buyer on or prior to the
Closing.
c. Reporting Status. So long as the Buyer beneficially owns any of the
Securities, the Company shall file all reports required to be filed with the SEC
pursuant to the 1934 Act, and the Company shall not terminate its status as an
issuer required to file reports under the 1934 Act even if the 1934 Act or the
rules and regulations hereunder would permit such termination.
d. Use of Proceeds. The Company will use the proceeds from the sale of the
Securities to pay off certain outstanding obligations of the Company and for the
Company's internal working capital purposes, including costs and expenses of the
Company's business operations, and to the extent deemed advisable by the
Company, for the purchase of new technologies for use by the Company and its
subsidiaries, and for the purchase of additional subsidiaries and the
development and marketing of their technologies.
e. Financial Information. At the request of the Buyer, until such time as
the Buyer no longer beneficially owns or is entitled to purchase Debentures, the
Company agrees to send the following reports to the Buyer: (i) after filing with
the SEC, a copy of each of its Annual Reports on Form 10-K, its quarterly
Reports on Form 10-Q, and any reports filed on Form 8-K; and (ii) as soon as
practicable after release thereof, copies of all press releases issued by the
Company or any of its subsidiaries.
f. Reservation of Shares. The Company shall at all times have authorized,
and reserved for the purpose of issuance, a sufficient number of shares of
Common Stock to provide for the issuance of all of the Conversion Shares and the
Interest Shares (if any). Prior to complete conversion of the Debentures, the
Company shall not reduce the number of shares reserved for issuance hereunder
without the written consent of the Buyer except for a reduction proportionate to
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a reverse stock split effected for a business purpose other than affecting the
requirements of this Section, which reverse stock split affects all shares of
Common Stock equally.
g. Listing. Upon the Closing, the Company shall promptly secure the
listing of the Registrable Securities then underlying the Debentures purchased
by the Buyer upon each national securities exchange or automated quotation
system, if any, upon which shares of Common Stock are then listed (subject to
official notice of issuance) and shall maintain, so long as any other shares of
Common Stock shall be so listed, such listing of shares of Registrable
Securities from time to time issued under the terms of this Agreement and the
Registration Rights Agreement. If at the relevant time the Company's Common
Stock trades on the OTC Bulletin Board Market, then the Company shall take any
steps necessary to ensure that the Registrable Securities are eligible to trade
on the OTC Bulletin Board Market. The Company shall at all times comply in all
respects with the Company's reporting, filing and other obligations under the
by-laws or rules of the National Association of Securities Dealers and the OTC
Bulletin Board Market (and such other national exchange on which the Common
Stock may be listed, as applicable), if any.
h. Prospectus Delivery Requirement. The Buyer understands that the 1933
Act requires delivery of a prospectus relating to the Common Stock in connection
with any sale thereof pursuant to a registration statement under the 1933 Act
covering any resale by the Buyer of the Common Stock being sold, and the Buyer
shall comply with any applicable prospectus delivery requirements of the 1933
Act in connection with any such sale. The Company shall deliver a copy of the
required prospectus to the Buyer immediately upon registration of the
Registrable Securities.
(i) Additional Security. As additional security for the Buyer's
undertakings as described in this Agreement, the Company has executed the pledge
and security agreement (the "Security Agreement") attached hereto as Exhibit F,
and the stock escrow and security agreement (the "Stock Escrow Agreement")
attached hereto as Exhibit G. The Stock Escrow Agreement requires that the
Company issue a number of shares of Common Stock (the "Security Shares"). The
Security Shares will be registered with the other Registrable Securities
pursuant to the Registration Rights Agreement, and administered in accordance
with the terms of the Stock Escrow Agreement.
j. Intentional Acts or Omissions. Neither party shall intentionally
perform any act which if performed, or omit to perform any act which if omitted
to be performed, would prevent or excuse the performance of this Agreement or
any of the transactions contemplated hereby.
k. No Shorting. As a material inducement for the Company to enter into
this Agreement, the Buyer represents that it has not as of the date hereof, and
covenants on behalf of itself and its affiliates that neither Buyer nor any
affiliate of Buyer will at any time in which the Buyer or any affiliate of the
Buyer beneficially owns any of the Securities, engage in any short sales of, or
hedging or arbitrage transactions with respect to, the Common Stock, or sell
"put" options or similar instruments with respect to the Common Stock.
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1. Transfer Agent. The Company covenants that it will, within forty-five
(45) days after the date of the Closing, replace its current (that is, as of the
date of Closing) transfer agent with a new transfer agent. To ensure that the
Company complies with the covenants contained in this Section 1(l), the Escrow
Agent shall retain in escrow from the net proceeds of the sale of the Debentures
and Warrants the sum of US$25,000.00 (the "Trust"). If the Company has not
replaced its current transfer agent within such forty-five (45) day period, then
the Buyer shall inform the Escrow Agent of such fact and the Escrow Agent shall
release the Trust to the Buyer. Notwithstanding the above, if the Company
demonstrates to the reasonable satisfaction of the Buyer that it has used its
best efforts to replace its current transfer agent in accordance with this
Section 1(l), the Buyer may in its sole discretion inform the Escrow Agent in
writing of such fact, and the Company shall have another fifteen (15) days to
complete the replacement of its transfer agent as described herein. If the
Company replaces its current transfer agent as herein specified prior to the end
of such forty-five (45) day period (or to the end of any extensions granted by
the Buyer), the Company shall provide written notice of such fact to the Escrow
Agent and the Escrow Agent shall deliver the Trust to the Company as soon as
practicable thereafter.
m. Restriction on Below Market Issuance of Securities. Until the date
which is six (6) months from the date hereof, the Company shall not issue or
agree to issue {other than (i) to the Buyer or other buyers pursuant to the
transactions contemplated herein, (ii) pursuant to any employee stock option
plan or employee stock purchase plan of the Company in effect on December 31,
1998, (iii) pursuant to any existing security, option, warrant, scrip, call or
commitment or right in each case as disclosed on Schedule 3(c) hereof, or (iv)
with the consent of the Buyer, not to be unreasonably withheld} any equity
securities of the Company (or any security convertible into or exercisable or
exchangeable, directly or indirectly, for equity securities of the Company) or
debt securities of the Company if such securities are issued at a price (or
provide for a conversion, exercise or exchange price) which may be less than the
current market price for the Common Stock on the date of issuance (in the case
of Common Stock) or the date of conversion, exercise or exchange (in the case of
securities convertible into or exercisable or exchangeable, directly or
indirectly, for Common Stock). Except as provided with respect to the
transactions contemplated herein and in subsections (i), (ii), (iii), or (iv)
above of this Section 4(m), the Company shall not grant any additional so-called
"registration rights."
5. LEGEND AND TRANSFER INSTRUCTIONS.
a. Transfer Agent Instructions. The Company shall instruct its transfer
agent to issue certificates, registered in the name of the Buyer or its nominee,
for the Conversion Shares, the Warrant Shares and the Interest Shares (if any)
in accordance with the terms of the Debentures and Warrants, as applicable, and
in such amounts as specified from time to time by the Buyer to the Company, upon
conversion of the Debentures and exercise of the Warrants. All such certificates
shall bear the restrictive legend specified in Section 2(g) of this Agreement
only to the extent required by applicable law and as specified in the
Transaction Documents. The Company warrants that no instruction other than such
instructions referred to in this Section 5, and stop transfer instructions to
give effect to Section 2(f) hereof in the case of the Conversion Shares and the
Interest
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Shares (if any) prior to the registration of same under the 1933 Act, will be
given by the Company to its transfer agent and that the Conversion Shares, the
Warrant Shares and the Interest Shares (if any) shall otherwise be freely
transferable on the books and records of the Company as and to the extent
permitted by applicable law and provided by this Agreement and the Registration
Rights Agreement. Nothing in this Section shall affect in any way the Buyer's
obligations and agreement to comply with all applicable securities laws upon
resale of the Conversion Shares, the Warrant Shares and/or the Interest Shares
(if any). If the Buyer (x) provides the Company with an opinion of counsel
reasonably satisfactory to Company, that is reasonably satisfactory in form,
substance and scope to the Company, that registration by the Buyer of the
Debentures, the Conversion Shares, the Warrant Shares and/or the Interest Shares
(if any) is not required under the 1933 Act, or (y) transfers Securities to an
affiliate which is an accredited investor (in accordance with the provisions of
this Agreement) or in compliance with Rule 144, then in either instance the
Company shall permit the said transfer, and if applicable promptly (and in all
events within two (2) trading days after receipt by the Company of each of the
original documents and things to be delivered by the Buyer to effect a
conversion of the applicable Debentures) instruct its transfer agent to issue
one or more certificates in such name and in such denominations as specified by
the Buyer.
b. Removal of Legends. The Legend shall be removed and the Company shall
issue a certificate without such Legend to the holder of any Security upon
which it is stamped, and a certificate for a security shall be originally issued
without the Legend, if, unless otherwise required by state securities laws, (x)
the sale of such Security is registered under the 1933 Act, or (y) such holder
provides the Company with an opinion by counsel reasonably satisfactory to the
Company, that is in form, substance and scope reasonably satisfactory to the
Company, to the effect that a public sale or transfer of such Security may be
made without registration under the 1933 Act or (z) such holder provides the
Company with assurances reasonably satisfactory to the Company and its counsel,
that such Security can be sold pursuant to Rule 144. The Buyer agrees that its
sale of all Securities, including those represented by a certificate(s) from
which the Legend has been removed, or which were originally issued without the
Legend, shall be made only pursuant to an effective registration statement (and
to deliver a prospectus in connection with such sale) or in compliance with an
exemption from the registration requirements of the 1933 Act. In the event the
Legend is removed from any Security or any Security is issued without the Legend
and thereafter the effectiveness of a registration statement covering the sales
of such Security is suspended or the Company determines that a supplement or
amendment thereto is required by applicable securities laws, then upon
reasonable advance notice to the holder of such Security, the Company shall be
entitled to require that the Legend be placed upon any such Security which
cannot then be sold pursuant to an effective registration statement or Rule 144
or with respect to which the opinion referred to in clause (y) next above has
not been rendered, which Legend shall be removed when such Security may be sold
pursuant to an effective registration statement or Rule 144 (or such holder
provides the opinion with respect thereto described in clause (y) next above.
c. Conversion of Debentures. The Buyer shall have the right to convert the
Debentures sold hereunder by delivering via facsimile an executed and completed
Notice of Conversion (as defined in the Debentures) to the Company and
delivering within two (2) business days thereafter
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<PAGE>
the original Notice of Conversion by express courier to the Company. Each date
on which a Notice of Conversion is telecopied to the Company in accordance with
the provisions hereof shall be deemed a "Conversion Date." The Company may, but
is not required to, request that the Buyer submit the original Debenture to the
Company for notation and/or cancellation and reissuance of a new Debenture of
like tenor, reflecting the partial conversion thereof. The Company will transmit
a certificate or certificates (collectively the "Certificate") representing the
shares of Common Stock issuable upon conversion of any Debentures converted
pursuant to such Notice of Conversion (along with a replacement Debenture if the
converted Debenture was submitted to the Company) to the Buyer via express
courier, within three (3) business days after the relevant Conversion Date (the
third business day after the relevant Conversion Date shall be referred to
hereinafter as the "Deadline"). With the mutual agreement of the Company and the
Buyer, the Company or a third party may (until and unless the Buyer in a
particular instance requests otherwise) hold the Debentures in trust, such that,
to effect a conversion of the Debentures, the Buyer shall deliver to the Company
via courier only the original Notice of Conversion as described in this Section
and the Company and the Buyer shall keep a record of the portion of Debentures
so converted. If either the Company or a third party holds the certificates
representing the Debentures in trust as described in the preceding sentence, the
Company will as required above deliver the Certificates directly to the Buyer
via express courier on or before the Deadline.
d. Injunctive Relief for Breach. The Company acknowledges that the remedy
at law for a breach of its obligations under Sections 5(a), 5(b) and 5(c) above
will cause irreparable harm to the Buyer by vitiating the intent and purpose of
the transactions contemplated hereby. Accordingly the Company agrees that the
remedy at law for a breach of its obligations under such Sections would be
inadequate and agrees, in the event of a breach or threatened breach by the
Company of the provisions of such Sections, the Buyer shall be entitled, in
addition to all other remedies at law or in equity (including without limitation
those remedies specified in Section 5(e) below), to an injunction restraining
any breach and requiring immediate issuance and transfer, without the necessity
of showing economic loss and without any bond or other security being required.
e. Liquidated Damages for Non-Delivery of Certificates. In addition to the
provisions of Section 5(d) above, the Company understands and agrees that a
delay in the issuance of the Certificates beyond the Deadline could result in
economic loss and other damages to the Buyer. As partial compensation to the
Buyer for such loss, the Company agrees to pay liquidated damages (and which the
Company acknowledges is not a penalty) to the Buyer for issuance and delivery of
the Certificates after the Deadline, in accordance with the following schedule
(where "No. Business Days Late" is defined as the number of business days beyond
seven (7) business days from the date of delivery by the Buyer to the Company of
a facsimile Notice of Conversion (or, if later, from the date on which the
original Notice of Conversion is submitted to the Company in accordance with
this Agreement only if such necessary documentation has not been delivered to
the Company within the three (3) business day period after the facsimile
delivery to the Company of the Notice of Conversion required in this
Agreement)):
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Liquidated Damages
No. Business Days Late (in US$)
---------------------- ------------------
1 $ 300
2 $ 400
3 $ 500
4 $ 600
5 $ 700
6 $ 800
7 $ 900
8 $1,000
9 $1,000
10 $1,500
11+ $1,500 + $500 for
each Business Day Late
beyond 11 days
The Company shall pay the Buyer any liquidated damages incurred as called
for under this Section 5(e) by certified or cashier's check upon the earlier of
(i) issuance of the Certificates to the Buyer or (ii) each monthly anniversary
of the receipt by the Company of the Buyer's Notice of Conversion. Nothing
herein shall limit the Buyer's right to pursue actual damages for the Company's
failure to issue and deliver the Certificates to the Buyer in accordance with
the terms of this Agreement or for breach by the Company of this Agreement.
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
The obligation of the Company hereunder to sell Debentures at the Closing
is subject to the satisfaction, on or before the date of the Closing, of each of
the following conditions, provided that these conditions are for the Company's
sole benefit and may be waived by the Company at any time in its sole
discretion:
a. The parties shall have executed this Agreement, the Registration Rights
Agreement and the Escrow Agreement, and the parties shall have delivered the
respective documents or signature pages thereof (via facsimile or otherwise as
permitted in the Escrow Agreement) to the Escrow Agent.
b. The Buyer shall have delivered to the Escrow Agent on behalf of the
Company the Purchase Price in full (subject to Section 1(a) above) for the
Debentures purchased at the Closing, by wire transfer of immediately available
funds pursuant to the wiring instructions provided by the Escrow Agent.
c. The representations and warranties of the Buyer shall be true and
correct in all material respects as of the date made and as of the date of the
Closing as though made at that time (except for representations and warranties
that speak as of a specific date), and the Buyer shall have
15
<PAGE>
performed, satisfied and complied in all material respects with the covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by the Buyer at or prior to the date of the Closing.
d. No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction or any self regulatory
organization having authority over the matters contemplated hereby which
restricts or prohibits the consummation of any of the transactions contemplated
herein.
7. CONDITIONS TO THE BUYER'S OBLIGATION TO PURCHASE.
The obligation of the Buyer to purchase Debentures is subject to the
satisfaction, on or before the date of the Closing, of each of the following
conditions, provided that these conditions are for the sole benefit of the Buyer
and may be waived by the Buyer at any time in its sole discretion:
a. The parties shall have executed this Agreement, the Registration Rights
Agreement and the Escrow Agreement, and the parties shall have delivered the
respective documents or signature pages thereof (via facsimile or otherwise as
permitted in the Escrow Agreement), to the Escrow Agent on behalf of each other.
b. The representations and warranties of the Company shall be true and
correct in all material respects as of the date made and as of the date of the
Closing as though made at that time (except for representations and warranties
that speak as of a specific date) and the Company shall have performed,
satisfied and complied in all material respects with the covenants, agreements
and conditions required by this Agreement to be performed, satisfied or complied
with by the Company at or prior to the date of the Closing. The Buyer may
require a certificate, executed by the Chief Executive Officer of the Company,
dated as of the date of the Closing, to the foregoing effect and as to such
other matters as may be reasonably requested by the Buyer.
c. With respect to the Closing, the Company shall have issued and have
duly executed by the authorized officers of the Company, and delivered to the
Escrow Agent on behalf of the Buyer, the original Debentures being sold thereat.
d. The Common Stock shall be authorized for quotation on the OTC Bulletin
Board Market and trading in the Common Stock on such market shall not have been
suspended by the SEC or other relevant regulatory agency.
e. The Company shall not have received, as of the date of the Closing,
from the National Association of Securities Dealers or any other relevant
regulatory agency, any written or oral communication as to its actual or
potential ineligibility for the Common Stock to continue trading on the OTC
Bulletin Board Market.
f. [Intentionally Omitted.]
16
<PAGE>
g. No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by any
court or governmental authority of competent jurisdiction or any self regulatory
organization having authority over the matters contemplated hereby which
restricts or prohibits the consummation of any of the transactions contemplated
herein.
h. The Escrow Agent shall have received on behalf of the Buyer the opinion
of Company counsel, dated as of the date of the Closing, in the form attached
hereto as Exhibit E.
8. GOVERNING LAW; MISCELLANEOUS.
a. Governing Law. This Agreement shall be governed by and interpreted in
accordance with the laws of the State of Delaware without regard to the
principles of conflict of laws. In the event of any litigation regarding the
interpretation or application of this Agreement, the parties irrevocably consent
to jurisdiction in any of the state or federal courts located in the State of
Delaware and waive their respective rights to object to venue in any such court,
regardless of the convenience or inconvenience thereof to any party. Service of
process in any civil action relating to or arising out of this Agreement
(including also all Exhibits or Addenda hereto) or the transaction(s)
contemplated herein may be accomplished in any manner provided by law. The
parties hereto agree that a final, non-appealable judgment in any such suit or
proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on such judgment or in any other lawful manner.
b. Counterparts. This Agreement may be executed in two or more identical
counterparts, all of which shall be considered one and the same agreement and
shall become effective when counterparts have been signed by each party and
signature pages from such counterparts have been delivered to the Escrow Agent
on behalf of the other party. In the event any signature page is delivered by
facsimile transmission (which the parties agree is an acceptable form of
delivery), the party using such means of delivery shall cause three (3)
additional originally executed signature pages to be physically delivered to the
Escrow Agent on behalf of the other party within two (2) business days after the
execution and delivery hereof.
c. Headings; Gender, Etc. The headings of this Agreement are for
convenience of reference and shall not form a part of, or affect the
interpretation of this Agreement. As used herein, the masculine shall refer to
the feminine and neuter, the feminine to the masculine and neuter, and the
neuter to the masculine and feminine, as the context may require. As used
herein, unless the context clearly requires otherwise, the words "herein,"
"hereunder" and "hereby," shall refer to this entire Agreement and not only to
the Section or paragraph in which such word appears. If any date specified
herein falls upon a Saturday, Sunday or public or legal holidays, the date shall
be construed to mean the next business day following such Saturday, Sunday or
public or legal holiday. For purposes of this Agreement, a "business day" is
any day other than a Saturday, Sunday or public or legal holiday.
17
<PAGE>
d. Severability. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement in that
jurisdiction or the validity or enforceability of any provision of this
Agreement in any other jurisdiction.
e. Entire Agreement; Amendments. This Agreement and the instruments
referenced herein contain the entire understanding of the parties with respect
to the matters covered herein and therein and, except as specifically set forth
herein or therein, neither the Company nor the Buyer makes any representation,
warranty, covenant or undertaking with respect to such matters. No provision of
this Agreement may be waived or amended other than by an instrument in writing
signed by the party to be charged with enforcement.
f. Notices. Any notices required or permitted to be given under the terms
of this Agreement shall be sent by U. S. Mail or delivered personally or by
courier or via facsimile (if via facsimile, to be followed within three (3)
business days by an original of the notice document via U.S. Mail or courier)
and shall be effective five (5) days after being placed in the mail, if mailed,
certified or registered, return receipt requested, or upon receipt, if delivered
personally or by courier or by facsimile, in each case properly addressed to the
party to receive the same. The addresses for such communications shall be:
If to the Company: American Biomed, Inc.
10077 Grogan's Mill Road, Suite 100
The Woodlands, Texas 77380
Telephone: (281) 367-3895
Facsimile: (281) 367-3212
Attention: Mr. Steven B. Rash, President & CEO
If to the Buyer, at the address on the signature page of this Agreement. Each
party shall provide written notice to the other party of any change in address.
g. Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the parties and their respective successors and assigns.
Neither the Company nor the Buyer shall assign this Agreement or any rights or
obligations hereunder without the prior written consent of the other (which
consent shall not be unreasonably withheld), and in any event any assignee of
the Buyer shall be an accredited investor (as defined in Regulation D), in the
written opinion of counsel who is reasonably satisfactory to Seller and in form,
substance and scope reasonably satisfactory to the Seller. Notwithstanding the
foregoing, if applicable, any of the entities constituting the Buyer (if greater
than one (1) entity) may assign its rights hereunder to any of its "affiliates,"
as that term is defined under the 1934 Act, without the consent of the Company;
provided, however, that any such assignment shall not release such assigning
entity from its obligations hereunder unless such obligations are assumed by
such affiliate and the Company has prior to such assignment and assumption
consented in writing to the same; and no such assignment shall be made unless it
is made in accordance with any applicable securities laws of any applicable
18
<PAGE>
jurisdiction. Any request for an assignment made hereunder by the Buyer shall
be accompanied by an opinion by counsel reasonably satisfactory to the Company,
that is in form, substance and scope reasonably satisfactory to the Company,
that such assignment is proper under applicable law.
h. No Third Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns, and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.
i. Survival. Unless this Agreement is terminated under Section 8(1), the
representations and warranties of the Company and the Buyer contained in
Sections 2 and 3 and the agreements and covenants set forth in Sections 4, 5 and
8 shall survive the Closing of the purchase and sale of Securities purchased and
sold hereby for a period of twelve (12) months after such Closing.
j. Publicity. The Company and the Buyer shall have the right to review
before issuance by the other, any press releases or any other public statements
with respect to the transactions contemplated hereby; provided, however, that
the Company shall be entitled, without prior consultation with or approval of
the Buyer, to make any press release or other public disclosure with respect to
such transactions as is required by applicable law and regulations.
k. Further Assurance. Each party shall do and perform, or cause to be
done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
l. Termination. In the event that the Closing shall not have occurred on
or before ten (10) business days from the date hereof, this Agreement shall
terminate at the close of business on such date. Neither party may unilaterally
terminate this Agreement after the Closing for any reason other than a material
breach of this Agreement by the non-terminating party. Such termination shall
not be the sole remedy for a breach of this Agreement by the non-terminating
party, and each party shall retain all of its rights hereunder at law or in
equity. Notwithstanding anything herein to the contrary, a party whose breach of
a covenant or representation and warranty or failure to satisfy a condition
prevented the Closing shall not be entitled to terminate this Agreement.
m. Remedies. No provision of this Agreement providing for any specific
remedy to a party shall be construed to limit such party to the specific remedy
described, and any other remedy that would otherwise be available to such party
at law or in equity shall be so available. Nothing in this Agreement shall
limit any rights a party may have with any applicable federal or state
securities laws with respect to the transactions contemplated hereby.
IN WITNESS WHEREOF, the Buyer and the Company have caused this Securities
Purchase Agreement to be duly executed as of the date first written above.
19
<PAGE>
[SIGNATURE PAGE FOLLOWS]
20
<PAGE>
[SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT DATED
MARCH 3, 1999]
COMPANY:
AMERICAN BIOMED, INC.
By: /s/ Steven B. Rash
___________________________________________
Mr. Steven B. Rash, President and CEO
BUYER:
THE AUGUSTINE FUND, L.P.
By: Augustine Capital Management, Inc., its General Partner
By: /s/ Tom F. Duszynski
____________________________________________
Mr. Tom Duszynski, President
BUYER'S ADDRESS: The Augustine Fund, LP
C/o Augustine Capital Management, Inc.
141 West Jackson Blvd., Suite 2182
Chicago, Illinois 60604
Telecopier Number: 312.427.5396
Attn: Mr. Tom Duszynski
21
<PAGE>
EXHIBIT 10.100
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of
March 3, 1999, by and between American Biomed, Inc., a corporation organized
under the laws of the State of Delaware, U.S.A., with headquarters located at
10077 Grogan's Mill Road, Suite 100, The Woodlands, Texas 77380 (the "Company"),
and the buyer set forth on the execution page hereof (the "Buyer").
RECITALS
A. In connection with the Securities Purchase Agreement by and between the
parties of even date herewith (the "Securities Purchase Agreement"), the Company
has agreed, upon the terms and subject to the conditions of the Securities
Purchase Agreement, to issue and sell to the Buyer (i) a number of shares of the
Company's Series 1999-A Nine Percent (9%) Redeemable Convertible Debentures of
American Biomed, Inc. (the "Debentures"); and (ii) a number of warrants (each a
"Warrant" and collectively the "Warrants") to purchase a number of shares of the
Company's common stock, $.001 par value per share ("Common Stock"). The
Debentures are convertible in accordance with their terms into Common Stock.
The Common Stock into which the Debentures are convertible may be referred to
herein as the "Conversion Shares." In accordance with the terms of the
Debentures, shares of Common Stock may be issued in payment of interest on the
Debentures ("Interest Shares"). The Company was required to issue 2,500,000
shares of Common Stock pursuant to the Stock Escrow Agreement (defined in the
Securities Purchase Agreement) (the "Security Shares").
B. The Buyer has agreed to purchase and pay for the Debentures and the
Warrants as provided in the Securities Purchase Agreement. At the Closing (as
defined in the Securities Purchase Agreement), the Company will issue the
Debentures, along with the Warrants, purchased at such Closing by the Buyer.
C. To induce the Buyer to execute and deliver the Securities Purchase
Agreement, the Company has agreed to provide certain registration rights under
the Securities Act of 1933, as amended, and the rules and regulations
thereunder, or any similar successor statute (collectively, the "1933 Act"), and
applicable state securities laws.
AGREEMENTS
NOW THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by all parties hereto, the Company
and the Buyer hereby agree as follows:
1. DEFINITIONS.
a. As used in this Agreement, the following terms shall have the following
meanings:
i. "Investor" or "Investors" means the Buyer and any permitted
transferee(s) or assignee(s) thereof to whom the Buyer assigns this Agreement
and who agrees to become bound by the provisions of this Agreement in accordance
with Section 9 hereof.
<PAGE>
ii. "Register," "registered," and "registration" refer to a registration
effected by preparing and filing a Registration Statement or Statements in
compliance with the 1933 Act and pursuant to Rule 415 under the 1933 Act or any
successor rule providing for offering securities on a continuous basis ("Rule
415"), and the declaration or ordering of effectiveness of such Registration
Statement by the United States Securities and Exchange Commission (the "SEC").
iii. "Registrable Securities" means the Security Shares, the Conversion
Shares, the Warrant Shares and the Interest Shares (if any), underlying the
Debentures and the Warrants and any shares of capital stock issued or issuable,
from time to time (with any adjustments) on or in exchange for or otherwise with
respect to either of the foregoing (including without limitation any shares
issued pursuant to Section 2(b) hereinafter).
iv. "Registration Statement" or "Registration Statements" means a
registration statement or statements of the Company filed under the 1933 Act.
b. Capitalized terms used herein and not otherwise defined herein shall
have the respective meanings set forth in the Securities Purchase Agreement.
2. REGISTRATION.
a. Mandatory Registration. (i) The Company shall use its best efforts to
prepare, and, on or before the date that is forty-five (45) business days after
the date of the Closing, file with the SEC a Registration Statement or
Registration Statements (as necessary) on Form S-3 or Form S-1 (or, if such form
is unavailable for such a registration, on such other form as is available for
such a registration of all of the Registrable Securities) (any of which may
contain a combined prospectus with other registrations by the Company), covering
the resale of all of the Registrable Securities, which Registration
Statement(s), to the extent allowable under the 1933 Act and the rules
promulgated thereunder (including without limitation Rule 416), shall state that
such Registration Statement(s) also covers such indeterminate number of
additional shares (the "Indeterminate Shares") of Common Stock as may become
issuable upon conversion of the Debentures to prevent dilution resulting from
stock splits, stock dividends or similar transactions.
(ii) To the extent the Indeterminate Shares for any reason can not be
registered under the Registration Statement(s) required under Section 2(a)(i)
above, then with respect to such Indeterminate Shares, the Company shall use its
best efforts to prepare, and, on or before the date that is thirty (30) days
after the Indeterminate Shares become issuable, file with the SEC a Registration
Statement or Registration Statements (as necessary) on Form S-3 or on Form S-1
(or, if such form is unavailable for such a registration, on such other form as
is available for such a registration of all of the Indeterminate Shares) (any of
which may contain a combined prospectus with other registrations by the
Company), covering the resale of all of the Indeterminate Shares.
A copy of the Registration Statement(s) (and each amendment or supplement
thereto, and each request for acceleration of effectiveness thereof) shall be
provided to (and subject to the approval of the Buyer, which approval shall not
be unreasonably withheld or denied) the Buyer and its counsel prior to its
filing or other submission.
b. Liquidated Damages. The Company shall use its best efforts to obtain
effectiveness of the Registration Statement as soon as practicable. If (i) the
Registration Statement(s) covering the Registrable Securities required to be
filed by the Company pursuant to Section 2(a)
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hereof is not declared effective by the SEC within one hundred twenty (120) days
after the date of the Closing (other than by reason of any act or failure to act
in a timely manner by the Investor or its counsel) (the "Registration Deadline")
or if, after the Registration Statement has been declared effective by the SEC,
sales cannot be made pursuant to the Registration Statement (by reason of a
suspension, a stop order, the Company's failure to update the Registration
Statement, or any other reason outside the control of the Investor), or (ii) the
Common Stock is not listed or included for quotation on either the OTC Bulletin
Board Market or the National Association of Securities Dealers Automated
Quotation system Small Cap Market ("NASDAQ Small Cap"), or another United States
national exchange; then in either case (in either case, a "Delay") the Company
will make payments to the Investors, as liquidated damages and in such amounts
and at such times as shall be determined pursuant to this Section 2(b) as relief
and as the sole remedy for the damages to the Investor by reason of any such
delay in or reduction of its ability to sell the Registrable Securities (which
remedy shall be exclusive of any other remedies available at law or in equity),
an amount to be determined as follows. The Company shall pay to the Investor an
amount equal to the purchase price for the Debentures purchased at the Closing
(including, without limitation, any Debentures that have been converted into
Conversion Shares then held by such Investors) (the "Aggregate Share Price")
multiplied by: one and one-half hundredths (.015) times the sum of: (i) the
number of months (prorated for partial months) beginning the day after the
Registration Deadline and ending on the date the Registration Statement is
declared effective by the SEC, provided, however, that there shall be excluded
from such period any delays which are solely attributable to changes required by
the Investor in the Registration Statement with respect to information relating
to the Investor, including, without limitation, changes to the plan of
distribution, or to the failure of the Investor to conduct its review of the
registration statement pursuant to Section 2(a) above in a reasonably prompt
manner; (ii) the number of months (prorated for partial months) that sales
cannot be made pursuant to the Registration Statement after the Registration
Statement has been declared effective; and (iii) the number of months (prorated
for partial months) that the Common Stock is not listed or included for
quotation on the OTC Bulletin Board Market, the NASDAQ Small Cap or another
United States national exchange after the Registration Statement has been
declared effective.
For example, if the Registration Statement becomes effective two months
after the end of the Registration Deadline, the Company would pay US$3,750 for
each month for each US$250,000 of Aggregate Share Price until the Registration
Statement becomes effective.
Such amounts shall be paid in cash or, at the Investor's option such
amounts may be convertible into Common Stock at the "Conversion Price" for the
Debentures, as defined in the Debentures. Any shares of Common Stock issued upon
conversion of such amounts shall be Registrable Securities. If the Investor
desires to convert the amounts due hereunder into Registrable Securities it
shall so notify the Company in writing within two (2) business days of the date
on which such amounts are first payable in cash and such amounts shall be so
convertible (pursuant to the mechanics set forth in the Debentures), beginning
on the last day upon which the cash amount would otherwise be due in accordance
with the following sentence. Payments of cash pursuant hereto shall be made
within five (5) days after the end of each period that gives rise to such
obligation, provided that, if any such period extends for more than thirty (30)
days, interim payments shall be made for the full amount owed up to the date of
such interim payment at the end of each thirty (30) day period. At any time
after one (1) year from the date of the Closing, upon delivery by legal counsel
for the Company to the Buyer and the Company's transfer agent a legal opinion to
the effect that the Conversion Shares may be sold without restriction pursuant
to Rule 144, and so long as the
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Company permits the conversion of the Debentures into Common Stock in accordance
with the terms of the Securities Purchase Agreement and the Debentures,
liquidated damages as called for in this paragraph shall cease and the Investor
may rely upon Rule 144 for conversion of the Debentures into Common Stock and
subsequent sales thereof.
c. Piggy-Back Registrations. If at any time prior to the expiration of
the Registration Period (as hereinafter defined) the Company shall file with the
SEC a Registration Statement relating to an offering for its own account or the
account of others under the 1933 Act of any of its equity securities (other than
on Form S-4 or Form S-8 or their then equivalents relating to equity securities
to be issued solely in connection with any acquisition of any entity or business
or equity securities issuable in connection with stock option or other employee
benefit plans) the Company shall send to the Investor written notice of such
determination and, if within twenty (20) days after receipt of such notice, such
Investor shall so request in writing, the Company, to the extent permitted by
law, shall include in such Registration Statement all or any part of the
Registrable Securities such Investor requests to be registered, except that if,
in connection with any underwritten public offering for the account of the
Company the managing underwriter(s) thereof shall impose a limitation on the
number of shares of Common Stock which may be included in the Registration
Statement because, in such underwriter(s)' reasonable good faith judgment,
marketing or other factors dictate such limitation is necessary to facilitate
public distribution, then only such limited portion of the Registrable
Securities with respect to which such Investor has requested inclusion hereunder
will be included in the Registration Statement; provided that no portion of the
equity securities which the Company is offering for its own account shall be
excluded; provided, further that the Company shall be entitled to exclude
Registrable Securities to the extent necessary to avoid breaching obligations
existing prior to the date hereof to other stockholders of the Company.
Any exclusion of Registrable Securities shall be made pro rata among the
Investors seeking to include Registrable Securities, in proportion to the number
of Registrable Securities sought to be included by such Investors; provided,
however, that the Company shall not exclude any Registrable Securities unless
the Company has first excluded all outstanding securities, the holders of which
are not entitled to inclusion of such securities in such Registration Statement
or are not entitled to pro rata inclusion with the Registrable Securities; and
provided, further, however, that, after giving effect to the immediately
preceding proviso, any exclusion of Registrable Securities shall be made pro
rata with holders of other securities having the right to include such
securities in the Registration Statement other than holders of securities
entitled to inclusion of their securities in such Registration Statement by
reason of demand registration rights or whose registration rights existed prior
to the date hereof. No right of the Investor to registration of Registrable
Securities under this Section 2(c) shall be construed to limit any registration
required under Section 2(a) hereof. If an offering in connection with which an
Investor is entitled to registration under this Section 2(c) is an underwritten
offering, then each Investor whose Registrable Securities are included in such
Registration Statement shall, unless otherwise agreed by the Company, offer and
sell such Registrable Securities in an underwritten offering using the same
underwriter or underwriters and, subject to the provisions of this Agreement, on
the same terms and conditions as other shares of Common Stock included in such
underwritten offering.
d. Eligibility for Form S-3. The Company represents and warrants that it
meets the requirements for the use of Form S-3 for registration of the sale by
the Buyer of the Registrable Securities and the Company shall file all reports
required to be filed by the Company with the SEC in a timely manner so as to
maintain such eligibility for the use of Form S-3. In the event that Form S-3
is not available for registration of the Registrable Securities, the Company
shall register the securities on another appropriate form.
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3. RELATED OBLIGATIONS. In connection with the registration of the
Registrable Securities, the Company shall have the following obligations:
a. The Company shall use its best efforts to cause such Registration
Statement(s) relating to Registrable Securities to become effective as soon as
possible after such filing, but in no event later than the Registration
Deadline, and keep the Registration Statement(s) effective pursuant to Rule 415
at all times until the earlier of (i) the date on which all of the Registrable
Securities have been sold (and no further Registrable Securities may be issued
in the future), (ii) the date as of which the Investors may immediately sell
all of the Registrable Securities without restriction pursuant to Rule 144
promulgated under the 1933 Act (or successor thereto) or otherwise, or (iii)
the date on which none of the Debentures or Warrant Shares is outstanding (the
"Registration Period"), which Registration Statement(s) (including any
amendments or supplements thereto and prospectuses contained therein) shall not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein, or necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading.
b. The Company shall prepare and file with the SEC such amendments
(including post-effective amendments) and supplements to the Registration
Statement and the prospectus used in connection with the Registration Statement
as may be necessary to keep the Registration Statement effective at all times
during the Registration Period, and, during such period, comply with the
provisions of the 1933 Act with respect to the disposition of all Registrable
Securities of the Company covered by the Registration Statement. In the event
the number of shares available under a Registration Statement filed pursuant to
this Agreement is insufficient to cover all of the Registrable Securities issued
or issuable upon conversion of the Debentures, the Company shall amend the
Registration Statement, or file a new Registration Statement (on the short form
available therefor, if applicable), or both, so as to cover all of the
Registrable Securities, in each case, as soon as practicable, but in any event
within fifteen (15) days after the need therefor arises (based on the market
price of the Common Stock and other relevant factors on which the Company
reasonably elects to rely). The Company shall use its best efforts to cause
such amendment and/or new Registration Statement to become effective as soon as
practicable following the filing thereof.
c. The Company shall furnish to each Investor whose Registrable Securities
are included in the Registration Statement(s) promptly after the same is
prepared and publicly distributed, filed with the SEC, or received by the
Company, (i) one copy of the Registration Statement and any amendment thereto,
each preliminary prospectus and prospectus and each amendment or supplement
thereto in each case relating to such Registration Statement (other than any
portion thereof which contains information for which the Company has sought
confidential treatment) and, in the case of the Registration Statement referred
to in Section 2(a), each letter written by or on behalf of the Company to the
SEC or the staff of the SEC, and each item of correspondence from the SEC or the
staff of the SEC, in each case relating to such Registration Statement; and
(ii) such number of copies of a prospectus, including a preliminary prospectus,
and all amendments and supplements thereto and such other documents as such
Investor may reasonably request in order to facilitate the disposition of the
Registrable Securities owned (or to be owned) by such Investor.
d. The Company shall use reasonable efforts to (i) register and qualify
the Registrable Securities covered by the Registration Statement(s) under such
other securities or "blue sky" laws of such jurisdictions in the United States
as each Investor who holds (or has the right to hold) Registrable Securities
being offered reasonably requests, (ii) prepare and file in those jurisdictions
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such amendments (including post-effective amendments) and supplements to such
registrations and qualifications as may be necessary to maintain the
effectiveness thereof during the Registration Period, (iii) take such other
actions as may be necessary to maintain such registrations and qualifications in
effect at all times during the Registration Period, and (iv) take all other
actions reasonably necessary or advisable to qualify the Registrable Securities
for sale in such jurisdictions; provided, however, that the Company shall not be
required in connection therewith or as a condition thereto to (a) qualify to do
business in any jurisdiction where it would not otherwise be required to qualify
but for this Section 3(d), (b) subject itself to general taxation in any such
jurisdiction, (c) file a general consent to service of process in any such
jurisdiction, (d) provide any undertakings that cause more than nominal expense
or burden to the Company, or (e) make any change in its charter or bylaws,
which in each case the Board of Directors of the Company determines to be
contrary to the best interests of the Company and its stockholders.
e. As promptly as practicable after becoming aware of such event, the
Company shall notify each Investor of the happening of any event, of which the
Company has knowledge, as a result of which the prospectus included in a
Registration Statement, as then in effect, includes an untrue statement of a
material fact or omission to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, and use its best efforts promptly to
prepare a supplement or amendment to the Registration Statement to correct such
untrue statement or omission, and deliver such number of copies of such
supplement or amendment to each Investor as such Investor may reasonably
request.
f. The Company shall use its best efforts to prevent the issuance of any
stop order or other suspension of effectiveness of a Registration Statement,
and, if such an order is issued, to obtain the withdrawal of such order at the
earliest possible moment and to notify each Investor who holds Registrable
Securities being sold (or, in the event of an underwritten offering, the
managing underwriters) of the issuance of such order and the resolution thereof.
g. [Intentionally omitted.]
h. At the request of the Investor, but no more than three (3) times in any
one ninety (90) day period, the Company shall furnish, on the date of
effectiveness of the Registration Statement and thereafter from time to time on
such dates as the Investor may reasonably request an opinion, dated as of such
requested date, of counsel representing the Company for purposes of such
Registration Statement, in form, scope and substance as is customarily given in
an underwritten public offering, addressed to the Company's transfer agent
and/or to the Investors. Such opinion shall be substantially as set forth in
Exhibit I attached hereto.
i. The Company shall make available for inspection by (i) any Investor,
(ii) any underwriter participating in any disposition pursuant to a Registration
Statement, (iii) one firm of attorneys and one firm of accountants or other
agents retained by the Investors, and (iv) one firm of attorneys retained by all
such underwriters (collectively, the "Inspectors") all pertinent financial and
other records, and pertinent corporate documents and properties of the Company
(collectively, the "Records"), as shall be reasonably deemed necessary by each
Inspector to enable each Inspector to exercise its due diligence responsibility,
and cause the Company's officers, directors and employees to supply all
information which any Inspector may reasonably request for purposes of such due
diligence; provided, however, that each Inspector shall hold in strict
confidence and shall not make any disclosure (except to an Investor) or use of
any Record or other information which the Company
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<PAGE>
determines in good faith to be confidential, and of which determination the
Inspectors are so notified, unless (a) the disclosure of such Records is
necessary to avoid or correct a misstatement or omission in any Registration
Statement, (b) the release of such Records is ordered pursuant to a final, non-
appealable subpoena or order from a court or government body of competent
jurisdiction, or (c) the information in such Records has been made generally
available to the public other than by disclosure in violation of this or any
other agreement. The Company shall not be required to disclose any confidential
information in such Records to any Inspector until and unless such Inspector
shall have entered into confidentiality agreements (in form and substance
reasonably satisfactory to the Company) with the Company with respect thereto,
substantially in the form of this Section 3(i). Each Investor agrees that it
shall, upon learning that disclosure of such Records is sought in or by a court
or governmental body of competent jurisdiction or through other means, give
prompt notice to the Company and allow the Company, at its expense, to undertake
appropriate action to prevent disclosure of, or to obtain a protective order
for, the Records deemed confidential.
j. The Company shall hold in confidence and not make any disclosure of
information concerning an Investor provided to the Company unless (i)
disclosure of such information is necessary to comply with federal or state
securities laws, (ii) the disclosure of such information is necessary to avoid
or correct a misstatement or omission in any Registration Statement, (iii) the
release of such information is ordered pursuant to a subpoena or other final,
non-appealable order from a court or governmental body of competent
jurisdiction, or (iv) such information has been made generally available to the
public other than by disclosure in violation of this or any other agreement.
The Company agrees that it shall, upon learning that disclosure of such
information concerning an Investor is sought in or by a court or governmental
body of competent jurisdiction or through other means, give prompt notice to
such Investor and allow such Investor, at the Investor's expense, to undertake
appropriate action to prevent disclosure of, or to obtain a protective order
for, such information.
k. The Company shall cooperate with the Investors who hold Registrable
Securities being offered to facilitate the timely preparation and delivery of
certificates (not bearing any restrictive legend) representing the Registrable
Securities to be offered pursuant to a Registration Statement and enable such
certificates to be in such denominations or amounts, as the case may be, the
Investors may reasonably request and registered in such names as the Investors
may request. Not later than the date on which any Registration Statement
registering the resale of Registrable Securities is declared effective, the
Company shall deliver (at its expense) to its transfer agent instructions,
accompanied by any required opinion of counsel, that permit sales of unlegended
securities in a timely fashion that complies with then mandated securities
settlement procedures for regular way market transactions.
l. Upon the Closing, the Company shall promptly secure the listing of the
Registrable Securities then underlying the Debentures and the Warrants purchased
by the Buyer (or, if at such time the Common Stock trades on the OTC Bulletin
Board Market, make such Registrable Securities eligible to trade) upon each
national securities exchange or automated quotation system, if any, upon which
shares of Common Stock are then listed or eligible to trade (subject to official
notice of issuance) and shall maintain, so long as any other shares of Common
Stock shall be so listed or eligible to trade, such listing or eligibility of
shares of Registrable Securities from time to time issued under the terms of
this Agreement and the Registration Rights Agreement. As applicable, the Company
shall at all times comply in all respects with the Company's reporting, filing
and other obligations under the by-laws or rules of the OTC Bulletin Board
Market, National Association of
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Securities Dealers and if applicable the NASDAQ SmallCap Market (and such other
national exchange on which the Common Stock may be listed or eligible to trade,
as applicable).
m. The Company shall provide a transfer agent and registrar, which may be
a single entity, for the Registrable Securities not later than the effective
date of the Registration Statement.
n. The Company shall comply with all applicable laws relating to a
Registration Statement and offering and sale of securities and all applicable
rules and regulations of governmental authorities in connection therewith
(including without limitation the 1933 Act and the Securities Exchange Act of
1934, as amended, and all the rules and regulations promulgated by the SEC).
o. The Company shall take all other reasonable actions necessary to
expedite and facilitate disposition by the Investors of Registrable Securities
pursuant to a Registration Statement.
4. OTHER OBLIGATIONS. In connection with the registration of the
Registrable Securities, the Investors shall have the following obligations:
a. At least fifteen (15) days prior to the first anticipated filing date
of the Registration Statement, the Company shall notify each Investor of the
information the Company requires from each such Investor if such Investor elects
to have any of such Investor's Registrable Securities included in the
Registration Statement. It shall be a condition precedent to the obligations of
the Company to complete the registration pursuant to this Agreement with respect
to the Registrable Securities of a particular Investor that such Investor shall
furnish to the Company such information regarding itself, the Registrable
Securities held by it and the intended method of disposition of the Registrable
Securities held by it as shall be reasonably required to effect the registration
of such Registrable Securities and shall execute such documents in connection
with such registration as the Company may reasonably request.
b. Each Investor by such Investor's acceptance of the Registrable
Securities agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of the Registration
Statement(s) hereunder, unless such Investor has notified the Company in writing
of such Investor's election to exclude all of such Investor's Registrable
Securities from the Registration Statement.
c. In the event Investors holding a majority of the Registrable Securities
being registered determine to engage the services of an underwriter, each
Investor agrees to enter into and perform such Investor's obligations under an
underwriting agreement, in usual and customary form, including, without
limitation, customary indemnification and contribution obligations, with the
managing underwriter of such offering and take such other actions as are
reasonably required in order to expedite or facilitate the disposition of the
Registrable Securities, unless such Investor notifies the Company in writing of
such Investor's election to exclude all of such Investor's Registrable
Securities from the Registration Statement(s).
d. Each Investor agrees that, upon receipt of any notice from the Company
of the happening of any event of the kind described in Section 3(e) or 3(f),
such Investor will immediately discontinue disposition of Registrable Securities
pursuant to the Registration Statement(s) covering such Registrable Securities
until such Investor's receipt of the copies of the supplemented or amended
prospectus contemplated by Section 3(e) or 3(f) and, if so directed by the
Company, such Investor shall deliver to the Company (at the expense of the
Company) or destroy (and deliver to the
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Company a certificate of destruction) all copies in such Investor's possession,
of the prospectus covering such Registrable Securities current at the time of
receipt of such notice.
e. No Investor may participate in any underwritten registration hereunder
unless such Investor (i) agrees to sell such Investor's Registrable Securities
on the basis provided in any underwriting arrangements approved by the Investors
entitled hereunder to approve such arrangements, (ii) completes and executes
all questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents reasonably required under the terms of such underwriting
arrangements, and (iii) agrees to pay its pro rata share of all underwriting
discounts and commissions and any expenses incurred by the Company pursuant to
Section 5 below.
5. EXPENSES OF REGISTRATION. The Company agrees to pay all reasonable
expenses, other than underwriting discounts and commissions, incurred in
connection with registrations, filings or qualifications pursuant to Sections 2
and 3, including, without limitation, all registration, listing and
qualifications fees, printers and accounting fees, and fees and disbursements of
counsel for the Company. If Investors who hold a majority of Registrable
Securities undertake to resell the Registrable Securities in an underwritten
public offering, the Company will reasonably cooperate as is customarily
required in an underwritten public offering. The Investors who participate in
such a public offering shall pay all expenses incurred in connection with such
registration, whether incurred by them or the Company, including without
limitation, underwriting discounts and commissions, all registration, listing
and qualification fees, printing charges, and fees and disbursements of
accountants and counsel for the Company.
6. INDEMNIFICATION. In the event any Registrable Securities are included
in a Registration Statement under this Agreement:
a. To the extent permitted by law, the Company will indemnify, hold
harmless and defend each Investor who holds such Registrable Securities, the
directors, officers and each person who controls any Investor within the meaning
of the 1933 Act or the Securities Exchange Act of 1934, as amended (the "1934
Act"), if any, and any underwriter (as defined in the 1933 Act) for the
Investors, and the directors and the officers of, and each person, if any, who
controls, any such underwriter within the meaning of the 1933 Act or the 1934
Act (each, an "Indemnified Person"), against any losses, claims, damages,
liabilities or expenses (joint or several) (collectively, together with actions,
proceedings or inquiries by any regulatory or self regulatory organization,
whether commenced or threatened, in respect thereof, "Claims") to which any of
them may become subject insofar as such Claims (or actions or proceedings,
whether commenced or threatened, in respect thereof) arise out of or are based
upon: (i) any untrue statement or alleged untrue statement of a material fact
in a Registration Statement or the omission or alleged omission to state a
material fact therein required to be stated or necessary to make the statements
therein not misleading, (ii) any untrue statement or alleged untrue statement
of a material fact contained in any preliminary prospectus if used prior to the
effective date of such Registration Statement, or contained in the final
prospectus (as amended or supplemented, if the Company files any amendment
thereof or supplement thereto with the SEC) or the omission or alleged omission
to state therein any material fact necessary to make the statements made
therein, in light of the circumstances under which the statements therein were
made, not misleading, or (iii) any violation or alleged violation by the
Company of the 1933 Act, the 1934 Act, any other law, including, without
limitation, any state securities law, or any rule or regulation thereunder
relating to the offer or sale of the Registrable Securities pursuant to a
Registration Statement (the matters in the foregoing clauses (i) through (iii)
being, collectively, "Violations"). Subject to the restrictions set forth in
Section 6(d) with respect to the number of legal counsel, the Company shall
reimburse the Investors and each such underwriter
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or controlling person, promptly as such expenses are incurred and are due and
payable, for any legal fees or other expenses reasonably incurred by them in
connection with investigating or defending any such Claim. Notwithstanding
anything to the contrary contained herein, the indemnification agreement
contained in this Section 6(a): (i) shall not apply to a Claim arising out of or
based upon a Violation which occurs in reliance upon and in conformity with
information furnished in writing to the Company by any Indemnified Person or
underwriter for such Indemnified Person expressly for use in connection with the
preparation of the Registration Statement or any such amendment thereof or
supplement thereto, if such prospectus was timely made available by the Company
pursuant to Section 3(c) hereof; (ii) with respect to any preliminary
prospectus, shall not inure to the benefit of any such person from whom the
person asserting any such Claim purchased the Registrable Securities that are
the subject thereof (or to the benefit of any person controlling such person) if
the untrue statement or omission of the material fact contained in the
preliminary prospectus was corrected in the prospectus, as then amended or
supplemented, if such prospectus was timely made available by the Company
pursuant to Section 3(c) hereof; (iii) shall not be available to the extent such
Claim is based on a failure of the Investor to deliver or to cause to be
delivered the prospectus made available by the Company or the failure of the
Investor to comply with federal or state law relating to the offering or sale of
the Registrable Securities; and (iv) shall not apply to amounts paid in
settlement of any Claim if such settlement is effected without the prior written
consent of the Company, which consent shall not be unreasonably withheld. Such
indemnity shall remain in full force and effect regardless of any investigation
made by or on behalf of the Indemnified Person and shall survive the transfer of
the Registrable Securities by the Investors pursuant to Section 9.
b. In connection with any Registration Statement in which an Investor is
participating, each such Investor agrees to indemnify, hold harmless and defend,
to the same extent and in the same manner as is set forth in Section 6(a), the
Company, each of its directors, each of its officers who signs the Registration
Statement, each person, if any, who controls the Company within the meaning of
the 1933 Act or the 1934 Act, any underwriter and any other stockholder selling
securities pursuant to the Registration Statement or any of its directors or
officers or any person who controls such stockholder or underwriter within the
meaning of the 1933 Act or the 1934 Act (collectively and together with an
Indemnified Person, an "Indemnified Party"), against any Claim to which any of
them may become subject, under the 1933 Act, the 1934 Act or otherwise, insofar
as such Claim arises out of or is based upon any Violation, in each case to the
extent (and only to the extent) that such violation occurs in reliance upon and
in conformity with written information furnished to the Company by such Investor
expressly for use in connection with such Registration Statement or to the
extent such Claim is based upon any violation or alleged violation by the
Investor of the 1933 Act, 1934 Act or any other law; and such Investor will
reimburse any legal or other expenses reasonably incurred by them in connection
with investigating or defending any such Claim; provided, however, that the
indemnity agreement contained in this Section 6(b) shall not apply to amounts
paid in settlement of any Claim if such settlement is effected without the prior
written consent of such Investor, which consent shall not be unreasonably
withheld; provided, further, however, that the Investor shall be liable under
this Section 6(b) for only that amount of a Claim as does not exceed the net
proceeds to such Investor as a result of the sale of Registrable Securities
pursuant to such Registration Statement. Such indemnity shall remain in full
force and effect regardless of any investigation made by or on behalf of such
Indemnified Party and shall survive the transfer of the Registrable Securities
by the Investors pursuant to Section 9. Notwithstanding anything to the
contrary contained herein, the indemnification agreement contained in this
Section 6(b) with respect to any preliminary prospectus shall not inure to the
benefit of any Indemnified Party if the untrue statement or omission of material
fact contained in the preliminary prospectus was corrected on a timely basis in
the prospectus, as then amended or supplemented.
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c. The Company shall be entitled to receive indemnities from underwriters,
selling brokers, dealer managers and similar securities industry professionals
participating in any distribution, to the same extent as provided above, with
respect to information such persons so furnished in writing by such persons
expressly for inclusion in the Registration Statement.
d. Promptly after receipt by an Indemnified Person or Indemnified Party
under this Section 6 of notice of the commencement of any action (including any
governmental action), such Indemnified Person or Indemnified Party shall, if a
Claim in respect thereof is to be made against any indemnifying party under this
Section 6, deliver to the indemnifying party a written notice of the
commencement thereof, and the indemnifying party shall have the right to
participate in, and, to the extent the indemnifying party so desires, jointly
with any other indemnifying party similarly noticed, to assume control of the
defense thereof with counsel mutually satisfactory to the indemnifying party and
the Indemnified Person or the Indemnified Party, as the case may be; provided,
however, that an Indemnified Person or Indemnified Party shall have the right to
retain its own counsel with the fees and expenses to be paid by the indemnifying
party, if, in the reasonable opinion of counsel retained by the indemnifying
party, the representation by such counsel of the Indemnified Person or
Indemnified Party and the indemnifying party would be inappropriate due to
actual or potential differing interests between such Indemnified Person or
Indemnified Party and any other party represented by such counsel in such
proceeding. The Company shall pay reasonable fees for only one separate legal
counsel for the Investors, and such legal counsel shall be selected by the
Investors holding a majority in interest of the Registrable Securities included
in the Registration Statement to which the Claim relates; provided, that the
Company shall have the right to approve the selection of counsel and legal fees
and expenses of such firm shall be reasonable. The failure to deliver written
notice to the indemnifying party within a reasonable time of the commencement of
any such action shall not relieve such indemnifying party of any liability to
the Indemnified Person or Indemnified Party under this Section 6, except to the
extent that the indemnifying party is prejudiced in its ability to defend such
action. The indemnification required by this Section 6 shall be made by
periodic payments of the amount thereof during the course of the investigation
or defense, as such expense, loss, damage or liability is incurred and is due
and payable.
7. CONTRIBUTION. To the extent any indemnification by an indemnifying
party is prohibited or limited by law, the indemnifying party agrees to make the
maximum contribution with respect to any amounts for which it would otherwise be
liable under Section 6 to the fullest extent permitted by law; provided,
however, that (i) no contribution shall be made under circumstances where the
maker would not have been liable for indemnification under the fault standards
set forth in Section 6, (ii) no seller of Registrable Securities guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933
Act) shall be entitled to contribution from any seller of Registrable Securities
who was not guilty of fraudulent misrepresentation, and (iii) contribution by
any seller of Registrable Securities shall be limited in amount to the net
amount of proceeds received by such seller from the sale of such Registrable
Securities.
8. REPORTS UNDER THE 1934 ACT. With a view to making available to the
Investors the benefits of Rule 144 promulgated under the 1933 Act or any other
similar rule or regulation of the SEC that may at any time permit the investors
to sell securities of the Company to the public without registration ("Rule
144"), the Company agrees to:
a. make and keep public information available, as those terms are
understood and defined in Rule 144;
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<PAGE>
b. file with the SEC in a timely manner all reports and other documents
required of the Company under the 1933 Act and the 1934 Act so long as the
Company remains subject to such requirements (it being understood that nothing
herein shall limit the Company's obligations under Section 4(c) of the
Securities Purchase Agreement) and the filing of such reports and other
documents is required for the applicable provisions of Rule 144; and
c. furnish to each Investor so long as such Investor owns Registrable
Securities, promptly upon request, (i) a written statement by the Company that
it has complied with the reporting requirements of Rule 144, the 1933 Act and
the 1934 Act, (ii) a copy of the most recent annual or quarterly report of the
Company and such other reports and documents so filed by the Company, and (iii)
such other information as may be reasonably requested to permit the Investor to
sell such securities pursuant to Rule 144 without registration.
9. ASSIGNMENT OF REGISTRATION RIGHTS. The rights to have the Company
register Registrable Securities pursuant to this Agreement shall be
automatically assignable by the Investors to any transferee of all or any
portion of Registrable Securities if: (i) the Investor agrees in writing with
the transferee or assignee to assign such rights, and a copy of such agreement
is furnished to the Company within a reasonable time after such assignment,
(ii) the Company is, within a reasonable time after such transfer or assignment,
furnished with written notice of (a) the name and address of such transferee or
assignee, and (b) the securities with respect to which such registration rights
are being transferred or assigned, (iii) immediately following such transfer or
assignment the further disposition of such securities by the transferee or
assignee is restricted under the 1933 Act and applicable state securities laws,
(iv) at or before the time the Company receives the written notice contemplated
by clause (ii) of this sentence the transferee or assignee agrees in writing
with the Company to be bound by all of the provisions contained herein, (v)
such transfer shall have been made in accordance with the applicable
requirements of the Securities Purchase Agreement, (vi) such transferee shall
submit evidence reasonably satisfactory to the Company that the Transferee is an
"accredited investor" as that term is defined in Rule 501 of Regulation D
promulgated under the 1933 Act; and (vii) in the event the assignment occurs
subsequent to the date of effectiveness of the Registration Statement required
to be filed pursuant to Section 2(a), the transferee agrees to pay all
reasonable expenses of amending or supplementing such Registration Statement to
reflect such assignment. Notwithstanding anything herein to the contrary, no
assignment of the rights represented by this Agreement shall be effective unless
in compliance with any applicable securities laws of any applicable
jurisdiction.
10. AMENDMENT OF REGISTRATION RIGHTS. Provisions of this Agreement may be
amended and the observance thereof may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of the Company and Investors who hold a majority of the
Registrable Securities. Any amendment or waiver effected in accordance with
this Section 10 shall be binding upon each Investor and the Company.
11. MISCELLANEOUS.
a. A person or entity is deemed to be a holder of Registrable Securities
whenever such person or entity owns of record such Registrable Securities. If
the Company receives conflicting instructions, notices or elections from two or
more persons or entities with respect to the same Registrable Securities, the
Company shall act upon the basis of instructions, notice or election received
from the registered owner of such Registrable Securities.
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<PAGE>
b. Any notices required or permitted to be given under the terms of this
Agreement shall be sent by registered or certified mail, return receipt
requested, or delivered personally or by courier and shall be effective five
days after being placed in the mail, if mailed, or upon receipt, if delivered
personally or by courier or facsimile, in each case properly addressed to the
party to receive such notice. The addresses for such communications shall be:
If to the Company: American Biomed, Inc.
10077 Grogan's Mill Road, Suite 100
The Woodlands, Texas 77380
Telephone: 281.367.3895
Facsimile: 281.367.3212
Attention: Mr. Steven B. Rash, President & CFO
If to the Buyer, at the address on the signature page of the Securities
Purchase Agreement. Each party shall provide written notice to the other party
of any change in address.
c. Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
d. This Agreement shall be governed by and interpreted in accordance with
the laws of the state of Delaware without regard to the principles of conflict
of laws. If any provision of this Agreement shall be invalid or unenforceable
in any jurisdiction, such invalidity or unenforceability shall not affect the
validity or enforceability of the remainder of this Agreement in that
jurisdiction or the validity or enforceability of any provision of this
Agreement in any other jurisdiction. The Company irrevocably consents to the
jurisdiction of the state and federal courts of the state of Delaware in any
suit or proceeding arising out of or based on this Agreement and irrevocably
agrees that all claims in respect of such suit or proceeding may be determined
in such courts. The Company irrevocably waives the defense of inconvenient
forum to the maintenance of such suit or proceeding. Service of process in any
civil action relating to or arising out of this Agreement (including also all
Exhibits or Addenda hereto) or the transaction(s) contemplated herein may be
accomplished in any manner provided by law.
e. This Agreement, the Escrow Agreement, the Debentures, the Security
Agreement (as defined in the Securities Purchase Agreement), the Warrants, and
the Securities Purchase Agreement (including all exhibits and addenda thereto)
constitute the entire agreement between the parties hereto with respect to the
subject matter hereof and thereof. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein and
therein. This Agreement and the other agreements previously identified supersede
all prior agreements and understandings among the parties hereto with respect to
the subject matter hereof and thereof.
f. Subject to the requirements of Section 9 hereof, this Agreement shall
inure to the benefit of and be binding upon the permitted successors and assigns
of each of the parties hereto.
g. The headings in this Agreement are for convenience of reference only
and shall not limit or otherwise affect the meaning hereof.
h. This Agreement may be executed in two or more identical counterparts,
each of which shall be deemed an original but all of which shall constitute one
and the same agreement. This
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<PAGE>
Agreement, once executed by a party, may be delivered to the other party hereto
by facsimile transmission of the signature page of this Agreement bearing the
signature of the party so delivering this Agreement to the Escrow Agent, with
the original executed Agreement to be delivered to the Escrow Agent via
overnight delivery.
i. Each party shall do and perform, or cause to be done and performed, all
such further acts and things, and shall execute and deliver all such other
agreements, certificates, instruments and documents, as the other party may
reasonably request in order to carry out the intent and accomplish the purposes
of this Agreement and the consummation of the transactions contemplated hereby.
IN WITNESS WHEREOF, the parties have caused this Registration Rights
Agreement to be duly executed as of day and year first above written.
[SIGNATURE PAGE FOLLOWS]
14
<PAGE>
[SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT DATED
MARCH 3, 1999]
COMPANY:
AMERICAN BIOMED, INC.
By: /s/ Steven B.Rash
___________________________________________
Mr. Steven B.Rash, President and CEO
BUYER:
THE AUGUSTINE FUND, L.P.
By: Augustine Capital Management, Inc., a General
Partner
By: /s/ Thomas F. Duszynski
____________________________________________
Mr. Thomas F. Duszynski, President
15
<PAGE>
EXHIBIT I TO REGISTRATION RIGHTS AGREEMENT
[DATE]
[NAME AND ADDRESS OF BUYER]
[NAME AND ADDRESS OF COMPANY'S TRANSFER AGENT]
Re: Registration of Certain Securities of American Biomed, Inc.
Ladies and Gentlemen:
We are counsel to American Biomed, Inc., a Delaware Corporation (the
"Company"), whose stock is eligible for trading on the OTC Bulletin Board Market
utilizing the symbol "ABMI." We understand that [NAME OF BUYER] (the "Holder")
has purchased from the Company (a) a number of Series 1999-A Nine Percent (9%)
Redeemable Convertible Debentures American Biomed, Inc. (the "Debentures"), and
(b) a number of warrants (the "Warrants") to purchase common stock of the
Company, $.001 par value per share ("Common Stock"). The Debentures are
convertible in accordance with their terms into Common Stock. The Warrants are
exercisable into Common Stock. The Debentures and the Warrants were purchased
pursuant to a Securities Purchase Agreement between the Company and the Holder
dated as of February __, 1999 (including all Exhibits and Addenda thereto, the
"Securities Purchase Agreement").
Pursuant to a Registration Rights Agreement between the Company and the
Holder dated as of February __, 1999, the Company agreed with the Holder, among
other things, to register the Common Stock into which the Debentures (and, as
applicable, Common Stock issued (i) in payment of interest on the Debentures
and/or (ii) in payment of certain penalties for late or non-registration of the
said Common Stock) are convertible and the Common Stock into which the Warrants
are exercisable (collectively, the "Registrable Securities") under the
Securities Act of 1933, as amended (the "1933 Act"), upon the terms provided in
the Registration Rights Agreement. In connection with the Company's obligations
under the Registration Rights Agreement, the Company filed a registration
statement on Form S-__, No. 333-_________, on [DATE S-3 or S-1 WAS FILED] (the
"Registration Statement") with the United States Securities and Exchange
Commission relating to the Registrable Securities, which names the Holder as a
selling stockholder thereunder.
[OTHER INTRODUCTORY AND SCOPE OF EXAMINATION LANGUAGE TO BE INSERTED, AS IS
USUAL AND CUSTOMARY FOR SUCH OPINION LETTERS.]
Based upon the foregoing, we are of the opinion that the Registrable
Securities have been registered under the 1933 Act.
Very truly yours,
______________________
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<PAGE>
EXHIBIT 10.101
LICENSE AGREEMENT
This License Agreement is entered into this 26th day of March, 1999, by
and between Manufacturing and Research, Inc., hereinafter referred to as "MRI"
and American BioMed Inc., hereinafter referred to as "ABMI". MRI is a
corporation organized under the laws of the State or Arizona, with its principal
place of business at 2045 North Forbes Boulevard, Tucson, Pima County, Arizona.
ABMI is a corporation organized under the laws of the State of Delaware, with
its principal place of business at 10077 Grogans Mill Road, Suite 100, The
Woodlands, Montgomery County, Texas. The term MRI shall include Manufacturing
and Research, Inc., as well as, any subsidiary of MRI established to accomplish
the terms of this Agreement.
Recitals
A. ABMI is the owner of the entire right, title and interest in the following
Cathlab and balloon cardiovascular inventions letters patent of the United
States with the indicated patent numbers, issuance dates, and expiration
dates:
1.1 Embolectomy Catheters
1.2 Bi-Lumen Irrigation Catheters
1.3 Occlusion Catheters
1.4 Biliary Catheters
1.5 Termodilution Catheters
1.6 Angiographic/Angioscopic Catheters
1.7 Ahn Thrombectomy Catheters
1
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
Invention Title Patent No. Date Patent Expiration FDA 510K
Issued Date of Registration
Patent
- -----------------------------------------------------------------------------------------------------------------
Embolectomy Catheters * K881455
K905139
- -----------------------------------------------------------------------------------------------------------------
Bi-Lumen Irrigation Catheters * K893680
K897184
- -----------------------------------------------------------------------------------------------------------------
Occlusion Catheters * K910916
- -----------------------------------------------------------------------------------------------------------------
Biliary Catheters * K910917
- -----------------------------------------------------------------------------------------------------------------
Thermodilution Catheters * K893435
- -----------------------------------------------------------------------------------------------------------------
Angiographic/Angioscopic
Catheters 5,464,394 11/07/95 11/07/12 K897051
- -----------------------------------------------------------------------------------------------------------------
Ahn Thrombectomy Catheters Application K972572
Pending
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
*All of the catheters listed above are variations of the following patents:
<TABLE>
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
Product Patent No. Date Patent Expiration
Issued Date of Patent
- ---------------------------------------------------------------------------------------------------------
Method for Parting Rubber and Products 4,670,313 06/02/87 06/02/04
Formed Thereby, and a Method of Making
a Blood Vessel
- ---------------------------------------------------------------------------------------------------------
Method for Parting Rubber and Products 4,690,844 09/01/87 09/01/04
Formed Thereby, and a Method of Making
a Blood Vessel
- ---------------------------------------------------------------------------------------------------
</TABLE>
B. MRI desires to secure exclusive licenses to, and ABMI is willing to grant
exclusive licenses under the above-stated patents to manufacture, use, and
sell the Cathlab and balloon cardiovascular inventions.
2
<PAGE>
C. ABMI is currently leasing the capital equipment identified in Exhibit "A"
from Aberlyn Capital Management Limited Partnership. Under the terms of such
lease agreement, ABMI has the authority to sublease the identified capital
equipment.
D. ABMI desires to transfer to MRI the capital equipment utilized in its Cathlab
manufacturing business and MRI is willing to provide maintenance and utilize
from ABMI such capital equipment as is, per the attached Exhibit "A".
E. ABMI desires to transfer to MRI and MRI is willing to accept from ABMI the
finished inventory and the raw materials currently held in inventory by ABMI
at ABMI's Cathlab manufacturing facility. See Exhibits "F" and "G".
COVENANTS
In consideration of the mutual covenants and obligations hereinafter set
forth, and the mutual benefits to be derived hereunder, the Parties agree as
follows:
Section One
Definitions
1.1 ABMI customer base. ABMI customer base shall include all ABMI customers
existing at the time this Agreement is executed and all ABMI customers
existing at such time who are interested in purchasing the balloon
cardiovascular devices. ABMI's customer base may also include customers for
which there is no prior or existing customer relationship with ABMI, so
long as an existing customer relationship does not exist with MRI or a
subsidiary of MRI.
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<PAGE>
1.2 Clamshell packaging. ABMI's designed polypropylene packaging for Cathlab
products which is manufactured using ABMI's proprietary molds.
1.3 Licensed inventions. Licensed inventions shall be the term used to identify
as a group the following inventions: Embolectomy Catheters, Bi-Lumen
Irrigation Catheters, Occlusion Catheters, Biliary Catheters,
Thermodilution Catheters, Angiographic/Angioscopic Catheters, Ahn
Thrombectomy Catheters, as identified in Section A 1.1 through 1.7.
1.4 Licensed patents. Licensed patents shall mean all patents issued to ABMI
regarding or relating to the Cathlab and any and all balloon cardiovascular
devices.
1.5 Licensed products. Licensed products shall mean all products manufactured
by MRI using the licensed patents owned by ABMI and the processes developed
by ABMI in conjunction with the licensed patents, including, but not
limited to the licensed inventions and any newly designed non-Cathlab
products designed by MRI using ABMI's patented balloon cardiovascular
technology on an application by application basis.
1.6 Net receipts. The term net receipts shall mean MRI's gross receipts less
refunds for returned goods, and the cost of transportation and insurance.
1.7 OEM. OEM means original equipment manufacturer.
1.8 Sales. The term sales as used herein shall mean the sales of the licensed
products that are made in the territorial limits of the United States, its
territories, and Mexico, and export sales originating in the United States
and Mexico, or any other facility controlled by MRI.
4
<PAGE>
Section Two
Grant of License
ABMI grants to MRI an exclusive license to use the licensed patents and
to manufacture and sell the licensed inventions. ABMI shall grant to MRI an
exclusive right to utilize the processes involved in manufacturing the licensed
inventions. MRI shall assume ABMI's FDA 510K approvals on the licensed
inventions and the respective processes. The exclusive license conveyed in this
Agreement shall be exercisable throughout the United States, its territories and
possessions, and in all foreign countries.
Section Three
Licensing Fee
MRI shall pay ABMI a one-time license fee in the amount of TWENTY-FIVE
THOUSAND AND NO/100 ($25,000.00) DOLLARS for the exclusive right to manufacture,
use and sell the licensed inventions. Payment of the licensing fee will be
divided into six (6) equal monthly installments of FOUR THOUSAND ONE HUNDRED
SIXTY-SIX AND 66/100 ($4,166.66) DOLLARS and commence six (6) months after the
close of this Agreement. Furthermore, MRI will pay ABMI a one-time license fee
in the amount of FIVE HUNDRED AND NO/100 ($500.00) DOLLARS for each newly
designed non-Cathlab product designed by MRI using ABMI's patented balloon
technology processes.
Section Four
Royalty
During the term of this Agreement, MRI shall pay to ABMI a royalty
interest on the net receipts received from all sales by MRI of licensed
inventions, as follows:
5
<PAGE>
- -----------------------------------------------------------------------
Annual Net Receipts Royalty Percentage
- -----------------------------------------------------------------------
0 - $1,000,000 5.0%
- -----------------------------------------------------------------------
$1,000,000 - $2,000,000 4.0%
- -----------------------------------------------------------------------
$2,000,000 + 2.5%
- -----------------------------------------------------------------------
On all newly designed non-Cathlab products designed and manufactured by
MRI using ABMI's patented balloon cardiovascular technology which are sold
during the term of this Agreement, MRI shall pay to ABMI a royalty interest on
the net receipts received from such sales by MRI as follows:
- -----------------------------------------------------------------------
Annual Net Receipts Royalty Percentage
- -----------------------------------------------------------------------
0 - $2,000,000 2.5%
- -----------------------------------------------------------------------
$2,000,000 + 1.5%
- -----------------------------------------------------------------------
Section Five
Payment
Royalty payments hereunder shall be due and payable thirty (30) days
after the end of each calendar quarter during which this Agreement is in effect,
commencing October 30, 1999.
Section Six
Reporting
MRI shall submit written reports to ABMI quarterly commencing July 1,
1999. Each such report shall include a statement of the number, description, and
net receipts of licensed products sold or otherwise disposed of during the
preceding three calendar months and on which royalty is payable.
6
<PAGE>
as provided in Section Four. The first such report shall include all licensed
products sold or otherwise disposed of from the date of this Agreement.
Section Seven
ABMI Right to Purchase
Subject to the terms of Section Eighteen, ABMI shall have a right to
purchase from MRI at the price as set forth in Exhibit "E" all licensed
inventions subject to this Agreement for a period of ten years, or until this
Agreement expires. In addition, ABMI shall have a right to purchase from MRI and
resell under its own label, MRI's OEM produced products including all Silicone
Foley Catheters, the Silicone Gastronomy Tubes and the Silicone Temperature
Sensing Catheters.
Section Eight
ABMI Right to Sell and Distribute
ABMI shall have the authorization and consent from MRI to sell and
distribute all licensed inventions subject to this Agreement to ABMI's customer
base, as are identified in Exhibit "C". ABMI shall be responsible for taking all
orders and for all order correspondence with its customer base. Upon receipt of
a customer order, ABMI shall contact MRI either by e-mail or facsimile and
provide all pertinent information including units ordered by part number and
shipment method. Upon completion of the shipment by MRI to ABMI's customer, MRI
will notify ABMI either by e-mail or facsimile of the items shipped and the
transportation charges incurred for such order.
Section Nine
Purchase Price
ABMI shall purchase the licensed inventions from MRI at the prices set
forth in Exhibit "E".
7
<PAGE>
The purchase prices are based on ABMI's current manufacturing cost. The prices
are fixed for the 1999 calendar year. In the calendar year 2000 and thereafter,
the Parties shall review the prices and adjustments may be made to such prices
upon mutual agreement of both Parties. A reduction in the manufacturing costs of
the licensed inventions may be considered in making adjustments to such prices.
Section Ten
Inventory of Cathlab Products
ABMI shall be responsible for maintaining an inventory of Cathlab
finished goods in MRI's warehouse to meet ABMI's customers needs. MRI shall fill
ABMI's orders for finished goods within six (6) weeks from the confirmation of
placement of such order by ABMI. The payment terms for the finished inventory
will be net twenty (20) days from the date of shipment from MRI to ABMI's
contract sterilizer.
Section Eleven
Shipping Charges
MRI will bill ABMI directly for shipping charges incurred by MRI in
shipping orders to ABMI's customers, including bonding and insurance, if any.
MRI will directly bill the shipping charges according to ABMI's customer account
numbers, and utilize ABMI's billing accounts with freight vendors.
Section Twelve
Handling Charges
MRI will assess ABMI a handling charge in the amount of two (2%) percent
of the purchase
8
<PAGE>
price to perform the following services: (1) receive ABMI's Cathlab products
from its sterilizer; and (2) identifying the Cathlab products ordered by ABMI
customers from ABMI's inventory of finished goods in MRI's warehouse and
packaging such products for shipment.
Section Thirteen
Transfer of Capital Equipment
The capital equipment used by ABMI in the manufacturing of the licensed
inventions, which are identified in Exhibit "A", shall be relocated to MRI's
Tucson manufacturing facility. In addition, ABMI shall transfer and relocate all
finished inventory and all raw materials included in inventory, which are
specifically identified in Exhibits "F" and "G" respectively, to MRI's Tucson
manufacturing facility. ABMI and MRI shall mutually agree upon the capital
equipment to be relocated to MRI's Tucson manufacturing facility. ABMI shall be
responsible for and pay for loading the capital equipment, finished inventory,
and raw materials included in ABMI's inventory, to MRI's Tucson manufacturing
facility. MRI shall be responsible for the shipping and delivery of the capital
equipment, finished inventory, and raw materials. MRI shall be responsible for
the setup and ongoing maintenance of ABMI's manufacturing equipment.
Section Fourteen
Name
All licensed products that are subject to this Agreement and are
manufactured by MRI shall be distributed under the company name of MRI, Cathlab,
or MRI's OEM Customers.
9
<PAGE>
Section Fifteen
Option to Purchase Licensed Invention
If, during the term of this Agreement, ABMI desires to sell the licensed
inventions, or any improvements thereon, or any patents relating thereto, ABMI
shall give MRI the first opportunity to purchase the same at a price to be
mutually agreed on, which price shall not be greater than that for which the
invention, improvements, or patents are offered for sale to any other purchaser.
Section Sixteen
Exclusive Right
ABMI shall license to MRI the exclusive right to use and manufacture the
Cathlab balloon cardiovascular devices and ABMI will not directly or indirectly,
through an entity owned by them, individually or collectively or otherwise,
including officers, directors, shareholders, subsidies or merged or parent
company of successor, compete with MRI in the use and manufacturing of Cathlab
and balloon cardiovascular devices, other than as stated in Paragraphs Seven and
Eight.
Section Seventeen
Patent Infringement
In the event that a third person or entity is using the licensed
inventions and it is known or reasonably known that such use is an infringement
of the patents, ABMI and MRI shall take suitable action to stop
such infringement. It is expressly understood and agreed that ABMI and MRI will
pursue the adjudication of the infringement claim together. ABMI and MRI will
initiate such action each agreeing to be responsible for one-half of the expense
incurred. In the event of recovery of any damages in any such litigation,
reasonable attorney's fees and costs incurred by ABMI and MRI shall be first
deducted from the gross recovery and the balance shall be divided one-half to
ABMI and one-
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<PAGE>
half to MRI.
Section Eighteen
ABMI's OEM Customers
MRI will provide ABMI a quote to manufacture and assemble the Polamedco
Nasopharyngeal Airway for which ABMI has an OEM agreement. ABMI will provide MRI
with its current specifications to include bills of materials, routing, process
procedures, inspection procedures, drawings, etc. MRI will submit a quote within
three weeks following the receipt of the requested information and materials.
Section Nineteen
Packaging
AMBI's current clamshell packaging will remain the exclusive property of
ABMI for its current Cathlab brand Emobectomy Catheter products. ABMI's current
clamshell packaging for the Cathlab Thermodilution Catheters will be available
to MRI and MRI's OEM customers, however, such packaging material shall be color
tinted in order to differentiate the product from ABMI's Cathlab Thermodilution
Catheters.
Section Twenty
Representations and Warranties
A. ABMI warrants that it is the sole owner, free from the obligations of
any license or encumbrance whatsoever, and no threatened or pending legal
action, of all the patents or rights to patents assigned hereunder. Further,
AMBI warrants it has the authority
11
<PAGE>
to grant such licenses as is contemplated herein.
B. ABMI is a corporation duly formed and validly existing under the
laws of the State of Delaware and has the full power and authority to enter into
this Agreement to carry out the transactions contemplated hereby to be carried
out by it; and all persons signing this agreement and/or any documents and
instruments in connection herewith on behalf of ABMI have full corporate power
and authority to do so.
C. The execution, delivery and performance by ABMI and such other
instruments and documents to be executed and delivered in connection herewith by
ABMI does not, and will not, result in any violation of, or conflict with or
constitute a default under, any provisions of any Agreement of ABMI or any
mortgage, deed of trust, indenture, lease, security agreement, or other
instrument or agreement to which ABMI is a party, or any judgment, writ,
decree, order, injunction, rule or governmental regulation to which it is
subject.
D. ABMI is not prohibited from consummating the transaction
contemplated by this Agreement by any law, rule, regulation, instrument,
agreement, order or judgment.
E. To ABMI's knowledge, there are not, nor has ABMI received any notice
of, any current violations of any laws, statutes, ordinances, regulations or
other requirements of any governmental agency in connection with or related to
ABMI.
F. To ABMI's knowledge, there are not any existing, pending or
anticipated litigation, or similar proceedings against or involving ABMI,
including without limitation, patent infringement, or any other claims, actions,
suits or other proceedings threatened or pending which would materially and/or
adversely affect ABMI's right, title and/or interest in and to, or enjoyment or
use of ABMI.
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<PAGE>
F. There are no attachments, levies, executions, assignments for the
benefit of creditors, receivership, conservatorship, or voluntary or involuntary
proceedings in bankruptcy (or pursuant to any other debt or relief laws)
contemplated by ABMI, filed by ABMI or, to ABMI's knowledge, pending or
threatened in any current judicial or administrative proceedings against ABMI.
Section Twenty-One
Transferability of Rights and Obligations
The license granted in this Agreement shall be binding on any successor
to ownership or control of the licensed patents. The obligations shall run in
favor of any successor of MRI. Neither Party shall have any right to assign its
rights hereunder except to a subsidiary of MRI established to accomplish the
terms of this Agreement or to the purchaser of substantially all its business,
without the written consent of the other Party.
Section Twenty-Two
Duration of Agreement
Unless sooner terminated as hereinafter provided, the terms of this
Agreement shall continue for a period of ten (10) years or until the expiration
of the last of such licensed patents, including any extensions or reissues
thereof.
Section Twenty-Three
Termination of Agreement
A. If ABMI defaults or breaches any of the provisions of this Agreement
or fails to account for or pay the respective party any of the royalties due or
purchase price due and
13
<PAGE>
payable under this Agreement, the non-defaulting party may cancel this license
on the giving of ninety (90) days written notice. If the defaulting party,
within such ninety (90) days remedies the default or breach, the license shall
continue in full force and effect in accordance with this Agreement. If this
license is terminated for default or breach, the defaulting party shall not be
relieved of its duties and obligations to pay all royalties accrued and/or
purchase price due and payable at the effective day of the termination.
B. If any of the claims of any of the licensed patents are adjudged or
decreed to be invalid by an appellate court or by a lower court of competent
jurisdiction from whose decree no appeal is seasonably taken, MRI may, at MRI's
option, by giving sixty (60) days written notice thereto to ABMI, elect either
to terminate this Agreement in its entirety or to continue the same in force
with respect to such patents or claims as shall not have been so adjudged or
decreed to be invalid.
C. The occurrence of any of the following events shall cause a default
or breach of this Agreement by ABMI: (i) the making by ABMI of any general
arrangement or assignment for the benefit of creditors; (ii) ABMI's becoming a
"debtor" as defined in 11 U.S.C. (S)101 or any successor statute thereto
(unless, in the case of a petition filed against ABMI, the same is dismissed
within sixty (60) days); (iii) the appointment of a trustee or receiver to take
possession of substantially all of ABMI's assets; or (iv) the attachment,
execution or other judicial seizure of substantially all of ABMI's assets, where
such seizure is not discharged within thirty (30) days; provided, however, in
the event that any provision of this subparagraph (C) is contrary to any
applicable law, such provision shall be of no force or effect, and not affect
the validity of the remaining provisions.
14
<PAGE>
Section Twenty-Four
Closing
MRI and ABMI shall comply with the transaction and transfers
contemplated herein on or within forty-five (45) days after execution of this
Agreement.
Section Twenty-Five
Arbitration
All disputes that may arise in connection with this Agreement and that
are not settled by the Parties themselves shall be submitted to arbitration
under the rules and regulations of the American Arbitration Association. All
costs of arbitration shall be divided equally between the Parties, and the
Parties agree to abide by the award.
Section Twenty-Six
Ordinary Course of Business
MRI and ABMI agree that ABMI's Cathlab business will be operated
from this date through the closing date in the ordinary course of business,
consistent with past practices, unless otherwise agreed to by the Parties.
Section Twenty-Seven
Cooperation
ABMI shall provide MRI with all requested technical information relating
to the licensed inventions, provided that such information is in ABMI's
possession and shall aid MRI in manufacturing or developing the licensed
inventions.
15
<PAGE>
Section Twenty-Eight
Notices
Any notices or other communication required or permitted hereunder shall
be deemed sufficiently given if sent by registered or certified mail, return
receipt requested, and addressed as follows (the address for any Party may be
changed by giving notice thereof to the other Party in accordance with this
section):
Manufacturing and Research, Inc. (MRI)
Attn: Robert Kelliher
2045 N. Forbes Blvd., Suite 105
Tucson, Arizona 85745
American BioMed, Inc. (ABMI)
Attn: Steven B. Rash
10077 Grogans Mill Rd., Suite 100
The Woodlands, Texas 77380
Section Twenty-Nine
Binding Effect
This agreement shall be binding upon and inure to the benefit of the
representatives, successors and assigns of the Parties hereto.
Section Thirty
Governing Law
This Agreement and all other matters relating to the execution of this
Agreement shall be governed in all respects, including without limitation,
validity, interpretation, construction and performance, by the laws of the State
of Texas. The Parties consent and agree to the jurisdiction of the State of
Texas.
16
<PAGE>
Section Thirty-One
Entire Agreement
This Agreement and the Letter of Intent dated March 3, 1999, constitutes
the entire agreement between the Parties hereto with respect to the subject
matter hereof and may not be amended, altered, or modified in any manner
whatsoever, except by written instrument executed by both Parties hereto.
In witness whereof, the Parties have executed this Agreement the day and
year first written above.
Manufacturing and Research, Inc. American BioMed, Inc.
/s/ Robert E. Kelliher /s/ Steven B. Rash
- --------------------------------- -----------------------------------
By: ROBERT E. KELLIHER, President By: STEVEN B. RASH, President, CEO
17
<PAGE>
EXHIBIT 23.1
[LETTERHEAD OF KARLINS, ARNOLD & CORBITT APPEARS HERE]
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 26, 1999, included in the Annual Report on Form 10-K for the year ended
December 31, 1998.
/s/ Karlins, Arnold & Corbitt, P.C.
KARLINS, ARNOLD & CORBITT P.C.
Houston, Texas
March 26, 1999
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