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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
_______________
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, 1999
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 March 21, 2000 was $13,925,567.
The number of outstanding shares of Common Stock, $.001 par value, of the
registrant was 45,144,859 shares as of March 21, 2000.
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TABLE OF CONTENTS
PAGE
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PART I
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. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS 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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AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
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;
(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
on September 4, 1984 and closed its initial public
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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.
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 (stents and delivery system),
the OmniStent(TM). These devices are implantable within the vessels of the body
to maintain an open lumen allowing necessary rates of blood flow.
The third product area, the OmniFilter is a catheter-mounted percutaneous
temporary blood filter used to prevent stroke-causing blood clots from reaching
various organs of the human body. This technology was licensed to
IntraTherapeutics, Inc. ("ITI") in April 1999 to accelerate development and
commercialization of the technology. The Company estimates that ITI could
receive initial approvals for commercialization by late 2000 after which the
Company would become eligible to receive royalty payments until the year 2015.
The fourth product area, 100%-silicone balloon catheters from which the
Company currently derives the majority of its revenue, is protected by a series
of domestic and international patents for the ten 510(k) product approvals which
the Company is currently marketing. The Company's subsidiary, 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 fifth product area is a toposcopic catheter, the Evert-O-Cath(TM), a drug
delivery catheter that 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 Food and Drug
Administration ("FDA") for the peripheral indication. The amended protocol was
approved on May 8, 1998. The Company expects to resume the clinical trials by
mid-2000 and submit to the FDA approximately 18 months later.
In addition, the Company plans to amend its Investigative Device Exemption
("IDE") with the FDA in 2000 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 2000. These
clinical trials will be conducted in parallel with the ongoing peripheral
clinical trials. The Company anticipates completion of these trials within
twelve months of the start date and would make an FDA submission in the U.S.
within three 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. Significant additional
financing will be required to fund the clinical trials for OmniCath(R),
OmniStent(TM) and OmniFilter. (See "Liquidity and Capital Resources.")
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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
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,
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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.
These products also have received CE Mark certification. In addition, the
Company has plans to submit a 510(k) Notification to the FDA during 2000 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. The
Company's products are manufactured in a facility which has received ISO 9001
and EN 46001 certification.
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.
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 that is used in the
assessment of a patient's hemodynamic condition (the efficiency of the heart
muscle) through direct intracardiac and pulmonary artery pressure monitoring and
cardiac output determination. This catheter is also used for blood sampling and
infusing solutions.
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Angiographic/Angioscopic Irrigation Catheter
Cathlab manufactures and markets an angiographic/angioscopic irrigation
catheter which is used as a sheath for insertion of an appropriate size
angioscope to visually examine the interior of circulatory vessels. The
flexibility of this catheter permits its navigation through tortuous vessels of
the circulatory system. The variety of sizes and lengths of this catheter
provide compatibility with a variety of angioscopes.
Biliary Catheter
Cathlab manufactures and markets a biliary catheter which is used for the
removal of intraductal stones and debris from the biliary tree.
The OmniCath(R) Atherectomy Catheter
The OmniCath(R) is an "atherectomy catheter," designed to allow physicians to
remove atherosclerotic plaque from obstructed blood vessels throughout the body,
enlarging the narrowed vessel openings and thereby restoring normal blood flow.
The Company is developing the OmniCath(R) with catheter shafts of several
different diameters for use in coronary arteries which feed the heart (5.8 to 7
French) and in peripheral arteries in the abdomen, groin and legs (7 French and
8 French). "French" is a measure of diameter; one French is equivalent to 1/3rd
of a millimeter. The OmniCath(R) is self-contained and disposable and is powered
by a small battery pack and motor assembly in the handle. Connected to the
handle is the catheter shaft, which will vary in length depending on the
distance needed from insertion to the treatment site. The weight of the
OmniCath(R) is approximately 11 ounces.
The OmniCath(R)'s shaft has a side-window and a small rotating cylindrical
blade near its distal end (the end of the catheter, or farthest part of the
catheter, which is inserted into the body). At the surface opposite the side-
window are two deflector wires which, when advanced against the arterial wall
opposite the plaque using controls in the handle, stabilize the catheter shaft
and allow the window to cover a larger volume of the plaque, compressing it into
the path of the rotating blade. Once the deflector wires are engaged and the
side window is in position, using controls on the OmniCath(R) handle, the
rotating blade can be advanced and retracted across the side-window at
approximately 11,000 revolutions per minute 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 that enters the catheter system. Further, the
blockage of blood circulation by an inflated balloon, which often occurs in
balloon angioplasty, does not occur in a procedure using the OmniCath(R). The
deflectable system, which holds the catheter in place, is designed to allow for
continuous blood flow. This allows more time to complete a procedure, although a
procedure using the OmniCath(R) should generally require less time than a
procedure utilizing multiple balloon inflations to break up the plaque. As
opposed to balloon angioplasty, which cracks and displaces plaque, the shaving
mechanism of the OmniCath(R) removes plaque and is designed to leave the artery
clean and smooth, free of fissures, ruptures, and flaps.
Overall, the OmniCath(R) is designed for ease of use and provides the
physician with the capability to perform 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 commenced limited human clinical trials in the United States with
the 8 French OmniCath(R) for peripheral use in 1991. 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
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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 the 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 2000 and submission to the FDA
approximately 18 months later.
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
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 2000. 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 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. In
addition, the Company received CE mark certification November 17, 1999 and the
Company plans to launch the OmniCath(R) in international markets in 2000.
The OmniFilter
The Company is developing a percutaneous temporary filter that 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 entered into an exclusive worldwide, royalty-bearing license
agreement on April 14, 1999 with IntraTherapeutics, Inc. for its OmniFilter
technology, a percutaneous filter to be used in carotid angioplasty procedures.
The Company received 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, which is currently 2015, or ten
years from the first commercial sale of the licensed product.
The Company believes that the OmniFilter, which has not been submitted to the
FDA for pre-market approval, would find significant use in such emerging
procedures as percutaneous angioplasty and stenting for carotid arteries, acute
lytic procedures for limb salvage, and endoluminal stent grafting for such
procedures or endoluminal aortic abdominal aneurysm. There can be no assurances
that the clinical trials for the product will be completed successfully and FDA
approval received. (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. A tubular structure that normally has 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
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advanced over the wire to the lesion being treated. At the site of the lesion,
initial inflation to 5-6 atmospheres 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 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, the design is unique 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. It is potentially
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,
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. In addition, the Company received
a Notice of Allowance from the U.S. Patent Office in February 2000 for its
fourth patent related to the stent technology. All patents are assigned to the
Company.
The Company's patents include a proven biocompatible coating used to coat the
interior surface of artificial hearts. This neutralized collagen compound is
considered to be one of the most blood and tissue-compatible biomaterials used
to construct a smooth blood flow around the device. When applied as a thin film
it provides a smooth, biochemically stable protein coating with non-pseudo
intimal properties, very little platelet adhesion, and high blood compatibility.
In addition, when used as a substrate, the coating bonds easily with various
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 arcuate 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
9
<PAGE>
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.
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 once 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 that 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 this product line 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.
10
<PAGE>
Regulatory Status of Products
As of March 1, 2000
<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")
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. As of March 1, 2000 the Company has twelve North
American and twenty-eight international distributors.
Sales to Sorin BioMedica ("Sorin") (based in Italy) and PFM (based in Germany)
represented 16.07% and 11.44% of the Company's total 1999 net sales,
respectively. Revenues from BioControl (based in Pennsylvania) for sales,
marketing and distribution services represented 15.99% of the Company's total
1999 net sales while revenues from the sale of raw materials and supplies to
Manufacturing & Research, Inc. ("MRI") represented 24.76% of net sales. The
remainder of net sales to any one customer were less than 10%. Sorin, PFM,
BioControl and MRI are not affiliated with the Company. MRI is the Company's
strategic manufacturing partner. The loss of these major accounts would be
material to the Company's overall results of operations, financial position and
cash flow.
The following summary indicates the Company's percentage of sales within
geographic regions for the years 1999, 1998, and 1997:
REGION 1999 1998 1997
United States.... 48.4 45.3 34.5
Italy............ 16.1 13.3 16.9
Germany.......... 11.4 2.1
South America.... 4.1 1.5 12.0
Japan............ 1.3 11.3 9.1
Other European
Countries....... 7.9 17.2 15.7
Other (1)...... 10.8 9.3 11.8
(1) Includes India, Mexico, Latin America, and Canada
11
<PAGE>
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 2000 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 2000 in targeted global markets in which 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 which represent hospital consortiums and other multifacility chains can
facilitate market share growth. At March 1, 2000, the Company was in
negotiations with a number of GPO's.
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. The contract terminated March 1999 when the facility relocation
agreement was signed. (See "Item 2 - Properties.") Polamedco was the Company's
first OEM contract and was 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 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 (rather than 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.
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
12
<PAGE>
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 require as much as nine months in order 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 may declare the FDA's
determination that the device is substantially equivalent to another legally
marketed device and allow the proposed device to be marketed in the United
States. The FDA may, however, determine that the proposed device is not
substantially equivalent, or may require further information, such as additional
test data, before the FDA is able to make a determination regarding substantial
equivalence.
If a manufacturer or distributor of medical devices cannot establish that a
proposed device is substantially equivalent, whether or not the FDA has made a
determination in response to a 510(k) Notification, the manufacturer or
distributor will have to seek "premarket approval" of the proposed device. A
premarket approval application would be submitted supported by extensive data,
including preclinical and human clinical trial data, as well as extensive
literature, to provide recommendations to the FDA. While the FDA has responded
to 510(k) Notifications and premarket approval applications ("PMAs") within the
allotted time period, reviews more often than not occur over a significantly
protracted time period, usually 12 to 18 months for a PMA, and possibly as much
as a year or more for certain 510(k) Notifications supported by clinical data. A
number of devices have never been cleared for marketing under either the PMA or
510(k) Notification process.
If human clinical trials of a proposed device are required and the device
presents significant risk, the manufacturer of the device must file an IDE
application with the FDA prior to commencing these 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. The Company received CE mark
certification for the OmniCath(R) November 17, 1999 and has launched the product
in international markets.
13
<PAGE>
Due to the additional risks 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. 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 preliminarily developed 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 it secures a
strategic partner to collaborate in their development and to provide the
substantial funds required.
Cathlab has ten specialty products that 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. The new Ahn Thrombectomy catheter was
launched in the second quarter 1998. 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 its 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
14
<PAGE>
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,
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.
While a limited number of national coverage decisions are made by HCFA, the
determination of whether a procedure satisfies these standards generally is made
regionally 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 procedures utilizing other catheter products currently are covered by
Medicare. 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
for its balloon catheters along with certification to EN46001. On November 17,
1999 the Company received the CE Mark for the OmniCath(R).
On March 26, 1999, the Company entered into a strategic manufacturing alliance
with MRI and relocated its manufacturing facility to Tucson, Arizona from
Irvine, California. The facility is managed and operated by MRI. Cathlab has
ten FDA and seven CE Mark approved balloon catheters that are used primarily in
vascular surgery for the removal of embolus (blood clots). Seven of the
catheters are currently being marketed in domestic and international markets.
The Company's newest product, the Ahn Thrombectomy catheter, a dual balloon
catheter with a safety balloon, was launched in the second quarter 1998.
Cathlab's catheters utilize a patented one-piece balloon design that
eliminates glue and ties, thereby permitting superior smoothness and thereby
preventing the possibility of balloon dislodgement. Cathlab's strategic
partner, MRI, is currently producing 35,000 embolectomy, thrombectomy (dual
balloon), bi-lumen irrigation, occlusion, angioscopy, biliary and cardiac output
catheters of advanced silicone technology. MRI has the capacity to manufacture
approximately 100,000 balloon catheters annually. In addition, the Company has
sufficient inventory
15
<PAGE>
of the OmniCath(R) for a product launch in international markets and for U.S.
clinical trials. The Company is in discussions with numerous companies to
manufacture the OmniCath(R) and anticipates selecting a manufacturing partner in
the second quarter of 2000 with production to begin third quarter of 2000.
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.
Research and Development
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 9001and 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 OmniFilter was
licensed to IntraTherapeutics, Inc. for development and marketing. This joint
cooperation utilizing strategic alliances will ensure accelerated development
and commercialization of the Company's proprietary technologies.
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 for the fiscal years ended December 31, 1999, 1998, and 1997 were
$122,681, $471,724, and $648,049, respectively, nearly all of which was applied
to the development of the OmniCath(R), OmniStent(TM) and OmniFilter. Research
and development expenses decreased 74.0% and 27.2% in 1999 and 1998,
respectively. 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 six U.S.
patents 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 a notice of allowance and it also has one patent on the spinal dissector. In
addition, the Company received a patent on its stent delivery system. The
Company also received an international patent for its stent technologies. 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
16
<PAGE>
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. Although there can be no assurances, the Company believes
that the patented aspects of its products enhance the functionality of its
products and suitability for their intended purposes which, in turn, may
increase their likelihood of commercial acceptance. The patents may limit, to
some extent, the ability of others to develop competing products.
In connection with the Company's acquisition of Cathlab Corporation in 1992,
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, Mexico, France, Italy and Spain. Various foreign patent applications
relating to the same process are pending.
Lawrence M. Hoffman, currently a director and stockholder 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, Aberlyn, acting as agent for BioQuest - A, and the Company
entered into a Patent Assignment and License Agreement (the "Patent and License
Agreement") pursuant to which the Company assigned patents owned by Cathlab (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.
Aberlyn and the Company 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 for 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 and
the Second 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 further
modification agreements of the Leases, which revised the schedule of lease
payments and extended the maturity date to October 1, 1998. Since May 5, 1999
Aberlyn has no longer been the agent for BioQuest - A. BioQuest - A's fund is
now being managed by its supervisory board of directors, which has engaged
Berwick Group, Inc. to service the leases. Neither
17
<PAGE>
BioQuest - A nor Berwick Group, Inc. are affiliated with the Company. The
Company currently is seeking to restructure the leases.
The Company believes that its future success does not depend solely upon
patents, but additionally depends, to a significant extent, upon the technical
competence and creative skills of its personnel, the execution of its strategic
plan and on its significant unpatented proprietary technology. The Company has
no knowledge that it is infringing any existing patent such that it would be
liable for material damages or prevented from manufacturing or marketing its
planned products. However, competitors continue to obtain new patents and to
file applications to modify or expand claims of existing patents that could lead
to possible conflict with the Company's products or proposed products.
The Company may decide for business reasons to retain a patentable invention
as a trade secret. In that event, or if patent protection is unobtainable, the
Company must rely upon trade secrets, know-how and continuing technological
innovation to maintain its competitive position. Employees and consultants of
the Company who have access to proprietary information have signed
confidentiality agreements with the Company.
The Company has four trademarks: the OmniCath(R), the OmniStent(TM), the
Evert-O-Cath(TM) and Cathlab Corporation(R). The Company has applied to register
the OmniStent(TM), however, there can be no assurance that federal registration
will be obtained. "Cathlab Corporation(R)" and "OmniCath(R)" are registered
trademarks.
Competition
Competition in the biomedical industry is intense. Cathlab's catheters
compete directly with similar products sold by a number of companies 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 or 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) include 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
18
<PAGE>
balloon devices, spark ablation systems, and other new modalities are currently
under development and have not reached commercialization. The Company believes
that direct removal of tissue without thermal effect may be the most desirable
approach for angioplasty, as most thermal systems cause trauma to the arterial
wall, resulting in proliferation of fibrous tissue and early restenosis.
The Company does not know of any person or entity currently marketing a
toposcopic catheter with features similar to the Evert-O-Cath(TM).
Employees
As of March 1, 2000, the Company had 5 full-time employees, 1 in sales and
marketing, 1 in manufacturing and quality control and 3 in corporate management
and administration. None of the Company's employees are represented by labor
unions. On April 30, 1999 the Company relocated its manufacturing operation to
Arizona and closed the California manufacturing facility. MRI staffs and
manages the Company's balloon catheter technologies and equipment in the Tucson
Arizona facility.
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.
The Company relocated its manufacturing facility on April 30, 1999 to its
strategic manufacturing partner's facility in Tucson, Arizona. The Company's
strategic manufacturing partner, MRI, staffs and manages the facility and will
manufacture the Company's products under a licensing agreement.
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 court-mandated mediation conference in February 1998 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 was executable 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 and a release filed in April 1999. The plaintiff has now
filed suit claiming that the Company anticipatorily breached the agreement to
pay licensing revenues. The Company has filed a response denying the claim.
Royalty expense in the amount of $50,000 has been accrued as of September 30,
1999.
In August 1997, an individual who formerly was 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 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. The judgment was amended to include the guaranteed value shortage in the
amount of $70,173 for a total of $155,173.
19
<PAGE>
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.
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
The Company held its annual meeting of stockholders (the "Annual Meeting") on
December 15, 1999. The stockholders of record on October 26, 1999 were entitled
to vote at the meeting. The following directors were elected to serve until the
next Annual Meeting or until their successors are duly elected and qualified:
For Withheld
Steven B. Rash.......................... 32,654,659 2,326,582
Lawrence M. Hoffman..................... 32,982,609 1,998,632
Marshall Kerr........................... 33,252,559 1,728,682
Justine B. Corday....................... 33,280,259 1,700,982
David C. Arnold......................... 33,305,259 1,675,982
The following proposals were approved:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C> <C>
Amendment to the Company's Amended and Restated
Certificate of Incorporation to effect a one-for-30
reverse stock split of the Company's common stock.... 23,870,572 11,032,211 78,458
Amendment to the Company's Amended and Restated
Certificate of Incorporation to increase the number
of authorized shares of common stock from 50,000,000
to 200,000,000 if the one-for-30 reverse stock split
is not approved by the stockholders.................. 30,955,620 3,605,786 419,835
The Company's 1999 Stock Incentive Plan, under which
options for up to 5,000,000 shares of common stock
may be issued to key employees, directors and
consultants of the Company and its subsidiaries...... 13,050,394 5,197,462 305,783
</TABLE>
20
<PAGE>
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.
COMMON STOCK
------------
High Low
---------------------------
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
Year Ending December 31, 1999
First Quarter............................ 0.23500 0.11000
Second Quarter........................... 0.18500 0.13250
Third Quarter............................ 0.14000 0.09000
Fourth Quarter........................... 0.20000 0.06500
As of December 15, 1999 there were 341 holders of record and approximately
4,200 additional beneficial shareholders of the Company's common stock. The
closing Inter-dealer prices for the Company's common stock on March 3, 2000 was
$0.37.
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, capital requirements and
financial condition, as well as, other relevant factors. The Company does not
intend to declare any cash dividends in the foreseeable future, but instead
intends to retain all earnings, if any, for use in the Company's business
operations.
21
<PAGE>
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.
Selected Operating Statement Data:
<TABLE>
<CAPTION>
INCEPTION,
FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR SEPT. 4, 1984
ENDED ENDED ENDED ENDED ENDED TO
DEC. 31, 1999 DEC. 31, 1998 DEC. 31, 1997 DEC. 31, 1996 DEC. 31, 1995 DEC. 31, 1999
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sales, net......................... $ 356,503 $ 550,717 $ 545,473 $ 579,533 $ 660,770 $ 4,767,340
Cost of sales...................... (324,275) (546,409) (482,360) (420,838) (649,355) (4,585,950)
Interest income.................... 94 2,429 44,200 4,252 7,239 156,457
Other income (expense)............. 168,987 (36,499) 25,766 (114,762) 1,561,203 2,075,038
Interest expense................... (296,325) (144,774) (183,538) (313,914) (276,688 (3,320,075)
Research & development............. (122,681) (471,724) (648,049) (640,792) (537,962 (8,492,447)
Selling, general & administrative.. (1,694,635) (1,983,824) (2,075,695) (1,718,595) (2,169,591) (21,211,089)
Distributor settlement............. -- -- -- -- -- (1,080,915)
Net loss........................... (1,912,332) (2,630,084) (2,774,203) (2,625,116) (1,404,384) (31,691,641)
Less preferred stock dividends..... (170,031) -- (1,183,413) -- (1,353,444)
----------- ----------- ----------- ----------- ----------- ------------
Net loss available to common
shareholders...................... $(1,912,332) $(2,800,115) $(2,774,203) $(3,808,529) $(1,404,384) $(33,045,085)
=========== =========== =========== =========== =========== ============
Net loss per common share.......... $(0.05) $(0.11) $(0.18) $(0.34) $(0.15)
=========== =========== =========== =========== ===========
Average number of common
shares outstanding............... 39,206,257 26,302,790 15,528,231 11,310,592 9,362,198
=========== =========== =========== =========== ===========
</TABLE>
__________
(1) Other income in December 31, 1995 includes $1,000,000 forfeited escrow
deposit received from U.S. Surgical Corporation and sale of OmniCath((R))
EPO patent to Guerbet.
Selected Balance Sheet Data:
<TABLE>
<CAPTION>
December 31
------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Working capital (deficit)............................. $ (2,824,717) $ (1,852,718) $ (627,151) $ (256,206) $ (3,827,287)
Total assets.......................................... 1,085,452 1,615,469 1,945,056 3,069,151 1,883,278
Long-term debt, net of current maturities............. -- 29,928 71,855 110,472 --
Capital lease obligations, net of current maturities.. 179 2,274 -- 302,766 7,095
Total liabilities..................................... 4,246,198 2,817,701 1,847,905 2,940,556 4,685,133
Preferred stock....................................... 23 42 2 3 --
Deficit accumulated during the development stage...... (31,691,641) (29,779,309) (27,149,225) (24,375,022) (21,749,906)
Total stockholders' equity (deficit).................. (3,160,746) (1,202,232) 97,151 128,595 (2,801,855)
</TABLE>
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<PAGE>
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, 1999, the Company had an accumulated deficit of $31,691,641. During 1999,
the Company focused its efforts on raising capital and forming strategic
alliances. On March 26, 1999, the Company entered into an exclusive license
agreement with MRI for its Cathlab(R) patents. Pursuant to the license
agreement, the Company relocated its manufacturing facility to MRI's facility in
Tucson, Arizona. MRI staffs and manages the facility and manufactures the
Company's cardiovascular products under the licensing agreement. This action
resulted in the Company saving approximately $480,000 during 1999 in operating,
production and engineering costs and will lead to additional revenue
opportunities. As a result of the Company's decision to relocate its
manufacturing facility and form a strategic manufacturing alliance with MRI,
manufacturing backlogs have been temporarily created. These backlogs continued
through the end of 1999 as the Arizona manufacturing facility completes the
manufacturing start-up phase. Production problems were encountered during the
start-up phase and process validations related to the CE Marking process, which
resulted in production being approximately 60 - 90 days behind schedule.
Production levels are increasing and full-scale production is expected to
commence during the second quarter of 2000.
Year Ended December 31, 1999 Compared With Year Ended December 31, 1998
During the year ended December 31, 1999, the Company's net sales decreased
35.3% to $356,503 compared to net sales of $550,717 for the same period in
1998. Year to date domestic sales decreased 30.8% to $172,517 from $249,397,
while foreign export net sales decreased 39.0% for the year to $183,986 from
$301,320. Sales decreased primarily due to the manufacturing backlogs created
by the relocation of the manufacturing facility and the associated problems with
the start-up phase and process validations incurred by MRI.
Cost of sales represented 91.0% and 99.2% of net sales for the years ended
1999 and 1998, 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, during 1999 the Company sold fewer samples to distributors
for use in training at reduced prices and has decreased sales of products whose
gross margins are lower than the majority of its existing products.
Selling, general and administrative expenses decreased 14.6% to $1,694,635
during 1999, compared to $1,983,824 in 1998. Selling expenses decreased 17.6%
to $210,072 as compared to $255,072 for 1998, while general and administrative
expenses decreased 14.1% to $1,484,563 as compared to $1,728,752 in 1998.
Approximately $17,000 fewer samples were distributed at no charge in 1999 and
expenses related to trade shows, exhibits and promotional materials decreased
approximately $19,000. Administrative personnel costs increased approximately
$78,000 in 1999. However, adjusting for the 1998 reduction of approximately
$111,000 related to a favorable settlement of a lawsuit that reduced salary and
related compensation expense, administrative personnel costs actually $33,000.
Consulting expenses related to the CE Mark, investor relations, and investment
banking, decreased approximately $168,000. Facility and equipment expenses
decreased approximately $61,000. Legal and accounting fees decreased $77,000
and insurance premiums decreased $31,000.
Research and development expenses totaled $122,681 during 1999, a decrease of
74.0% from the 1998 total of $471,724. 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 increased 104.7% to $296,325 for 1999, compared to $144,774
for 1998, due to the increase during 1999 of approximately $100,000 in notes
payable and the issuance of convertible debentures totaling $700,000.
23
<PAGE>
Other income for 1999 includes $40,000 amortization of the license fee
received from Wright Medical Technologies, Inc. for the spinal dissector
transaction in 1994, $150,000 amortization of the license fee received from
IntraTherapeutics for the OmniFilter, $16,667 for the license fee received from
MRI for use of the Cathlab patents, and approximately $29,000 net loss on
furniture and equipment sold or abandoned when the California plant was closed
April 30, 1999.
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 to 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 $357,082.
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
appoximately 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 reclassified 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.
24
<PAGE>
Liquidity and Capital Resources
During 1999 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, 1999 of $2,824,717, and cash and cash equivalents of $12,322
compared to a deficiency of $1,852,718 and cash and cash equivalents of $36,463
as of December 31, 1998.
The net cash used by operating activities of $615,680 for 1999 was
approximately $970,000 less than during the same period in 1998. This is due in
part to the relocation of the manufacturing facility. 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 staffs and
manages the facility and manufactures the Company's Cathlab and balloon
cardiovascular products under the licensing agreement. The Company saved
approximately $480,000 during 1999 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
utilize 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 received 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.
In addition, because of cash shortages the Company has increased payment time
to vendors from 30 - 45 days to 90 - 120 days. Purchases were also reduced and
lead time decreased.
Cash flows of $4,511 were provided by investing activities in 1999, as
compared to cash used by investing activities of $ 37,459 and $185,046 in 1998
and 1997, respectively. In 1999 and 1998 capital expenditures were reduced
pending additional funding; capital expenditures were $316, $35,161, and
$142,206 in 1999, 1998 and 1997, respectively. The sale of equipment provided
total cash of $18,010, 26,000 and $1,516 in 1999, 1998 and 1997, respectively.
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 accommodated the millenium change. In
addition, the Company continues to invest in the development and maintenance of
its patents as evidenced by the expenditure of $13,183, $28,298, and $44,356 for
the years ended December 31, 1999, 1998, and 1997, respectively. Since
inception, the Company has expended $522,825 on internally developed patents.
Cash flows of $587,028, $1,579,758, and $1,371,414, were provided by financing
activities for the years ended December 31, 1999, 1998, and 1997, respectively.
Since inception, financing activities have provided net cash of $22,683,066.
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.
During 1999, the issuance of convertible debentures provided funds totaling
$700,000 less $77,500 in offering costs.
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.
25
<PAGE>
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 125% of the face amount to be redeemed.
Pursuant to Secured Convertible Debenture Purchase Agreement dated September
30, 1999, (the "Purchase Agreement"), the Company issued an aggregate of
$300,000 of its 13% Secured Convertible Debentures due April 1, 2000 (the "2000
Debentures") to AJW Partners, LLC, New Millenium Capital Partners, LLC and Bank
de Insinger in order to raise additional funds for working capital purposes.
The Company also entered into a Registration Rights Agreement with the holders
of the 2000 Debentures whereby the Company agreed to register for resale under
the Securities Act of 1933, as amended, the shares of common stock issuable upon
conversion of the 2000 Debentures and shares issuable upon exercise of certain
warrants issued in connection therewith (the "Warrants"). Offering costs of
$30,000 excluding legal fees were incurred in the transactions. Interest on the
2000 Debentures is payable quarterly. As additional consideration, the Company
issued warrants to purchase a total of 100,000 shares of common stock at an
exercise price of $0.13 which is equal to 130% of the average per share market
values for the five days preceding the closing date. These debentures are part
of the $10 million financing that the Company has engaged The NIR Group to
structure. However, there can be no assurance that additional capital will be
secured pursuant to this arrangement.
The 2000 Debentures are convertible into common stock. The number of shares
issuable upon such conversion shall be equal to the outstanding principal to be
converted, plus accrued and unpaid interest thereon, divided by 60% of the
average bid price during the twenty trading days immediately prior to such
conversion or $0.125, whichever is lower. The conversion price is subject to
adjustment under certain circumstances. The Company has the option to prepay
the 2000 Debentures upon prior notice.
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.
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 negotiating a
restructure agreement to include all of its patents and equipment in a
sale/leaseback arrangement.
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%. As of March 1, 2000 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 2000, 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
26
<PAGE>
revenues should increase during 2000, 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.
Subsequent Events
During the first quarter of 2000, additional funds of $300,000 less offering
costs of $30,000 were received from the issuance of additional 2000 Debentures.
However, there can be no assurance that additional capital will be
secured pursuant to this arrangement.
On March 14, 2000 the board of Directors appointed Justine B. Corday as
Chairman and Interim Chief Executive Officer and Marshall Kerr as President and
Chief Operating Officer, replacing Steven B. Rash.
Previously, David C. Arnold had resigned as Director of the Company, citing
personal commitments and time restraints as his reason for resigning. The
Company's Controller, Colene Blankinship, resigned effective March 31, 2000 to
pursue other opportunities, but will remain as Corporate Secretary. Their
resignations were not caused by any disagreement involving company policies and
operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements and Financial Statement
Schedule on page F-1 herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
27
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information pertaining to fiscal year 1999
directors and executive officers of the Company:
Name Age Position
---- --- --------
Steven B. Rash.................. 52 President and Chief Executive Officer
Chairman of the Board
Marshall Kerr................... 49 Vice President, Sales & Marketing
Lawrence M. Hoffman............. 56 Director
Justine B. Corday............... 52 Director
Colene Blankinship.............. 50 Controller, Chief Accounting Officer
Secretary and Treasurer
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. He served in these positions until March 14, 2000. 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. Previously, Mr. Rash held various positions with
BOC Group, PLC, an international manufacturer of industrial gases and healthcare
products and services. Mr. Rash has 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, was
appointed Vice President, Sales and Marketing December 15, 1997, and was elected
a Director in December 1999. Effective March 14, 2000, he became Chief
Operating Officer and replaced Mr. Rash as President. 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.
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 has a B.S. in
Economics from New York University.
JUSTINE B. CORDAY joined the Company as director in December 1999 and replaced
Mr. Rash as Chairman of the Board and as Interim Chief Executive Officer on
March 14, 2000. Ms. Corday is Chief Executive Officer of Avera Corp., a
position she has held since 1993. Avera Corp. is a privately-held company that
develops, finances and operates high-technology medical services and products
ventures. Previously, Ms. Corday served as an executive officer of three
publicly-traded companies: Chief Operating Officer of Maxum Health Corp;
President and Chief Operating Officer of Heritage Health Corporation; and Vice
President of Acquisitions and Corporate Development of Comprehensive Care
Corporation.
COLENE BLANKINSHIP, CPA joined the Company February 7, 1995 as Controller and
became Chief Accounting Officer in November 1995, a position she held through
March 2000. She was elected Secretary/Treasurer February 4, 1997 and is
currently serving the Company in that capacity. From 1992 through 1994 Mrs.
28
<PAGE>
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.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and executive officers to report their initial ownership
of the Company's common stock and any subsequent changes in that ownership to
the Securities and Exchange Commission. Specific due dates for these reports
have been established by the Securities and Exchange Commission and the Company
is required to disclose any late filings or failures to file. To the Company's
best knowledge all required reports for 1999 have been filed on a timely basis
by reporting persons, except for Mr. Hoffman who made a late filing of a Form 4
involving the assignment of indirectly owned warrants to purchase the Company's
common stock.
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 $100,000 for the fiscal year ended
December 31, 1999, for services during the fiscal years ended December 31, 1999,
1998 and 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term Compensation
-------------------------------------------------
Annual Compensation Awards Payouts
---------------------------------------------------------- ----------------------- ------------------
(e)
Other (f) (g) (i)
Annual Restricted Shares/ (h) All
(a) (c) (d) Compen- Stock Options/ LTP Other
Name and (b) Salary Bonus sation Award(s) SARs Payouts Compen-
Principal Position Year ($) ($) ($)(1) ($) (#) ($) sation
------------------ ---- ------ ----- ------ -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Steven B. Rash..... 1999 165,000 __ 9,600 ___ ___ ___ ___
President, Chief 1998 165,000 __ 9,600 ___ ___ ___ ___
Executive Officer 1997 165,000 __ 9,600 ___ 927,000(2)(3) ___ ___
Marshall Kerr...... 1999 108,000 __ __ ___ ___ ___ ___
Vice President, 1998 105,667 __ __ ___ ___ ___ ___
Sales and 1997 20,000(4) __ __ ___ 400,000 ___ ___
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 $80,000 prorated from October 1997, when Mr. Kerr
began his service with the Company.
29
<PAGE>
The following table sets forth certain information with respect to each exercise
of stock options during the fiscal year ended December 31, 1999 by each of the
named executive officers and the number and value of unexercised options held by
such named executive officers as of December 31,1999.
AGGREGATED OPTION/SAR EXERCISES IN 1999 FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
- --------------------------------------------------------------------------------
Number Of Value Of
Securities Underlying Unexercised
Unexercised in-the-Money
Options/SARs Options
Shares At Year-End At Year-End
Acquired on Value Exercisable/ Exercisable/
Name Exercise Realized Unexercisable Unexercisable
(#) ($) (#) ($)
- --------------------------------------------------------------------------------
Steven B. Rash 0 0 1,527,000/0 0/0
- --------------------------------------------------------------------------------
Marshall Kerr 0 0 300,000/0 0/0
- --------------------------------------------------------------------------------
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 was employed as President and Chief Executive Officer of the Company.
The Agreement provided 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 the 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. On March 14, 2000 Ms. Corday
was appointed Chairman of the Board and Interim Chief Executive Officer, and Mr.
Kerr was appointed President and Chief Operating Officer, replacing Mr. Rash.
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
Lawrence Hoffman served as the sole member of the Compensation Committee in
1999 until December 14, 1999 when the Board of Directors revised its corporate
governance structure. The Board replaced the existing committees with the
Corporate Governance Committee, the Corporate Finance Committee and the
Corporate Strategy Committee. The Corporate Governance Committee supplants the
Compensation Committee, including and expanding its role. David Arnold and
Justine Corday, both outside directors of the Company, were elected to the
committee on December 14, 1999. Mr. Hoffman was a consultant of the Company and
is an outside director of the Company. Mr. Arnold resigned from the Board
effective February 29, 2000, and on March 14, 2000 Mr. Hoffman was elected to
replace Mr. Arnold on the Corporate Governance Committee.
Finance Committee
The Corporate Finance Committee assists the Board in recommending capital
formation and capitalization structures and approaches and governing 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.
Mr. Hoffman and Richard Serbin, a former director, served as members of the
former Audit Committee that was replaced when the Board revised its governance
structure on December 14, 1999. Steve Rash, Lawrence Hoffman and David Arnold
were elected to the committee on December 14, 1999. Mr. Arnold resigned from
the Board effective February 29, 2000, and on March 14, 2000 Ms. Corday was
elected to replace Mr. Arnold on the Corporate Finance Committee.
30
<PAGE>
Compensation of Directors
It has been the Company's policy to compensate its 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. On March
14, 2000, Ms. Corday replaced him as Chairman. No compensation or options have
been paid to directors since 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of March 21, 2000,
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 21, 2000, the Company had issued and outstanding 45,144,859 shares of
common stock.
NAME AND ADDRESS OF AMOUNT AND NATURE OF
BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP(2)(3) PERCENT OF CLASS
- -------------------------------- -------------------------- ----------------
Steven B. Rash.................. * *
Marshall Kerr................... 300,000 (5) .66%
Lawrence M. Hoffman............. 510,674 (4) 1.12%
701 Mohican Court
Morganville NJ
Justine B. Corday............... 21,000 .05%
14800 Quorum Dr, Suite 200
Dallas, TX 75240
All Directors and Officers as a
Group (4 persons).............. 855,674 (6) 1.87%
*As of March 14, 2000, Mr. Rash was no longer a director or executive officer of
the Company and beneficially owns less than 5% of the Company.
__________
(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 322,000 shares that may be acquired within 60 days upon the
exercise of options by Mr. Hoffman.
(5) These shares may be acquired upon the exercise of options.
(6) Includes 632,000 shares that 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, 1999, 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, $31,250 related to December 31, 1999, and $37,500
related to each of the years ended December 31, 1998 and 1997.
31
<PAGE>
Steven B. Rash entered into a three-year employment agreement with the
Company, dated as of July 15, 1995. Pursuant to the Agreement, Mr. Rash was
employed as President and Chief Executive Officer of the Company. The Agreement
provided for a salary of $135,000 per year with annual increases, plus bonuses
of up to fifty percent, and options to purchase 600,000 shares of common stock.
In 1997 Mr. Rash's agreement was extended to December 31, 1999. The base salary
was increased to $165,000 per year. 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. On March 14, 2000 Ms. Corday was appointed Chairman of the Board and
Interim Chief Executive Officer, and Mr. Kerr was appointed President and Chief
Operating Officer, replacing Mr. Rash.
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 and stockholder 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, Aberlyn, acting as agent for BioQuest - A, and the Company
entered into a Patent Assignment and License Agreement (the "Patent and License
Agreement") pursuant to which the Company assigned patents owned by Cathlab (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.
Aberlyn and the Company 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 for 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 and
the Second 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
32
<PAGE>
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 further
modification agreements of the Leases, which revised the schedule of lease
payments and extended the maturity date to October 1, 1998. Since May 5, 1999
Aberlyn has no longer been the agent for BioQuest - A. BioQuest - A's fund is
now being managed by its supervisory board of directors, which has engaged
Berwick Group, Inc. to service the leases. Neither BioQuest - A nor Berwick
Group, Inc. are affiliated with the Company. The Company currently is seeking
to restructure the leases.
The Company does not have a policy against employing relatives. During the
year ended December 31, 1997, the Company paid salaries and wages to relatives
of officers of the Company amounting to $7,797. No relatives were employed
during 1998 or 1999. 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.
33
<PAGE>
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
On March 21, 2000 the Company filed a Form 8-K regarding the change in the
Company's management and the resignation of one of the Company's directors.
c. Exhibits
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------------------
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
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)
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(14)
10.100 -- Registration Rights Agreement, dated March 3, 1999, between the
Company and holders of the Series 1999-A, 9% Redeemable
Convertible Debentures (14)
10.101 -- License Agreement dated March 26, 1999 between the Company and
Manufacturing & Research, Inc. (14)
10.102 -- License Agreement dated April 14, 1999 between the Company and
IntraTherapeutics, Inc. (15)
10.103 -- Securities Purchase Agreement, dated September 30, 1999, 13%
Secured Convertible Debentures
10.104 -- Registration Rights Agreement, dated September 30, 1999, between
the Company and holders of the 13% Secured Convertible Debentures
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.
34
<PAGE>
__________
(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.
(14) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
(15) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999.
35
<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 30th day of March, 2000.
AMERICAN BIOMED, INC.
By: /s/ Justine B. Corday
------------------------------
Justine B. Corday
Chairman of the Board and
Interim Chief Executive Officer
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>
<CAPTION>
<S> <C> <C>
/s/ Justine B. Corday Chairman of the Board and March 30, 2000
- --------------------------- Interim Chief Executive Officer
Justine B. Corday
/s/ Marshall Kerr President and Chief Operating Officer March 30, 2000
- ---------------------------
Marshall Kerr
/s/ Colene Blankinship Controller, Secretary and Treasurer March 30, 2000
- --------------------------- (Principal Financial and Accounting Officer)
Colene Blankinship
/s/ Lawrence M. Hoffman Director March 30, 2000
- ---------------------------
Lawrence M. Hoffman
</TABLE>
36
<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, 1999 and 1998............................................ F-3 & 4
Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997 and for
the period from inception, September 4, 1984, to December 31, 1999.................................. 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, 1999, 1998, 1997, 1996, 1995 and 1994 and
for the period from inception, September 4, 1984, to December 31, 1999............................. F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998, and 1997, and for
the period from inception, September 4, 1984, to December 31, 1999.................................. F-10
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, 1999 and 1998, 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, 1999. 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 18 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, 1999 and 1998, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Notes 1 and
18 to the consolidated financial statements, the Company has operated as a
development stage enterprise since its inception by devoting substantially all
of its efforts to financial planning, raising capital, research and development
and developing markets for its products. Consequently, as shown in the
accompanying consolidated financial statements through December 31, 1999, the
Company had a cumulative loss of $31,691,641 since its inception and had a
working capital deficit of $(2,824,717) at December 31, 1999. 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 14, 2000
F-2
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---------- ----------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents....................................... $ 12,322 $ 36,463
Accounts receivable, trade, net of allowance for doubtful
accounts of $3,100 and $40,000 for 1999 and 1998,
respectively................................................... 119,362 128,844
Accounts receivable, other...................................... 4,021 11,850
Inventories..................................................... 400,797 569,209
Other current assets............................................ 32,910 146,415
---------- ----------
Total current assets..................................... 569,412 892,781
Property and equipment, net....................................... 79,942 131,446
Patents, net of accumulated amortization of $974,048 and $960,862
in 1999 and 1998, respectively................................... 125,340 145,526
Goodwill, net of accumulated amortization of $943,642 and
$820,559 in 1999 and 1998, respectively......................... 287,194 410,277
Other assets...................................................... 23,564 35,439
---------- ----------
Total assets............................................. $1,085,452 $1,615,469
========== ==========
</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>
LIABILITIES AND STOCKHOLDERS' DEFICIT
1999 1998
------------ ------------
<S> <C> <C>
Current liabilities:
Notes payable to stockholders and others.......................... $ 706,038 $ 616,309
Current maturities of long-term debt.............................. 54,804 51,881
Current maturities of capital lease obligations................... 414,952 414,845
Convertible debentures............................................ 700,000
Accounts payable.................................................. 749,456 640,572
Accrued liabilities............................................... 768,879 1,021,892
------------ ------------
Total current liabilities.................................. 3,394,129 2,745,499
Long-term debt, net of current maturities........................... 29,928
Capital lease obligations, net of current maturities............... 179 2,274
Deferred revenue.................................................... 851,890 40,000
------------ ------------
Total liabilities.......................................... 4,246,198 2,817,701
------------ ------------
Commitments and contingencies
Stockholders' deficit:
Preferred stock, $.001 par value, 2,000,000 shares authorized,
Series A: Convertible preferred stock, 1,390 shares
authorized, 683 issued and outstanding at December 31, 1998,
$1,000 per share or $683,000 aggregate liquidation preference 1
Series D: Convertible preferred stock, 60,000 shares
authorized, 15,500 and 34,000 shares issued and
outstanding at December 31, 1999 and 1998, respectively,
$10 per share or $155,000 and $340,000 aggregate
liquidation preference increasing 8% per year from date
of issuance............................................... 16 34
Series E: Convertible preferred stock, 500,000 shares
authorized, 7,500 shares issued and outstanding at December
31, 1999 and 1998, $10 per share or $75,000 aggregate
liquidation preference increasing at 8% per year 7
from date of issuance...................................... 7
Common stock, $.001 par value, 50,000,000 and 25,000,000 shares
authorized in 1999 and 1998 respectively, 43,054,282 and
32,648,075 shares issued at December 31, 1999 and 1998,
respectively...................................................... 43,054 32,648
Additional paid-in capital........................................ 28,487,818 28,544,387
Deficit accumulated during the development stage.................. (31,691,641) (29,779,309)
------------ ------------
Total stockholders' deficit................................ (3,160,746) (1,202,232)
------------ ------------
Total liabilities and stockholders' equity (deficit)...... $ 1,085,452 $ 1,615,469
============ ============
</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,
1999 1998 1997 1999
------------ ------------ ------------ -----------------
<S> <C> <C> <C> <C>
Sales, net...................................... $ 356,503 $ 550,717 $ 545,473 $ 4,767,340
Cost of sales................................... (324,275) (546,409) (482,360) (4,585,950)
----------- ----------- ----------- ------------
Gross profit.................................... 32,228 4,308 63,113 181,390
----------- ----------- ----------- ------------
Operating expenses:
Selling, general and administrative........... (1,694,635) (1,983,824) (2,075,695) (21,211,089)
Research and development...................... (122,681) (471,724) (648,049) (8,492,447)
Distributor settlement........................ -- -- -- (1,080,915)
----------- ----------- ----------- ------------
(1,817,316) (2,455,548) (2,723,744) (30,603,061)
----------- ----------- ----------- ------------
Loss from operations.................. (1,785,088) (2,451,240) (2,660,631) (30,594,818)
----------- ----------- ----------- ------------
Other income (expense):
Interest income............................... 94 2,429 44,200 156,457
Interest expense.............................. (296,325) (144,774) (183,538) (3,320,075)
Other income (expense)........................ 168,987 (36,499) 25,766 2,075,038
----------- ----------- ----------- ------------
Other income (expense), net........... (127,244) (178,844) (113,572) (1,088,580)
----------- ----------- ----------- ------------
Net loss.............................. (1,912,332) (2,630,084) (2,774,203) (31,691,641)
Less preferred stock dividends........ (170,031) -- (1,353,444)
----------- ----------- ----------- ------------
Net loss available to common
shareholders......................... $(1,912,332) $(2,800,115) $(2,774,203) $(33,045,085)
=========== =========== =========== ============
Net loss per common share............. $(0.05) $(0.11) $(0.18)
=========== =========== ===========
Weighted average number of common
shares outstanding................... 39,206,257 26,302,790 15,528,231
=========== =========== ===========
</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 STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
PREFERRED 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
</TABLE>
F-6
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CHANGE IN STOCKHOLDERS' EQUITY (DEFICIT)--Continued
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL DURING THE 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 $.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
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
-------- ----- ---------- ------ ----------- ------------ ------- --------- ------------
</TABLE>
F-7
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CHANGE IN STOCKHOLDERS' EQUITY (DEFICIT)--Continued
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL DURING THE 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..................... 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)
-------- ----- ---------- ------- ----------- ------------ ------- --------- ------------
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
-------- ----- ---------- ------- ----------- ------------ ------- --------- ------------
</TABLE>
F-8
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CHANGE IN STOCKHOLDERS' EQUITY (DEFICIT)--Continued
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL DURING THE 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................ 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)
-------- ----- ---------- ------- ----------- ------------ ------- --------- ------------
Conversion of preferred stock... (19,183) (19) 7,918,207 7,918 (7,899)
Shares in escrow................ 2,500,000 2,500 (2,500)
Valuation correction - shares
issued in payment of certain
liabilities.................... (46,182) (46,182)
Cancel shares issued for
services....................... (12,000) (12) 12
Net loss for the year........... (1,912,332) (1,912,332)
-------- ----- ---------- ------- ----------- ------------ ------- --------- ------------
Balance, December 31, 1999...... 23,000 $ 23 43,054,282 $43,054 $28,487,818 $(31,691,641) 0 $ 0 $ (3,160,746)
======== ===== ========== ======= =========== ============ ======= ========= ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-9
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CHANGE IN CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED INCEPTION,
DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 4, 1984, TO
1999 1998 1997 DECEMBER 31, 1999
------------ ------------ ------------ ---------------------
Cash flows from operating activities:
<S> <C> <C> <C> <C>
Net loss.................................................... $(1,912,332) $(2,630,084) $(2,774,203) $(31,691,641)
----------- ----------- ----------- ------------
Adjustments to reconcile net loss to cash used by
Operating activities
Depreciation and amortization........................... 184,203 232,061 237,633 3,429,464
Write off of goodwill................................... 120,000
Expenses paid by transfer of equipment.................. 37,134
Loss (gain) on sale of assets........................... 7,576 (21,804) (490,299)
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 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.................................... 79,167
Write off of obsolete inventory......................... 367,688
Changes in operating assets and liabilities:
Accounts receivable, net................................ 15,795 31,746 15,767 (67,341)
Inventories............................................. 168,411 79,749 (186,860) (862,924)
Other assets............................................ 125,380 (1,031) 181,378 292,781
Accounts payable........................................ 186,384 471,653 (33,460) 1,629,385
Accrued liabilities..................................... (202,987) 154,215 332,553 1,087,075
Deferred revenue........................................ 811,890 (60,000) (60,000) 851,890
----------- ----------- ----------- ------------
Total adjustments..................................... 1,296,652 1,041,459 487,011 9,866,025
----------- ----------- ----------- ------------
Net cash used by operating activities................. (615,680) (1,588,625) (2,287,192) (21,825,616)
----------- ----------- ----------- ------------
Cash flows from investing activities:
Capital expenditures........................................ (316) (35,161) (142,206) (612,909)
Issuance of notes receivable................................ (85,000)
Proceeds from repayment of notes receivable................. 35,000
Investments in patents...................................... (13,183) (28,298) (44,356) (522,825)
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................................ 18,010 26,000 1,516 553,903
Cash acquired in acquisition of Freedom Machine............. 6,338
Cash acquired in acquisition of Cathlab Corporation......... 6,446
----------- ----------- ----------- ------------
Net cash provided (used) by investing activities...... 4,511 (37,459) (185,046) (845,128)
----------- ----------- ----------- ------------
Cash flows from financing activities:
Cash dividends on preferred stock........................... (138)
Offering costs.............................................. (77,500) (89,503) (287,590) (1,107,246)
Financing costs............................................. (59,309)
Proceeds from notes payable to banks........................ 2,333,880
Proceeds from notes payable to stockholders................. 1,225,921
Proceeds from notes payable to others....................... 127,745 722,209 116,250 6,708,541
Repayments of notes payable to bank......................... (2,070,000)
Repayments of notes payable to stockholders................. (822,992)
Repayments of notes payable to others....................... (163,217) (192,217) (1,129,086) (6,259,537)
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) (785,841)
Proceeds from sale of debentures............................ 700,000 1,340,000
Proceeds from sale of preferred stock....................... 675,000 2,500,000 9,111,502
Proceeds from sales of common stock and exercise of
unregistered warrants..................................... 468,000 320,033 9,522,350
Proceeds from exercise of stock options..................... 3,750 339,917
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............. 587,028 1,579,758 1,371,414 22,683,066
----------- ----------- ----------- ------------
Net increase (decrease) in cash and cash equivalents.......... (24,141) (46,326) (1,100,824) 12,322
Cash and cash equivalents at beginning of period.............. 36,463 82,789 1,183,613
----------- ----------- ----------- ------------
Cash and cash equivalents at end of period.................... $ 12,322 $ 36,463 $ 82,789 $ 12,322
=========== =========== =========== ============
</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. For the year ended December
31, 1999, domestic and foreign export sales comprise approximately 48.4% and
51.6%, respectively, of the Company's sales. The percentage of sales by
geographic region is as follows: 48.4% in the United States, 16.1% in Italy,
11.4% in Germany, 7.9% in other European countries, 4.1% in South America and
12.1% 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.
Fair Values of Financial Instruments.
Due to the short-term nature of the Company's financial instruments,
management believes the carrying values of the
Company's assets, short-term liabilities and lease obligations approximate their
fair values.
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.
Long-Lived Assets
The Company reviews for the impairment of long-lived assets whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The carrying amount of a long-lived asset is considered impaired
when anticipated undiscounted cash flows expected to result from the use of the
asset and its eventual disposition are less than its carrying amount. The
Company believes that no material impairment exists at December 31, 1999.
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.
Income Taxes
Deferred tax assets and liabilities are determined based on the temporary
differences between the consolidated financial statement carrying amounts and
the tax bases of assets and liabilities using the enacted tax rates in effect in
the years in which the differences are expected to reverse. In estimating future
tax consequences, all expected future events are considered with the exception
of enacted changes in the tax law or rates.
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,
F-12
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
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 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 accommodated the millennium change. The millennium change did
not have an adverse impact on its operations.
Advertising
Advertising costs are expensed as incurred.
Recent Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133 Accounting for Derivative Instruments and Hedging Activities ("SFAS No.
133"), which is effective for fiscal years beginning after June 15, 1999, and
establishes accounting and reporting standards for derivative instruments. In
June 1999, the FASB issued SFAS
F-13
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
No. 137, which deferred the effective date of SFAS No. 133 to June 15, 2000. The
Company has historically not engaged in derivative instrument activity. The
adoption of this standard is not expected to have a material effect on the
Company's financial position or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements. SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements. The Company
will adopt SAB 101 as required in the first quarter of 2000 and does not expect
the adoption of this standard to have a material effect on it's financial
position or results of operations.
2. INVENTORIES:
Inventories consisted of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------
1999 1998
--------- ---------
<S> <C> <C>
Raw materials................................................... $ 95,480 $ 206,800
Work in process................................................. 124,762 120,188
Finished goods.................................................. 180,555 242,221
--------- ---------
$ 400,797 $ 569,209
========= =========
</TABLE>
3. PROPERTY AND EQUIPMENT, NET:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1999 1998
--------- ---------
<S> <C> <C>
Furniture and fixtures.......................................... $ 62,940 $ 74,777
Machinery and equipment......................................... 603,590 644,336
Leasehold improvements.......................................... 34,872
Equipment under capital lease agreements........................ 7,123 7,123
--------- ---------
673,653 761,108
Less accumulated depreciation and amortization.................. (593,711) (629,662)
--------- ---------
$ 79,942 $ 131,446
========= =========
</TABLE>
Included in accumulated depreciation and amortization at December 31, 1999 and
1998 is $1,425 and $1,068, respectively, of accumulated amortization on
equipment acquired under capital lease agreements. Depreciation expense for the
years ended December 31, 1999, 1998 and 1997 was approximately $47,000, $68,000,
and $54,000, 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 expired 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, which is now fully amortized, was
amortized over five
F-14
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
years, the life the Company uses to amortize patents. The unamortized balance of
$40,000 was reflected as deferred revenue as of December 31, 1998.
The Company entered into an exclusive worldwide, royalty-bearing license
agreement on April 14, 1999 with IntraTherapeutics, Inc. for its OmniFilter
technology, a percutaneous filter to be used in carotid angioplasty procedures.
The Company received 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. The license fee is being amortized
over five years, the life the Company uses to amortize patents. The unamortized
balance of $850,000 is reflected as deferred revenue as of December 31, 1999.
5. NOTES PAYABLE AND LONG-TERM DEBT:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1999 1998
-------- --------
<S> <C> <C>
Notes payable and long-term debt consisted of the following:
Notes payable to insurance companies with varying interest rates up to
10.2% per year maturing at various dates through 2000................... $ 22,830 $ 36,509
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%, matured 50,000
November, 1999..........................................................
Note payable bearing interest at 15.0% per year, matured October 1999
secured by guaranty..................................................... 150,000 150,000
Note payable to an individual, bearing interest at 20.0%, maturing in
December 1999 with interest payable monthly, secured by officer options 260,000
to purchase 1,527,000 shares of common stock............................
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
Note payable to an individual, bearing interest at 20.0%, maturing in
October 2000 with interest payable monthly, secured by officer options
to purchase 1,527,000 shares of common stock............................ 456,208
Notes payable to investors, bearing interest at 20.0%, matured August
1999.................................................................... 77,000
-------- --------
$706,038 $616,309
======== ========
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............................ $ 54,804 $ 81,809
Less current maturities.................................................. (54,804) (51,881)
-------- --------
$ 0 $ 29,928
======== ========
</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:
2000............................................... $760,842
F-15
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
6. CONVERTIBLE DEBENTURES:
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-CathTM. 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 125% of the face amount to be redeemed.
Pursuant to Secured Convertible Debenture Purchase Agreement dated September
30, 1999, (the "Purchase Agreement"), the Company issued an aggregate of
$300,000 of its 13% Secured Convertible Debentures due April 1, 2000 (the "2000
Debentures") to AJW Partners, LLC, New Millenium Capital Partners, LLC and Bank
de Insinger in order to raise additional funds for working capital purposes.
The Company also entered into a Registration Rights Agreement with the holders
of the 2000 Debentures whereby the Company agreed to register for resale under
the Securities Act of 1933, as amended, the shares of common stock issuable upon
conversion of the 2000 Debentures and shares issuable upon exercise of certain
warrants issued in connection therewith (the "Warrants"). Offering costs of
$30,000 excluding legal fees were incurred in the transactions. Interest on the
2000 Debentures is payable quarterly. As additional consideration, the Company
issued warrants to purchase a total of 100,000 shares of common stock at an
exercise price of $0.13 which is equal to 130% of the average per share market
values for the five days preceding the closing date. These debentures are part
of the $10 million financing that the Company has engaged The NIR Group to
structure. However, there can be no assurance that additional capital will be
secured pursuant to this arrangement.
The 2000 Debentures are convertible into common stock. The number of shares
issuable upon such conversion shall be equal to the outstanding principal to be
converted, plus accrued and unpaid interest thereon, divided by 60% of the
average bid price during the twenty trading days immediately prior to such
conversion or $0.125, whichever is lower. The conversion price is subject to
adjustment under certain circumstances. The Company has the option to prepay
the 2000 Debentures upon prior notice.
7. ACCRUED LIABILITIES:
Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
December 31
-----------------------------
1999 1998
-------- ----------
<S> <C> <C>
Accrued interest payable................................................. $217,598 $ 67,901
Accrued offering costs................................................... 109,700 109,500
Accrued consulting fees.................................................. 253,625 222,375
Accrued settlement....................................................... 155,173 555,173
</TABLE>
F-16
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
<TABLE>
<CAPTION>
<S> <C> <C>
Other.................................................................... 32,783 66,943
-------- ----------
$768,879 $1,021,892
======== ==========
</TABLE>
8. COMMITMENTS AND CONTINGENCIES:
Lease Obligations
The Company leases certain patents and equipment under agreements classified
as capital leases. In addition, the Company leases its office space and other
properties under noncancelable operating leases through November 2002. Future
minimum payments under the capital leases and noncancelable operating leases
with initial or remaining terms of one year or more consisted of the following
at December 31, 1999:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
2000.................................................................. $ 528,877 $27,462
2001.................................................................. 179 6,143
2002.................................................................. 6,143
2003.................................................................. 6,143
2004.................................................................. 5,119
--------- -------
Total minimum lease payments.......................................... 529,056 $51,010
=======
Amounts representing interest......................................... 113,925
---------
Present value of future lease payments................................ 415,131
Less current maturities............................................... (414,952)
---------
$ 179
=========
</TABLE>
Rental expense under operating leases for the years ended December 31, 1999,
1998, and 1997 and for the period from inception, September 4, 1984, to December
31, 1999 amounted to $137,025, $218,398, $166,480, and $1,653,033, respectively.
Litigation
In May 1997, an individual who formerly was Chairman, Chief Scientific
Officer, and a 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 court-mandated mediation
conference in February 1998 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 was executable 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 and a release filed in
April 1999. The plaintiff has now filed suit claiming that the Company
anticipatorily breached the agreement to pay licensing revenues. The Company
has filed a response denying the claim. Royalty expense in the amount of
$50,000 has been accrued as of December 31, 1999.
F-17
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
In August 1997, an individual who formerly was Chief Financial Officer,
Secretary and Treasurer, and a 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 seeking specific
performance and monetary damages of approximately $307,000. On August 24, 1998
the parties reached a settlement through mediation. The Company paid $2,800 in
cash, issued at no cost to the plaintiff stock options to purchase 150,000
shares of common stock at an exercise price of $0.6875 with a guaranteed value
of $100,000 and executed an agreed judgment in the amount of $85,000 at 10%
interest payable November 1, 1999. The judgment was amended to include the
guaranteed value shortage in the amount of $70,173 for a total of $155,173.
In January 1999, a former distributor filed a lawsuit in the State District
Court of Georgia alleging breach of contract and 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.
9. FEDERAL INCOME TAXES:
At December 31, 1999, the Company had net operating loss (NOL) and research
and development (R&D) credit carryforwards available to offset future taxable
income approximately as follows:
Year Expires N O L R & D
- ------------- ----- -----
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
2014.......................................... 830,000 1,700
----------- --------
$24,603,300 $570,161
=========== ========
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.
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
F-18
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
tax assets to their net realizable value. The tax-effected components of
deferred tax assets at December 31, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Total deferred tax assets:
Net operating losses and other...................... $ 9,950,000 $ 9,660,000
Valuation allowance................................. (9,950,000) (9,660,000)
----------- -----------
$ - $ -
=========== ===========
</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, 1999 and 1998, respectively. The change
in the total valuation allowance for the year ended December 31, 1999 and 1998
was a net increase of approximately $290,000 and $833,000, respectively.
Contributing primarily to this change were operating losses incurred during 1999
and 1998.
10. RELATED PARTY TRANSACTIONS:
For the period from inception, September 4, 1984, to December 31, 1999, 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, $31,250 related to December 31, 1999, and $37,500
related to each of the years ended December 31, 1998 and 1997.
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 was employed as President and Chief Executive Officer of the Company.
The Agreement provided for a salary of $135,000 per year with annual increases,
plus bonuses of up to fifty percent, and options to purchase 600,000 shares of
common stock. In 1997 Mr. Rash's agreement was extended to December 31, 1999.
The base salary was increased to $165,000 per year. 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. On March 14, 2000 Justine B. Corday was
appointed Chairman of the Board and Interim Chief Executive Officer and Marshall
Kerr was appointed President and Chief Operating Officer, replacing Mr. Rash.
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 and stockholder 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, Aberlyn, acting as agent for BioQuest - A and the Company
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
F-19
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
months for a monthly license fee of $17,099, after which the Cathlab Patents
would automatically revert back to the Company.
Aberlyn and the Company 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 for 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. As of May 5, 1999 Aberlyn no
longer was the agent for BioQuest - A. BioQuest - A's fund is now being managed
by its supervisory board of directors, which has engaged Berwick Group, Inc. to
service the leases. Neither BioQuest - A nor Berwick Group, Inc. are affiliated
with the Company. The Company is seeking to restructure the leases.
The Company does not have a policy against employing relatives. During the
year ended December 31, 1997, the Company paid salaries and wages to relatives
of officers of the Company amounting to $7,797. No relatives were employed
during 1998 or 1999. 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.
F-20
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
11. 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
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.
F-21
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
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.
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,
1999 and 1998, 15,500 and 34,000 shares, respectively 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 and B 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.
12. STOCK PURCHASE WARRANTS:
F-22
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
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 warrants to purchase 50,000 shares of common stock in connection
with the renewal and extension of the note. The warrants expired in 1999.
In connection with the modification of the lease terms with Aberlyn in March
1994, the Company issued warrants to purchase 150,000 shares of common stock at
$1.50 per share. The warrants to purchase 75,000 shares issued to Aberlyn
Holding expired in 1999. The remaining warrant agreement for 75,000 shares was
amended to 60,000 shares at $0.35 per share, expiring November 2000.
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 expired in 1999.
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 expired in 1999.
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 expired in 1999.
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 were 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 1999 the exercise date was extended to December 2001
and the exercise price was changed from $0.50 to $0.35 per share.
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.
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.
F-23
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
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. The warrant was rescinded in 1999.
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. Warrants to purchase 260,000 shares were replaced when the note was
renewed October 1999 with a warrant to purchase 360,000 shares at an exercise
price of $0.09 per share, exercisable for two years.
In January 1999 the Company issued a warrant to purchase 200,000 shares of
common stock at an exercise price of $0.155 as an incentive to the landlord in
California not to declare the rent in default. The warrant is exercisable for
two years.
In connection with the issuance of a 9% convertible debenture in the amount of
$400,000 in March 1999, the Company issued a warrant to purchase 40,000 shares
common stock with an exercise price of $0.175. The warrant is exercisable for
three years.
During the last quarter of 1999, in connection with the issuance of 13%
convertible debentures totaling $300,000, the Company issued warrants to
purchase 150,000 shares of common stock for an exercise price of $0.13 per
share. The warrants are exercisable for three 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, 1999 are as follows:
<TABLE>
<CAPTION>
GRANT EXPIRATION NUMBER OF EXERCISE
DATE DATE SHARES PRICE
----- ----------- ---------- --------
<S> <C> <C> <C>
March 1994.................................. 2000 60,000 $0.3500
June 1995................................... 2001 100,000 $0.1875
June 1995................................... 2001 100,000 $0.3500
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 $0.3500
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
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
January 1999................................ 2001 200,000 $0.1550
March 1999.................................. 2002 40,000 $0.1750
September 1999.............................. 2002 50,000 $0.1300
October 1999................................ 2002 50,000 $0.1300
December 1999............................... 2002 50,000 $0.1300
---------
4,046,987
=========
</TABLE>
13. STOCK OPTIONS:
At December 31, 1999, the Company had three 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 and $122,800 for 1998 and 1997, respectively, and none for
1999. Had compensation cost for the Company's three 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:
F-25
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
<TABLE>
<CAPTION>
YEAR 1999 1998 1997
- ---- ---- ---- ----
<S> <C> <C> <C>
Net loss
As reported......................................... $(1,912,332) $(2,630,084) $(2,774,203)
Pro forma........................................... $(2,137,031) $(2,764,781) $(3,084,982)
Net loss available to common shareholders
As reported......................................... $(1,912,332) $(2,800,115) $(2,774,203)
Pro forma........................................... $(2,137,031) $(2,934,812) $(3,084,982)
Net loss per common share
As reported......................................... $ (.05) $ (.11) $ (.18)
Pro forma........................................... $ (.05) $ (.11) $ (.20)
</TABLE>
The Company's fixed option plans include the 1999 Incentive Stock Option Plan
(the "1999 Plan"), 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 1999 Plan provides for the grant of stock options, including incentive
stock options and non-qualified stock options. As of December 31, 1999, no
options to purchase shares have been granted. The number of shares of common
stock subject to the 1996 Plan is 5,000,000 and is effective as approved by the
stockholders at the annual meeting held December 15, 1999. The 1999 Plan will
terminate December 15, 2009 unless earlier terminated by the Company. No
optionee shall receive options for more than 800,000 shares of common stock
during any fiscal year under the plan.
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, 1999, 203,000 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. As of December 31, 1999, options to purchase 310,000 shares are
outstanding. 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.
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.
F-26
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
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 were 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. Mr. Hoffman's options expired in 1999.
The Company granted options to purchase common stock totaling 93,000 shares as
a retainer to each of its four directors and for attendance at the Board of
Directors meetings during 1997. The options are exercisable for five years at
an exercise price ranging from $0.46875 o $1.3125 which equaled fair market
value at the time of issuance.
In connection with his employment agreement in December 1997 as Vice
President, Sales and Marketing, the Company granted Marshall Kerr options to
purchase 100,000 shares at $.50 and 200,000 shares at $0.42 vesting at various
times during his two-year contract and expiring December 2004.
A summary of the status of the Company's stock options granted to employees as
of December 31, 1999, December 31, 1998 and December 31, 1997 and the changes
during the year ended on these dates is presented below:
<TABLE>
<CAPTION>
EMPLOYEE STOCK OPTIONS
- ------------------------------------------------------------------------------------------------------------------
1999 1998 1997
---------------------- ------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
# SHARES OF AVERAGE # SHARES OF AVERAGE # SHARES OF AVERAGE
UNDERLYING EXERCISE UNDERLYING EXERCISE UNDERLYING EXERCISE
OPTIONS PRICES OPTIONS PRICES OPTIONS PRICES
---------- ------- ---------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of the year........... 2,295,000 $0.73 2,295,000 $0.73 1,465,476 $1.09
Granted at-a-discount.... n/a 0 n/a 59,000 $0.94
Granted at-the-money..... n/a 0 n/a 1,134,000 $0.67
Granted at-a-premium..... n/a 0 n/a 105,000 $0.55
Total options granted.... n/a 0 n/a 1,298,000 $0.67
Exercised................ n/a 0 n/a 20,000 $0.19
Forfeited................ n/a 0 n/a 30,000 $1.04
Expired.................. 2,000 $1.00 0 n/a 418,476 $1.73
Outstanding at end of
year.................. 2,293,000 $0.73 2,295,000 $0.73 2,295,000 $0.73
Exercisable at end of
year.................. 2,291,000 $0.73 1,514,000 $0.79 886,000 $0.90
Weighted-average FV of
options granted at-a-
discount.............. n/a n/a $0.79
Weighted-average FV of
options granted
at-the-money........ n/a n/a $0.49
Weighted-average FV of
options granted at-a-
premium.............. n/a n/a $0.34
Weighted-average FV of
all options granted... n/a n/a $0.49
</TABLE>
F-27
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
The following table summarizes information about stock options for employees
and directors outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OPTIONS
OUTSTANDING EXERCISABLE
--------------------------------------- ---------------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
NUMBER AVERAGE REMAINING NUMBER AVERAGE
RANGE OF OUTSTANDING EXERCISE CONTRACTUAL EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/99 PRICE LIFE AT 12/31/99 PRICE
- --------------- ------------ -------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C>
$0.42 to $0.99.................. 1,850,000 $0.58 5.35566 1,848,000 $0.58
$1.00 to $2.99.................. 368,000 $1.02 3.57342 368,000 $1.02
$3.00........................... 75,000 $3.00 4.58000 75,000 $3.00
--------- -------- ----------- --------- --------
$0.42 to $3.00.................. 2,293,000 $0.73 5.04426 2,291,000 $0.73
</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 1999 1998 1997
---------- ----- ----- -----
<S> <C> <C> <C>
Expected Term............................................. n/a n/a 4.82
Expected Dividend Yield................................... 0.00% 0.00% 0.00%
Expected Volatility....................................... 83.32% 96.87% 95.00%
Risk-Free Interest Rate................................... 6.50% 6.50% 6.29%
</TABLE>
A summary of the status of the Company's stock options granted to non-
employees as of December 31, 1999, December 31, 1998 and December 31, 1997 and
the changes during the year ended on these dates is presented below:
<TABLE>
<CAPTION>
NON-EMPLOYEE STOCK OPTIONS
- ------------------------------------------------------------------------------------------------------------------
1999 1998 1997
---------------------- ------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
# SHARES OF AVERAGE # SHARES OF AVERAGE # SHARES OF AVERAGE
UNDERLYING EXERCISE UNDERLYING EXERCISE UNDERLYING EXERCISE
OPTIONS PRICES OPTIONS PRICES OPTIONS PRICES
---------- -------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of the year........... 1,280,000 $0.63 1,602,500 $0.62 1,272,500 $0.52
Granted at-a-discount.... 0 225,000 $0.40 60,000 $1.00
Granted at-the-money..... 0 0 n/a 0 n/a
Granted at-a-premium..... 0 100,000 $0.70 270,000 $1.00
Total options granted.... 0 325,000 $0.49 330,000 $1.00
Exercised................ 0 150,000 $0.69 0 n/a
Forfeited................ 0 437,500 $0.40 0 n/a
Expired.................. 225,000 $0.69 60,000 $1.00 0 n/a
Outstanding at end of
year.................. 1,055,000 $0.62 1,280,000 $0.63 1,602,500 $0.62
Exercisable at end of
year.................. 1,055,000 $0.62 1,280,000 $0.63 1,602,500 $0.62
Weighted-average FV of
options granted at-a-
discount.............. n/a $0.31 $0.81
Weighted-average FV of
options granted
at-the-money......... n/a n/a n/a
Weighted-average FV of
options granted at-a-
premium............... n/a $0.37 $0.34
Weighted-average FV of
all options granted... n/a $0.33 $0.42
</TABLE>
F-28
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
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 1999 1998 1997
------------ ------ ----- -----
<S> <C> <C> <C>
Expected Term............................................. n/a 1.12 5.00
Expected Dividend Yield................................... 0.00% 0.00% 0.00%
Expected Volatility....................................... 83.32% 96.87% 95.00%
Risk-Free Interest Rate................................... 6.50% 6.50% 6.15%
</TABLE>
The following summarizes information about fixed stock options for employees,
directors and non-employees outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OPTIONS
OUTSTANDING EXERCISABLE
-------------------------------------- ----------------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
NUMBER AVERAGE REMAINING NUMBER AVERAGE
RANGE OF OUTSTANDING EXERCISE CONTRACTUAL EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/99 PRICE LIFE AT 12/31/99 PRICE
- --------------- ------------ -------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C>
$0.001 to $0.99................. 725,000 $0.45 4.79931 725,000 $0.45
$1.00 to $2.99.................. 330,000 $1.00 7.65909 330,000 $1.00
$0.001 to $2.99................. 1,055,000 $0.62 5.69384 1,055,000 $0.62
</TABLE>
F-29
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
14. SUPPLEMENTAL INFORMATION FOR CONSOLIDATED STATEMENT OF CASH FLOWS:
<TABLE>
<CAPTION>
INCEPTION
YEAR YEAR YEAR SEPTEMBER 4,
ENDED ENDED ENDED 1984, TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest paid................................... $146,628 $ 113,161 $ 108,660 $1,515,327
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.................................. 718,150 3,280,579 1,260,000 5,258,729
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..... 538,671
Common stock and warrants issued in lieu of
interest....................................... 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 1,108,457
Issuance of common stock for certain liabilities (46,182) 122,334 178,286 1,800,947
</TABLE>
15. SALES INFORMATION:
Sales to four customers represented 24.76%, 16.07%, 15.99% and 11.44% of the
Company's total net sales during the year ended December 31, 1999. 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. Sales to one customer during the
year ended December 31, 1997 represented 16.9% of net sales. The remainder of
net sales to any one customer was less than 10%. 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 1999, 1998 and
1997 were approximately 51%, 55%, and 62%, respectively.
F-30
<PAGE>
AMERICAN BIOMED, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
On November 9, 1999, the Company received notification that the OmniCath(R)
has been granted CE Mark approval, a precondition for European sales. The
Company is planning to launch the OmniCath(R) in Europe during the fourth
quarter of 1999. Management estimates the target market to be in excess of $500
million.
16. ACQUISITION AND PURCHASE AGREEMENTS:
During October 1992, the Company acquired the assets of SuperStat, Inc.
("SuperStat") in exchange for 18,182 shares of the Company's common stock,
valued at $81,819. Superstat has developed a patented modified collagen
hemostatic sponge for use to control bleeding in vascular and general surgery.
In March 1995, under an agreement with SuperStat, the Company transferred the
license agreement to BioCell, Inc. and was relieved of the obligation to pay
royalties in consideration of receiving a .5% royalty on future product sales by
BioCell, Inc. The Company received royalties in the amount of $367 in 1998.
No royalties were received in 1997 and 1999.
17. SUBSEQUENT EVENT:
During the first quarter of 2000, additional funds of $300,000 less offering
costs of $30,000 were received from the issuance of additional 2000 Debentures.
On March 14, 2000 the board of Directors appointed Justine B. Corday as
Chairman and Interim Chief Executive Officer and Marshall Kerr as President and
Chief Operating Officer, replacing Steven B. Rash.
Previously, David C. Arnold had resigned as director of the Company citing
personal commitments and time restraints as his reason for resigning. The
Company's controller, Colene Blankinship, resigned effective March 31, 2000 to
pursue other opportunities, but will remain as Corporate Secretary. Their
resignations were not caused by any disagreement involving company policies or
operations.
18. OPERATIONS:
The Company has incurred recurring operating losses and negative cash flow. In
order to continue as a going concern, the Company must raise additional capital
and ultimately achieve profitable operations. Though still a developmental stage
company engaged in the development, manufacture and marketing of medical
devices, the Company has 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.
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 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.
The Company received ISO 9001 certification in January 1998 and CE Mark
Certification in September 1998. In addition, during 1999, 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 additional risks
associated with these initiatives.
F-31
<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 14, 2000
F-32
<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
-----------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT (1) (2)
BEGINNING CHARGED TO CHARGED TO BALANCE AT
OF COSTS OTHER ACCOUNTS- DEDUCTIONS- END OF
DESCRIPTION PERIOD AND EXPENSES DESCRIBE DESCRIBE PERIOD
- ----------------------------------------------- ----------- ------------- ---------------- ----------- ----------
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
DECEMBER 31, 1999
Allowance for doubtful accounts............... 40,000 4,072 40,972(1) 3,100
Allowance for deferred tax assets............. 9,660,000 290,000 9,950,000
</TABLE>
__________
(1) Write-off of bad debts.
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
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.
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)
<PAGE>
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
10.100 -- Registration Rights Agreement, dated March 3, 1999, between the
Company and holders of the Series 1999-A 9% Redeemable Convertible
Debentures (14)
10.101 -- License Agreement dated March 26, 1999 between the Company and
Manufacturing & Research, Inc. (14)
10.102 -- License Agreement dated April 14, 1999 between the Company and
IntraTherapeutics, Inc. (15)
10.103 -- Securities Purchase Agreement, dated September 30, 1999, 13% Secured
Convertible Debentures
10.104 -- Registration Rights Agreement, dated September 30, 1999, between the
Company and holders of the 13% Secured Convertible Debentures
21.1 -- Subsidiaries of the Registrant(9)
23.1 -- Consent of Karlins, Arnold & Corbitt, PC
27 -- Financial Data Schedule
(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.
(14) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
(15) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999.
<PAGE>
EXHIBIT 3.2
BY-LAWS OF AMERICAN BIOMED, INC
(A Delaware Corporation)
Amended and Restated by the Board of Directors
as of February 9, 2000
ARTICLE I
OFFICES
1.1 Registered Office. The Corporation's registered office shall be in the City
of Wilmington, New Castle County, Delaware.
1.2 Other Offices. The Corporation also may have and maintain a principal place
of business or other offices at such additional places, within or outside the
State of Delaware, as the Board of Directors may designate.
ARTICLE II
STOCKHOLDERS
2.1 Stockholder Action. Any action required or permitted to be taken by the
Corporation's Stockholders must be effected at a duly-called Stockholders'
meeting and may not be effected by written consent.
2.2 Annual and Special Meetings. The Corporation shall hold an annual meeting of
its Stockholders to elect Directors and transact such other business as properly
may come before the meeting. Except as otherwise prescribed by law, and subject
to the rights of holders of any class of stock having a preference over the
holders of the Corporation's common stock, special meetings of Stockholders may
be called by (a) written request of the Board of Directors, (b) the Chief
Executive Officer, or (c) written request of Stockholders owning not less than
twenty-five percent (25%) of the shares entitled to vote at such meeting. Any
request for a special meeting shall state the purpose(s) for which such meeting
is proposed.
2.3 Date, Time and Place of Meetings. Stockholders meetings may be held either
within or outside the State of Delaware at such date, time, and place as the
Board of Directors shall designate.
2.4 Notice of Meetings. Written notice of each Stockholders' meeting shall be
given to all Stockholders entitled to vote at such meeting. Notice shall be
given in the manner prescribed by law, delivered not less than ten (10)
nor more than sixty (60) days before the meeting date, and shall state (a) the
meeting place, date, and time, and (b) the purpose(s) for which the meeting has
been called.
2.5 Business Transacted. At any Stockholders' meeting, only such business as
properly has been brought before the meeting shall be conducted. To be brought
properly before an annual meeting, business must (a) be specified in the meeting
notice or any supplement thereto, (b) otherwise properly be brought before the
meeting by or at the direction of the Board of Directors, or (c) otherwise
properly be brought before the meeting by a Stockholder. Business transacted at
any special meeting of Stockholders shall be confined to the purposes stated in
the notice of such special meeting.
2.6 Stockholder Agenda Items. For a Stockholder to bring business properly
before an annual meeting, the Stockholder must have given written notice
thereof, delivered or mailed to the Corporation's Secretary at the Corporation's
principal executive offices, not later than the close of business on the tenth
(10th) day following the date on which notice was given or public disclosure
made of the annual meeting. The
<PAGE>
Stockholder's notice shall set forth as to each proposed agenda item (a) the
Stockholder's name and address, as they appear on the Corporation's books; (b)
the class and number of the Corporation's shares beneficially owned by the
Stockholder; (c) for each agenda item, a brief description of the business
desired to be brought before the annual meeting; and (d) any material interest
of the Stockholder in such business.
2.7 Qualification of Voters. The Board of Directors may fix a day and hour not
less than ten (10) nor more than sixty (60) days prior to the date of any
Stockholders' meeting as the time as of which Stockholders are entitled to
notice of and eligible to vote at such meeting. A list of all such Stockholders
of record, arranged in alphabetical order, showing the address and number of
shares held by each, shall be kept at the Corporation's principal executive and
shall be open to inspection by any Stockholder at any time during usual business
hours for a period of at least ten (10) days prior to such meeting. Such a list
also shall be kept at the meeting during its duration and may be inspected by
any Stockholder present.
2.8 Quorum. Unless otherwise provided by law or the Corporation's certificate of
incorporation, the holders of not less than fifty percent (50%) of the shares
entitled to vote at a meeting, whether present in person or represented by
proxy, shall constitute a quorum. If a quorum shall fail to be established or
maintained, the meeting's chairman may adjourn the meeting to another place,
date, or time. No further notice other than an announcement of the adjourned
meeting shall be required, unless (a) the adjournment is for more than thirty
(30) days, or if (b) after the adjournment, a new record date is fixed for the
adjourned meeting. Once a quorum at an adjourned meeting is proven, the
Stockholders present at a duly constituted meeting may transact any business
which might have been transacted at the meeting, as originally noticed.
2.9 Chairman and Secretary of Meetings. Stockholders' meetings shall be presided
over by the Chief Executive Officer or, in his absence, by any other Officer of
the Corporation, or, in the absence of any such Officers, by a chairman to be
chosen by a majority of the Stockholders present entitled to vote thereat. The
Corporation's Secretary, or in his absence, any person appointed by the
chairman, shall act as meeting secretary. The order of business at all
Stockholders' meetings shall be as determined by the meeting chairman or as
otherwise may be determined by a vote of the Stockholders in accordance with
this Article.
2.10 Voting Methods. A Stockholder may vote either (a) in person or (b) by
proxy, executed in writing by the Stockholder or his duly appointed attorney-in-
fact, authorizing another person or persons to act for him. No such proxy shall
be voted or acted upon after one (1) year from its date, unless the proxy
provides for a longer period, as allowable by law. A duly executed proxy shall
be irrevocable, if it so states, and if and only as long as it is coupled with
an interest sufficient in law to support an irrevocable power. All proxies shall
be filed with the secretary of the meeting before being voted upon.
2.11 Number of Votes. Each outstanding share having voting power shall be
entitled to one (1) vote on each matter submitted to a vote at a Stockholders'
meeting. At each election of Directors, each Stockholder entitled to vote
thereat shall have the right to vote the number of shares owned by such
Stockholder for as many persons as there are Directors to be elected and for
whose election such Stockholder has a right to vote. It expressly is prohibited
for any Stockholder to cumulate his votes in any election of Directors.
2.12 Ballots. Election of Directors shall be by written ballot; however, unless
otherwise provided by law, the certificate of incorporation, or the Board of
Directors, no vote on any other question before the Stockholders' meeting need
be by ballot unless (a) the meeting chairman shall so determine, or (b) the
holders of a majority of the shares present in person or by proxy and entitled
to participate in such vote shall so demand. In a vote by ballot, each ballot
shall state the number of shares voted in the name of the Stockholder or proxy
voting. All votes by ballot at any Stockholders' meeting shall be conducted by
two
<PAGE>
(2) judges, who need not be Stockholders, and who, except as otherwise provided
by law or the certificate of incorporation, shall be appointed for such purpose
by the meeting's chairman. The judges shall decide on the qualification of
votes, count the votes, and declare the results.
2.13 Majority Vote. If a quorum is present at any Stockholders' meeting, the
vote of the holders of a majority of the shares entitled to vote, present in
person or represented by proxy, shall decide any matter properly brought before
such meeting, unless the matter is one upon which a different vote is required
by law or by the certificate of incorporation. If a notice of any adjourned
special meeting of Stockholders is sent to all Stockholders entitled to vote
thereat stating that all present shall constitute a quorum, then all matters
shall be determined by a majority of the votes cast at such meeting.
ARTICLE III
CORPORATE SEAL AND STOCK
3.1 Corporate Seal. The Corporation shall have a corporate seal, inscribed with
the Corporation's name, its year of organization, and the words "Corporate Seal,
Delaware." The seal or a facsimile thereof may be impressed, affixed, or in any
manner reproduced.
3.2 Stock Certificates. The Corporation's shares shall be represented by
certificates or may be uncertificated. Each registered holder of shares, upon
request to the Corporation, shall be provided a stock certificate, representing
the number of shares owned by such Stockholder. Absent a specific request for
such a certificate by the registered owner or transferee, all shares shall be
uncertificated upon original issuance by the Corporation or surrender to the
Corporation of the certificate representing such shares. Certificates for shares
of the Corporation's capital stock shall be in such form as the Board of
Directors shall approve. Stock certificates shall (a) identify the number and
class of shares held by the Stockholder, (b) be signed by or have thereon a
facsimile signature of the Chief Executive Officer and the Secretary, and (c)
may be sealed with the seal of Corporation or a facsimile thereof. In case any
Officer who has signed or whose facsimile signature has been placed upon such
certificate shall have ceased to be such Officer before the certificate is
issued, the Corporation may issue it with the same effect as if he were such
Officer at the issue date.
3.3 Transfer Agents and Registrars. The Board of Directors shall have power and
authority to make all such rules and regulations as it may deem expedient
concerning the issue, transfer, and registration of the Corporation's stock. The
Board of Directors may appoint responsible banks or trust companies or other
appropriately qualified institutions to act as Transfer Agents and Registrars of
the Corporation's stock. Upon such appointments being made, no stock certificate
shall be valid until countersigned by one of such Transfer Agents and registered
by one of such Registrars. Where any such certificate is registered with the
manual signature of a Registrar, the countersignature of the Transfer Agent may
be a facsimile, or engraved, stamped, or printed.
3.4 Stock Ledger. The Corporation shall maintain a stock ledger containing the
name and address of each Stockholder and the number of shares of stock of each
class which he holds. The stock ledger may be in written form or in any other
form which can be converted within a reasonable time into written form for
visual inspection. The original stock ledger may be kept at the offices of the
Corporation's Transfer Agents.
3.5 Transfer of Stock. Shares may be transferred by delivery of certificates to
the Corporation or to any Transfer Agent or Registrar thereof. Such certificates
shall be accompanied by an assignment in writing on the back of the certificates
or by written power of attorney to sell, assign, and transfer the same, signed
by the record holder. The certificate then shall be cancelled and the
transaction recorded upon the Corporation's books, and only then shall such
transfer be valid.
<PAGE>
3.6 Lost Certificates. In case any stock certificate shall be lost, stolen, or
destroyed, the Board of Directors may authorize issuance of a new certificate or
of uncertificated shares as a replacement. In each case, the applicant for such
replacement shall furnish to the Corporation and to such of its Transfer Agents
and Registrars as each may require, (a) evidence of the loss, theft, or
destruction of such certificates and of the ownership thereof, and (b) security
or indemnity in conjunction with the replacement.
3.7 Dividends. As the conditions of the Corporation may warrant and the Board of
Directors deem expedient, the Board of Directors may declare and pay dividends
upon the shares of the Corporation's capital stock. Dividends may be paid in
cash, property, or the Corporation's own shares.
3.8 Denial of Preemptive Rights. No holder of the Corporation's stock shall be
entitled as a matter of preemptive or other right to subscribe for or purchase
any securities of the Corporation, whether issued or sold for cash or other
consideration, as a dividend, or otherwise. Any such securities may be issued or
disposed of by the Board Directors to such persons and on such terms as in its
discretion shall deem advisable.
3.9 Warrants. From time to time the Board of Directors may authorize the
issuance of warrants representing rights with respect to the Corporation's
stock, and the foregoing provisions relative to stock also shall apply to such
warrants.
ARTICLE IV
BOARD OF DIRECTORS
4.1 Powers. The business, property, and affairs of the Corporation shall be
under the direction of a Board of Directors, which may exercise all such powers
of the Corporation and do all such lawful acts and things as are not by law, the
certificate of incorporation, or these By-Laws directed or required to be
exercised or done by the Stockholders.
4.2 Number, Nomination, and Election of Directors. The number of Directors which
shall constitute the whole Board of Directors shall be not less than one (1) nor
more than nine (9). The Board of Directors shall have the power to set and from
time to time increase or decrease the number of Directors. Nominations for the
election of Directors may be made by (a) the Board of Directors or its
Governance Committee; (b) a Stockholder or Stockholders holding at least twenty-
five percent (25%) of the outstanding votes entitled to be cast by holders of
the Corporations common stock; or (c) any Stockholder entitled to vote for the
election of Directors, provided notice of the Stockholder's intention to make
such nomination has been given timely in accordance with Section 2.6 hereunder.
Additionally, such notice shall include (a) a description of all arrangements or
understandings between the Stockholder intending to make the nomination and the
proposed nominee(s), (b) all such other information regarding each such proposed
nominee as would be included in the Corporation's proxy statement, and (c) each
nominee's written consent to serve as a Director if so elected. Directors shall
be elected at the annual meeting of Stockholders.
4.3 Term of Office. All Directors shall be subject to yearly reelection at the
annual meeting of Stockholders. Each Director shall continue in office until his
successor shall have been qualified and elected or until his earlier resignation
or removal. No decrease in the number of Directors shall have the effect of
shortening the term of any incumbent Director.
4.4 Resignation and Removal. Any Director may resign his office at any time by
written resignation to the Corporation. Any such resignation shall be effective
immediately, unless another date is specified, in
<PAGE>
which event such given date shall apply. Acceptance of a Director's resignation
shall not be necessary to make it effective. In the event any Director is absent
for three (3) successive properly-noticed meetings of the Board of Directors,
such Director may be deemed to have resigned his Director position. Any Director
may be removed either for or without cause at any special meeting of
Stockholders duly called and held for such purpose.
4.5 Vacancies. If the office of any Director shall become vacant for any reason,
then such vacancy may be filled by an affirmative vote of a majority of the
total number of remaining Directors, even though less than a quorum, including
by a sole remaining Director. Unless sooner removed, any Director so chosen
shall hold office until the next annual election and until his successor is duly
elected and qualified. If there are no Directors in office, then an election of
Directors may be held in the same manner provided by law.
4.6 Committees. The Board of Directors shall have standing Committees and may
appoint other Committees for general or special purposes. The standing
Committees shall consist of the Corporate Governance Committee, the Corporate
Strategy Committee, and the Corporate Finance Committee. A charter setting out
the power and duties of each standing Committee shall be set and may be modified
from time to time by the Board of Directors and shall be included in the
Corporation's proxy statement. Powers and duties of other Committees shall be
determined by the Board of Directors, in its discretion. The Board of Directors
shall have the power at any time to change the number and members of any
Committee and to discharge Committees.
4.7 Officers and Committee Members. At each first meeting of newly elected
Directors, the members of the Board of Directors shall elect the Officers of the
Corporation, a Chairman of the Board of Directors, and the members of standing
Committees and any other Committees being appointed.
4.8 Meetings. The Board of Directors and its standing Committees may by
resolution set in advance the time and place for holding stated meetings.
Special meetings of the Board of Directors shall be held whenever called by the
Chairman of the Board of Directors or the Chief Executive Officer.
4.9 Notice of Meetings. Stated meetings of the Board of Directors and/or its
Committees may be held without notice. Notice of special meetings of the Board
of Directors, setting forth the time and place, shall be deemed given if (a)
mailed to each Director, addressed to his residence or usual place of business,
not less than the second day before such meeting; or (b) personally delivered,
sent by facsimile or electronic mail, or provided telephonically not later than
the second day before the meeting date. Notice of any meeting of the Board of
Directors or any Committee thereof need not be given to any Director if waived
by him, before or after such meeting, or if he shall be present at the meeting.
Any meeting of the Board of Directors or any Committee thereof shall be a legal
meeting, without any notice thereof being given, if all the members shall be
present.
4.10 Participation by Conference Telephone. Members of the Board of Directors or
any Committee thereof may participate in stated or special meetings by means of
conference communications equipment by which all persons participating in the
meeting can hear each other. Participation by such means shall constitute
presence in person at such meeting.
4.11 Meeting Procedure. The Chairman of the Board of Directors shall preside at
all Board of Directors meetings at which he is present. If the Chairman of the
Board shall be absent, the Chief Executive Officer shall preside, and, in the
event of the Chief Executive Officer's absence, one of the Directors present
shall be chosen as meeting chairman. The Corporation's Secretary shall act as
the secretary at all Board of Directors meetings and shall keep regular minutes
of such meetings, and, in his absence, a temporary secretary shall be appointed
by the meeting chairman. Each Committee shall keep regular minutes of its
meetings and, when required, report the same to the Board of Directors.
<PAGE>
4.12 Quorum. A majority of the total number of Directors then in office at the
time of any meeting shall constitute a quorum for the transaction of business.
At any meeting of a Board of Directors Committee, a majority of the total number
of Committee members shall constitute a quorum.
4.13 Method of Vote. Each Director shall be entitled to a vote on each matter
submitted to a vote at a meeting of the Board of Directors or any Committee
thereof.
4.14 Majority Vote. Except as otherwise provided by law or the certificate of
incorporation, if a quorum is present at any meeting of the Board of Directors
or any Committee thereof, then, the vote of a majority of the Directors present
thereat shall decide any question brought before such meeting.
4.15 Action by Unanimous Consent. Any action required or permitted to be taken
at any meeting of the Board of Directors or any Committee thereof may be taken
without a meeting, if (a) all Directors or Committee members, as applicable,
consent in writing thereto and (b) such consent is filed with the appropriate
proceedings minutes.
4.16 Directors' Fees. By resolution of the Board of Directors, Directors may be
paid their expenses of attendance at Directors' and Committee meetings.
Directors, other than those who serve and are compensated as Officers or
employees of the Corporation, also may be paid a fixed sum for attendance at
each meeting of the Board of Directors or Committee thereof.
4.17 Emergency Conditions. The Board of Directors may provide for an Emergency
Management Committee and appoint members or designate the manner in which
membership of the Committee shall be determined. The emergency powers granted
thereunder shall be operative during any civil emergency or catastrophe as a
result from which the Board of Directors cannot readily convene, including by
telephone. In such event, the Emergency Management Committee shall have and may
exercise all of the powers of the Board of Directors to act on its behalf until
such time as the Board of Directors as constituted prior to the emergency or as
reconstituted to fill any vacancies can meet.
ARTICLE V
OFFICERS
5.1 Stated and Other Officers. The Corporation's stated Officers, to be elected
by the Board of Directors, shall be the Chief Executive Officer, Chief Operating
Officer, one or more Vice Presidents, Secretary, and Treasurer. Subject to the
requirements of law and except if otherwise provided by the certificate of
incorporation, one or more offices may be left vacant and any number of offices
held by the same person. The Board of Directors also may appoint such other
officers and agents as may be necessary or advisable to conduct the
Corporation's business.
5.2 Term of Office. The stated Officers shall hold office for such terms as the
Board of Directors may designate, and, if not so designated, until their
respective successors are elected and qualified or their earlier resignation or
removal. Other Officers shall hold office for such terms as the Board of
Directors may determine.
5.3 Removal of Officers and Vacancies. Any Officer may be removed at any time,
either with or without cause, by the Board of Directors, and the Board of
Directors may fill any vacant Officer position.
5.4 Chief Executive Officer. The Chief Executive Officer shall have active and
general supervision and management over the Corporation's business and affairs
and shall have full power and authority to act for all purposes for and in the
name of the Corporation in all matters, except where action of the Board of
<PAGE>
Directors is required by law, these Bylaws, or resolutions of the Board of
Directors. The Chief Executive Officer shall have the authority to designate
another to act in his stead when he is unavailable to perform the duties of
office for periods of short duration.
5.5 Vice Presidents. The Vice Presidents shall have such powers as properly may
be assigned to them by the Board of Directors or the Chief Executive Officer.
They shall perform the operating duties incident to their positions as may be
assigned to them by the Chief Executive Officer.
5.6 Secretary. The Secretary shall issue notices of meetings, maintain custody
of the minutes of the Board of Directors and its Committees, have charge of the
corporate seal, and perform such other duties and exercise such other powers as
may be assigned properly to him by the Board of Directors or the Chief Executive
Officer.
5.7 Treasurer. The Treasurer shall be responsible for custody of Corporate funds
and securities; shall keep full and accurate books of account thereof; and shall
deposit the funds of the Corporation, in the name of the Corporation, with such
banks or trust companies as the Board of Directors from time to time shall
designate. The Treasurer shall perform such other duties and exercise such other
powers as may be assigned properly to him by the Board of Directors or the Chief
Executive Officer. If required, the Treasurer shall give a bond for the faithful
performance of his duties in such sum and with such surety as the Board of
Directors may determine.
5.8 Compensation. The Officers' annual base salaries, any executive perquisites,
and any duly authorized bonus or incentive awards shall be fixed by the Board of
Directors. A report shall be made annually to the Governance Committee by the
Chief Executive Officer detailing the total compensation, including any
perquisites, any stock option grants, and any stock awards or other equity-based
awards, paid to each Officer. The report shall contain such other information
concerning executive compensation and performance justification as the Board of
Directors shall deem appropriate.
ARTICLE VI
INDEMNIFICATIONS
6.1 General. To the fullest extent permitted by law, the Corporation shall
indemnify and hold harmless each Director and Officer against any liability and
expenses arising from any threatened, pending, or completed action, suit,
arbitration, alternative dispute resolution mechanism, or proceeding, whether
civil, criminal, administrative, or investigative, arising by reason of the
individual's authorized actions and service on behalf of the Corporation.
6.2 Advancement of Expenses. The Corporation shall pay reasonable expenses,
including attorneys' fees, as and when incurred by a Director or Officer in
connection with any proceeding involving indemnified actions or service,
provided the indemnitee agrees in writing to repay all expenses so advanced if
ultimately it should be determined that the Director or Officer is not entitled
to be indemnified, either under this Article or otherwise.
6.3 Non-Exclusive Rights. The rights conferred on any person by this Article
shall not be exclusive of any other rights which such person may have or
hereafter acquire under any statute, provision of the certificate of
incorporation, these By-Laws, any agreement with the Corporation, or any vote of
Stockholders.
6.4 Continuation. The indemnification and advancement of expenses provided by or
pursuant to this Article VI, unless otherwise provided when authorized or
ratified, shall continue as to a person who has
<PAGE>
ceased to be a Director or Officer and shall insure to the benefit of the heirs,
executors, and administrators of such a person.
6.5 Insurance. At its expense, the Corporation may maintain insurance to protect
itself and any Director, Officer, employee, or agent of the Corporation against
any expense, liability, or loss. To the extent that the Corporation maintains
any policy or policies providing such insurance, each Director or Officer shall
be covered by to the maximum extent of the coverage thereunder.
ARTICLE VII
GENERAL PROVISIONS
7.1 Fiscal Year. The Corporation's fiscal year shall fixed by resolution of the
Board of Directors.
7.2 Signatures. All checks or demands for money and notes of the Corporation
shall be signed by such Officer(s) or such other person(s) as the Board of
Directors from time to time may designate. Other obligations of the Corporation
shall be signed by such Officer(s) as the Board of Directors by resolution may
approve.
7.3 Enforceability. If any provision of these By-Laws shall be held to be
invalid, illegal, or unenforceable for any reason whatsoever, then the validity,
legality, and enforceability of the remaining provisions shall not be affected
in any way.
7.4 Amendments. Unless reserved to the Stockholders by the certificate of
incorporation, these By-Laws may be altered, amended, or repealed, and new
bylaws may be adopted by a majority of the full Board of Directors, at any
stated meeting or at any special meeting duly called for that purpose.
<PAGE>
EXHIBIT 10.103
- --------------------------------------------------------------------------------
SECURED CONVERTIBLE DEBENTURE PURCHASE AGREEMENT
Among
AMERICAN BIOMED, INC.
and
THE INVESTORS SIGNATORY HERETO
Dated as of September 30, 1999
- --------------------------------------------------------------------------------
<PAGE>
SECURED CONVERTIBLE DEBENTURE PURCHASE AGREEMENT (this "Agreement"),
dated as of September 30, 1999, among American BioMed, Inc. a Delaware
corporation (the "Company"), and the investors signatory hereto (each such
investor is a "Purchaser" and all such investors are, collectively, the
"Purchasers").
WHEREAS, subject to the terms and conditions set forth in this Agreement,
the Company desires to issue and sell to the Purchasers and the Purchasers,
severally and not jointly, desire to purchase from the Company, from time to
time, an aggregate principal amount of $1,050,000 of the Company's 13% Secured
Convertible Debentures, due April 1, 2000, which shall be in the form of Exhibit
A (the "Debentures") and which are convertible into shares of the Company's
Class A Common Stock, no par value per share (the "Common Stock").
IN CONSIDERATION of the mutual covenants contained in this Agreement, and
for other good and valuable consideration the receipt and adequacy are hereby
acknowledged, the Company and the Purchasers agree as follows:
ARTICLE I
PURCHASE AND SALE
1.1 The Closing.
(a) Subject to the terms and conditions set forth in this Agreement,
the Company shall issue and sell to the Purchasers and the Purchasers shall,
severally and not jointly, purchase from the Company the Debentures for an
aggregate purchase price of $1,050,000. The closing of the purchase and sale of
the Debentures (the "Closing") shall take place at the offices of Owen
Nacarrato, Esq. ("Escrowee"), having an office at 19600 Fairchild, Suite 260,
Irvine, CA 92612 immediately following the execution hereof or such later date
or dates as the parties shall agree. The date of the first Closing is
hereinafter referred to as the "Closing Date."
(b) Prior to the Closing Date, the parties shall deliver or shall
cause to be delivered the following: (A) the Company shall deliver to Escrowee
for the benefit of the Purchasers (1) the Debentures in the aggregate principal
amount indicated below each Purchaser's name on the signature page to this
Agreement, registered in the name of each such Purchaser, (1) one Common Stock
purchase warrant for every two dollars of principal amount indicated below each
Purchaser's name on the signature page of this Agreement, each in the form of
Exhibit D, registered in the name of the appropriate Purchasers, pursuant to
which the Purchasers shall have the right at any time and from time to time
thereafter through the 3rd anniversary of the Closing Date to acquire an
aggregate of 50,000 shares of Common Stock, at an exercise price per share
(subject to adjustment as provided therein) equal to 130% of the average of the
Per Share Market Values for the five (5) days immediately preceding the Closing
Date (collectively, the "Warrants"), and (3) all other documents, instruments
and writings required to have been delivered at or prior to the Closing by the
Company pursuant to this Agreement, including (A) an executed Registration
Rights Agreement, dated the date hereof, by and among the Company and the
Purchasers, in the form of Exhibit B (the "Registration Rights Agreement"), (B)
an executed Security Agreement, dated the date hereof, by and among the Company
and the Purchasers, in the form of Exhibit F (the "Security Agreement"), (E) the
Secured Convertible Debenture Purchase Agreement
<PAGE>
Irrevocable Transfer Agent Instructions, in the form of Exhibit E, delivered to
and acknowledged by the Company's transfer agent (the "Transfer Agent
Instructions"), and (B) each Purchaser shall deliver to Owen M. Naccarato, Esq.
("Escrow Agent"), for delivery to the Company the purchase price for the
Debentures indicated below such Purchaser's name on the signature page to this
Agreement in United States dollars in immediately available funds by wire
transfer to an account designated in writing by the Company for such purpose,
and to Escrowee for delivery upon funding, all documents, instruments and
writings required to have been delivered at or prior to the Closing Date by such
Purchaser pursuant to this Agreement, including, without limitation, an executed
Registration Rights Agreement, Security Agreement.
(c) The Company and the Buyers agree that, upon the declaration of
effectiveness of the Registration Statement to be filed pursuant to the
Registration Rights Agreement (the "Effective Date"), provided that the trading
price of the Common Stock is at least $.45 for the ten (10) consecutive trading
days immediately preceding the Effective Date, the Buyers will be obligated to
purchase additional debentures ("Additional Debentures") in the aggregate
principal amount of Six Hundred Thousand ($600,000) and additional warrants
("Additional Warrants") to purchase an aggregate of 300,000 shares of Common
Stock for an aggregate purchase price of Six Hundred Thousand Dollars
($600,000), with the closing of such purchase to occur within thirty (30) days
of the Effective Date. The terms of the Additional Debentures and the Additional
Warrants shall be identical to the terms of the Debentures and the Warrants to
be issued on the Closing Date, provided that the Initial Conversion Price (as
defined in the Debentures) for the Additional Debentures shall be twenty-six
hundredths of one dollar ($.26). The Common Stock underlying the Additional
Debentures and the Additional Warrants shall be Registrable Securities (as
defined in the Registration Rights Agreement) and shall be included in the
Registration Statement to be filed pursuant to the Registration Rights
Agreement.
1.2 Certain Defined Terms. For purposes of this Agreement,
"Conversion Price," "Original Issue Date" and "Trading Day" shall have the
meanings set forth in the Debentures; "Business Day" shall mean any day except
Saturday, Sunday and any day which shall be a federal legal holiday or a day on
which banking institutions in the State of New York or the State of California
are authorized or required by law or other governmental action to close.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
2.1 Representations and Warranties of the Company. The Company hereby
makes the following representations and warranties to the Purchasers:
(a) Organization and Qualification. The Company is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware with the requisite corporate power and authority to own and use its
properties and assets and to carry on its business as currently conducted. The
Company has no subsidiaries other than as set forth in Schedule 2.1(a)
(collectively the "Subsidiaries"). Each of the Subsidiaries is an entity, duly
incorporated or otherwise organized, validly existing and in good standing under
the laws of the jurisdiction of its incorporation or organization (as
applicable), with the full power and authority to
Secured Convertible Debenture Purchase Agreement
-2-
<PAGE>
own and use its properties and assets and to carry on its business as currently
conducted. Each of the Company and the Subsidiaries is duly qualified to do
business and is in good standing as a foreign corporation in each jurisdiction
in which the nature of the business conducted or property owned by it makes such
qualification necessary, except where the failure to be so qualified or in good
standing, as the case may be, could not, individually or in the aggregate, (x)
adversely affect the legality, validity or enforceability of the Debentures or
any of this Agreement, the Registration Rights Agreement, the Warrants, or the
Security Agreement (collectively, the "Transaction Documents"), (y) have or
result in a material adverse effect on the results of operations, assets,
prospects, or condition (financial or otherwise) of the Company and the
Subsidiaries, taken as a whole, or (z) materially impairs the Company's ability,
in an adverse manner, to perform fully on a timely basis its obligations under
any of the Transaction Documents (any of (x), (y) or (z), a "Material Adverse
Effect").
(b) Authorization; Enforcement. The Company has the requisite
corporate power and authority to enter into and to consummate the transactions
contemplated by each of the Transaction Documents and otherwise to carry out its
obligations thereunder. The execution and delivery of each of the Transaction
Documents by the Company and the consummation by it of the transactions
contemplated thereby have been duly authorized by all necessary action on the
part of the Company and no further action is required by the Company. Each of
the Transaction Documents and the Debentures has been duly executed by the
Company and, when delivered (or filed, as the case may be) in accordance with
the terms hereof, will constitute the valid and binding obligation of the
Company enforceable against the Company in accordance with its terms. Neither
the Company nor any Subsidiary is in violation of any of the provisions of its
respective certificate of incorporation, by-laws or other charter documents.
(c) Capitalization. The number of authorized, issued and outstanding
capital stock of the Company is set forth in Schedule 2.1(c). No shares of
Common Stock are e ntitled to preemptive or similar rights, nor is any holder of
the Common Stock entitled to preemptive or similar rights arising out of any
agreement or understanding with the Company by virtue of any of the Transaction
Documents. Except as a result of the purchase and sale of the Debentures and the
Warrants and except as disclosed in Schedule 2.1(c), there are no outstanding
options, warrants, script rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities, rights or obligations
convertible into or exchangeable for, or giving any Person (as defined below)
any right to subscribe for or acquire, any shares of Common Stock, or contracts,
commitments, understandings, or arrangements by which the Company or any
Subsidiary is or may become bound to issue additional shares of Common Stock, or
securities or rights convertible or exchangeable into shares of Common Stock. To
the knowledge of the Company, except as specifically disclosed in the SEC
Documents (as defined below) or Schedule 2.1(c), no Person or group of related
Persons beneficially owns (as determined pursuant to Rule 13d-3 promulgated
under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), or
has the right to acquire by agreement with or by obligation binding upon the
Company, in excess of 5% of the Common Stock. A "Person" means an individual or
corporation, partnership, trust, incorporated or unincorporated association,
joint venture, limited liability company, joint stock company, government (or an
agency or subdivision thereof) or other entity of any kind.
Secured Convertible Debenture Purchase Agreement
-3-
<PAGE>
(d) Issuance of the Debentures and the Warrants. The Debentures and
the Warrants are duly authorized and, when issued and paid for in accordance
with the terms hereof, will be duly and validly issued, fully paid and
nonassessable, free and clear of all liens, encumbrances and rights of first
refusal of any kind (collectively, "Liens"). The Company shall cause to be
authorized for issuance and shall maintain thereafter at all times while the
Debentures and the Warrants are outstanding, an adequate reserve of duly
authorized shares of Common Stock, reserved for issuance to the holders of the
Debentures and the Warrants, to enable it to perform its conversion, exercise
and other obligations under this Agreement, the Debentures and the Warrants.
Such number of reserved and available shares of Common Stock is not less than
the sum of (i) 150% of the number of shares of Common Stock which would be
issuable upon conversion in full of the Debentures, assuming such conversion
occurred on the Original Issue Date for the Debentures, the Filing Date or the
Effectiveness Date (each as defined in the Registration Rights Agreement),
whichever yields the lowest Conversion Price, (ii) the number of shares of
Common Stock issuable upon exercise of the Warrants, and (iii) the number of
shares Common Stock which would be issuable upon payment of interest on the
Debentures, assuming the Debentures are outstanding for one year and all
interest is paid in shares of Common Stock (such number of shares of Common
Stock as contemplated in clauses (i)-(iii), the "Initial Minimum"). All such
newly authorized shares of Common Stock shall be duly reserved for issuance to
the holders of the Debentures and the Warrants. The shares of Common Stock
issuable upon conversion of the Debentures, as payment of interest thereon and
upon exercise of the Warrants are collectively referred to herein as the
"Underlying Shares." The Debentures, the Warrants and the Underlying Shares are
collectively referred to herein as, the "Securities." When issued in accordance
with the Debentures and the Warrants, the Underlying Shares will be duly
authorized, validly issued, fully paid and nonassessable, free and clear of all
Liens.
(e) No Conflicts. Except as set forth on Schedule 2.1(e), the
execution, delivery and performance of the Transaction Documents by the Company
and the consummation by the Company of the transactions contemplated thereby do
not and will not (i) conflict with or violate any provision of its articles of
incorporation, bylaws or other charter documents (each as amended through the
date hereof), or (ii) subject to obtaining the Required Approvals (as defined
below), 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 (with or without
notice, lapse of time or both) of, any agreement, credit facility, indenture or
instrument (evidencing a Company debt or otherwise) to which the Company or any
Subsidiary is a party or by which any property or asset of the Company or any
Subsidiary is bound or affected, or (iii) result in a violation of any law,
rule, regulation, order, judgment, injunction, decree or other restriction of
any court or governmental authority to which the Company is subject (including
Federal and state securities laws and regulations), or by which any property or
asset of the Company is bound or affected, except in the case of each of clauses
(ii) and (iii), as could not, individually or in the aggregate, have or result
in a Material Adverse Effect. The business of the Company is not being
conducted in violation of any law, ordinance or regulation of any governmental
authority, except for violations which, individually or in the aggregate, could
not have or result in a Material Adverse Effect.
(f) Filings, Consents and Approvals. Neither the Company nor any
Subsidiary is required to obtain any consent, waiver, authorization or order of,
give any notice to, or make any
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filing or registration with, any court or other Federal, state, local or other
governmental authority or other Person in connection with the execution,
delivery and performance by the Company of the Transaction Documents, other than
(i) the filings required pursuant to Section 3.11, (ii) the filing with the
Securities and Exchange Commission (the "Commission") of a registration
statement meeting the requirements set forth in the Registration Rights
Agreement and covering the resale of the Underlying Shares by the Purchasers
(the "Underlying Shares Registration Statement"), (iii) the application(s) to
the Nasdaq National Market or OTC Bulletin Board ("NASDAQ") for the listing of
the Underlying Shares for trading on the NASDAQ or OTC Bulletin Board (and with
any other national securities exchange or market on which the Common Stock is
then listed), (iv) applicable Blue Sky filings and (v) in all other cases where
the failure to obtain such consent, waiver, authorization or order, or to give
such notice or make such filing or registration could not have or result in,
individually or in the aggregate, a Material Adverse Effect (collectively, the
"Required Approvals").
(g) Litigation; Proceedings. Except as specifically disclosed in
Schedule 2.1(g), there is no action, suit, notice of violation, proceeding or
investigation pending or, to the knowledge of the Company, threatened against or
affecting the Company or any of its Subsidiaries or any of their respective
properties before or by any court, governmental or administrative agency or
regulatory authority (Federal, state, county, local or foreign) which could,
individually or in the aggregate, have or result in a Material Adverse Effect.
(h) No Default or Violation. Neither the Company nor any Subsidiary
(i) is in default under or in violation of (and no event has occurred which has
not been waived which, with notice or lapse of time or both, would result in a
default by the Company or any Subsidiary under), nor has the Company or any
Subsidiary received notice of a claim that it is in default under or that it is
in violation of, any indenture, loan or credit agreement or any other agreement
or instrument to which it is a party or by which it or any of its properties is
bound, (ii) is in violation of any order of any court, arbitrator or
governmental body, or (iii) is in violation of any statute, rule or regulation
of any governmental authority, except as could not individually or in the
aggregate, have or result in a Material Adverse Effect. The security interests
granted to the Purchasers pursuant to the Security Agreement will convey and
grant to the Purchasers a security interest in all of the Collateral (as such
terms is defined in such agreements) subordinate only to the Augustine Security
Interest (as defined in the Security Agreement.
(i) Private Offering. Assuming the accuracy of the representations
and warranties of the Purchasers set forth in Sections 2.2(b)-(g), the offer,
issuance and sale of the Securities to the Purchasers as contemplated hereby are
exempt from the registration requirements of the Securities Act of 1933, as
amended (the "Securities Act"). Neither the Company nor any Person acting on
its behalf has taken any action that could subject the offering, issuance or
sale of the Securities to the registration requirements of the Securities Act.
(j) SEC Documents; Financial Statements. Except as set forth in
Schedule 2.1(j) attached hereto, the Company has filed all reports required to
be filed by it under the Exchange Act, including pursuant to Section 13(a) or
15(d) thereof, for the three years preceding the date hereof (or such shorter
period as the Company was required by law to file such material) (the foregoing
materials being collectively referred to herein as the "SEC Documents" and,
together with
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the Schedules to this Agreement as well as due diligence materials delivered to
Purchasers prior to the date hereof, the "Disclosure Materials") on a timely
basis or has received a valid extension of such time of filing and has filed any
such SEC Documents prior to the expiration of any such extension. As of their
respective dates, the SEC Documents complied in all material respects with the
requirements of the Securities Act and the Exchange Act and the rules and
regulations of the Commission promulgated thereunder, and none of the SEC
Documents, when filed, 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. All material agreements to which the Company is
a party or to which the property or assets of the Company are subject have been
filed as exhibits to the SEC Documents as required. The financial statements of
the Company included in the SEC Documents comply in all material respects with
applicable accounting requirements and the rules and regulations of the
Commission with respect thereto as in effect at the time of filing. Such
financial statements have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis during the periods involved
("GAAP"), except as may be otherwise specified in such financial statements or
the notes thereto, and fairly present in all material respects the financial
position of the Company and its consolidated subsidiaries as of and for the
dates thereof and the results of operations and cash flows for the periods then
ended, subject, in the case of unaudited statements, to normal, immaterial,
year-end audit adjustments. As of the date hereof, (a) there has been no event,
occurrence or development that has or that could result in a Material Adverse
Effect, (b) the Company has not incurred any liabilities (contingent or
otherwise) other than (x) liabilities incurred in the ordinary course of
business consistent with past practice and (y) liabilities not required to be
reflected in the Company's financial statements pursuant to GAAP or required to
be disclosed in filings made with the Commission, (c) the Company has not
altered its method of accounting or the identity of its auditors and (d) the
Company has not declared or made any payment or distribution of cash or other
property to its stockholders or officers or directors (other than in compliance
with existing Company stock option plans) with respect to its capital stock, or
purchased, redeemed (or made any agreements to purchase or redeem) any shares of
its capital stock. The Company last filed audited financial statements with the
Commission on ______________, and has not received any comments from the
Commission in respect thereof.
(k) Investment Company. The Company is not, and is not an
Affiliate (as defined in Rule 405 under the Securities Act) of, an "investment
company" within the meaning of the Investment Company Act of 1940, as amended.
(l) INTENTIONALLY OMITTED.
(m) Solicitation Materials. Neither the Company nor any Person
acting on the Company's behalf has solicited any offer to buy or sell the
Securities by means of any form of general solicitation or advertising.
(n) INTENTIONALLY OMITTED.
(o) Exclusivity. The Company shall not issue and sell the Debentures
to any Person other than the Purchasers other than with the specific prior
written consent of Majority in Interest of the Purchasers.
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(p) Seniority. Other the the indebtedness pursuant to which the
Augustine Security Interest was granted, no indebtedness of the Company is
senior to the Debentures in right of payment, whether with respect to interest
or upon liquidation, dissolution or otherwise.
(q) Listing and Maintenance Requirements Compliance. Except as
specified in Schedule 2.1 (q) hereto, the Company has not, in the two years
preceding the date hereof, received notice (written or oral) from the NASDAQ OTC
Bulletin Board or any other stock exchange, market or trading facility on which
the Common Stock is or has been listed (or on which it has been quoted) to the
effect that the Company is not in compliance with the listing or maintenance
requirements of such exchange or market. The Company is, and has no reason to
believe that it will not in the foreseeable future continue to be, in compliance
with all such maintenance requirements.
(r) Patents and Trademarks. The Company has, or has rights to use,
all patents, patent applications, trademarks, trademark applications, service
marks, trade names, copyrights, licenses and rights which are necessary or
material for use in connection with its business, and which the failure to so
have would have a Material Adverse Effect (collectively, the "Intellectual
Property Rights"). The patents and trademark specified in the Security
Agreement are the only patent or trademark intellectual property rights (or
applications therefor) held by the Company and the Subsidiaries for which
applications for patents and trademarks have been made or granted in the United
States. To the best knowledge of the Company all such Intellectual Property
Rights are enforceable and there is no existing infringement by another Person
of any of the Intellectual Property Rights.
(s) Registration Rights; Rights of Participation. Except as set forth
on Schedule 6(b) to the Registration Rights Agreement, the Company has not
granted or agreed to grant to any Person any rights (including "piggy-back"
registration rights) to have any securities of the Company registered with the
Commission or any other governmental authority which has not been satisfied. No
Person, has any right of first refusal, preemptive right, right of
participation, or any similar right to participate in the transactions
contemplated by the Transaction Documents.
(t) Regulatory Permits. The Company and its Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate Federal,
state or foreign regulatory authorities necessary to conduct their respective
businesses as described in the SEC Documents, except where the failure to
possess such permits could not, individually or in the aggregate, have or result
in a Material Adverse Effect ("Material Permits"), and neither the Company nor
any such Subsidiary has received any notice of proceedings relating to the
revocation or modification of any Material Permit.
(u) Title. The Company and the Subsidiaries have good and marketable
title in fee simple to all real property and personal property owned by them
which is material to the business of the Company and its Subsidiaries, in each
case free and clear of all Liens, except for Liens granted to the Purchasers
pursuant to the Security Agreement and for other Liens as do not materially
affect the value of such property and do not interfere with the use made and
proposed to be made of such property by the Company and its Subsidiaries. Any
real property and facilities held under lease by the Company and its
Subsidiaries are held by them under valid, subsisting and enforceable leases
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with such exceptions as are not material and do not interfere with the use made
and proposed to be made of such property and buildings by the Company and its
Subsidiaries.
(v) Disclosure. The Company confirms that it has not provided any of
the Purchasers or its agents or counsel with any information that constitutes or
might constitute material non-public information. The Company understands and
confirms that the Purchasers shall be relying on the foregoing representations
in effecting transactions in securities of the Company. All disclosure provided
to the Purchasers regarding the Company, its business and the transactions
contemplated hereby, including the Schedules to this Agreement, furnished by or
on behalf of the Company are true and correct and do not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements made therein, in light of the circumstances under
which they were made, not misleading.
2.2 Representations and Warranties of the Purchasers. Each Purchaser
hereby represents and warrants to the Company as follows:
(a) Organization; Authority. Such Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation with the requisite corporate power and
authority, to enter into and to consummate the transactions contemplated by the
Transaction Documents and otherwise to carry out its obligations thereunder. The
purchase by such Purchaser of the Securities hereunder has been duly authorized
by all necessary corporate or other action on the part of such Purchaser. Each
of this Agreement, the Registration Rights Agreement, and the Security Agreement
has been duly executed and delivered by such Purchaser and constitutes the valid
and legally binding obligation of such Purchaser, enforceable against it in
accordance with its terms.
(b) Investment Intent. Such Purchaser is acquiring the Securities
for its own account for investment purposes only and not with a view to or for
distributing or reselling such Securities or any part thereof or interest
therein, without prejudice, however, to such Purchaser's right, subject to the
provisions of this Agreement and the Registration Rights Agreement, at all times
to sell or otherwise dispose of all or any part of such Securities pursuant to
an effective registration statement under the Securities Act and in compliance
with applicable state securities laws or under an exemption from such
registration. Nothing contained herein shall be deemed a representation or
warranty by such Purchaser to hold Securities for any amount of time.
(c) Purchaser Status. At the time such Purchaser was offered the
Debentures and the Warrant, it was, and at the date hereof it is, and at each
exercise date under the Warrant, it will be, an "accredited investor" as defined
in Rule 501(a) under the Securities Act.
(d) Experience of the Purchaser. Such Purchaser, either alone or
together with its representatives, has such knowledge, sophistication and
experience in business and financial matters so as to be capable of evaluating
the merits and risks of the prospective investment in the Securities, and has so
evaluated the merits and risks of such investment.
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(e) Ability of the Purchaser to Bear Risk of Investment. Such
Purchaser is able to bear the economic risk of an investment in the Securities
and, at the present time, is able to afford a complete loss of such investment.
The Company acknowledges and agrees that each of the Purchasers makes
no representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in this Section 2.2.
ARTICLE III
OTHER AGREEMENTS OF THE PARTIES
3.1 Transfer Restrictions. (a) Securities may only be disposed of pursuant
to an effective registration statement under the Securities Act, to the Company
or pursuant to an available exemption from or in a transaction not subject to
the registration requirements of the Securities Act. In connection with any
transfer of Securities other than pursuant to an effective registration
statement or to the Company, except as otherwise set forth herein, the Company
hereby consents to and agrees to register on the books of the Company and with
any transfer agent for the securities of the Company any transfer of Securities
by a Purchaser to an Affiliate of such Purchaser or to one or more funds or
managed accounts under common management with such Purchaser, and any transfer
among any such Affiliates or one or more funds or managed accounts, provided
that the transferee certifies to the Company that it is an "accredited investor"
as defined in Rule 501(a) under the Securities Act and that it is acquiring the
Securities solely for investment purposes (subject to the qualifications hereof)
and subject to compliance with federal and state securities laws. Any such
transferee shall agree in writing to be bound by the terms of this Agreement and
shall have the rights of a Purchaser under this Agreement, the Security
Agreement and the Registration Rights Agreement and shall have the rights of a
Purchaser under each such Agreement.
(b) The Purchasers agree to the imprinting, so long as is required by
this Section 3.1(b), of the following legend on the Securities:
NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE
SECURITIES ARE CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE
UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR
SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES
ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS.
Underlying Shares shall not contain the legend set forth above nor any
other legend if the conversion of Debentures, the payment of interest thereon,
and exercise of the Warrants or
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other issuances of Underlying Shares as contemplated hereby, by the Debentures
or the Warrants occurs at any time while an Underlying Shares Registration
Statement is effective or required to be amended under the Securities Act or, in
the event there is not an effective Underlying Shares Registration Statement, at
such time, in the opinion of counsel to the Company, such legend is not required
under applicable requirements of the Securities Act (including judicial
interpretations and pronouncements issued by the staff of the Commission). The
Company shall cause its counsel to issue the legal opinion included in the
Transfer Agent Instructions to the Company's transfer agent on the day that the
Underlying Shares Registration Statement is declared effective by the
Commission. The Company agrees that, in the event any Underlying Shares are
issued with a legend in accordance with this Section 3.1(b), it will, within
three (3) Trading Days after request therefor by a Purchaser, provide such
Purchaser with a certificate or certificates representing such Underlying
Shares, free from such legend at such time as such legend would not have been
required under this Section 3.1(b) had such issuance occurred on the date of
such request. The Company may not make any notation on its records or give
instructions to any transfer agent of the Company which enlarge the restrictions
of transfer set forth in this Section. However, the Company may provide
appropriate instructions to any transfer agent of the Company to enforce the
provisions of this Section 3.1(b) when the Underlying Shares Registration
Statement is not effective or is required to be amended under the Securities
Act.
3.2 Acknowledgment of Dilution. The Company acknowledges that the
issuance of the Underlying Shares upon (i) conversion of the Debentures and
payment of interest thereon in accordance with the terms of the Debentures, and
(ii) exercise of the Warrants in accordance with their terms, will result in
dilution of the outstanding shares of Common Stock, which dilution may be
substantial under certain market conditions. The Company further acknowledges
that its obligation to issue Underlying Shares upon (x) conversion of the
Debentures and payment of interest thereon in accordance with the terms of the
Debentures, and (y) exercise of the Warrants in accordance with their terms, is
unconditional and absolute, subject to the limitations set forth herein in the
Debentures or pursuant to the Warrants, regardless of the effect of any such
dilution.
3.3 Furnishing of Information. As long as the Purchasers own Securities,
the Company covenants to timely file (or obtain extensions in respect thereof
and file within the applicable grace period) all reports required to be filed by
the Company after the date hereof pursuant to Section 13(a) or 15(d) of the
Exchange Act. As long as the Purchasers own Securities, if the Company is not
required to file reports pursuant to such sections, it will prepare and furnish
to the Purchasers and make publicly available in accordance with Rule 144(c)
promulgated under the Securities Act such information as is required for the
Purchasers to sell the Securities under Rule 144 promulgated under the
Securities Act. The Company further covenants that it will take such further
action as any holder of Securities may reasonably request, all to the extent
required from time to time to enable such Person to sell Underlying Shares
without registration under the Securities Act within the limitation of the
exemptions provided by Rule 144 promulgated under the Securities Act, including
the legal opinion referenced above in this Section. Upon the request of any such
Person, the Company shall deliver to such Person a written certification of a
duly authorized officer as to whether it has complied with such requirements.
3.4 Integration. The Company shall not, and shall use its best efforts
to ensure that, no Affiliate of the Company shall, sell, offer for sale or
solicit offers to buy or otherwise negotiate in
Secured Convertible Debenture Purchase Agreement
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respect of any security (as defined in Section 2 of the Securities Act) that
would be integrated with the offer or sale of the Securities in a manner that
would require the registration under the Securities Act of the sale of the
Securities to the Purchasers.
3.5 Increase in Authorized Shares. If on any date after the date which is
120 days after the date hereof, the Company would be, if a notice of conversion
or exercise (as the case may be) were to be delivered on such date, precluded
from (a) issuing 150% of the number of Underlying Shares as would then be
issuable upon a conversion in full of the Debentures and as payment of any
accrued and unpaid interest in respect thereof in shares of Common Stock, or (b)
issuing the number of Underlying Shares upon exercise in full of the Warrants
(the "Current Required Minimum"), in either case, due to the unavailability of a
sufficient number of authorized but unissued or reserved shares of Common Stock,
then the Board of Directors of the Company shall promptly (and in any case,
within 30 Business Days from such date) prepare and mail to the stockholders of
the Company proxy materials requesting authorization to amend the Company's
Articles of Incorporation to increase the number of shares of Common Stock which
the Company is authorized to issue to at least such number of shares as
reasonably requested by the Purchasers in order to provide for such number of
authorized and unissued shares of Common Stock to enable the Company to comply
with its issuance, conversion exercise and reservation of shares obligations as
set forth in this Agreement, the Debentures and the Warrants (the sum of (x) the
number of shares of Common Stock then outstanding plus all shares of Common
Stock issuable upon exercise of all outstanding options, warrants and
convertible instruments, and (y) the Current Required Minimum, shall be a
reasonable number). In connection therewith, the Board of Directors shall (a)
adopt proper resolutions authorizing such increase, (b) recommend to and
otherwise use its best efforts to promptly and duly obtain stockholder approval
to carry out such resolutions (and hold a special meeting of the stockholders no
later than the 60th day after delivery of the proxy materials relating to such
meeting) and (c) within five (5) Business Days of obtaining such stockholder
authorization, file an appropriate amendment to the Company's Articles of
Incorporation to evidence such increase.
3.6 Reservation and Listing of Underlying Shares. (a) The Company shall (i)
in the time and manner required by NASDAQ and such other exchange, market or
quotation system on which the Common Stock is traded, prepare and file with the
NASDAQ (and such other national securities exchange or market or trading or
quotation facility) an additional shares listing application covering a number
of shares of Common Stock which is not less than the Initial Minimum, (ii) take
all steps necessary to cause such shares of Common Stock to be approved for
listing in the OTC Bulletin Board or NASDAQ (as well as on any such other
national securities exchange or market or trading or quotation facility on which
the Common Stock is then listed) as soon as possible thereafter, and (iii)
provide to the Purchasers evidence of such listing, and the Company shall
maintain the listing of its Common Stock thereon. If the number of Underlying
Shares issuable upon conversion in full of the then outstanding Debentures, as
payment of interest thereon, and upon exercise of the then unexercised portion
of the Warrants exceeds 85% of the number of Underlying Shares previously listed
on account thereof with NASDAQ (and any such other required exchanges), then the
Company shall take the necessary actions to immediately list a number of
Underlying Shares as equals no less than the then Current Required Minimum.
(b) The Company shall maintain a reserve of shares of Common Stock
for issuance upon conversion of the Debentures and for payment of interest
thereupon in shares of Common
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Stock and upon exercise in full of the Warrants in accordance with this
Agreement, the Debentures and the Warrants, respectively, in such amount as may
be required to fulfill its obligations in full under the Transaction Documents,
which reserve shall equal no less than the then Current Required Minimum.
3.7 Conversion and Exercise Procedures. The Transfer Agent Instructions,
Conversion Notice (as defined in Exhibit A) and Form of Election to Purchase
under the Warrants set forth the totality of the procedures with respect to the
conversion of the Debentures and exercise of the Warrants, including the form of
legal opinion, if necessary, that shall be rendered to the Company's transfer
agent and such other information and instructions as may be reasonably necessary
to enable the Purchasers to convert their Debentures and exercise their Warrants
as contemplated in the Debentures and the Warrants (as applicable).
3.8 Notice of Breaches. Each of the Company and the Purchasers shall give
prompt written notice to the other of any breach by it of any representation,
warranty or other agreement contained in any Transaction Document, as well as
any events or occurrences arising after the date hereof which would reasonably
be likely to cause any representation or warranty or other agreement of such
party, as the case may be, contained therein to be incorrect or breached as of
the Closing Date. However, no disclosure by either party pursuant to this
Section shall be deemed to cure any breach of any representation, warranty or
other agreement contained in any Transaction Document.
3.9 Conversion and Exercise Obligations of the Company. The Company shall
honor conversions of the Debentures and exercises of the Warrants and shall
deliver Underlying Shares in accordance with the respective terms, conditions
and time periods set forth in the Debentures and the Warrants.
3.10 Subsequent Registrations. (a) The Company shall not, directly or
indirectly, without the prior written consent of the Purchasers, offer, sell,
grant any option to purchase, or otherwise dispose of (or announce any offer,
sale, grant or any option to purchase or other disposition) any of its or its
Affiliates' equity or equity-equivalent securities (including the issuance of
any debt or other instrument is at any time over life thereof convertible into
or exchangeable for Common Stock or any other transaction intended to be exempt
or not subject to registration under the Securities Act (a "Subsequent
Placement") for a period of 180 days after the later to occur of the
Effectiveness Date (as defined in the Registration Rights Agreement) and the
date that the Commission first declares effective an Underlying Shares
Registration Statement, except (i) the granting of options or warrants to
employees, consultants, officers and directors, and the issuance of shares upon
exercise of options granted, under any stock option plan heretofore or
hereinafter duly adopted by the Company, (ii) shares of Common Stock issuable
upon exercise of any currently outstanding warrants and upon conversion of any
currently outstanding convertible securities of the Company, in each case only
if such security is disclosed in Schedule 2.1(c), (iii) shares of Common Stock
or Common Stock Equivalents (as defined in the Debentures) permitted to be
issued without giving rise to an Event of Default under Sections 3(a)(xii) or
3(a)(xiii)(a) of the Debentures, and (iv) shares of Common Stock issuable upon
conversion of Debentures, as payment of interest thereon and upon exercise of
the Warrants in accordance with the Debentures or the Warrants.
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(b) Except for (x) Underlying Shares, (y) other "Registrable
Securities" (as such term is defined in the Registration Rights Agreement) to be
registered, and securities of the Company permitted pursuant to Schedule 6(b) of
the Registration's Rights Agreement to be registered, in the Underlying Shares
Registration Statement in accordance with the Registration Rights Agreement, and
(z) Common Stock permitted to be issued pursuant to paragraph (a)(i), (ii) and
(iv) of Section 3.10(a), the Company shall not, for a period of not less than 90
Trading Days after the date that the Underlying Shares Registration Statement is
declared effective by the Commission, without the prior written consent of the
Purchasers (i) issue or sell any of its or any of its Affiliates' equity or
equity-equivalent securities pursuant to Regulation S promulgated under the
Securities Act, or (ii) register for resale any securities of the Company. Any
days that a Purchaser is not permitted to sell Underlying Shares under the
Underlying Shares Registration Statement shall be added to such 90 Trading Day
period for the purposes of (i) and (ii) above.
3.11 Certain Securities Laws Disclosures; Publicity. The Company shall to
the extent required by law: (i) on the Closing Date issue a press release
acceptable to the Purchasers disclosing the transactions contemplated hereby,
(ii) file with the Commission a Report on Form 8-K disclosing the transactions
contemplated hereby within ten (10) Business Days after the Closing Date, and
(iii) timely file with the Commission a Form D promulgated under the Securities
Act as required under Regulation D promulgated under the Securities Act and
provide a copy thereof to the Purchasers promptly after the filing thereof. The
Company shall, no less than two (2) Business Days prior to the filing of any
disclosure required by clauses (ii) and (iii) above, provide a copy thereof to
the Purchasers. No such filing or disclosure may be made that mentions the
Purchasers by name without the prior consent of the Purchasers. Such filings
shall be subject to Section 4.11 hereof.
3.12 Transfer of Intellectual Property Rights. Except in connection
with the sale of all or substantially all of the assets of the Company or
licensing arrangements in the ordinary course of the Company's business, the
Company shall not transfer, sell or otherwise dispose of any Intellectual
Property Rights, or allow any of the Intellectual Property Rights to become
subject to any Liens, or fail to renew such Intellectual Property Rights (if
renewable and it would otherwise lapse if not renewed), without the prior
written consent of the Purchasers.
3.13 INTENTIONALLY OMITTED.
3.14 Reimbursement. If any Purchaser, other than by reason of its gross
negligence or willful misconduct, becomes involved in any capacity in any
action, proceeding or investigation brought by or against any Person, including
stockholders of the Company, in connection with or as a result of the
consummation of the transactions contemplated by Transaction Documents, the
Company will reimburse such Purchaser for its reasonable legal and other
expenses (including the cost of any investigation and preparation) incurred in
connection therewith, as such expenses are incurred. In addition, other than
with respect to any matter in which a Purchaser is a named party, the Company
will pay such Purchaser the charges, as reasonably determined by such Purchaser,
for the time of any officers or employees of such Purchaser devoted to appearing
and preparing to appear as witnesses, assisting in preparation for hearings,
trials or pretrial matters, or otherwise with respect to inquiries, hearings,
trials, and other proceedings relating to the subject matter of this Agreement.
The reimbursement obligations of the Company under this paragraph shall be in
addition to any liability which the Company may otherwise have, shall extend
upon the same terms and conditions
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to any Affiliates of the Purchasers who are actually named in such action,
proceeding or investigation, and partners, directors, agents, employees and
controlling persons (if any), as the case may be, of the Purchasers and any such
Affiliate, and shall be binding upon and inure to the benefit of any successors,
assigns, heirs and personal representatives of the Company, the Purchasers and
any such Affiliate and any such Person. The Company also agrees that neither the
Purchasers nor any such Affiliates, partners, directors, agents, employees or
controlling persons shall have any liability to the Company or any Person
asserting claims on behalf of or in right of the Company in connection with or
as a result of the consummation of the Transaction Documents except to the
extent that any losses, claims, damages, liabilities or expenses incurred by the
Company result from the gross negligence or willful misconduct of the applicable
Purchaser or entity in connection with the transactions contemplated by this
Agreement.
ARTICLE IV
MISCELLANEOUS
4.1 Fees and Expenses. Each party shall pay the fees and expenses
of its advisers, counsel, accountants and other experts, if any, and all other
expenses incurred by such party incident to the negotiation, preparation,
execution, delivery and performance of this Agreement. The Company shall pay
all stamp and other taxes and duties levied in connection with the issuance of
the Securities.
4.2 Entire Agreement; Amendments. The Transaction Documents,
together with the Exhibits and Schedules thereto, and the Transfer Agent
Instructions contain the entire understanding of the parties with respect to the
subject matter hereof and supersede all prior agreements and understandings,
oral or written, with respect to such matters, which the parties acknowledge
have been merged into such documents, exhibits and schedules.
4.3 Notices. Any and all notices or other communications or
deliveries required or permitted to be provided hereunder shall be in writing
and shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section prior to 6:30 p.m. (New
York City time) on a Business Day, (ii) the Business Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Agreement later than 6:30 p.m. (New
York City time) on any date and earlier than 11:59 p.m. (New York City time) on
such date, (iii) the Business Day following the date of mailing, if sent by
nationally recognized overnight courier service, or (iv) upon actual receipt by
the party to whom such notice is required to be given. The address for such
notices and communications shall be as follows:
Secured Convertible Debenture Purchase Agreement
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<PAGE>
If to the Company: American BioMed, Inc.
10077 Grogan's Mill Road, Suite 100
The Woodlands, TX 77380
Facsimile No.: (281) 367-3212
Attn: Steven Rash
If to a Purchaser: To the address set forth under such Purchaser's name
on the signature pages hereto.
or such other address as may be designated in writing hereafter, in the same
manner, by such Person.
4.4 Amendments; Waivers. No provision of this Agreement may be waived
or amended except in a written instrument signed, in the case of an amendment,
by the Company and each of the Purchasers or, in the case of a waiver, by the
party against whom enforcement of any such waiver is sought. No waiver of any
default with respect to any provision, condition or requirement of this
Agreement shall be deemed to be a continuing waiver in the future or a waiver of
any other provision, condition or requirement hereof, nor shall any delay or
omission of either party to exercise any right hereunder in any manner impair
the exercise of any such right accruing to it thereafter.
4.5 Headings. The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof.
4.6 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and permitted assigns.
The Company may not assign this Agreement or any rights or obligations hereunder
without the prior written consent of the Purchasers. Except as set forth in
Section 3.1(a), the Purchasers may not assign this Agreement or any of the
rights or obligations hereunder without the consent of the Company. This
provision shall not limit each Purchaser's right to transfer securities or
transfer or assign rights under the Registration Rights Agreement.
4.7 No Third-Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective successors and permitted
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person.
4.8 Governing Law. The corporate laws of the State of Delaware shall
govern all issues concerning the relative rights of the Company and its
stockholders. All other questions concerning the construction, validity,
enforcement and interpretation of this Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
York, without regard to the principles of conflicts of law thereof. Each party
hereby irrevocably submits to the exclusive jurisdiction of the state and
federal courts sitting in Nassau County, New York, for the adjudication of any
dispute hereunder or in connection herewith or with any transaction contemplated
hereby or discussed herein (including with respect to the enforcement of the any
of the Transaction Documents), and hereby irrevocably waives, and agrees not to
assert in any suit, action
Secured Convertible Debenture Purchase Agreement
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<PAGE>
or proceeding, any claim that it is not personally subject to the jurisdiction
of any such court, that such suit, action or proceeding is improper. Each party
hereby irrevocably waives personal service of process and consents to process
being served in any such suit, action or proceeding by mailing a copy thereof
via registered or certified mail or overnight delivery (with evidence of
delivery) to such party at the address in effect for notices to it under this
Agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof. Nothing contained herein shall be deemed
to limit in any way any right to serve process in any manner permitted by law.
4.9 Survival. The representations, warranties, agreements and
covenants contained herein shall survive the Closing and the delivery and
conversion or exercise (as the case may be) of the Debentures and the Warrants.
4.10 Execution. This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party, it being understood that both
parties need not sign the same counterpart. In the event that any signature is
delivered by facsimile transmission, such signature shall create a valid and
binding obligation of the party executing (or on whose behalf such signature is
executed) the same with the same force and effect as if such facsimile signature
page were an original thereof.
4.11 Publicity. The Company and the Purchasers shall consult with
each other in issuing any press releases or otherwise making public statements
or filings and other communications with the Commission or any regulatory agency
or stock market or trading facility with respect to the transactions
contemplated hereby and neither party shall issue any such press release or
otherwise make any such public statement, filings or other communications
without the prior written consent of the other, which consent shall not be
unreasonably withheld or delayed, except that no prior consent shall be required
if such disclosure is required by law, in which such case the disclosing party
shall provide the other party with prior notice of such public statement, filing
or other communication. Notwithstanding the foregoing, the Company shall not
publicly disclose the names of the Purchasers, or include the names of the
Purchasers in any filing with the Commission, or any regulatory agency, trading
facility or stock market without the prior written consent of the Purchasers,
except to the extent such disclosure (but not any disclosure as to the
controlling Persons thereof) is required by law, in which case the Company shall
provide the Purchasers with prior notice of such disclosure.
4.12 Severability. In case any one or more of the provisions of this
Agreement shall be invalid or unenforceable in any respect, the validity and
enforceability of the remaining terms and provisions of this Agreement shall not
in any way be affecting or impaired thereby and the parties will attempt to
agree upon a valid and enforceable provision which shall be a reasonable
substitute therefor, and upon so agreeing, shall incorporate such substitute
provision in this Agreement.
4.13 Remedies. In addition to being entitled to exercise all rights
provided herein or granted by law, including recovery of damages, each of the
Purchasers will be entitled to specific performance of the obligations of the
Company under the Transaction Documents. The Company and each of the Purchasers
agree that monetary damages may not be adequate compensation for any
Secured Convertible Debenture Purchase Agreement
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<PAGE>
loss incurred by reason of any breach of its obligations described in the
foregoing sentence and hereby agrees to waive in any action for specific
performance of any such obligation the defense that a remedy at law would be
adequate.
4.14 Independent Nature of Purchasers' Obligations and Rights. The
obligations of each Purchaser hereunder is several and not joint with the
obligations of any other Purchaser hereunder, and neither Purchaser shall be
responsible in any way for the performance of the obligations of any other
Purchaser hereunder. Nothing contained herein or in any other agreement or
document delivered at any closing, and no action taken by any Purchaser pursuant
hereto or thereto, shall be deemed to constitute the Purchasers as a
partnership, an association, a joint venture or any other kind of entity, or
create a presumption that the Purchasers are in any way acting in concert with
respect to such obligations or the transactions contemplated by this Agreement.
Each Purchaser shall be entitled to protect and enforce its rights, including
without limitation the rights arising out of this Agreement or out of the
Transaction Documents, and it shall not be necessary for any other Purchaser to
be joined as an additional party in any proceeding for such purpose.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOLLOWS]
Secured Convertible Debenture Purchase Agreement
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IN WITNESS WHEREOF, the parties hereto have caused this Secured
Convertible Debenture Purchase Agreement to be duly executed by their respective
authorized signatories as of the date first indicated above.
AMERICAN BIOMED, INC.
By:_____________________________________
Name:
Title:
AJW PARTNERS, LLC
By:_____________________________________
Corey S. Ribotsky
Manager
Debenture Purchase Price: $50,000
155 First Street, Suite B
Mineola, New York 11501
Fax 516-739-7110
NEW MILLENNIUM CAPITAL PARTNERS, LLC
By:_____________________________________
Glenn A. Arbeitman
Authorized Signatory
Debenture Purchase Price: $50,000
155 First Street, Suite B
Mineola, New York 11501
Fax 516-739-7110
Secured Convertible Debenture Purchase Agreement
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<PAGE>
EXHIBIT 10.104
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made and
entered into as of September 30, 1999, among American BioMed, Inc., a Delaware
corporation (the "Company"), and the investors signatory hereto (each such
investor is a "Purchaser" and all such investors are, collectively, the
"Purchasers").
This Agreement is made pursuant to the Secured Convertible Debenture
Purchase Agreement, dated as of the date hereof among the Company and the
Purchasers (the "Purchase Agreement").
The Company and the Purchasers hereby agree as follows:
1. Definitions
Capitalized terms used and not otherwise defined herein that are
defined in the Purchase Agreement shall have the meanings given such terms in
the Purchase Agreement. As used in this Agreement, the following terms shall
have the following meanings:
"Advice" shall have meaning set forth in Section 3(r).
"Affiliate" means, with respect to any Person, any other Person that
directly or indirectly controls or is controlled by or under common control with
such Person. For the purposes of this definition, "control," when used with
respect to any Person, means the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities, by contract or otherwise;
and the terms of "affiliated," "controlling" and "controlled" have meanings
correlative to the foregoing.
"Business Day" means any day except Saturday, Sunday and any day which
shall be a legal holiday or a day on which banking institutions in the state of
New York generally are authorized or required by law or other government actions
to close.
"Closing Date" means September 30, 1999.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's Class A Common Stock, no par value.
"Debentures" means the Company's 13% Secured Convertible Debentures
due three years from the date of issuance thereof, issued to the Purchasers
pursuant to the Purchase Agreement.
<PAGE>
"Effectiveness Date" means the 150th day following the Closing Date.
"Effectiveness Period" shall have the meaning set forth in
Section 2(a).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Filing Date" means the 45th day following the Closing Date.
"Holder" or "Holders" means the holder or holders, as the case may be,
from time to time of Registrable Securities.
"Indemnified Party" shall have the meaning set forth in Section 5(c).
"Indemnifying Party" shall have the meaning set forth in Section 5(c).
"Losses" shall have the meaning set forth in Section 5(a).
"Person" means an individual or a corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or political subdivision
thereof) or other entity of any kind.
"Proceeding" means an action, claim, suit, investigation or proceeding
(including, without limitation, an investigation or partial proceeding, such as
a deposition), whether commenced or threatened.
"Prospectus" means the prospectus included in the Registration
Statement (including, without limitation, a prospectus that includes any
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A promulgated under the
Securities Act), as amended or supplemented by any prospectus supplement, with
respect to the terms of the offering of any portion of the Registrable
Securities covered by the Registration Statement, and all other amendments and
supplements to the Prospectus, including post-effective amendments, and all
material incorporated by reference or deemed to be incorporated by reference in
such Prospectus.
"Registrable Securities" means the shares of Common Stock issuable (i)
upon conversion in full of the Debentures, (ii) as payment of interest in
respect of the Debentures, and (iii) upon exercise of the Warrants.
"Registration Statement" means the registration statement and any
additional registration statements contemplated by Section 2(a), including (in
each case) the Prospectus, amendments and supplements to such registration
statement or Prospectus, including pre- and post-effective amendments, all
exhibits thereto, and all material incorporated by reference or deemed to be
incorporated by reference in such registration statement.
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<PAGE>
"Rule 144" means Rule 144 promulgated by the Commission pursuant to
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Rule 158" means Rule 158 promulgated by the Commission pursuant to
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Rule 415" means Rule 415 promulgated by the Commission pursuant to
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
"Special Counsel" means one special counsel to the Holders, for which
the Holders will be reimbursed by the Company pursuant to Section 4.
"Underwritten Registration or Underwritten Offering" means a
registration in connection with which securities of the Company are sold to an
underwriter for reoffering to the public pursuant to an effective registration
statement.
"Warrants" means the Common Stock purchase warrants issued to the
Purchasers pursuant to the Purchase Agreement.
2. Shelf Registration
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(a) On or prior to the Filing Date, the Company shall prepare and file
with the Commission a "Shelf" Registration Statement covering the resale of the
number of Registrable Securities contemplated by Section 2(b) for an offering to
be made on a continuous basis pursuant to Rule 415. The Registration Statement
shall be on Form S-1 or Form SB-2 (or on another appropriate form as mutually
agreed to by the Company and the Holders). The Company shall, within ten (10)
days of the date on which the Company becomes eligible to register the resale by
selling security holders of its securities under Form S-3 promulgated by the
Commission, convert the Registration Statement from the originally filed form to
Form S-3. The Company shall use its best efforts to cause the Registration
Statement to be declared effective under the Securities Act as promptly as
possible after the filing thereof, but in any event prior to the Effectiveness
Date, and shall use its best efforts to keep such Registration Statement
continuously effective under the Securities Act until the date which is two
years after the date that such Registration Statement is declared effective by
the Commission or such earlier date when all Registrable Securities covered by
such Registration Statement have been sold or may be sold without volume
restrictions pursuant to Rule 144(k) as determined by the counsel to the Company
pursuant to a written opinion letter to such effect, addressed and acceptable
to the Company's transfer agent (the "Effectiveness Period"), provided, however,
that the Company shall not be deemed to have used its best efforts to keep the
Registration Statement effective during the Effectiveness Period if it
voluntarily takes any action that would result in the Holders not being able to
sell the Registrable Securities covered by such Registration Statement during
the Effectiveness Period, unless such action is required under applicable law or
the Company has filed a supplement to a post-effective amendment to the
Registration Statement within five (5) days of such action and the Commission
has not declared it effective.
(b) In order to account for the fact that the number of shares of
Common Stock issuable upon conversion of the Debentures (and as payment of
interest thereon) is determined in part upon the bid price of the Common Stock
prior to the time of conversion, the initial Registration Statement required to
be filed hereunder shall include (but not be limited to) a number of shares of
Common Stock equal to no less than the sum of (I) 150% of the number of shares
of Common Stock into which the Debentures, together with the payment of interest
thereon (assuming all interest is paid in shares of Common Stock and that the
Debentures remain outstanding for three years), are convertible, assuming such
conversion occurred on the Closing Date, the Filing Date or the date the Company
files an acceleration request with the Commission relating to the Registration
Statement, whichever yields the lowest Conversion Price (as defined in the
Debentures) and (ii) the number of shares of Common Stock issuable upon exercise
in full of the Warrants.
(c) If the Holders of a majority of the Registrable Securities so
elect, an offering of Registrable Securities pursuant to the Registration
Statement may be effected in the form of an Underwritten Offering. In such
event, and, if the managing underwriters advise the Company and such Holders in
writing that in their opinion the amount of Registrable Securities proposed to
be sold in such Underwritten Offering exceeds the amount of Registrable
Securities which can be sold in such Underwritten Offering, there shall be
included in such Underwritten Offering the amount of such Registrable Securities
which in the opinion of such managing underwriters can be sold, and such amount
shall be allocated pro-rata among the Holders proposing to sell Registrable
Securities in such Underwritten Offering.
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(d) If any of the Registrable Securities are to be sold in an
Underwritten Offering, the investment banker in interest that will administer
the offering will be selected by the Holders of a majority of the Registrable
Securities included in such offering upon consultation with the Company and
shall be subject to the approval of the Company, which shall not be unreasonably
withheld.
3. Registration Procedures
In connection with the Company's registration obligations hereunder,
the Company shall:
(a) Prepare and file with the Commission on or prior to the Filing
Date, a Registration Statement on the form contemplated by Section 2(a) which
Registration Statement shall contain (except if otherwise directed by the
Holders) the "Plan of Distribution" attached hereto as Annex A, and cause the
Registration Statement to become effective and remain effective as provided
herein; provided, however, that not less than three (3) Business Days prior to
the filing of the Registration Statement or any related Prospectus or any
amendment or supplement thereto (including any document that would be
incorporated or deemed to be incorporated therein by reference), the Company
shall, (i) furnish to the Holders, their Special Counsel and any managing
underwriters, copies of all such documents proposed to be filed, which documents
(other than those incorporated or deemed to be incorporated by reference) will
be subject to the review of such Holders, their Special Counsel and such
managing underwriters, and (ii) cause its officers and directors, counsel and
independent certified public accountants to respond to such inquiries as shall
be necessary, in the reasonable opinion of respective counsel to such Holders
and such underwriters, to conduct a reasonable investigation within the meaning
of the Securities Act. The Company shall, within ten (10) days of the date on
which the Company becomes eligible to register the resale by selling security
holders of its securities under Form S-3 promulgated by the Commission, convert
the Registration Statement from the originally filed form to Form S-3. The
Company shall not file the Registration Statement or any such Prospectus or any
amendments or supplements thereto to which the Holders of a majority of the
Registrable Securities, their Special Counsel, or any managing underwriters,
shall reasonably object on a timely basis.
(b) (i) Prepare and file with the Commission such amendments,
including post-effective amendments, to the Registration Statement and the
Prospectus used in connection therewith as may be necessary to keep the
Registration Statement continuously effective as to the applicable Registrable
Securities for the Effectiveness Period and prepare and file with the Commission
such additional Registration Statements in order to register for resale under
the Securities Act all of the Registrable Securities; (ii) cause the related
Prospectus to be amended or supplemented by any required Prospectus supplement,
and as so supplemented or amended to be filed pursuant to Rule 424 (or any
similar provisions then in force) promulgated under the Securities Act; (iii)
respond as promptly as reasonably possible to any comments received from the
Commission with respect to the Registration Statement or any amendment thereto
and as promptly as reasonably possible provide the Holders true and complete
copies of all correspondence from and to the Commission relating to the
Registration Statement; and (iv) comply in all material respects
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<PAGE>
with the provisions of the Securities Act and the Exchange Act with respect to
the disposition of all Registrable Securities covered by the Registration
Statement during the applicable period in accordance with the intended methods
of disposition by the Holders thereof set forth in the Registration Statement as
so amended or in such Prospectus as so supplemented.
(c) File additional Registration Statements if the number of
Registrable Securities at any time exceeds the number of shares of Common Stock
then registered in a Registration Statement. The Company shall have 30 days to
file such additional Registration Statements after its receipt of notice of the
requirement thereof which the Holders may give at any time when the Registrable
Securities exceeds 85% of the number of shares of Common Stock then registered
in a Registration Statement hereunder. In such event, the Registration
Statement required to be filed by the Company shall include a number of shares
of Common Stock equal to no less than 150% of the number of shares of Common
Stock into which all then outstanding principal amount of Debentures are
convertible (assuming such conversion occurred on the Filing Date for such
Registration Statement or the date of the filing of the final acceleration
request therefor, whichever date yields a lower Conversion Price) less the
shares covered by the prior Registration Statement and any other Registrable
Securities not then registered in a Registration Statement.
(d) Notify the Holders of Registrable Securities to be sold, their
Special Counsel and any managing underwriters as promptly as reasonably possible
(and, in the case of (i)(A) below, not less than five (5) days prior to such
filing) and (if requested by any such Person) confirm such notice in writing no
later than one (1) Business Day following the day (i)(A) when a Prospectus or
any Prospectus supplement or post-effective amendment to the Registration
Statement is proposed to be filed; (B) when the Commission notifies the Company
whether there will be a "review" of such Registration Statement and whenever the
Commission comments in writing on such Registration Statement (the Company shall
provide true and complete copies thereof and all written responses thereto to
each of the Holders, which the Holders shall keep confidential); and (C) with
respect to the Registration Statement or any post-effective amendment, when the
same has become effective; (ii) of any request by the Commission or any other
Federal or state governmental authority for amendments or supplements to the
Registration Statement or Prospectus or for additional information; (iii) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement covering any or all of the Registrable Securities or the
initiation of any Proceedings for that purpose; (iv) if at any time any of the
representations and warranties of the Company contained in any agreement
(including any underwriting agreement) contemplated hereby ceases to be true and
correct in all material respects; (v) of the receipt by the Company of any
notification with respect to the suspension of the qualification or exemption
from qualification of any of the Registrable Securities for sale in any
jurisdiction, or the initiation or threatening of any Proceeding for such
purpose; and (vi) of the occurrence of any event or passage of time that makes
the financial statements included in the Registration Statement ineligible for
inclusion therein or any statement made in the Registration Statement or
Prospectus or any document incorporated or deemed to be incorporated therein by
reference untrue in any material respect or that requires any revisions to the
Registration Statement, Prospectus or other documents so that, in the case of
the Registration Statement or the Prospectus, as the case may be, it will not
contain any untrue statement of a material fact or omit to state any 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.
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(e) Use its best efforts to avoid the issuance of, or, if issued,
obtain the withdrawal of (i) any order suspending the effectiveness of the
Registration Statement, or (ii) any suspension of the qualification (or
exemption from qualification) of any of the Registrable Securities for sale in
any jurisdiction, at the earliest practicable moment.
(f) If requested by any managing underwriter or the Holders of a
majority in interest of the Registrable Securities to be sold in connection with
an Underwritten Offering, (i) promptly incorporate in a Prospectus supplement or
post-effective amendment to the Registration Statement such information as such
managing underwriters and such Holders reasonably agree should be included
therein, and (ii) make all required filings of such Prospectus supplement or
such post-effective amendment as soon as practicable after the Company has
received notification of the matters to be incorporated in such Prospectus
supplement or post-effective amendment; provided, however, that the Company
shall not be required to take any action pursuant to this Section 3(f) that
would, in the opinion of counsel for the Company, violate applicable law or be
materially detrimental to the business prospects of the Company.
(g) Furnish to each Holder, their Special Counsel and any managing
underwriters, without charge, at least one conformed copy of each Registration
Statement and each amendment thereto, including, if requested, financial
statements and schedules, all documents incorporated or deemed to be
incorporated therein by reference, and all exhibits to the extent requested by
such Person (including those previously furnished or incorporated by reference)
promptly after the filing of such documents with the Commission.
(h) Promptly deliver to each Holder, their Special Counsel, and any
underwriters, without charge, as many copies of the Prospectus or Prospectuses
(including each form of prospectus) and each amendment or supplement thereto as
such Persons may reasonably request; and the Company hereby consents to the use
of such Prospectus and each amendment or supplement thereto by each of the
selling Holders and any underwriters in connection with the offering and sale of
the Registrable Securities covered by such Prospectus and any amendment or
supplement thereto.
(i) Prior to any public offering of Registrable Securities, use its
best efforts to register or qualify or cooperate with the selling Holders, any
underwriters and their Special Counsel in connection with the registration or
qualification (or exemption from such registration or qualification) of such
Registrable Securities for offer and sale under the securities or Blue Sky laws
of such jurisdictions within the United States as any Holder or underwriter
requests in writing, to keep each such registration or qualification (or
exemption therefrom) effective during the Effectiveness Period and to do any and
all other acts or things necessary or advisable to enable the disposition in
such jurisdictions of the Registrable Securities covered by a Registration
Statement; provided, however, that the Company shall not be required to qualify
generally to do business in any jurisdiction where it is not then so qualified
or to take any action that would subject it to general service of process in any
such jurisdiction where it is not then so subject or subject the Company to any
material tax in any such jurisdiction where it is not then so subject.
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(j) Cooperate with the Holders and any managing underwriters to
facilitate the timely preparation and delivery of certificates representing
Registrable Securities to be delivered to a transferee pursuant to a
Registration Statement, which certificates shall be free, to the extent
permitted by applicable law, of all restrictive legends, and to enable such
Registrable Securities to be in such denominations and registered in such names
as any such managing underwriters or Holders may request.
(k) Upon the occurrence of any event contemplated by Section 3(d)(vi),
as promptly as reasonably possible, prepare a supplement or amendment, including
a post-effective amendment, to the Registration Statement or a supplement to the
related Prospectus or any document incorporated or deemed to be incorporated
therein by reference, and file any other required document so that, as
thereafter delivered, neither the Registration Statement nor such Prospectus
will contain an 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 under which they were made, not misleading.
(l) Use its best efforts to cause all Registrable Securities relating
to such Registration Statement to be listed on the Nasdaq National Market
("NASDAQ") or on any other stock market or trading facility on which the shares
of Common Stock are traded, listed or quoted, including, without limitation, the
OTC Bulletin Board (each a "Subsequent Market") as and when required pursuant to
the Purchase Agreement.
(m) Enter into such agreements (including an underwriting agreement in
form, scope and substance as is customary in Underwritten Offerings) and take
all such other actions in connection therewith (including those reasonably
requested by any managing underwriters and the Holders of a majority of the
Registrable Securities being sold) in order to expedite or facilitate the
disposition of such Registrable Securities, and whether or not an underwriting
agreement is entered into, (i) make such representations and warranties to such
Holders and such underwriters as are customarily made by issuers to underwriters
in underwritten public offerings (subject to the scheduling of appropriate
exceptions to insure such representations and warranties are accurate), and
confirm the same if and when requested; (ii) in the case of an Underwritten
Offering obtain and deliver copies thereof to each Holder and the managing
underwriters, if any, of opinions of counsel to the Company and updates thereof
addressed to each Holder and each such underwriter, in form, scope and substance
reasonably satisfactory to any such managing underwriters and Special Counsel to
the selling Holders covering the matters customarily covered in opinions
requested in Underwritten Offerings and such other matters as may be reasonably
requested by such Special Counsel and underwriters; (iii) immediately prior to
the effectiveness of the Registration Statement, and, in the case of an
Underwritten Offering, at the time of delivery of any Registrable Securities
sold pursuant thereto, use its best reasonable efforts to obtain and deliver
copies to the Holders and the managing underwriters, if any, of "cold comfort"
letters and updates thereof from the independent certified public accountants of
the Company (and, if necessary, any other independent certified public
accountants of any subsidiary of the Company or of any business acquired by the
Company for which financial statements and financial data is, or is required to
be, included in the Registration Statement), addressed to the Company in form
and substance as are customary in connection with Underwritten Offerings; (iv)
if an underwriting agreement is entered into, the same
8
<PAGE>
shall contain indemnification provisions and procedures no less favorable to the
selling Holders and the underwriters, if any, than those set forth in Section 5
(or such other provisions and procedures acceptable to the managing
underwriters, if any, and holders of a majority of Registrable Securities
participating in such Underwritten Offering); and (v) deliver such documents and
certificates as may be reasonably requested by the Holders of a majority of the
Registrable Securities being sold, their Special Counsel and any managing
underwriters to evidence the continued validity of the representations and
warranties made pursuant to Section 3(m)(i) above and to evidence compliance
with any customary conditions contained in the underwriting agreement or other
agreement entered into by the Company.
(n) Make available for inspection by the selling Holders, any
representative of such Holders, any underwriter participating in any disposition
of Registrable Securities, and any attorney or accountant retained by such
selling Holders or underwriters, at the offices where normally kept, during
reasonable business hours, all financial and other records, pertinent corporate
documents and properties of the Company and its subsidiaries, and cause the
officers, directors, agents and employees of the Company and its subsidiaries to
supply all information in each case reasonably requested by any such Holder,
representative, underwriter, attorney or accountant in connection with the
Registration Statement; provided, however, that any information that is
determined in good faith by the Company in writing to be of a confidential
nature at the time of delivery of such information shall be kept confidential by
such Persons, unless (i) disclosure of such information is required by court or
administrative order or is necessary to respond to inquiries of regulatory
authorities; (ii) disclosure of such information, in the opinion of counsel to
such Person, is required by law; (iii) such information becomes generally
available to the public other than as a result of a disclosure or failure to
safeguard by such Person; or (iv) such information becomes available to such
Person from a source other than the Company and such source is not known by such
Person to be bound by a confidentiality agreement with the Company.
(o) Comply with all applicable rules and regulations of the
Commission.
(p) The Company may require each selling Holder to furnish to the
Company such information regarding the distribution of such Registrable
Securities and the beneficial ownership of Common Stock held by such Holder as
is required by law to be disclosed in the Registration Statement, and the
Company may exclude from such registration the Registrable Securities of any
such Holder who unreasonably fails to furnish such information within a
reasonable time after receiving such request.
(q) If the Registration Statement refers to any Holder by name or
otherwise as the holder of any securities of the Company, then such Holder shall
have the right to require (if such reference to such Holder by name or otherwise
is not required by the Securities Act or any similar Federal statute then in
force) the deletion of the reference to such Holder in any amendment or
supplement to the Registration Statement filed or prepared subsequent to the
time that such reference ceases to be required.
(r) Each Holder covenants and agrees that (i) it will not sell any
Registrable Securities under the Registration Statement until it has received
copies of the Prospectus as then
9
<PAGE>
amended or supplemented as contemplated in Section 3(h) and notice from the
Company that such Registration Statement and any post-effective amendments
thereto have become effective as contemplated by Section 3(d) and (ii) it and
its officers, directors or Affiliates, if any, will comply with the prospectus
delivery requirements of the Securities Act as applicable to it in connection
with sales of Registrable Securities pursuant to the Registration Statement.
Each Holder agrees by its acquisition of such Registrable Securities
that, upon receipt of a notice from the Company of the occurrence of any event
of the kind described in Sections 3(d)(ii), 3(d)(iii), 3(d)(iv), 3(d)(v) or
3(d)(vi), such Holder will forthwith discontinue disposition of such Registrable
Securities under the Registration Statement until such Holder's receipt of the
copies of the supplemented Prospectus and/or amended Registration Statement
contemplated by Section 3(k), or until it is advised in writing (the "Advice")
by the Company that the use of the applicable Prospectus may be resumed, and, in
either case, has received copies of any additional or supplemental filings that
are incorporated or deemed to be incorporated by reference in such Prospectus or
Registration Statement. The Company may provide appropriate stop orders to
enforce the provisions of this paragraph.
4. Registration Expenses(a) All fees and expenses incident to the
performance of or compliance with this Agreement by the Company, except as and
to the extent specified in Section 4(b), shall be borne by the Company whether
or not pursuant to an Underwritten Offering and whether or not the Registration
Statement is filed or becomes effective and whether or not any Registrable
Securities are sold pursuant to the Registration Statement. The fees and
expenses referred to in the foregoing sentence shall include, without
limitation, (i) all registration and filing fees (including, without limitation,
fees and expenses (A) with respect to filings required to be made with the
NASDAQ and any Subsequent Market on which the Common Stock is then listed for
trading, and (B) in compliance with state securities or Blue Sky laws
(including, without limitation, fees and disbursements of counsel for the
Holders in connection with Blue Sky qualifications or exemptions of the
Registrable Securities and determination of the eligibility of the Registrable
Securities for investment under the laws of such jurisdictions as the managing
underwriters, if any, or the Holders of a majority of Registrable Securities may
designate)), (ii) printing expenses (including, without limitation, expenses of
printing certificates for Registrable Securities and of printing prospectuses if
the printing of prospectuses is requested by the managing underwriters, if any,
or by the holders of a majority of the Registrable Securities included in the
Registration Statement), (iii) messenger, telephone and delivery expenses, (iv)
fees and disbursements of counsel for the Company and Special Counsel for the
Holders, (v) Securities Act liability insurance, if the Company so desires such
insurance, and (vi) fees and expenses of all other Persons retained by the
Company in connection with the consummation of the transactions contemplated by
this Agreement. In addition, the Company shall be responsible for all of its
internal expenses incurred in connection with the consummation of the
transactions contemplated by this Agreement (including, without limitation, all
salaries and expenses of its officers and employees performing legal or
accounting duties), the expense of any annual audit, the fees and expenses
incurred in connection with the listing of the Registrable Securities on any
securities exchange as required hereunder.
(b) If the Holders require an Underwritten Offering pursuant to the
terms hereof, the Company shall be responsible for all costs, fees and expenses
in connection therewith, except
10
<PAGE>
for the fees and disbursements of the Underwriters (including any underwriting
commissions and discounts) and their legal counsel and accountants. By way of
illustration which is not intended to diminish from the provisions of Section
4(a), the Holders shall not be responsible for, and the Company shall be
required to pay the fees or disbursements incurred by the Company (including by
its legal counsel and accountants) in connection with, the preparation and
filing of a Registration Statement and related Prospectus for such offering, the
maintenance of such Registration Statement in accordance with the terms hereof,
the listing of the Registrable Securities in accordance with the requirements
hereof, and printing expenses incurred to comply with the requirements hereof.
Furthermore, the Holders shall in all events be responsible for any selling
commissions and stock transfer taxes associated with Holders sale of Registrable
Securities.
5. Indemnification (a) Indemnification by the Company. The Company
shall, notwithstanding any termination of this Agreement, indemnify and hold
harmless each Holder, the officers, directors, agents (including any
underwriters retained by such Holder in connection with the offer and sale of
Registrable Securities), brokers (including brokers who offer and sell
Registrable Securities as principal as a result of a pledge or any failure to
perform under a margin call of Common Stock), investment advisors and employees
of each of them, each Person who controls any such Holder (within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act) and the
officers, directors, agents and employees of each such controlling Person, to
the fullest extent permitted by applicable law, from and against any and all
losses, claims, damages, liabilities, costs (including, without limitation,
costs of preparation and attorneys' fees) and expenses (collectively, "Losses"),
as incurred, arising out of or relating to any untrue or alleged untrue
statement of a material fact contained in the Registration Statement, any
Prospectus or any form of prospectus or in any amendment or supplement thereto
or in any preliminary prospectus, or arising out of or relating to any omission
or alleged omission of a material fact required to be stated therein or
necessary to make the statements therein (in the case of any Prospectus or form
of prospectus or supplement thereto, in light of the circumstances under which
they were made) not misleading, except to the extent, but only to the extent,
that (1) such untrue statements or omissions are based solely upon information
regarding such Holder furnished in writing to the Company by such Holder
expressly for use therein, or to the extent that such information relates to
such Holder or such Holder's proposed method of distribution of Registrable
Securities and was reviewed and expressly approved in writing by such Holder
expressly for use in the Registration Statement, such Prospectus or such form of
Prospectus or in any amendment or supplement thereto or (2) in the case of an
occurrence of an event of the type specified in Section 3(d)(ii)-(vi), the use
by such Holder of an outdated or defective Prospectus after the Company has
notified such Holder in writing that the Prospectus is outdated or defective and
prior to the receipt by such Holder of the Advice contemplated in Section 3(r).
The Company shall notify the Holders promptly of the institution, threat or
assertion of any Proceeding of which the Company is aware in connection with the
transactions contemplated by this Agreement.
(b) Indemnification by Holders. Each Holder shall, severally and not
jointly, indemnify and hold harmless the Company, its directors, officers,
agents and employees, each Person who controls the Company (within the meaning
of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the
directors, officers, agents or employees of such controlling Persons, to the
fullest extent permitted by applicable law, from and against all Losses (as
determined by a
11
<PAGE>
court of competent jurisdiction in a final judgment not subject to appeal or
review) arising solely out of or based solely upon any untrue statement of a
material fact contained in the Registration Statement, any Prospectus, or any
form of prospectus, or in any amendment or supplement thereto, or arising solely
out of or based solely upon any omission of a material fact required to be
stated therein or necessary to make the statements therein not misleading to the
extent, but only to the extent, that such untrue statement or omission is
contained in any information so furnished in writing by such Holder to the
Company specifically for inclusion in the Registration Statement or such
Prospectus or to the extent that such information relates to such Holder or such
Holder's proposed method of distribution of Registrable Securities and was
reviewed and expressly approved in writing by such Holder expressly for use in
the Registration Statement, such Prospectus or such form of Prospectus, or in
any amendment or supplement thereto. In no event shall the liability of any
selling Holder hereunder be greater in amount than the dollar amount of the net
proceeds received by such Holder upon the sale of the Registrable Securities
giving rise to such indemnification obligation.
(c) Conduct of Indemnification Proceedings. If any Proceeding shall be
brought or asserted against any Person entitled to indemnity hereunder (an
"Indemnified Party"), such Indemnified Party shall promptly notify the Person
from whom indemnity is sought (the "Indemnifying Party") in writing, and the
Indemnifying Party shall assume the defense thereof, including the employment of
counsel reasonably satisfactory to the Indemnified Party and the payment of all
fees and expenses incurred in connection with defense thereof; provided, that
the failure of any Indemnified Party to give such notice shall not relieve the
Indemnifying Party of its obligations or liabilities pursuant to this Agreement,
except (and only) to the extent that it shall be finally determined by a court
of competent jurisdiction (which determination is not subject to appeal or
further review) that such failure shall have proximately and materially
adversely prejudiced the Indemnifying Party.
An Indemnified Party shall have the right to employ separate counsel
in any such Proceeding and to participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of such Indemnified Party
or Parties unless: (1) the Indemnifying Party has agreed in writing to pay such
fees and expenses; or (2) the Indemnifying Party shall have failed promptly to
assume the defense of such Proceeding and to employ counsel reasonably
satisfactory to such Indemnified Party in any such Proceeding; or (3) the named
parties to any such Proceeding (including any impleaded parties) include both
such Indemnified Party and the Indemnifying Party, and such Indemnified Party
shall have been advised by counsel that a conflict of interest is likely to
exist if the same counsel were to represent such Indemnified Party and the
Indemnifying Party (in which case, if such Indemnified Party notifies the
Indemnifying Party in writing that it elects to employ separate counsel at the
expense of the Indemnifying Party, the Indemnifying Party shall not have the
right to assume the defense thereof and such counsel shall be at the expense of
the Indemnifying Party). The Indemnifying Party shall not be liable for any
settlement of any such Proceeding effected without its written consent, which
consent shall not be unreasonably withheld. No Indemnifying Party shall,
without the prior written consent of the Indemnified Party, effect any
settlement of any pending Proceeding in respect of which any Indemnified Party
is a party, unless such settlement includes an unconditional release of such
Indemnified Party from all liability on claims that are the subject matter of
such Proceeding.
12
<PAGE>
All fees and expenses of the Indemnified Party (including reasonable
fees and expenses to the extent incurred in connection with investigating or
preparing to defend such Proceeding in a manner not inconsistent with this
Section) shall be paid to the Indemnified Party, as incurred, within ten (10)
Business Days of written notice thereof to the Indemnifying Party (regardless of
whether it is ultimately determined that an Indemnified Party is not entitled to
indemnification hereunder; provided, that the Indemnifying Party may require
such Indemnified Party to undertake to reimburse all such fees and expenses to
the extent it is finally judicially determined that such Indemnified Party is
not entitled to indemnification hereunder).
(d) Contribution. If a claim for indemnification under Section 5(a)
or 5(b) is unavailable to an Indemnified Party (by reason of public policy or
otherwise), then each Indemnifying Party, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party and
Indemnified Party in connection with the actions, statements or omissions that
resulted in such Losses as well as any other relevant equitable considerations.
The relative fault of such Indemnifying Party and Indemnified Party shall be
determined by reference to, among other things, whether any action in question,
including any untrue or alleged untrue statement of a material fact or omission
or alleged omission of a material fact, has been taken or made by, or relates to
information supplied by, such Indemnifying Party or Indemnified Party, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such action, statement or omission. The amount paid or
payable by a party as a result of any Losses shall be deemed to include, subject
to the limitations set forth in Section 5(c), any reasonable attorneys' or other
reasonable fees or expenses incurred by such party in connection with any
Proceeding to the extent such party would have been indemnified for such fees or
expenses if the indemnification provided for in this Section was available to
such party in accordance with its terms.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 5(d) were determined by pro rata
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 5(d), no Holder shall be required
to contribute, in the aggregate, any amount in excess of the amount by which the
proceeds actually received by such Holder from the sale of the Registrable
Securities subject to the Proceeding exceeds the amount of any damages that such
Holder has otherwise been required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission. No Person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any Person who was not
guilty of such fraudulent misrepresentation.
The indemnity and contribution agreements contained in this Section
are in addition to any liability that the Indemnifying Parties may have to the
Indemnified Parties.
13
<PAGE>
6. Miscellaneous
(a) Remedies. In the event of a breach by the Company or by a Holder,
of any of their obligations under this Agreement, each Holder or the Company, as
the case may be, in addition to being entitled to exercise all rights granted by
law and under this Agreement, including recovery of damages, will be entitled to
specific performance of its rights under this Agreement. The Company and each
Holder agree that monetary damages would not provide adequate compensation for
any losses incurred by reason of a breach by it of any of the provisions of this
Agreement and hereby further agrees that, in the event of any action for
specific performance in respect of such breach, it shall waive the defense that
a remedy at law would be adequate.
(b) No Inconsistent Agreements. Neither the Company nor any of its
subsidiaries has, as of the date hereof, nor shall the Company or any of its
subsidiaries, on or after the date of this Agreement, enter into any agreement
with respect to its securities that is inconsistent with the rights granted to
the Holders in this Agreement or otherwise conflicts with the provisions hereof.
Except as and to the extent specified in Schedule 6(b) hereto, neither the
Company nor any of its subsidiaries has previously entered into any agreement
granting any registration rights with respect to any of its securities to any
Person. Without limiting the generality of the foregoing, without the written
consent of the Holders of a majority of the then outstanding Registrable
Securities, the Company shall not grant to any Person the right to request the
Company to register any securities of the Company under the Securities Act
unless the rights so granted are subject in all respects to the prior rights in
full of the Holders set forth herein, and are not otherwise in conflict or
inconsistent with the provisions of this Agreement.
(c) No Piggyback on Registrations. Except as and to the extent
specified in Schedule 6(b) hereto, neither the Company nor any of its security
holders (other than the Holders in such capacity pursuant hereto) may include
securities of the Company in the Registration Statement other than the
Registrable Securities, and the Company shall not after the date hereof enter
into any agreement providing any such right to any of its security holders.
(d) Piggy-Back Registrations. If at any time when there is not an
effective Registration Statement covering all of the Registrable Securities and
the Underlying Shares, the Company shall determine to prepare and file with the
Commission a registration statement relating to an offering for its own account
or the account of others under the Securities Act of any of its equity
securities, other than on Form S-4 or Form S-8 (each as promulgated under the
Securities Act) 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, then the Company shall send to each holder of Registrable
Securities written notice of such determination and, if within twenty (20) days
after receipt of such notice, any such holder shall so request in writing, the
Company shall include in such registration statement all or any part of such
Registrable Securities such holder requests to be registered; provided, however,
that the Company shall not be required to register any Registrable Securities
pursuant to this Section 6(d) that are eligible for sale pursuant to Rule 144(k)
of the Commission.
14
<PAGE>
(e) Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the same shall be in writing and signed by the Company
and the Holders of at least two-thirds of the then outstanding Registrable
Securities. Notwithstanding the foregoing, a waiver or consent to depart from
the provisions hereof with respect to a matter that relates exclusively to the
rights of Holders and that does not directly or indirectly affect the rights of
other Holders may be given by Holders of at least a majority of the Registrable
Securities to which such waiver or consent relates; provided, however, that the
provisions of this sentence may not be amended, modified, or supplemented except
in accordance with the provisions of the immediately preceding sentence.
(f) Notices. Any and all notices or other communications or
deliveries required or permitted to be provided hereunder shall be in writing
and shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section prior to 6:30 p.m.
(New York City time) on a Business Day, (ii) the Business Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in the Purchase Agreement later than
6:30 p.m. (New York City time) on any date and earlier than 11:59 p.m.
(New York City time) on such date, (iii) the Business Day following the date of
mailing, if sent by nationally recognized overnight courier service, or
(iv) upon actual receipt by the party to whom such notice is required to be
given. The address for such notices and communications shall be as follows:
If to the Company: American BioMed, Inc.
10077 Grogan's Mill Road, Suite 100
The Woodlands, TX 77380
Attn: Steven Rash
If to a Purchaser: To the address set forth under such Purchaser's name
on the signature pages hereto.
15
<PAGE>
If to any other Person who is then the registered Holder:
To the address of such Holder as it appears in the
stock transfer books of the Company
or such other address as may be designated in writing hereafter, in the same
manner, by such Person.
(g) Successors and Assigns. This Agreement shall inure to the benefit
of and be binding upon the successors and permitted assigns of each of the
parties and shall inure to the benefit of each Holder. The Company may not
assign its rights or obligations hereunder without the prior written consent of
each Holder. Each Holder may assign their respective rights hereunder in the
manner and to the Persons as permitted under the Purchase Agreement.
(h) Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original
and, all of which taken together shall constitute one and the same Agreement.
In the event that any signature is delivered by facsimile transmission, such
signature shall create a valid binding obligation of the party executing (or on
whose behalf such signature is executed) the same with the same force and effect
as if such facsimile signature were the original thereof.
(i) Governing Law. All questions concerning the construction,
validity, enforcement and interpretation of this Agreement shall be governed by
and construed and enforced in accordance with the internal laws of the State of
New York, without regard to the principles of conflicts of law thereof. Each
party hereby irrevocably submits to the exclusive jurisdiction of the state and
federal courts sitting in the City of New York, borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is improper. Each party hereby irrevocably
waives personal service of process and consents to process being served in any
such suit, action or proceeding by mailing a copy thereof to such party at the
address in effect for notices to it under this Agreement and agrees that such
service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law.
(j) Cumulative Remedies. The remedies provided herein are cumulative
and not exclusive of any remedies provided by law.
(k) Severability. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid,
illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their reasonable efforts to find and employ an alternative
means to achieve the same or substantially the same result as that contemplated
by such term, provision, covenant or restriction. It is hereby stipulated and
declared to be the intention of the parties that they would have executed
16
<PAGE>
the remaining terms, provisions, covenants and restrictions without including
any of such that may be hereafter declared invalid, illegal, void or
unenforceable.
(l) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(m) Shares Held by The Company and its Affiliates. Whenever the
consent or approval of Holders of a specified percentage of Registrable
Securities is required hereunder, Registrable Securities held by the Company or
its Affiliates (other than any Holder or transferees or successors or assigns
thereof if such Holder is deemed to be an Affiliate solely by reason of its
holdings of such Registrable Securities) shall not be counted in determining
whether such consent or approval was given by the Holders of such required
percentage.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE TO FOLLOW]
17
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Registration Rights
Agreement as of the date first written above.
AMERICAN BIOMED INC.
By:_____________________________________
Name:
Title:
AJW PARTNERS, LLC
By:_____________________________________
Corey S. Ribotsky
Manager
Address for Notice:
1670 Old Country Road, Suite 112
Plainview, New York 11803
NEW MILLENNIUM CAPITAL PARTNERS, LLC
By:_____________________________________
Glenn A. Arbeitman
Authorized Signatory
Address for Notice:
1670 Old Country Road, Suite 112
Plainview, New York 11803
18
<PAGE>
Annex A
PLAN OF DISTRIBUTION
The Selling Stockholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of Common Stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The Selling Stockholders may use any one or more of the
following methods when selling shares:
ordinary brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
block trades in which the broker-dealer will attempt to sell the shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction;
purchases by a broker-dealer as principal and resale by the broker-dealer
for its account;
an exchange distribution in accordance with the rules of the applicable
exchange;
privately negotiated transactions;
short sales;
broker-dealers may agree with the Selling Stockholders to sell a specified
number of such shares at a stipulated price per share;
a combination of any such methods of sale; and
any other method permitted pursuant to applicable law.
The Selling Stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
The Selling Stockholders may also engage in short sales against the box,
puts and calls and other transactions in securities of the Company or
derivatives of Company securities and may sell or deliver shares in connection
with these trades. The Selling Stockholders may pledge their shares to their
brokers under the margin provisions of customer agreements. If a Selling
Stockholder defaults on a margin loan, the broker may, from time to time, offer
and sell the pledged shares.
Broker-dealers engaged by the Selling Stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the Selling Stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser)
<PAGE>
in amounts to be negotiated. The Selling Stockholders do not expect these
commissions and discounts to exceed what is customary in the types of
transactions involved.
The Selling Stockholders and any broker-dealers or agents that are involved
in selling the shares may be deemed to be "underwriters" within the meaning of
the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.
The Company is required to pay all fees and expenses incident to the
registration of the shares, including fees and disbursements of counsel to the
Selling Stockholders. The Company has agreed to indemnify the Selling
Stockholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
<PAGE>
EXHIBIT 23.1
[LETTERHEAD OF KARLINS, ARNOLD
& CORBITT LOGO]
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 14, 2000, included in the Annual Report on Form 10-K for the year ended
December 31, 1999.
/s/ KARLINS ARNOLD & CORBITT, P.C.
- -----------------------------------
KARLINS ARNOLD & CORBITT, P.C.
Houston, Texas
March 14, 2000
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<PAGE>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 12,322
<SECURITIES> 0
<RECEIVABLES> 122,462
<ALLOWANCES> 3,100
<INVENTORY> 400,797
<CURRENT-ASSETS> 569,412
<PP&E> 673,653
<DEPRECIATION> 593,711
<TOTAL-ASSETS> 1,085,452
<CURRENT-LIABILITIES> 3,394,129
<BONDS> 0
0
23
<COMMON> 43,054
<OTHER-SE> (3,203,823)
<TOTAL-LIABILITY-AND-EQUITY> 1,085,452
<SALES> 356,503
<TOTAL-REVENUES> 356,503
<CGS> 324,275
<TOTAL-COSTS> 324,275
<OTHER-EXPENSES> 1,817,316
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 296,325
<INCOME-PRETAX> (1,912,332)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,912,332)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,912,332)
<EPS-BASIC> (.05)
<EPS-DILUTED> (.05)
</TABLE>
