As filed with the Securities and Exchange Commission on December 24, 1996
Registration No. 333-16535
----------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.
FORM SB-2/A
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
AMERICAN BIO MEDICA CORPORATION
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(Name of small business issuer in its charter)
New York 5122 22-3378935
- ------------------------------- ---------------------------- ---------------
(State or other jurisdiction of (Primary Standard Industrial (I.R.S Employer
incorporation or organization) Classification Code Number) (Identification No.)
102 Simons Road, Ancramdale, New York 12503 800-227-1243
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(Address and telephone number of principal executive offices)
102 Simons Road, Ancramdale, New York 12503 800-227-1243
- --------------------------------------------------------------------------------
(Address of principal place of business or intended principal place of business)
102 Simons Road, Ancramdale, New York 12503 800-227-1243
--------------------------------------------------------
(Name, address and telephone number of agent for service)
Approximate date of commencement of proposed sale to the public:
As soon as practical after this Registration Statement becomes effective.
<PAGE>
CALCULATION OF REGISTRATION FEE
Proposed Maximum
Title of each class Amount maximum aggregate Amount of
of securities to be offering price offering registration
to be registered registered per item (3) price (1) fee
- --------------------------------------------------------------------------------
Common Shares (2)
Underlying conversion 600,000 $2.50 $1,500,000 $454.54
of Preferred Shares Shares
Common Shares (2)
Underlying exercise 24,712 $6.07 150,002 $45.46
of Warrants Shares
Total registration fee $ 500.00
(1) Estimated for purposes of calculating the registration fee pursuant to
Rule 457.
(2) Any additional Common Shares issuable pursuant to stock splits, stock
dividends or similar transactions will be deemed registered by this registration
statement.
(3) Subsequent to the date of the filing of this registration statement,
the exercise price of the Warrants were reduced to $3.00
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
ii
<PAGE>
AMERICAN BIO MEDICA CORPORATION
CROSS REFERENCE SHEET
Indicating the location in the Prospectus included in this Registration
Statement of the Information called for by the Items of Part I of Form SB-2
Item Heading Caption in Prospectus
- ------- ------------------------------- ---------------------
Item 1 Front of Registration Statement
and Outside Front Cover
of Prospectus Front Cover Page
Item 2 Inside Front and Outside Back
Cover Pages of Prospectus Inside Front Cover,
Inside Back Cover
Additional Information
Item 3 Summary Information
and Risk Factors Prospectus Summary,
The Company, Risk Factors
Item 4 Use of Proceeds Prospectus Summary,
Use of Proceeds
Item 5 Determination of Offering Price Front Cover Page,
Risk Factors,
Item 6 Dilution Dilution
Item 7 Selling Security-Holders Selling Securityholders
Item 8 Plan of Distribution Front Cover Page, Underwriting
Item 9 Legal Proceedings Litigation
Item 10 Directors, Executive Officers,
Promoters and Control Persons Management
Item 11 Security Ownership of Certain
Beneficial Owners and Principal Shareholders
Management
Item 12 Description of Securities Front Cover Page,
Prospectus Summary,
Description of Securities
Item 13 Interest of Named Experts
and Counsel Legal Matters, Experts
Item 14 Disclosure of Commission Position
on Indemnification For
Securities Act Liabilities Commission Position
on Indemnification
for Securities Act
Liabilities
Item 15 Organization Within Last Five Years Certain Transactions
Item 16 Description of Business Business
Item 17 Management's Discussion and
Analysis of Plan of Operation Management's Discussion
and Analysis of Plan of
Operation
Item 18 Description of Property Business
Item 19 Certain Relationships
and Related Transactions Certain Transactions
Item 20 Market for Common Equity
and Related Stockholder Matters Market for Common Equity
and Related Shareholder
Matters
Item 21 Executive Compensation Management
Item 22 Financial Statements Financial Statements
Item 23 Changes in and Disagreement
With Accountants on Accounting
and Financial Disclosure Not Applicable
iii
<PAGE>
PROSPECTUS
AMERICAN BIO MEDICA CORPORATION
American Bio Medica Corporation (the "Company") is registering the
following securities: up to 600,000 Common Shares into which 150 preferred
shares ("Preferred Shares") may be converted and 24,712 common share purchase
warrants (the "Warrants"). Each Preferred Share is convertible pursuant to the
following formula: $10,000 (the purchase price of each Preferred Share) divided
by the lesser of $6.07 (which was the "Market Price" on the closing date of the
sale of the Preferred Shares) or 75% of the Market Price. ("Market Price" is
defined throughout this prospectus (the "Prospectus") as the average closing
price of the Common Shares for the five days prior to the date of purchase or
conversion, as the case may be, of the Preferred Shares.) Each Warrant entitles
the holder to purchase one Common Share at a price of $3.00 per share for a
period of two years commencing on the date of an effective registration
statement relating to the underlying shares. The exercise price of the Warrants
has been determined through negotiation between the Company and the holder
thereof and such price does not necessarily bear any direct relationship to the
current market value, asset value or net book value of the Company or other
generally accepted criteria of value. Warrants were issued as part of the
commission due and payable for the introduction to the Company of the purchaser
of the Preferred Shares. (See "Risk Factors" and "Certain Transactions" and
"Description of Securities.")
The Common Shares trade on the Electronic Bulletin Board of the National
Association of Securities Dealers, Inc. ("NASD"). It is not anticipated that a
market will develop in the Warrants; and they are not being registered herein.
There can be no assurance that a public market in the Common Shares will be
sustained during the period of exercise of the Warrants or conversion of the
Preferred Shares.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION TO INVESTORS.(SEE "RISK FACTORS" (page 5) AND "DILUTION.")
____________________________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") OR
BY ANY STATE OR JURISDICTION, NOR HAS THE COMMISSION OR ANY STATE OR
JURISDICTION PASSED UPON THE ACCURACY OR ADEQUACY OF THE PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE .
- --------------------------------------------------------------------------------
Price to Underwriting Discounts Proceeds to
Public (1) and Commissions(1)(3) Company(2)(3)
- --------------------------------------------------------------------------------
Per Share Underlying Con-
version of Preferred Shares $3.00 $-0- $3.00
- --------------------------------------------------------------------------------
Per Share Underlying
Warrants $3.00 $-0- $3.00
- --------------------------------------------------------------------------------
Total Shares Underlying
Conversion of Preferred
Shares $1,500,000 $-0- $1,500,000
- --------------------------------------------------------------------------------
Total Shares Underlying
Warrants $ 73,136 $-0- $ 73,136
- --------------------------------------------------------------------------------
Total $1,573,136
- --------------------------------------------------------------------------------
(1) Before deducting estimated expenses of the Offering, including, but not
limited to, legal and accounting fees, fees to regulatory authorities and
printing and distribution expenses, which are payable by the Company estimated
at $20,000. ("Use of Proceeds.")
AMERICAN BIO MEDICA CORPORATION
102 Simons Road
Ancramdale, New York 12503
800-227-1243
<PAGE>
AVAILABLE INFORMATION
The Prospectus, which constitutes a part of a Registration Statement filed
by the Company with the Securities and Exchange Commission (the "Commission")
under the Securities Act of 1933, as amended (the "Securities Act"), omits
certain information contained in the Registration Statement, and reference is
hereby made to the Registration Statement and to the exhibits relating thereto
for further information with respect to the Company and the Units offered
hereby. Statements contained herein concerning provisions of any documents are
not necessarily complete, and each statement is qualified in its entirety by
reference to the copy of such document filed with the Commission.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Securities Exchange Act"), and in
accordance therewith files reports, proxy statements, and other information with
the Commission. Such reports, proxy statements, and other information filed by
the Company can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549-1004; and at the following Regional Offices of the Commission:
Northeast Regional Office, 7 World Trade Center, New York, New York 10007; and
Chicago Regional Office, Northwest Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such material can be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549-1004 at prescribed rates. The Commission also maintains a
World Wide Web site on the Internet at http://www.sec.gov. that contains copies
of reports, proxy and information statements and other information regarding
registrants, including the Company, which electronically file reports with the
Commission.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information, financial statements and related notes appearing elsewhere
in the Prospectus including information under the caption "Risk Factors,"
particularly Limited Operating History and Revenues; Significant and Continuing
Losses; and Dependence on Management (see "Risk Factors"). Each investor is
urged to read the Prospectus in its entirety.
The Company
-----------
From its inception in 1986 until 1991, the Company, a New York corporation,
was involved in marketing educational books and software to schools and
municipal libraries and audiovisual educational packages to corporations
throughout the United States. In 1991, the Company reduced its concentration in
this market because of heightened competition, increasing costs of doing
business and slow collections from municipalities and commenced seeking new
technologies in emerging medical markets. The Company has continued one small
segment of its original business, that of selling audiovisual packages to
libraries.
2
<PAGE>
The Company is currently in the business of acquiring, developing and
marketing biomedical technologies and products. The Company, from inception to
date, has accumulated losses of $2,676,889. The Company's auditor, in his report
accompanying the financial statements, has characterized the Company as a
development stage company with little operating history subsequent to its
reorganization and commencement of development of biomedical technologies which
are, at present, its core business.This report could adversely affect the market
price of the Common Shares, the ability of the Company to raise capital, the
ability of the Company to conclude supply contracts for parts and inventory and
the ability of the Company to enter into contracts for the sale of its workplace
drug testing kits. The Company currently owns two technologies for screening
drugs of abuse, a workplace screening test and a preliminary test for use by
laboratories. The Company has begun to market its workplace screening test and
has produced and delivered several thousand units of this test. It has installed
equipment suitable for the mass production of the workplace screening test and
an is accumulating an inventory of reagent and other constituent parts of its
kits. It has commenced producing its marijuana/cocaine test kit using this
machinery during the second week in November, 1996 and its five drug (marijuana,
cocaine, opiates, PCP and amphetamines) kit during the fourth week of November.
It has secured several significant orders for its workplace screening tests and
many smaller orders. These orders aggregate $752,850. Each order has been
accompanied by estimates of yearly volume of orders. If all the estimates are
ultimately embodied in purchase orders, of which there is no assurance, the
total revenues to be received for the twelve months commencing November 1, 1996,
considering only orders and estimates received prior to that date, would be
$7,612,500. It has applied for and anticipates receiving Federal Drug
Administration ("FDA") approval of its preliminary laboratory drug test kit and
will not commence any marketing or production activities until after such
approval is granted.
The Company also owns a patented low cost method for producing Keratin
proteins. The uses for such proteins include hardening of finger nails and
carrying topical lotions and medicines through the skin. In addition, the
Company is developing a saliva test for alcohol consumption. Although the
Company has been supplying Keratin proteins on a limited basis for testing by
potential customers, the Company has no intention of further developing or
marketing its laboratory test, its Keratin technology nor its saliva test for
alcohol consumption until after its workplace screening test has been in full
production for at least three months.
The Company may develop or acquire additional drug testing or biomedical
technologies or products in the future. However, as of the date of the
Prospectus, it has not yet identified any technologies which it desires to
develop or acquire.
The Company's headquarters are located at 102 Simons Road, Ancramdale, New
York 12503. Its telephone number at that address is 800-227-1243 and its fax is
518-329-4156.
Securities
----------
Common Shares
-------------
The Company is authorized to issue 30,000,000 common shares, $.01 par value
per share. As of October 31, 1996, 12,510,894 Common Shares have been issued.
(See "Description of Securities -- Common Shares.")
3
<PAGE>
Preferred Shares
----------------
The Company is authorized to issue 5,000,000 preferred shares, $.01 par
value per share with such designations, rights and preferences as may be
determined by the Board of Directors. The Company sold 150 Preferred Shares.
Each Preferred Share may be converted into Common Shares pursuant to the
following formula: $10,000 divided by the lesser of $6.07 or 75% of the "Market
Price" of the Common Shares at the date of conversion. (See Front Cover Page,
"Business -- Financing, " "Description of Securities -- Preferred Shares.")
Options
-------
The Company has issued 500,000 "A" Options which are exercisable at $1.00
through March 14, 1999 and 500,000 "B" Options, which are exercisable at $2.00
through March 14, 1999. Until a registration statement relating to the Common
Shares underlying the Options is effective, certificates representing the shares
into which the Options are exercised will bear a legend restricting transfer in
the absence of an effective registration with the Commission or an exemption
therefrom. (See "Description of Securities--Options.")
The Company has adopted the Fiscal 1996 Nonstatutory Stock Option Plan (the
"Plan"). 2,000,000 Common Shares were reserved under the Plan. The Plan is
administered by the Board of Directors.
The Company has issued 1,631,000 options pursuant to the 1996 Nonstatutory
Option Plan. All Nonstatutory Options are exercisable for a period of three
years at $3.00 per share. (See "Certain Transactions.")
Warrants
--------
The Company has issued 24,712 Common Shares purchase warrants. The Warrants
are exercisable at $3.00 per share for a period of two years from the date of an
effective registration statement relating to the underlying Common Shares. (See
"Description of Securities--Warrants.")
Securities to be Registered
---------------------------
The Common Shares into which the Preferred Shares may be converted are
being registered herein. Although the number of Common Shares into which the
Preferred Shares are convertible will be a minimum of 247,117 shares, the
maximum number of Shares will depend on the "Market Price" of the Common Shares.
The number of Common Shares registered herein is the number of Common Shares
into which the Preferred Shares will be converted if the "Market Price" of the
Common Shares falls to $3.33 on the date of conversion. On October 22, the
"Market Price" of the Common Shares was $5.00. If the number of Common Shares
into which Preferred Shares are convertible exceeds 600,000, an amendment to the
Registration Statement, of which the Prospectus is a part, will be amended to
register the additional shares. (See Front Cover Page, "Risk Factors," "Terms of
the Offering" and "Description of Securities").
In addition, the 24,712 Common Shares underlying the Warrants are being
registered herein.
Dilution
--------
If all the Preferred Shares are converted into Common Shares and all the
Options and Warrants exercised, there will be 13,189,939 Common Shares
outstanding. Persons who convert their Preferred Shares and exercise their
Warrants will own 624,712 Shares (assuming the Preferred Shares are converted
into 600,000 Common Shares) or 4.7%. (See "Dilution" and "Capitalization.")
Certain Risk Factors
--------------------
An investment in the Shares involves substantial risks due in part to the
Company's minimal operating history, the lack of a minimum amount of Option and
Warrant exercise and the highly speculative nature of its business.
Warrantholders and holders of Preferred Shares ("Selling Security Holders")as
well as investors in the Common Shares should review the entire Prospectus,
particularly the "Risk Factors."
4
<PAGE>
Use of Proceeds
---------------
The proceeds of the exercise of the Warrants ($150,002) will be used for
working capital and for legal and accounting fees and for other expenses
relating to registering the Common Shares underlying the Preferred Shares and
Warrants. (See "Use of Proceeds" and "Business.")
Determination of Exercise and Conversion Prices
-----------------------------------------------
The exercise prices and other terms of the Warrants and the formula for the
conversion of the Preferred Shares have been determined by the Company and the
original holders thereof and bear no relation to the Company's assets, book
value, or any other customary investment criteria, including the Company's prior
operating history. (See "Determination of Offering Price.
SUMMARY FINANCIAL INFORMATION
For the period from inception
(April 10, 1986) to October 31, 1996
------------------------------------
Statement of Operations Data:
Sales $5,389,882
Cost of sales 3,149,900
Gross Profit 2,239,982
Operating expenses 4,701,656
Operating loss (2,461,674)
Other income (expense)-net ( 15,215)
Net loss (2,676,889)
Net loss per common share
primary $(.21)
Shares used in computing 12,565,227
net loss per share
Net loss per common share
fully diluted $(.20)
Shares used in computing
fully diluted 13,189,939
Cash dividends per share -0-
As adjusted (1)
As of October 31, 1996 As of October 31, 1996
---------------------- ----------------------
Balance Sheet Data:
Current assets $1,699,601 $1,753,737
Current liabilities 27,827 27,827
Working capital 1,671,774 1,725,910
Total assets 1,892,339 1,946,475
Long term debt,
less current portion -0- -0-
Accumulated deficit (2,676,889) (2,676,889)
Stockholders' equity $1,864,512 $1,918,648
------------------------------
1. Assumes conversion of Preferred Shares and exercise of the Warrants. The
number of Common Shares into which the Preferred Shares may be converted as been
taken for purposes of this table at 600,000 Common Shares. The formula for
conversion is $1,500,000 (the aggregate purchase price of the Preferred Shares)
divided by the lesser of $6.07 (the "Market Price on the date of purchase) or
75% of the "Market Price" on the date(s) of conversion. The actual number of
Common Shares into which the Preferred Shares are converted may be greater or
lesser than this number.
5
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE UNITS IS HIGHLY SPECULATIVE, INVOLVES A HIGH DEGREE OF
RISK AND SHOULD BE MADE ONLY BY INVESTORS WHO CAN AFFORD THE LOSS OF THEIR
ENTIRE INVESTMENT. A PROSPECTIVE PURCHASER, PRIOR TO MAKING AN INVESTMENT
DECISION, SHOULD CAREFULLY CONSIDER, ALONG WITH OTHER MATTERS REFERRED TO
HEREIN, THE FOLLOWING RISK FACTORS:
1. New Enterprise; Limited Operating History and Revenues; Significant and
Continuing Losses.
Although the Company was formed in 1986, as far as the development,
manufacture and sale of drug testing kits are concerned, it is in an early stage
of development and has extremely limited operational history upon which
investors may base an evaluation of its performance or any assumption as to the
likelihood that the Company will be profitable. (See "Business."). The Company's
prospects must be considered in light of the risks, expenses, delays, problems
and difficulties frequently encountered in the establishment of a new business,
the development and commercialization of new products based on innovative
technology and the competitive environment in which the Company operates. Since
inception, the Company has generated limited revenues. There can be no assurance
that the Company will be able to generate significant revenues or achieve
profitable operations. (See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Financial Statements.)
2. Dependence on Offering Proceeds to Continue its Operations within the
Context of the Offering; Need for Additional Financing.
The Company's management believes that its existing resources are
sufficient to meet its capital requirements for the marketing, production and
sale of its workplace drug kits. The proceeds of warrant exercise are being
applied to working capital and are not unallocated. However, the Company may
lack proceeds for the development, marketing and production of additional
testing kits and/or the purchase or development of other technologies of which
none has been located as of the date of the Prospectus. (See "Business.")
3. Technological Factors; Uncertainty of Product Development; Unproven
Technology.
Although the Company's development efforts relating to the technological
aspects of the workplace drug testing kit are substantially completed, the
Company is continually seeking to refine and improve it and to develop
additional versions. In addition, the Company plans, commencing at least three
months after full production commences in the manufacture of its workplace drug
testing kits, to perfect its laboratory drug test kit and its saliva alcohol
level test kit and its Keratin production technology. The Company's efforts
remain subject to all of the risks inherent in new product development,
including unanticipated technical, regulatory or other problems which could
result in material delays in product development or commercialization or
significantly increased costs. The Company may be required to commit
considerable additional efforts, time and resources to finalize development of
production versions of its additional products. The Company's success will
depend upon such products meeting targeted product costs and performance, and
may also depend upon their timely introduction into the marketplace. There can
be no assurance that development of the Company's proposed products will be
successfully completed on a timely basis, or at all, that they will meet
projected price or performance objectives, satisfactorily perform all of the
functions for which they are being designed, or prove to be sufficiently
reliable in widespread commercial application. Moreover, there can be no
assurance that unanticipated problems will not arise with respect to
technologies incorporated into its test kits or that product defects will not
become apparent after commercial introduction. In the event that the Company is
required to remedy defects in any of its products after commercial introduction,
the costs to the Company could be significant, which could have a material
adverse effect on the Company.
6
<PAGE>
4. Uncertainty of Continued Market Acceptance.
The Company's workplace drug test has been well received by potential
customers, including corporations, distributors and correctional institutions.
However, although the Company has received and is confident of receiving
additional large initial orders from customers in those categories, its success
is contingent on the receipt of reorders from these customers and orders from
new customers. (See "Business.") To date, the Company has generated limited
revenues from sales of its workplace drug test kit. As is typically the case of
an emerging company, demand and market acceptance for newly introduced products
is subject to a high level of uncertainty. Achieving continued market acceptance
for its workplace drug tests will require substantial marketing efforts and
expenditure of significant funds to inform potential and distributors of the
distinctive characteristics, benefits and advantages of its kits. There can be
no assurance that its drug test kits will become generally accepted or that the
Company's efforts will result in successful product commercialization or initial
or continued market acceptance for its drug testing products. (See
"Business--Marketing and Sales.")
5.Competition in Workplace Drug Testing Market; Technological Obsolescence.
The Company has competition in every area of its existing and proposed
products from drug manufacturers and other manufacturers of drug test kits. Some
of its competitors are well known and have far greater financial resources than
the Company. To the best of Management's knowledge no competitors have
introduced products which equal the ease of use combined with the accuracy of
the Company's drug test kits. (See "Business--Competition.") The markets for
drugs and related products are highly competitive. There can be no assurance
that other technologies or products which are functionally similar to those of
the Company are not currently under development. In addition, there can be no
assurance that other companies with the expertise or resources that would
encourage them to attempt to develop or market competing products will not
develop new products directly competitive with the Company's drug testing kits.
Despite the protections which would be available to the Company in the event its
design patent is granted, the Company expects other companies to attempt to
develop technologies or products which will compete with the Company's products.
6. Dilution as a Result of Conversion of Preferred Shares.
The number of Common Shares into which the Preferred Shares, in the
aggregate, will be convertible will be 247,117 shares unless the Market Price on
the date(s) of conversion is less than $8.09 in which event the number of Common
Shares will be $1,500,000 divided by 75% of the Market Price. On October 30, the
"Market Price" of the Common Shares was $5.00. Thus, there is a great likelihood
that the number of shares to be issued upon conversion of the Preferred Shares
will exceed 247,117. The number of Common Shares registered for conversion of
the Preferred Shares in the registration statement of which the Prospectus is a
part is 600,000 Common Shares which would be the number of Common Shares to be
issued by the Company in the event the Market Price of the Common Shares on the
date(s) of conversion was $3.33.
7. Inability to Exercise Warrants.
The Company intends to qualify the sale of the Warrants in a limited number
of states. Although certain exemptions in the securities laws of certain states
might permit the Warrants to be transferred to purchasers in states other than
those in which the Warrants were initially qualified, the Company will be
prevented from issuing Common Shares to residents in such other states upon the
exercise of the Warrants unless an exemption from qualification is available or
unless the issuance of Common Shares upon exercise of the Warrants is qualified.
The Company is under no obligation to seek, and may decide not to seek or may
not be able to obtain, qualification of the issuance of such Common Shares in
all of the states in which the ultimate purchasers of the Warrants reside. In
such a case, the Warrants held will expire and have no value if they cannot be
sold. Further, a current prospectus covering the Common Shares issuable upon
exercise of the Warrants must be in effect before the Company may accept
exercises. There can be no assurance that the Company will be able to have a
prospectus in effect when the Prospectus is no longer current, notwithstanding
the Company's commitment to use its best efforts to do so. (See "Description of
Securities.")
7
<PAGE>
8. Inability to Find and Attract Qualified Personnel.
The Company currently has sufficient management expertise and depth to
develop its business. However, it will need a skilled and dedicated marketing
staff as well as technical and production personnel in the future. There is no
guarantee that the Company can retain its present staff or that capable
personnel with relevant skills will be available. (See "Business.")
9. Dependence on Management.
The Company will be dependent on the expertise and experience of Stan
Cipkowski, President, and Jay Bendis, Executive Vice-President, for its
operations. The loss of either of Messrs. Cipkowski or Bendis will seriously
inhibit the Company's operations. (See "Management.")
10. Possible Adverse Changes in Regulatory Framework.
Approval from the Federal Food and Drug Administration ("FDA") is not
required for the sale of a workplace drug test kits which are the only products
presently marketed and sold by the Company. However, the Company, as a precursor
to entrance into the laboratory market, the Company has applied for approval
from the FDA of its tests and has received approval for the testing of three
drugs of abuse. There is no assurance if and when the FDA will grant approval
for the remaining two drugs of abuse contained in the Company's present kits or
if and when it will grant approval for additional drugs of abuse for future
kits.
11. Sales of Common Shares at Below the Offering Price/Dilution.
Present Shareholders acquired their Common Shares at prices substantially
below the Offering Price attributed to each Common Share or can convert their
Preferred Stock into Common Shares at a price per share substantially below the
Offering Price. Thus, upon completion of the Offering, there will be an
immediate substantial dilution to Subscribers in the book value of each Share,
and the present management and investors will realize an immediate increase
thereon. (See "Dilution.")
12. Restricted Resale of the Securities.
5,862,340 Common Shares presently issued and outstanding as of the date
hereof are "restricted securities" as that term is defined under the Securities
Act of 1933, as amended, (the "Securities Act") and in the future may be sold in
compliance with Rule 144 of the Securities Act, or pursuant to a Registration
Statement filed under the Securities Act. Rule 144 provides, in essence, that a
person holding restricted securities for a period of two years may sell those
securities in unsolicited brokerage transactions or in transactions with a
market maker, in an amount equal to one percent of the Company's outstanding
Common Stock every three months. Sales of unrestricted shares by affiliates of
the Company are also subject to the same limitation upon the number of shares
that may be sold in any three month period. If all the Shares offered herein are
sold, the holders of the restricted shares may each sell 58,623 shares during
any three month period. Additionally, Rule 144 requires that an issuer of
securities made available adequate current public information with respect to
the issuer. Such information is deemed available if the issuer satisfies the
reporting requirements of sections 13 or 15(d) of the Securities and Exchange
Act of 1934 (the "Securities Exchange Act") or of Rule 15c2-11 thereunder. Rule
144(k) also permits the termination of certain restrictions on sales of
restricted securities by persons who were not affiliates of the Company at the
time of the sale and have not been affiliates in the preceding three (3) months.
Such persons must satisfy a three (3) year holding period. There is no
limitation on such sales and there is no requirement regarding adequate current
public information. Investors should be aware that sales under Rule 144 or
144(k), or pursuant to a Registration Statement filed under the Act, may have a
depressive effect on the market price of the Company's securities in any market
which may develop for such shares. In addition, the Common Shares into which the
Class "A" Preferred Stock is convertible are likewise restricted securities.
Since conversion of such preferred stock is contingent on the Company's meeting
certain economic parameters, the Company cannot predict whether any of such
preferred shares will be converted or, if any are converted, how many Common
Shares will be issued as a result of the conversion of Class "A" Preferred
Stock. (See "Description of Securities.")
8
<PAGE>
13. Preferred Shares; Convertibility into Common Shares; Dilution.
The Company has the authority to issue up to 5,000,000 Shares of Preferred
Stock with such designations, rights and preferences as may be determined by the
Board of Directors. The Company is empowered, without further shareholder
approval, to issue Preferred Shares with dividend, liquidation, conversion,
voting or other rights which could adversely affect the voting power or other
rights of the holders of the Common Shares. The Company, as of the date of the
Prospectus, has issued 150 Preferred Shares which are convertible into Common
Shares. (See "Risk Factor #6--Dilution as a Result of Conversion of Preferred
Shares," "Certain Transactions" and "Description of Securities--Preferred
Shares.")
14. Need for Additional Financing.
The Company expects that its cash on hand plus the net proceeds from the
exercise of options and warrants will be sufficient to fund the Company's
proposed operations for at least 24 months following the completion of the
Offering. This estimate is based on certain assumptions and there can be no
assurance that unanticipated unbudgeted costs will not be incurred. Future
events, including the problems, delays, expenses and difficulties which may be
encountered in establishing a substantial market for the Company's drug test
kits and other technologies could make the net proceeds from exercise of options
and warrants insufficient to fund the Company's proposed operations. There can
be no assurance that the Company will be able to obtain any necessary additional
financing on terms acceptable to it, if at all. In addition, financing may
result in further dilution to the Company's then existing stockholders. The
Company has no established borrowing arrangements or available lines of credit.
(See "Certain Transactions.")
15. Management's Broad Discretion Over Net Proceeds from the Exercise of
the Warrants.
Management has total control of the net proceeds from warrant exercise all
of which is unallocated and which may be used for any relevant business purposes
in the discretion of Management. (See "Use of Proceeds.")
16. No Dividends.
The payment of dividends rests within the discretion of the Company's Board
of Directors. No dividends have been paid on the Common Shares and the Company
does not anticipate the payment of cash dividends in the foreseeable future. If
the operations of the Company become profitable, it is anticipated that, for the
foreseeable future, any income received therefrom would be devoted to the
Company's future operations and that cash dividends would not be paid to the
Company's shareholders. (See "Business--Dividend Policy.")
17. Control by Management.
After the exercise of the Warrants and conversion of the Preferred Shares
(assuming the Preferred Shares are converted into 600,000 Common Shares),
management of the Company will own 48.4% of the outstanding Common Shares and
will be in a position to control the election of the Board of Directors. The
certificate of incorporation of the Company does not provide for cumulative
voting and, as a result, purchasers of the Company's securities will not be able
to elect any directors or exert any control over the general policies of the
Company. (See "Description of Company's Securities--Description of Common
Stock.")
18. Substantial Dilution to Warrantholders Who Exercise Warrants.
Holders of the Warrants who exercise their warrants will incur an immediate
and substantial dilution in net tangible book value from the exercise prices of
their warrants. (See "Dilution.")
9
<PAGE>
19. Ability to Retain and Attract Market Makers.
The Company's Common Shares are trading on the NASD Electronic Bulletin
Board. In the event that the market makers cease to function as such, public
trading in the Company's Shares will be adversely affected or may cease
entirely. Presently, market makers for the Company's Common Shares include
Coastal Securities, Ltd., Fahnestock & Co., Inc., Hill Thompson Magid & Co.,
Kalb Voorhis & Co., L. B. Saks, Inc., Nash Weiss & Co., Inc., Paragon Capital
Corp., Troster Singer Corp., Comprehensive Capital Corp., Herzog, Heine, Geduld,
Inc., JW Charles Securities, Inc., Knight Securities, Ltd., Naib Trading Corp.,
National Financial Securities Corp., Sharpe Capital, Inc. and Wein Securities
Corp.
20. Anti-Takeover Provisions in Certificate of Incorporation
The Company's recently amended certificate of incorporation authorizes the
issuance of 5,000,000 preferred shares. The Board of Directors has the
authority, without further action by the Common Shareholders, to issue Preferred
Shares from time to time in one or more classes or series, to fix the number of
shares constituting any class or series and the stated value thereof, if
different from the par value, and to fix the terms of any such series or class,
including dividend rights, dividend rates, conversion or exchange rights, voting
rights, rights and terms of redemption (including sinking fund provisions), the
redemption price and the liquidation preference of such class or series. Thus,
the Board of Directors, in order to avoid a hostile takeover, could issue
Preferred Shares with supervoting rights, conversion rights into Common Shares,
liquidation preference or a combination of rights and preferences which could
inhibit success of such attempt.
USE OF PROCEEDS
The Company estimates that the net proceeds from exercise of Warrants will
be approximately $54,136 after deduction of registration expenses, estimated in
the aggregate at approximately $20,000. The Company intends to apply these net
proceeds over the 24-month period following the completion of the Offering as
follows:
Approximate Amount
Anticipated Applications of Net Proceeds
________________________ __________________
Working Capital $54,136
________
Total Net Proceeds $54,136
=======
----------------
Pending application, the proceeds from warrant exercise, if any, will be
invested in short-term, interest-bearing securities or money market funds. The
Company believes that it will not be an "investment company" (as such term is
defined in the Investment Company Act of 1940) as a result of such investments
pursuant to regulations promulgated thereunder. The Company does not require
that any specific minimum investment criteria be used in selecting such
short-term investments, but will select such investments as it deems
appropriate, taking into consideration such factors as liquidity, return on
investment and safety of investment.
The Company anticipates, based on currently proposed plans and assumptions
relating to its operations, that cash on hand augmented by proceeds from warrant
exercise, if any, will be sufficient to sustain current operations and finance
planned expansion for approximately 24 months. The allocation of the proceeds of
the exercise of the Warrants set forth above represents the Company's best
estimates based upon its present plans and certain assumptions regarding general
economic and industry conditions and the Company's anticipated future revenues
and expenditures. In the event that the Company's plans change, or its
assumptions change or prove to be incorrect, or cash on hand and the proceeds of
the exercise of the Warrants otherwise prove to be insufficient to fund
operations (due to unanticipated expenses or difficulties or otherwise), the
Company may be required to seek additional financing or curtail its operations.
10
<PAGE>
The Company may, if and when the opportunity arises, use a portion of its
cash on hand plus the proceeds of the exercise of the Warrants all of which are
allocated to working capital, together with the issuance of debt or equity
securities, to expand its operations by acquiring companies, or assets thereof,
which the Company believes are compatible with its business. Any decision to
make an acquisition will be based upon a variety of factors including, among
others, the purchase price and other financial terms of the transaction, the
business prospects and competitive position of and services and products
provided by the acquisition candidate and the extent to which any such
acquisition would enhance the Company's prospects. The Company is not, however,
currently engaged in identifying appropriate candidates for acquisition and has
no current plans, agreements, understandings or commitments and is currently not
engaged in any negotiations with respect to any such acquisition.
Proceeds not immediately required for the purposes described above will be
invested principally in United States government securities, short-term
certificates of deposit, money market funds or other interest-bearing
investments.
The Company's expected needs for additional financing reflect Management's
estimate at this time of the capital requirements, anticipated expenses, selling
activity, and cash flow available to the Company based on the Company's spending
plans, current operating assumptions and current economic, competitive and
industry conditions and are necessarily subject to change. There can be no
assurance that additional funds will not be required earlier than anticipated.
The Company has no firm arrangements to obtain any additional financing and
there can be no assurance that the Company will be able to do so at an
acceptable cost, if at all.
DIVIDEND POLICY
Since its inception, the Company has not paid any dividends on its Common
Shares. The Company intends to retain future earnings, if any, that may be
generated from the Company's operations to help finance the operations and
expansion of the Company and accordingly does not plan to pay dividends to
Shareholders. Any decision as to the future payment of dividends will depend on
the results of operations and financial position of the Company and such other
factors as the Company's Board of Directors, in its discretion, deems relevant.
(See "Risk Factors--No Dividends.")
11
<PAGE>
DILUTION
As of October 31, 1996, assuming sale of the Preferred Shares and
conversion of the Preferred Shares into 600,000 Common Shares, the net tangible
book value of the Company was $1,9802,983 or $.14 per share. After giving effect
to exercise of the Warrants and the receipt of the net proceeds therefrom, the
net tangible book value would be $.14 per share. This represents an immediate
increase in net tangible book value of $.00 per share to the existing
stockholders, and an immediate dilution of $2.86 to the holders of the Warrants
upon exercise thereof.
These figures are set forth in the following table:
Exercise Price per Warrant (1) $3.00
Pro forma net tangible book value per Share
before exercise/conversion (2) $0.14
Increase per Common Share
attributable to exercise of Warrants. $0.00
Pro forma net tangible book value per Share
after exercise/conversion $0.14
Dilution per Common Share attributable
to exercise/conversion $2.86
- -----------------------
(1) Exercise price per Warrant is $3.00.
(2) Net tangible book value per Common Share is determined by dividing the
tangible net worth of the Company by the number of Common Shares outstanding.
(3) Pro-forma net tangible book value per Common Share after
exercise/conversion is determined by dividing the tangible net worth of the
Company (taking into consideration registration expenses) by the number of
Common Shares outstanding after exercise of the Warrants.
(4) Dilution represents the difference between the amount per Common Share
paid by holders of Warrants who exercise them and the net tangible book value
after such exercise.
The following table sets forth, at October 31, 1996, the differences among
the existing shareholders of the Company, including holders of Preferred Shares
and holders of Warrants after exercise the total consideration paid and the
average price per Common Share paid.
Common Shares Purchased Total Consideration
Percent Percent Average Price
Number of Total Amount of Total Per Share
---------- ----- --------- ----- -----
Common Shares 12,565,227 95.3% $3,041,400 67.2% $0.24
150 Convertible
Preferred Shares* 600,000 4.8% $1,500,000 33.7% $3.00
Total Common Shares*
prior to exercise 13,189,939 100.0% $4,541,400 100.0% $0.34
Exercise of Warrants 24,712 0.0% $74,136 1.6% $3.00
Total Common Shares
after exercise 13,214,651 100.0% $4,615,536 100.0% $0.35
----------------------
* The number of Common Shares into which the Preferred Shares may be
converted as been taken, for purposes of this table, at 600,000 Common Shares.
The formula for conversion is $1,500,000 (the aggregate purchase price of the
Preferred Shares) divided by the lesser of $6.07 (the "Market Price on the date
of purchase) or 75% of the "Market Price" on the date(s) of conversion. The
actual number of Common Shares into which the Preferred Shares are converted may
be greater or lesser than this number.
12
<PAGE>
CAPITALIZATION
The table below sets forth the capitalization of the Company as at October
31, 1996 on an historical basis and as adjusted to give effect of the exercise
of the Warrants and conversion of the Preferred Shares.
As Adjusted for
Exercise of
Warrants and
Conversion of
Historical Basis Preferred Shares (2)
---------------- --------------------
Long Term Liabilities $0 $0
Stockholders' Equity
Common Shares, $.01 par value
per share, authorized 30,000,000
shares, issued and outstanding
12,565,227 shares at October 31, 1996;
13,189,939 Common Shares will be
issued and outstanding after
exercise of Warrants and conversion
of the Preferred Shares; 125,651 131,899
Preferred Shares, $.01 par value
per share, authorized 5,000,000
Shares, issued and outstanding
150 Preferred Shares at October 31,
1996 (1); after conversion of the
Preferred Shares, there will be -0-
Preferred Shares outstanding. 1 0
Additional paid in capital 4,415,749 4,463,638
Accumulated deficit (2,676,889) (2,676,889)
----------- ------------
Total stockholders' equity 1,864,512 1,918,648
----------- ------------
Total Capitalization $1,864,512 $1,918,648
=========== ============
____________________
(1) The Company filed a certificate of amendment authorizing the issuance
of 5,000,000 preferred shares, $.01 par value per share in September, 1996.
(2) Assumes conversion of Preferred Shares and exercise of the Warrants.
The number of Common Shares into which the Preferred Shares may be converted as
been taken for purposes of this table at 600,000 Common Shares. The formula for
conversion is $1,500,000 (the aggregate purchase price of the Preferred Shares)
divided by the lesser of $6.07 (the "Market Price on the date of purchase) or
75% of the "Market Price" on the date(s) of conversion. The actual number of
Common Shares into which the Preferred Shares are converted may be greater or
lesser than this number
13
<PAGE>
SELECTED FINANCIAL DATA
The selected unaudited financial data of the Company set forth below for
the period from inception, April 10, 1986, to October 31, 1996 have been derived
from the audited financial statements of the Company.
Period from Inception (April 10, 1986) to October 31, 1996
----------------------------------------------------------
Statement of Income Data:
Net Sales $5,389,882
Cost of Goods Sold 3,149,900
Gross Profit 2,239,982
Total Operating Expenses 4,701,656
Profit (Loss) From Operations (2,461,674)
Other Income (Expenses) (215,215)
Net Loss $(2,676,889)
Net Loss Per Share Primary $(0.21)
Common Shares Outstanding 12,565,227
Net Loss Per Share Diluted $(0.20)
Common Shares Outstanding
Assuming conversion of
convertible preferred shares 13,189,939
As of October 31, 1996 As Adjusted (Pro-forma) (1)
---------------------- ---------------------------
Balance Sheet Data
Working Capital $1,671,774 $1,725,910
Total Assets 1,892,339 1,946,475
Total Liabilities 27,827 27,827
Shareholders' Equity $1,864,512 $1,918,648
------------------------
(1) Assumes conversion of Preferred Shares and exercise of the Warrants.
The number of Common Shares into which the Preferred Shares may be converted as
been taken for purposes of this table at 600,000 Common Shares. The formula for
conversion is $1,500,000 (the aggregate purchase price of the Preferred Shares)
divided by the lesser of $6.07 (the "Market Price on the date of purchase) or
75% of the "Market Price" on the date(s) of conversion. The actual number of
Common Shares into which the Preferred Shares are converted may be greater or
lesser than this number.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (April 10, 1986) to October 31, 1996
Development Stage Activities
----------------------------
Until 1991, the Company was involved in marketing educational books and
software and audio-visual educational packages to schools and municipal
libraries throughout the United States. In 1991, the Company reduced its
concentration on this market because of competition, increasing costs of doing
business and slow collections from municipalities and sought new technologies in
emerging markets. The Company has continued one small segment of its original
business, that of selling audio-visual packages to libraries.
The Company has been a development stage enterprise since its date of
business reformulation in September, 1992 when the Company entered the
bio-technology field through the acquisition of technologies of three companies.
Subsequently, the acquisition of two of these companies was rescinded. With the
technology gained through the acquisition of Protein Resources, Inc., the
development of proprietory drug testing technology, and the employment of
medical and marketing specialists in the field of drug testing, the Company has
developed products, field and market tested these products, applied for patents
and copyrights and has begun initial shipments of product.
14
<PAGE>
These activities have been funded through the sale of convertible
debentures aggregating $1,407,000. As of April 30, 1996, all but $132,000 of the
convertible bonds had been converted to common shares at $.75 per share. The
Company has not as yet generated sufficient revenues during its limited
operating history to meet its ongoing operating expenses. The Company sold an
additional convertible debenture for $10,000 and received $132,000 through the
exercise of 100,000 "A" warrants at $1.00 and 32,000 "B" warrants at $1.00 per
share. As of September 30, 1996, the Company also sold 150 shares of convertible
preferred shares at $10,000 per share for an aggregate consideration of
$1,500,000. The Company is using proceeds from the sale of the preferred shares
to expand its marketing campaign and increase production of its workplace drug
testing kits.
Results of Operations for the year ended April 30, 1996 as compared to the
year ended April 30, 1995.
---------------------------------------------------------------------------
The only revenues for fiscal 1996 were revenues from the audio-visual
segment of the Company's operations. The Company had no revenues as of April 30,
1996 from the Company's drug testing products. Revenues from the audio-visual
segment of the business were $137,891 for the year ended April 30, 1995 as
compared to $158,105 for the year ended April 30, 1996 representing an increase
of $20,214 or 14.7%. This increase is directly attributable to the increased
effectiveness of the Company's use of telemarketing to reach the Company's
defined market of schools and libraries as substantially all marketing is
audio-visual materials is through telemarketing. Costs of good sold for the year
ended April 30, 1995 were $45,204 as compared to $96,444 for the year ended
April 30, 1996 representing a cost of goods sold percentage of 32.8 % for the
year ended April 30, 1995 as compared to 61% for the year ended April 30, 1996.
The increase in costs is attributable to the product mix of the items sold
having a higher wholesale cost. Increases in the wholesale price of products
caused a reduction in gross profits of $31,026 from $92, 687 for the year ended
April 30, 1995 as compared to $61,661 for the year ended April 30, 1996.
General and administrative costs for the year ended April 30, 1996 were
$518,826, an increase of 300% over expenses of $129,719 for the year ended April
30, 1995. These increased costs are the result of increased labor costs for
office personnel and consulting expenses of $427,225. Research and development
expenses of $358,844 for the year ended April 30, 1996 increased by $178,432 or
99% over the amount expended of $135,412 for the year ended April 30, 1995. This
increase in expenses is the result of increasing amounts expended for
development, experimentation and improvement of test chemicals and laboratory
and field trial testing of the workplace drug testing delivery system and
research and development relating to the Company's other biomedical products.
Results of Operations for the six months ended October 31, 1996 as compared
to the six months ended October 31, 1995.
---------------------------------------------------------------------------
Revenues from the audio-visual segment of the Company's business were
$82,416 for the six months ended October 31, 1995 as compared to $17,123 for the
six months ended October 31, 1996 representing a decrease of $65,293 or 79.2%.
This decrease in book sales is directly attributable to the Company's
reorganization of its telemarketing activities. Costs of goods sold for the six
months ended October 31, 1995 were $26,373 as compared to $5,565 for the six
months ended October 31, 1996 representing a cost of goods sold percentage of
32.0 % for the six months ended October 31, 1995 as compared to 32.5% for the
six months ended October 31, 1996. Revenues from the initial sales of drug
testing kits were $31,464 for the six months ended October 31, 1996. Cost of
goods sold for the six months ended October 31, 1996 was $20,213 or 64.2%. This
high level of costs of materials is the result of initial shipments of drug
testing kits manufactured from small lots of materials and supplies. General and
administrative costs for the six months ended October 31, 1996 were $336,113, an
increase of 504% over expenses of $66,672 for the six months ended October 31,
1995. These increased costs were the result of increased labor costs for office
personnel and consulting expenses of $75,000. Research and development expenses
of $66,750 for the six months ended October 31, 1996 decreased by $31,651 or
32.2% less than the amount expended of $98,401 for the six months ended October
31, 1995. This decrease in expenses is the result of gradual completion of
research and development of the Company's drug testing delivery system,
experimentation and improvement of active ingredient test chemicals, laboratory
and field trial testing.
15
<PAGE>
Liquidity And Capital Resources As Of The End of Fiscal Year, April 30, 1996
----------------------------------------------------------------------------
The Company increased its cash balance to $437,532 and working capital to
$329,085 as of the end of fiscal 1996 is the result of the sale in the aggregate
of $1,407,000 convertible debentures over a three year period. The Company has
expended $535,186 to date for the research and development of its biomedical
products.
Management believes that the present cash balance will pay the initial cost
of entering the bio-technical business. This includes completing the design,
creating initial inventories and obtaining initial orders and sales of the
Company's biomedical products. Management believes that until profitable
operations are achieved, the Company must expend resources on research and
development, design and marketing, and, as a result, additional funds may be
required.
Liquidity And Capital Resources As Of The End Of Fiscal Period Ending
October 31, 1996.
---------------------------------------------------------------------
The Company had $188,479 cash in bank and $1,411,866 in treasury bills and
certificates of deposit invested for six months. Working capital was $1,671,774
as at October 31, 1996. These balances are the result of the sale and conversion
into Common Shares of convertible debentures in the aggregate principal amount
of $18,500 and receipt of $175,000 through the exercise of 143,000 "A" warrants
and 32,000 "B" warrants at $1.00 per share. As of October 31, 1996, the Company
also sold 150 shares of convertible preferred shares for an aggregate gross
proceeds of $1,500,000 and net proceeds of $1,405,000. The preferred shares are
convertible in the aggregate into Common Shares at the lesser of $6.07 per share
or 75% of the Market Price of the Common Shares. The Company has used part of
the net proceeds to fund the conclusion of its product development, build an
inventory of parts and reagent chemistry, purchase production machinery, mount
an extensive marketing campaign and commence limited production. The remainder
of the net proceeds has been invested in Treasury bills and certificates of
deposit. The Company has expended $631,936 to date for the research and
development of its biomedical products.
Management believes that the present cash balance will pay the ongoing cost
of entering the workplace drug testing business. Management believes that until
profitable operations are achieved, the Company must expend resources on
research and development(albeit on a decreasing basis), and the design and
marketing of its workplace drug test kits.
BUSINESS
Summary
- -------
From its inception in 1986 until 1991, the Company, a New York corporation,
was involved in marketing educational books and software to schools and
municipal libraries and audiovisual educational packages to educational
institutions and to corporations throughout the United States. In 1991, the
Company reduced its concentration in this market because of heightened
competition, increasing costs of doing business and slow collections from
municipalities and commenced seeking new technologies in emerging medical
markets. The Company has continued one small segment of its original business,
that of selling audiovisual packages to libraries. The Company purchased certain
biomedical technologies from its Executive Vice-President and purchased and
rescinded the purchase of other technologies from another party who became and
then resigned as an officer and director of the Company. The Company has no
present intention of entering into transactions in the future with related
parties. (See "Certain Transactions.")
16
<PAGE>
Since its inception, the Company has an accumulated deficit of $2,676,889
(see Financial Statements - Balance Sheet). The Company's auditor, in his report
accompanying the financial statements, has characterized the Company as a
development stage company with little operating history subsequent to its
reorganization and commencement of development of biomedical technologies which
are, at present, its core business. This report could adversely affect the
market price of the Common Shares, the ability of the Company to raise capital,
the ability of the Company to conclude supply contracts for parts and inventory
and the ability of the Company to enter into contracts for the sale of its
workplace drug testing kits. Footnote No. 2 to the Financial Statements further
states that the Company's continuation as a going concern is dependent upon its
ability to obtain adequate financing or the develop profitable operations.
Management believes that the Company's accumulated deficit is the result of
discontinued operations, the development of its workplace drug test kits and the
development of other biomedical products. However, investors should be aware
that the Company has never been profitable during its ten year history and that
there is no assurance that the Company's biomedical operations will become
profitable.
The Company is currently in the business of acquiring, developing and
marketing biomedical technologies and products. The Company currently owns two
technologies for screening drugs of abuse - a workplace screening test and a
preliminary test for use by laboratories. The Company has begun to market its
workplace screening test and has produced and delivered several thousand units
of this test. The Company's workplace screening test is a one-step test kit that
allows a small urine sample to be tested for the presence or absence of drugs of
abuse. The competitively priced test is self-contained with no exposure of the
test administrator to the urine sample. In management's opinion, the Company's
drug test kit is easier to use than any competitive product and requires no
mixing of reagents In addition, hundreds of controlled tests conducted by
independent laboratories compared the Company's "Rapid Drug Screen Test" with
results produced by EMIT II and GCMS, two standard laboratory tests, with 100%
correlation of both positive and negative test results. As a result, management
believes that the Company's Rapid Drug Screen Test is as accurate as those
laboratory tests.
The Company has installed equipment suitable for the mass production of the
workplace drug screening test and commenced pre-production using this machinery
during the last week in October, 1996. Production, in December, 1996, increased
to 5,000 units per week. Mmanagement predicts that a production rate of 20,000
units per week will be achieved commencing January, 1997.
The Company has secured several significant orders and many smaller orders
for its workplace screening test. The Company, as of November 30, 1996, had
shipped and invoiced $228,101 of workplace drug test kits. Domestic orders were
$675,510 and international orders $1,112,250. Each order has been accompanied by
estimates of yearly volume of orders from the same customer. If all the
estimates are ultimately embodied in purchase orders, of which there is no
assurance, the total revenues to be received for the twelve months commencing
December 1, 1996, considering only orders and estimates received prior to
December 1, 1996, would exceed $10,000,000.
The Company also owns a patented low cost method for producing Keratin
proteins. The uses for such proteins include hardening of finger nails and
carrying topical lotions and medicines through the skin. In addition, the
Company is developing a saliva test for alcohol consumption. Existing saliva
tests for alcohol consumption require exposure to the saliva sample and the
addition of reagents. The Company's test is self-contained, involves no
additional reagents and can be priced lower than existing competitive products.
The Company has no intention of developing or marketing its laboratory test, its
Keratin technology nor its saliva test for alcohol consumption until after its
workplace screening test has been in full production for at least three months.
The Company has fully developed and expects to commercialize its anti-dilutant
product which detects the presence of dilutants to the urine specimen, added
detergents or "urinade" (a product which supposedly is able to void drug tests).
17
<PAGE>
The Company may develop or acquire additional drug testing or biomedical
technologies or products in the future. However, it has not yet located any
technologies which it desires to develop or acquire.
Background
----------
According to the "1996 AMA (American Management Association) Survey
Workplace Drug Testing and Drug Abuse Policies Summary of Key Findings," an
annual report on drug testing in the workplace, 81% of major United States firms
now test employees and/or job applicants for drug use, an increase of 277% since
1987 and an increase of 3% since 1995. The AMA attributed the increase to
several factors, including Department of Transportation and Department of
Defense regulations which, in conjunction with local and state legislation,
mandate testing in certain job categories, the Federal Drug-Free Workplace Act
of 1988, court decisions recognizing an employer's right to test both employees
and job applicants in the private sector for drugs of abuse; action by insurance
carriers to reduce accident liability and control health care costs; and
corporate requirements that vendors and contractors certify that their
workplaces are drug-free.
The AMA found that business category was the most important determinant in
drug testing. The percentages in each category which tests for drugs of abuse
are manufacturers (89%), transportation (100%), wholesalers and retailers (79%),
general service providers (77%), business service providers (60%) and financial
service providers (56%).
The survey states that the usual and recommended procedure for urine
samples calls for a retesting of positive samples by the gas-chromatography
method. It also states that 76% of firms that test utilize a medical review
officer ("MRO") who analyzes test findings, judges them against the test
subject's medical profile and renders a verdict to the employer which does not
see the test results but only the MRO's report. The use of an MRO offers
significant protection to employees who may test positive due to the use of
prescription drugs or non-controlled substances which register as controlled
substances.
The Substance Abuse and Mental Health Services Administration, Office of
Applied Studies of the United States Department of Health and Human Services,
Public Health Service, in its advance report number 18 released in August, 1996
entitled "Preliminary Estimates from the 1995 National Household Survey on Drug
Abuse," notes that 14.3% of unemployed adults, age 18 years and older, were
current illicit drug users in 1995 compared with 5.5 % of full-time employed
adults and that the rate of drug use decreased from 1994's 6.7%. 71% of all
current illicit drug users 18 years old and older (7.4 million adults) were
employed, including 5.5 million full-time workers and 1.9 million part-time
workers. Because of the high incidence of workplace drug use, the testing of
employees for the most "popular" drugs has become widespread. Positive tests
often result in discharge of or treatment for the employee. In addition, the
threat of testing, particularly random testing, has the prophylactic effect of
reducing workplace drug use.
The Company believes that the drug of abuse testing market is large and
growing and that the largest market opportunity for on-site drug screening
products is the private sector with an additional large public sector demand.
According to management, drug testing performed in an on-site facility using
technologies designed for on-site use can be just as accurate as testing
performed in a full-service lab. Drug screening tests are now performed in
markets which include: preemployment testing; random testing of employees; drug
rehabilitation programs; hospital laboratories; emergency rooms; private
security agencies; public transportation; law enforcement agencies; probation
and parole programs and Defense Department contractors.
18
<PAGE>
Workplace Drug Test
- -------------------
Design
------
The first product trademarked. "The Rapid Drug Screen," to be developed and
marketed by the Company is a workplace test of five drugs of abuse which can be
used in offices, factories, "halfway" houses, remote locations and in all
situations where an immediate result is required. The product consists of a
"NIDA 5 Card," a business-card size card divided into five lengthwise strips, or
sections. The person being tested urinates into a test cup, puts on the lid, and
hands it to a supervisor or other person administering the test. The test
administrator inserts the card into a pre-punched slit in the cup cover without
the danger of spilling or of touching the urine inside. Thus, the administrator
is not exposed to the urine sample does her or she have to mix reagents. Within
three minutes, the results can be read on the insert through the side of the
cup. A line across of the top segment of any of the sections indicates the
sample is positive for one of the five specific drugs of abuse - PCP, marijuana,
cocaine, amphetamines and opiates - designated by NIDA ("National Institute on
Drug Abuse") in the "Drug-Free Workplace Act of 1989" as those to be tested for
in most federally regulated drug testing programs. If the results are positive,
the cup is sealed with provided materials and sent to a laboratory for
confirmation. No adverse action is taken by the test administrator unless
confirmation of a positive test is received from an independent laboratory.
One of the problems which often occurs in the use of workplace drug testing
is fraud or evasion practiced by the person being tested. The two most prevalent
methods of avoiding adverse test results are (i) the substitution by the person
being tested of a hidden "clean" urine sample which he or she brings to the test
and (ii) the substitution of water or a colored liquid or the dilution of urine
with water. As a consequence, each of the Company's drug test strips contains
two additional sensors. The first is a temperature sensor which helps prevent
the substitution of another urine sample as the likelihood is that the
substituted sample could not retain proper temperature. The second is a chemical
strip incorporated in a horizontal band which changes color on both positive and
negative urine samples, if the sample is, indeed, urine. If this strip does not
change color, the test administrator is advised to retest.
The kit contains the following instructions: if only one horizontal band
changes color in any NIDA strip, the sample is positive for that drug and the
sample should be sent to a laboratory for confirmation. If both bands in any
NIDA strip change color, the sample has tested negative for that drug. If
neither band changes color, the sample is not urine or the test is void and the
employee or other person being tested must submit another urine sample for
retesting.
In addition, the Company has designed two additional drug tests, a two
panel card and an eight panel card. The Company began to ship the two panel test
in November, 1996, and intends to commence manufacturing the eight panel strip
in during the first quarter of 1997. The two panel strip, designed for juvenile
corrections centers and educational institutions, tests only for cocaine and
marijuana. The eight panel strip, designed to meet two competitive products,
Biosite and Drug Screen Systems, adds barbiturates, benzodiazepines and
methamphetamines. These additional tests will be combined in single unit with
the NIDA 5 card so that one sample can test for eight drugs of abuse
simultaneously.
19
<PAGE>
Manufacture
-----------
After the successful completion of clinical trials in May, 1996, the
Company initially subcontracted the manufacture of components, including the
test strips, of The Rapid Drug Screen to several outside manufacturers. These
components were then assembled for the Company by Columbia Advocacy and Resource
Center ("COARC"), an FDA-approved contract manufacturer in nearby Mellenville,
New York. COARC is a federal and state licensed no-for-profit agency where
several hundred non-disabled employees work side by side with developmentally
disabled employees to manufacture a wide variety of products and services.
The Company found that the use of subcontractors to produce the test strips
was unsatisfactory from a pricing, delivery and quality control standpoint. The
Company has ordered, received and installed equipment in a dedicated "white"
room in the COARC facility which will allow the COARC to manufacture the test
strip component of the product as well as to undertake its assembly operations
on the Company's behalf. The white room dedicated to the workplace drug
screening test is temperature and humidity controlled and has an airborne
particulate filtering system. The Company owns the equipment which is being be
used by employees of COARC; other employees of COARC assemble, pack and ship the
units. COARC has established a stringent Quality Assurance/Quality Control
("QA/QC") Program to insure data reliability and product consistency. The
Company intends to continue to contract out the printing and manufacture of
specimen cup components. The Company has commenced production using the
equipment and anticipates that the equipment will be fully operational during
December, 1996. The equipment, as installed, is capable of producing up to
600,000 units per month utilizing two shifts five days a week.
FDA Approval
- ------------
Though FDA approval is not required for most forms of workplace drug
testing, including The Rapid Drug Screen, it will be required for use in a
clinical setting which management anticipates may become a future marketplace
for the Company's drug testing products. Testing of one hundred samples was
completed in July, 1996 and showed 100% correlation to tests performed in a
recognized testing laboratory. An Federal Drug Administration ("FDA")"510K"
application was filed on July 15, 1996. Utility and application patents were
filed on March 11, 1996.
Marketing
- ---------
The Company has placed advertisements in trade journals and mounted direct
mail campaigns; and Company representatives have attended trade shows. Although
the Company initially believed that it would sell primarily through individual
representatives, it has changed its marketing program so that it sells primarily
to distributors which then resell to the various marketplaces. It has, however,
retained three of its initial twelve representatives. The Company has completed
the development of the instructional and support materials surrounding the test
kit. The Company is currently developing an educational curriculum to be
packaged with The Rapid Drug Screen as an option for corporate clients. The
package includes (i) educational materials such as an employee guide, brochures,
and posters for the workplace, (ii) a management guide, (iii) an "800" number
for supervisors/managers to call for guidance in various situations when an
employee is found positive for drugs of abuse, (iv) an "800" number for
employees for information on their rights and counseling opportunities, (v) test
kits, (vi) materials to help insure the urine samples are not contaminated,
(vii) plastic gloves, (viii) a secure container for positive samples,(ix) an
"800" number for pickup and delivery of positive samples to an associated
laboratory for confirmation and (x) a quarterly newsletter with updates for
management. The Company has garnered initial orders from distributors, municipal
bodies and corporate users as well as from penal facilities.
The Company has divided its marketplace into the following categories.
20
<PAGE>
Corporate Workplace Drug Testing Programs
-----------------------------------------
The Company has developed a network of twelve distributors and
administrators of workplace drug testing programs to sell its Rapid Drug Screen
testing kit. Its largest initial order for this marketplace is from Zee
Services, Inc. a division of Mckesson Corp. Zee Services utilizes a network of
80 regional distributors which, in turn, employ 1,300 sales representatives each
with a well-stocked company van to sell to 350,000 small and medium sized
industrial clients a variety of products ranging from first aid kits to drug
testing kits. The initial order of 50,000 test kits is being produced. CannAmm,
Inc., a similar company operating in Canada, has likewise become a distributor.
Other customers in this category include Bally's Total Fitness, Business Medical
Services, Inc., Noble House International, Inc. ("Noble House") and Alcohol
Testing for the Workplace, Inc., (a firm which tests for a variety of drugs of
abuse). The Company has recently entered into a distribution agreement with
Accuracy Testing PLUS, Houston, Texas, which offers comprehensive workplace
programs, including testing, education and training.
Corrections and Law Enforcement
-------------------------------
This market includes federal, state and county level correctional
facilities, pretrial agencies, probation and parole departments at the federal
and state levels and juvenile correction facilities. The Company has received
orders from several agencies such as the Broward County, Florida, Sheriff's
Department which has indicated potential orders of up to 200,000 units per year.
The United States Probation Department ordered 500 units for use in a comparison
test with other on-site products. The Company has exhibited at the American
Corrections Association summer trade show in Nashville in August, 1996 and will
exhibit at the January, 1997 winter show.
Rehabilitation Centers
----------------------
This market includes the people in treatment for substance abuse in general
hospitals, mental health centers and outpatient programs. The importance of this
market relates to the frequency of testing. For example, in many residence
programs, patients are tested each time they leave the facility and each time
they return. In outpatient programs, patients are generally tested on a weekly
basis. The Company has received orders from a chain of 60 rehabilitation centers
and is negotiating with others. The Company will be exhibiting at the Employee
Assistance Program convention in Chicago in 1997.
International Markets
---------------------
The Company has entered into a non-exclusive distribution agreement with
CanAmm, Inc., a Canadian distributor, an exclusive agreement with Nobel House
International, Inc., a U.S. distributor for Chile and is negotiating for
exclusive distribution for Pacific Rim countries with a Canadian-based
distributor. Nobel House International, Inc. has committed to a minimum of
250,000 two panel" tests for Chile (to test parochial high school students) and
is negotiating purchase agreement with relevant government agencies of other
South and Cental America and Caribbean countries.
Clinical, Physicians and Hospitals
----------------------------------
The Company was approached and is negotiating an agreement to distribute
the Rapid Drug Screen under a joint label to the worldwide clinical market,
including physicians, hospitals and laboratories. Such distribution will require
FDA 510K approval of all the drug tests to be distributed.
21
<PAGE>
Consumer and Over-the-Counter
-----------------------------
The Company's Rapid Drug Screen test is ideal for consumer use as it leads
to immediate and accurate results at a price less than half of available
consumer kits. The Company intends to pursue this market only after receiving
FDA 510K approval for all drugs to be tested in this market. It has been
approached by several store and pharmacy chains. The Company intends to market
through distributors or to sell directly to larger retain chains.
Additional Markets
------------------
As reported in the "New York Times," October 20, 1996, President Clinton
has called for drug testing of all teenagers by state motor vehicle departments
prior to granting driving licenses to them. In addition, certain low-income
housing funded by the Department of Housing and Urban Development are testing
residents as a condition for continued occupancy. Finally, many high school and
college sports programs are requiring random testing for drugs of abuse as a
condition of student participation.
Competition
- -----------
Competition to the Company's workplace drug test comes from tests by Roche
Diagnostic Systems, Editek, Inc., Biosite Diagnostics, Drug Test Resources
International and Drug Screening Systems, Inc. In the Roche test, the tester
must invert the cup for ten seconds. Because the testing chemistry for those
tests is contained in the cup, a number of confirming laboratories will not
except samples in the cup for confirmatory analysis as the presence of the
testing chemicals could skew results. Editek's Easy Screen involves six steps,
including pipeting a drop of urine for each test, applying drops of enzyme
conjugates, applying drops of wash buffer and wiping and applying drops of
substrate before the test results can be read. Biosite's Triage product involves
pipeting drops of urine and reagents. The Drug Test Resources test involves
pipeting drops of urine. The Drug Screening Systems test involves pipeting drops
of urine and reagents. In addition, Psychemedics introduced a test which
requires the subject's lock of hair be sent its laboratory for evaluation, a
period of five to fifteen days. The test is several times as expensive as the
Company's. Its only advantage to the Company's test is that drug residues remain
in the hair longer than in urine so that an employer or parent can gain a
perspective of drug use over a longer period of time and the drug test cannot be
circumvented by a brief period of abstinence.
Principal Suppliers
- -------------------
The Company's major suppliers are as follows: IVEK Corporation,
Springfield, VT, produces the equipment which is used in the manufacture of the
test strips; Kinematic Automation, Twin Harte, CA, produces the cutting
equipment for the test strip backing; Arpak Plastics, Inc., Plattsburgh, NY,
supplies specimen cups and covers; Monarch Plastics, Mount Laurel, NY, prints
the plastic test card. The Company has located additional sources of components
from which it could purchase if required. The Company subcontracts the
manufacturer of the test strips and the assembly, packaging and fulfillment to
COARC, Mellenville, NY, a medical device manufacturer registered with the
Federal Drug Administration. This registration requires that COARC submit to
periodic "audits" of its facilities to ensure compliance with FDA standards. The
COARC facility contains 70,000 square feet of manufacturing, office and assembly
space, including a white room specifically designated to the manufacture of the
Company's products which has airborne particulate removal equipment and is
humidity controlled. The Company has placed manufacturing equipment in COARC's
premises for use by COARC personnel.
The Company places purchase orders with COARC for specific quantities of
the test strips. It also pays COARC a per unit fee to assemble the test kits and
to pick, pack and ship the kits to the Company's designated customers. Although
the Company prefers COARC because it is located within twenty miles of its
premises, because of its quality of production, because of its ability to
respond quickly to orders and because of its experience in biomedical
production, the Company has located additional subcontractors which could, if
needed, perform substantially the same services as COARC at similar prices.
22
<PAGE>
Patents and Trademarks
- ----------------------
The Company has applied for registration of the following trademarks:
"American Bio Medica" and "Rapid Drug Screen." The Company's trademark counsel,
Edmund Jaskiewicz, Esq., Executive Vice-President, has opined that there are no
similar marks and, as a consequence, the Company feels confident that such marks
will be registered. Stan Cipkowski, has assigned to the Company for no
consideration, his application for a utility and design patent in the United
States and Canada on the drug screen kit as an entity. Mr. Jaskiewicz, as patent
counsel, has opined that a search has revealed no competing patented products
However, there can no assurance that a patent will be granted or that it will
withstand challenge. The Company intends to apply for patents and trademarks in
the European Common Market and Japan.
Government Regulations
- ----------------------
The Company's business had benefited by Federal and state regulations
relating to drug free workplace, particularly the Drug Free Workplace Act of
1988. Clinical sales of the drug test kit must await final FDA approval of the
tests for two of the NIDA drugs of abuse. Approval is anticipated prior to the
end of the year.
Drugs of Abuse Preliminary Screen (ABM Prescreen)
- -------------------------------------------------
The second of the Company's products is a preliminary drug screen which is
an easy to use, accurate and cost effective test paper for the drug testing
market. This test will, if the results are negative, eliminate the possibility
that the person tested has used any of twenty drugs. The laboratory technician
places a few drops of pretreated urine on a test paper and reads the results
visually within a few minutes. Over 90% of tests submitted to laboratories yield
negative results. Thus, the primary use for this product in laboratories is as a
means of inexpensively and quickly eliminating, through negative results, over
90% of the testing required. A patent application is in process. Pre-clinical
trials for the preliminary drug screen have been completed at two independent
laboratories contracted by the Company. Pre-clinical tests include laboratory
evaluation of product chemistry and observation of results of addict urine
samples tested with the product over a period of time. These tests were
conducted under the supervision of John Questal, principal of one of the
contract laboratories and a member of the Company's Scientific Advisory Board,
and were reviewed by Dr. Henry Wells, the Company's Vice-President-Product
Development. Based on the success of pre-clinical evaluations, independent
clinical tests prior to patent and FDA submission are currently taking place at
American Medical Laboratories, Chantilly, Virginia. By April, 1997, the Company
expects to have introduced its ABM Prescreen to the market as an inexpensive
alternative to the products being offered by the current market leaders, Roche
Diagnostics and Biosite.
These two companies dominate the rapid drug screen market. Roche's On Trak
product has been available since 1988 with an end-user cost of $24.00. The
majority of its sales is for clinical uses. Biosite's Triage product was
introduced in 1993 and is now priced at $33.50. The majority of its estimated
$25 million in sales comes from emergency rooms. Though similar in concept and
implementation, the technologies are different and involve a multi-step
procedure to indicate positive or negative results for up to eight specific
drugs of abuse within ten minutes. Management believes the ABM Prescreen is
positioned ahead of these products as an inexpensive first step in which
positives can be separated from negatives in five minutes for less than $8.00
per test. The ABM test is not drug specific and will indicate positive or
negative for all known drugs of abuse and their derivatives. Similar to the
Roche and Biosite products, it involves several steps, including adding a
reagent to the urine specimen and a filtering process. Since it is not
self-contained like the Company's tests, it is less appealing for customers not
used to or not desirous of handling urine. The Company has conducted research
and development activities(and will continue such activities once full
production in its workplace drug test products is achieved) with an objective of
reducing the number of steps and time necessary to conduct a preliminary screen
test.
23
<PAGE>
Alcohol/Saliva Test
- -------------------
The Company has developed a technology that will detect alcohol levels in
individuals through a quick, one step, on-site, saliva test that can be
calibrated to specific sensitivity levels. Though at an advanced stage of
development, additional laboratory work and clinical evaluations will need to be
funded and completed prior to any patent applications or commercialization.
These activities are not expected to commence prior to fiscal 1997. Law
enforcement and workplace testing would be the initial markets approached. The
Company is only aware of one, nonspecific to sensitivity levels, two step
product now available.
KDMP (Keratin Derivative Modified Protein)
- ------------------------------------------
Keratin Derived Modified Protein ("KDMP") is a liquid keratin protein
complex containing water soluble peptides and is rich in cysteine. It can be
used as an active ingredient in varying concentrations in the formulations of
quality skin, nail, and hair care products. Pre-clinical trials have been
completed and the Company intends to license or sell the technology. Various
patents relating to this technology have been assigned to the Company by Edmund
Jaskiewicz, Vice-President, as part of the consideration for his receipt of
common shares of the Company (see "Certain Transactions"). The Company is
currently manufacturing this product in small quantities for several companies
who have requested samples for evaluation. The Company does not intend to devote
any substantial economic or personnel resources to the development or marketing
of this product for at least twelve months. As a result, no revenue is expected
to be derived from this product until, at earliest, late 1997.
The Company's Plan of Operations
- --------------------------------
For the next twelve months, the Company intends to continue the
establishment of network of distributors which service customers in non-clinical
workplace, correctional institution or drug rehabilitation areas, to market and
sell its drug testing kits, to manufacture and ship such kits and, once
manufacturing has reached the capacity needed to fulfil orders, to continue
research and development on its additional biomedical products.
As of November 30, 1996, the Company had entered into non-exclusive,
non-clinical market distribution agreements with a number of companies,
including national (such as Z Services, Inc., a subsidiary of McKesson
Corporaton), regional (such as Accuracy Testing Plus, Houston, Texas and Excel
Laboratories, Huma, LA) and local distributors, (such as Western Pathology
Consultants, Scottsbluff, Nebraska, Business Medical Services, Columbus, Ohio
and Prima Healthcare Group, Springfield, Missouri). In addition, the Company, on
September, 6, 1996, entered into a non-exclusive distribution agreement for
Canada with Ammcan, Inc., Toronto, Ontario.
These agreements permit the distributors to sell the products of other
manufacturers and permit the Company to sell its test kits to other distributors
within and outside the territory of each distributor. The agreements are
cancelable by either the Company or the distributor upon 30-days' written
notice. Each of the Company's domestic distributors has submitted purchase
orders which the Company is in the process of fulfilling.
The Company intends to enter into distribution agreements on an
international basis as such distributors are identified. The Company has entered
into an agreement with Noble House, Miami, Florida for representation of the
Company in foreign countries, Noble House is negotiating sales on behalf of the
Company in Colombia, Argentina, Panama, Costa Rica and Caribbean countries as
well as in Puerto Rico. Noble House has secured a contract in Chile to sell, for
a two year period, a yearly minimum of 250,000 kits which test for two drugs of
abuse - Cocaine and Marijuana. The Company has entered discussions with several
suitable distributors in the Philippines, Mexico and Israel. However, no
agreements have been entered into and there is no assurance that any such
agreements will be executed or, if executed, that any sales will be generated
thereby.
24
<PAGE>
The Company has retained three sales representatives, on a straight
commission basis, in Atlanta, Georgia, Fort Lauderdale, Florida and Denver,
Colorado. These representatives call on accounts, such as corporations and
correctional institutions directly.
The Company's present manufacturing equipment and personnel designated by
COARC is sufficient to produce 60,000 drug test kits each week, assuming two
shifts per day, five days a week. In the event the Company desires to increase
production, which it intends to do when volume reaches 60,000 units per week,
its estimated costs for additional equipment are $40,000 which it anticipates
will be covered from gross profits or from cash on hand.
The Company has commenced an extensive direct mail campaign and
participation in trade shows such as the Employee Assistance Program held in
Chicago, in November, 1996 and the American Correctional Show in January, 1997
in Annapolis, Maryland. The Company has already produced and dispatched
materials for mailings and constructed trade show booths, attended trade shows
and committed to attend several annual and semiannual shows. It anticipates
funding its costs of transportation, lodging, entertainment and set up and other
miscellaneous expenses from cash on hand.
The Company has funded and will continue to fund its marketing, sales and
manufacturing activities from the proceeds of its recent sale of 150 Preferred
Shares, raising net proceeds of $1,405,000 (see Front Cover Page, "Certain
Transactions" and "Description of Securities.")
The Company does not now nor does it intend to enter into any agreements
with affiliated parties for the purchase of technologies, the sale of product or
the purchase of inventory. (See "Certain Transactions.")
MANAGEMENT
Directors and Executive Officers.
---------------------------------
The directors and executive officers of the Company and their respective
ages, positions with the Company, along with certain biographical information
are as set forth below.
Name Age Position Since
---- --- ---------------------------------- -----
Stan Cipkowski 48 President, Treasurer and a Director 1986
Edmund Jaskiewicz 74 Chairman of the Board of Directors,
Executive Vice-President and Secretary 1992
Jay Bendis 49 Vice-President-Marketing and a Director 1995
Henry J. Wells 64 Vice-President-Product Development 1995
Stan Cipkowski founded the predecessor of the Company in 1982 and has been
an officer and director of the Company since its incorporation in April 1986.
From 1982 to 1986, he was sole proprietor of American Micro Media, the
predecessor, which was acquired by the Company. In addition, from 1983 to 1987,
Mr. Cipkowski was a general partner of Florida Micro Media, a Fort
Lauderdale-based marketer of educational software and was a principal
shareholder and Chief Financial Officer of Southeast Communications Group, Inc.,
a publisher of direct response media. In 1982, he became a consultant to
Dialogue Systems, Inc., a New York-based developer of training and
communications materials, where he served as Vice President of Sales and
Marketing. From 1977 to 1982, he was employed by Prentice-Hall Publishing
Company, reaching the position of National Sales Manager. Prior to 1977 he was
employed as an accountant for the New Seabury Corporation and as Mid-West Area
Manager for the Howard Johnson Company.
25
<PAGE>
Edmund Jaskiewicz is a lawyer-engineer. He has practiced international
patent and corporate law as a sole practitioner since 1963 and has served as
Chairman of the Board of Directors since 1992. From 1953 to 1963 Mr. Jaskiewicz
was associated with Toulmin and Toulmin, Esqs., Washington, D.C. From 1960 to
1962, he resided in Frankfurt, Germany managing that firm's local office. From
1952 to 1953 he was with the Patent Section of the Bureau of ordinance of the
Department of the Navy working on patent infringement and licensing matters.
From 1948 to 1952, he served as an attorney at General Electric where he
prosecuted patents in electrical and mechanical fields and developed manuals on
procedures. He received his JD. in 1952 from George Washington University Law
School and his BS. in Engineering from the University of Connecticut in 1947.
Jay Bendis has been an independent consultant to biomedical companies since
1990, specializing in commercializing new concept products in both domestic and
international markets. From 1990 to 1992, he served as Vice-President of Sales
and Marketing for Scientific Imaging Instruments where he was a principal and
Vice President of Sales and Marketing. From 1985 to 1990, Mr. Bendis served as
National Sales Manager of the XANAR Laser Corp., a division of Johnson &
Johnson, where he directed its national sales force and developed its marketing
strategy for integrating high power lasers into the hospital market. From 1979
to 1984, he was the Eastern Area Sales and Marketing Manager for the IVAC Corp.,
a division of Eli Lilly. Prior to 1979, Mr. Bendis held sales management
positions with Xerox Corporation and A.M. International. Mr. Bendis earned his
BA. in Marketing/Management from Kent State University and is currently a member
of the Edison BioTechnology Center Advisory Council for the State of Ohio.
Henry Wells, Ph.D. has served since 1990 as a contract chemist with the
title of Vice-President-Science and Technology for New Horizons Diagnostics,
Inc. where he adapts immuno-chemical technologies for detection of infectious
diseases. From 1989 to 1990, he was director of production for Espro, Inc., a
producer of in-vivo pesticides. From 1985 to 1989, Dr. Wells was
Vice-President-Science and Technology for Keystone Diagnostics, Inc. From 1984
to 1985, he was Director of Research and Development for Hill-Wells Research
Corporation, a developer of diagnostics products. From 1981 to 1984, he was
Vice-President-Research and Development of Hematec Corporation. From 1979 to
1981, Dr. Wells was Director of Biochemistry for Helena Laboratories. From 1973
to 1979, he was Manager of Chemical Chemistry at Smith Kline Diagnostics. Dr.
Wells earned his Ph.D. in Biochemistry from the University of Pittsburgh, his
MA. from University of Pennsylvania and his BS. in Chemistry from the University
of Pittsburgh.
Scientific Advisory Committee
-----------------------------
John Questal has been since 1977 a Chemist and President of Adhesive
Consultants, Inc., a technical organization servicing all facets of the pressure
sensitive adhesive industry, including adhesive formulation and evaluations, as
well as processing. At Adhesive Consultants, Inc., he has been involved in the
development of products resulting in over sixty U.S. patents applied for to the
benefit of clients. Mr. Questal was Director of Research for Chemtrol Adhesives,
Inc. from 1972-1977, President of Adhesive Consultants, Inc. from 1967-1972, and
Research Director for Morgan Adhesives, Inc., from 1959 to 1967. Prior to 1959
he was employed as a research chemist for The Norton Company and Battelle
Memorial Institute. Mr. Questal earned his BS. in Organic Chemistry from Kent
State in 1951 and his MS. in Polymer Science from the University of Akron in
1963.
Maryce Jacobs, Ph.D. is a consultant to the biomedical industry. From 1988
to 1993, she was Vice-President of the American Institute for Cancer Research, a
nonprofit corporation that funds research and education programs on diet,
nutrition, and cancer. As a toxicologist from 1983-1988, Dr. Jacobs performed
technical analyses for the U.S. Environmental Protection Agency Office of
Pesticides, Office of Toxic Substances and Superfund, the U.S. Food and Drug
Administration, the U.S. Dept. of Agriculture, Forest Service, and the U.S. Army
Medical Research and Development Command. She was Director of the University of
Nebraska Testing Laboratory from 1977-1983, and Co-Chairperson of Biochemistry
and Assistant Professor of the M.D. Anderson Cancer Center at the University of
Texas from 1971-1977. Dr. Jacobs earned her Ph.D. from Stanford University in
1970.
26
<PAGE>
Executive Compensation
----------------------
The following table sets forth certain information concerning compensation
paid or accrued for 1995 by the Company to or for the benefit of the Company's
President. No executive officer's total annual compensation for fiscal year 1996
exceeded $100,000. As permitted under the rules of the Commission, no amounts
are shown in the table below with respect to any perquisites paid to a named
officer because the aggregate amount of such perquisites (e.g. auto allowance)
did not exceed the less of (i) $50,000 or (ii) 10% of the total annual salary
and bonus of a named officer.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
Awards Payouts
<TABLE>
<CAPTION>
_______________________________________________________________________________
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name Other Res- All
and Annual tricted Other
Principal Compen- Stock Options LTIP Compen-
Position Year Salary Bonus sation Awards SARs Payouts sation
($) ($) ($) (#) (#) ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
_______________________________________________________________________________
Stan 1996 44,000 -0- -0- -0- -0- -0- 3,000
Cipkowski,
President
</TABLE>
All of the Company's current directors will serve as directors until the
next annual meeting of stockholders and until their respective successors have
been duly elected and qualified, subject to their earlier removal or
resignation. None of the directors of the Company currently receives any
remuneration for serving on the Board of Directors. It is anticipated, however,
that upon the consummation of the exercise of the Warrants, directors will
receive a fee of $250 for attendance at meetings of directors. There are
presently no committees of the Board of Directors. The Company's by-laws provide
that the size of the Board of Directors shall be determined by the Board of
Directors and shall be between three and nine members. There are presently seven
directors of the Company. The present members of the Board of Directors were
elected by the stockholders in September, 1995.
The Company's officers are elected by, and serve at the pleasure of, the
Board of Directors.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
27
<PAGE>
Subsequent to the end of fiscal 1996 (April 30, 1996), the Company has
granted stock options to various management employees and consultants (see
"Certain Transactions" and Financial Statements-- Footnotes.
Directors and Officers Liability Insurance
The Company currently does not have directors and officers liability
insurance. It does not anticipate obtaining such coverage unless such insurance
can be purchased at a reasonable cost to the Company, of which there can be no
assurance. Officers and directors are indemnified by the Company in accordance
with the provisions of its certificate of incorporation to the maximum extent
permissible by law.
PRINCIPAL SHAREHOLDERS
The following table sets forth information as to the number of Shares
beneficially owned as of June 30, 1996 by (i) each person who is deemed to be a
beneficial owner of more than 5% of the outstanding Shares; (ii) each director;
(iii) each executive officer; and (iv) all directors and executive officers as a
group. A person is deemed to be a beneficial owner of any securities of which
that person has the right to acquire beneficial ownership of such securities
within sixty days. All Shares are owned both of record and beneficially.
Name of Beneficial Owner Common Shares Beneficially Owned
Percent After
Conversion of
Number Before Percent Before Preferred Shares and
Offering Offering Warrant Exercise (1)
------------- -------------- --------------------
Edmund Jaskiewicz 3,029,872 24.2% 23.1%
1730 M Street, NW
Washington, DC 20036
Stan Cipkowski 2,707,468 21.6% 20.8%
102 Simons Road
Ancramdale, NY 12503
Jay Bendis 625,000 5.0% 4.8%
71 Springcrest Drive
Akron, Ohio 44333
Henry J. Wells, Ph.D. -0- -0-% -0-%
9421 Book Row
Columbia, Maryland 21046
All Officers and
Directors as a Group
(4 persons) 6,362,340 50.9% 48.8%
- --------------------
1. Assumes conversion of Preferred Shares into 600,000 Common Shares and
exercise of 24,712 Warrants.
28
<PAGE>
CERTAIN TRANSACTIONS
The Company, a New York corporation, was formed in April 1986 to purchase a
sole proprietorship, American Micro Media, owned by Stan Cipkowski, its
President. It successfully completed a public offering in February, 1987.
Originally involved in the sale of educational software to schools, it expanded
to the sale of corporate training materials and library books. In 1991 and 1992,
the Company closed most of its existing business lines because of competition,
low margins and slow collections, but retained one book/audio cassette product
line.
In September 1992, the Company acquired all the issued and outstanding
common stock of three companies ("Target Companies") two of which were owned by
Robert M. Friedenberg and two nonaffiliated parties and the third by Edmund
Jaskiewicz, Chairman of the Board in exchange for an aggregate of 15,099,700
Common Shares. The assets of the Target Companies were various biomedical
technologies. Dr. Friedenberg, former major stockholder of two of the Target
Companies, failed to deliver the claimed technologies to the Company and/or
misrepresented them and resigned as an officer and director of the Company. The
Common Shares which Dr. Friedenberg and the two nonaffiliated parties would have
received (aggregating 9,069,828 shares) were rescinded. In February, 1994,
Robert Friedenberg, as owner of the two Target Companies, through these
corporations, filed suit to have the agreement of exchange rescinded on the
grounds of breach of contract. In order to avoid the imposition of damages
against it, the Company filed a counterclaim in July, 1994, seeking enforcement
of that agreement. In November, 1995, after a trial, the court dismissed Dr.
Friedenberg's lawsuit and allowed the Company's counterclaim to proceed.
The assets of the third company, previously owned by Mr. Jaskiewicz,
included the KDMP technology which had been assigned to the Company. Mr.
Jaskiewicz agreed, in February, 1996, to the cancellation of 3,000,000 of his
Common Shares because the major business of the Company became the development
and marketing of its drug test kit which was developed in-house, rather than the
KDMP for the assignment of which Mr. Jaskiewicz received much of his equity
interest in the Company.
On November 3, 1995, Stan Cipkowski, President, Edmund Jaskiewicz,
Executive Vice-President and Jay Bendis, Vice-President entered into three-year
employment contracts with the Company. Mr. Cipkowski received a salary of
$36,000 per annum until April 30, 1996; and $60,000 per annum thereafter until
such time as the Company's gross revenues reach $500,000 at which point the
annual base salary will increase to $72,000. Messrs. Jaskiewicz and Bendis
received a salary of $24,000 per annum until April 30, 1996; and $48,000 per
annum thereafter until such time as the Company's gross revenues reach $500,000
at which point the annual base salary will increase to $60,000. In addition,
Messrs. Cipkowski, Jaskiewicz and Bendis will each receive a bonus equal to 2%
of the gross revenues of the Company after the attainment of gross revenues of
$1,000,000 per fiscal year until such annual revenues reach $3,000,000; 1.5% of
gross revenues between $3,000,000 and $5,000,000; and 1% on additional revenues.
Mr. Bendis was issued 500,000 Common Shares in consideration of past services of
which 100,000 shares vested immediately, 100,000 shares after the Company
achieves aggregate revenues of $1,000,000; 100,000 after the Company achieves
aggregate revenues of $2,000,000; 100,000 shares after the Company achieves
aggregate revenues of $3,000,000; and 100,000 shares after the Company achieves
aggregate revenues of $4,000,000. Any shares which have not vested by April 30,
1998, will be cancelled.
In June, 1996, the Company adopted its 1996 Nonstatutory Stock Option Plan
(the "1996 Plan"). Options to purchase 2,000,000 Shares are included in the 1996
Plan of which 1,500,000 were issued on June 28, 1996 as follows: Stan Cipkowski,
550,000 options; Edmund Jaskiewicz, 250,000 options; Jay Bendis, 300,000
options; Henry Wells, 150,000 options; Joel Pensley, Esq. 160,000 options,
Michael Roy Fugler, Esq. 40,000 options and two non-management employees, 25,000
options each. Each option entitles the holder to purchase one Common Share for
$3.00 until June 27, 1999.
29
<PAGE>
In September, 1996, the Company sold 8% Cumulative Convertible Preferred
Shares, Series A (the "Preferred Shares") for an aggregate of $1,500,000. The
Preferred Shares are convertible into Common Shares at the lesser of $6.07 or
75% of the "Market Price" on the date(s) on which Preferred Shares are converted
to Common Shares, all accrued but unpaid dividends, payable in cash. The holder
of the Preferred Shares may convert a maximum of one-half of the Preferred
Shares on or after 60 days of the purchase of the Preferred Shares and all the
Preferred Shares on or after 90 days from the date of purchase. The Company is
obligated to register with the Commission the Common Shares underlying
Conversion of the Preferred Shares.
The Company does not now nor does it intend to enter into any agreements
with affiliated parties for the purchase of technologies, the sale of product or
the purchase of inventory. (See "Business.")
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 30,000,000 Common
Shares $.01 par value and 5,000,000 Preferred Shares.
Common Shares
-------------
12,510,894 Common Shares were issued as of October 31, 1996. Stockholders
(i) have general ratable rights to dividends from funds legally available
therefor, when, as and if declared by the Company's Board of Directors; (ii) are
entitled to share ratably in all assets of American Bio Medica available for
distribution to shareholders upon liquidation, dissolution or winding up of its
affairs; (iii) do not have preemptive, subscription or conversion rights, nor
are there any redemption or sinking fund provisions applicable thereto; and (iv)
are entitled to one vote per Share on all matters on which shareholders may vote
at all shareholder meetings. All Common Shares now outstanding are fully paid
and nonassessable and all Common Shares to be sold will be fully paid and
nonassessable when issued.
Stockholders do not have cumulative voting rights. Thus, the holders of
more than 50% of such outstanding Common Shares, voting for the election of
Directors, can elect all of the Directors to be elected, if they so choose, and
in such event, the holders of the remaining Common Shares will not be able to
elect any of the Company's Directors.
The following table sets forth the range of high and low sales prices for
the Common Shares on the NASD Bulletin Board for each quarter for the fiscal
years 1995 and 1996 and the first and second quarters of fiscal 1997. There are
approximately 1,730 holders of Common Shares. As of October 31, 1996, there were
outstanding 12,565,227 Common Shares and 150 Preferred Shares each of which is
convertible into Common Shares at $10,000 divided by lesser of $6.07 or 75% of
the average closing price for the five trading days preceeding conversion. There
is one holder of the Preferred Shares which do not trade.
High Low
---- ---
Fiscal Year Ending April 30, 1997
First Quarter 6.00 2.00
Second Quarter 7.38 4.31
Fiscal Year Ended April 30, 1996
Fourth Quarter 2.00 0.75
Third Quarter 1.00 0.63
Second Quarter 0.62 0.38
First Quarter 0.38 0.13
Fiscal Year Ended April 30, 1995
Fourth Quarter 0.13 0.06
Third Quarter 0.13 0.06
Second Quarter 0.09 0.06
First Quarter 0.19 0.03
30
<PAGE>
Preferred Shares
----------------
The Board of Directors of the Company has the authority, without further
action by the holders of the outstanding Common Shares, to issue Shares of
Preferred Stock from time to time in one or more classes or series, to fix the
number of Shares constituting any class or series and the stated value thereof,
if different from the par value, and to fix the terms of any such series or
class, including dividend rights, dividend rates, conversion or exchange rights,
voting rights, rights and terms of redemption (including sinking fund
provisions), the redemption price and the liquidation preference of such class
or series.
The Company has sold 150 8% Cumulative Convertible Series A Preferred Stock
for an aggregate of $1,500,000 less commissions of $90,000. The Preferred Shares
are convertible into Common Shares pursuant to the following formula: $10,000
divided by the lesser of $6.07 or 75% of the average of the daily closing bid
prices for the five consecutive trading days ending on the trading day prior to
the day on which Preferred Shares are converted to Common Shares. All accrued
but unpaid dividends are payable in cash.
Options
-------
The Company has issued 500,000 "A" Options which are exercisable at $1.00
through March 14, 1999 and 500,000 "B" Options, which are exercisable at $2.00
through March 14, 1999. Until a registration statement relating to the Common
Shares underlying the Options is effective, certificates representing the shares
into which the Options are exercised will bear a legend restricting transfer in
the absence of an effective registration with the Commission or an exemption
therefrom.
The Company has adopted the Fiscal 1996 Nonstatutory Stock Option Plan (the
"Plan"). 2,000,000 Common Shares were reserved under the Plan. The Plan is
administered by the Board of Directors.
Stock options under the Plan ("Plan Options") may be granted to employees,
officers, directors, consultants of the Company or any other parties who have
made a significant contribution to the business and success of the Company. The
exercise price of Plan Options under the Plan may be more, equal to or less than
the then current market price of the Common Shares as deemed to be appropriate.
The Company has issued 1,631,000 options pursuant to the 1996 Nonstatutory
Option Plan. All Nonstatutory Options are exercisable for a period of three
years at $3.00 per share. (See "Certain Transactions.")
Warrants
--------
The Company has issued 24,712 Common Share purchase warrants. The Warrants
are exercisable at $3.00 per share for a period of two years from the date of an
effective registration statement relating to the underlying Common Shares.
Transfer and Warrant Agent
--------------------------
The transfer agent for the Common Shares, Plan Options and Warrants is
United Stock Transfer, Englewood, Colorado.
31
<PAGE>
Plan of Distribution
--------------------
Common Shares acquired through exercise of the Warrants or conversion of
the Preferred Shares may be sold from time to time by the holders thereof or
their pledgees or donees. Such sales may be made in the over-the counter market
or in negotiated transactions, at prices and on terms then prevailing or at
prices related to the then current market price or at negotiated prices. The
Common Shares may be sold by means of (a) purchases by a broker or dealer as
principal and resale by such broker or dealer for its account pursuant to the
Prospectus and/or (b) ordinary brokerage transactions and transactions in which
the broker solicits purchasers. In effecting sales, brokers or dealers engaged
by holders may arrange for other brokers or dealers to participate. Brokers or
dealers will receive commissions or discounts from the holders in amounts to be
negotiated immediately prior to the sale which amounts will not be greater than
that normally paid in connection with ordinary trading transactions.
The Company will not receive any proceeds from the sale of securities by
holder(s) of Preferred Shares who convert their shares, but will receive the
Warrant exercise price from Warrantholder(s) who elect to exercise the
WarrantsCommonShares may be sold from time to time by Selling Securiyholders or
their pledgees or donees.
Shares Eligible for Future Sale
-------------------------------
In general, under Rule 144, as currently in effect, a person (or persons
whose Shares are aggregated), including a person who may be deemed to be an
"affiliate" of the Company as that term is defined under the Securities Act,
will be entitled to sell within any three-month period a number of Shares
beneficially owned for at least two years that does not exceed the greater of
(i) one (1%) percent of the then outstanding Common Shares, or (ii) the average
weekly trading volume in the Shares during the four calendar weeks preceding
such sale. Sales under Rule 144 are also subject to certain requirements as to
the manner of sale, notice and the availability of current public information
about the Company. 58,623 Common Shares may be sold pursuant to Rule 144 in each
three month period. However, a person who is not deemed to have been an
affiliate of the Company during the 90 days preceding a sale by such person, and
who has beneficially owned Common Shares for at least three (3) years, may sell
such Shares without regard to the volume, manner of sale or notice requirements
of Rule 144.
The Company cannot predict the effect, if any, that sales of Common Shares
pursuant to Rule 144 or otherwise, or the availability of such Shares for sale,
will have on the market price prevailing from time to time. Nevertheless, sales
by selling stockholders of substantial numbers of Common Shares in the public
market could adversely affect prevailing market prices for the Shares. In
addition, the availability for sale of a substantial number of Shares acquired
through the exercise of options under the 1996 Plan could adversely affect
prevailing market prices for the Shares. (See "Risk Factors--Common Shares
Eligible for Future Sale Pursuant to Rule 144.")
Commission Position on Indemnification for Securities Act Liabilities
---------------------------------------------------------------------
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the Company's certificate of incorporation, by-laws or provisions of
the New York Business Corporation Law the Company has been advised that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable.
32
<PAGE>
In the event that a claim for indemnification against such liabilities
(other than the payment by the Company of expenses incurred or paid by a
director, officer or controlling person in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Company will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
LITIGATION
In February, 1994, Robert Friedenberg, as owner of the two medical
technology companies, MDI and Gendex, acquired by the Company, in the name of
these corporations, filed suit to have the Agreement of Exchange rescinded on
the grounds of breach of contract. In order to avoid the imposition of damages
against it, the Company filed a cross claim, in July, 1994, against Dr.
Friedenberg, seeking enforcement of the Agreement of Exchange. In November,
1995, after a trial, the court dismissed Dr. Friedenberg's lawsuit and allowed
the Company's cross claim to proceed to trial. A pretrial hearing was held in
December, 1996 which set a trial date of April 28, 1997. In September, 1996, Dr.
Friedenberg died. The implications of his death vis-a-vis the lawsuit cannot be
assessed at this time.
In June, 1995, the Company filed a lawsuit against Mr. Morris, Dr.
Friedenberg's counsel, for the breach of attorney-client relationship and his
fiduciary duty and negligence in representing the Company in matters relating to
Dr. Friedenberg and in the preparation of the Share Exchange Agreement. The
Company's lawsuit demands damages in the amount of $1,000,000. The court has set
a trial date of September 14, 1998.
No other legal proceedings are pending to which the Company or any of its
property is subject, nor to the knowledge of the Company are any other legal
proceedings threatened.
LEGAL MATTERS
The validity of the securities offered by the Prospectus is being passed
upon for the Company by Pensley & Fugler, Esquires, 2067 Broadway, New York, New
York 10023. Joel Pensley, a partner in that firm, is the owner of 100,000 Common
Shares and 160,000 options issued under the 1996 Plan and Michael Roy Fugler, a
partner in that firm, is the owner of 5,000 Common Shares and 40,000 options
issued under the 1996 Plan.
EXPERTS
The audited consolidated financial statements of the Company as of April
30, 1996 included in the Prospectus and elsewhere in the Registration Statement
have been audited by Thomas P. Monahan, CPA, an independent public accountant,
as indicated in his report with respect thereto, and are included herein in
reliance upon the authority of Thomas P. Monahan, CPA as an expert in accounting
and auditing and in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Commission, a Registration Statement on Form
SB-2 under the Securities Act with respect to the securities offered hereby. The
Prospectus, which constitutes part of the Registration Statement, does not
contain all of the information set forth in such Registration Statement and the
exhibits and schedules thereto. For further information with respect to the
Company and the securities offered hereby, reference is made to the Registration
Statement and the exhibits filed therewith. Statements contained in the
Prospectus as to the contents of any contract or any other document referred to
are not necessarily complete. In each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement or otherwise filed with the Commission, each such statement being
qualified in all respects by such reference. The Registration Statement and the
exhibits and schedules thereto may be inspected without charge at the principal
offices of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and
copies of such material can be obtained from the Public Reference Section of the
Commission at prescribed rates. The Registration Statement and exhibits may also
be inspected a the Commission's regional offices at 500 West Madison Street,
Suite 1400, Chicago, Illinois and at 7 World Trade Center, Suite 1300, New York,
New York 10048. The Commission also maintains a World Wide Web site on the
Internet that contains copies of reports, proxy and information statements and
other information regarding registrants that file electronically on the
Commission's Electronic Data Gathering Analysis and Retrieval system ("EDGAR"),
including the Company, at http://www.sec.gov.
The Company's fiscal year ends on April 30. The Company intends to
distribute to its stockholders annual reports containing audited financial
statements with a report therein by independent public accountants after the end
of each fiscal year. In addition, the Company will furnish to its stockholders
quarterly reports for the first three quarters of each fiscal year containing
unaudited financial statements and other information after the end of each
fiscal quarter, upon written request to the Secretary of the Company or
otherwise as required by law.
33
<PAGE>
THOMAS P. MONAHAN
CERTIFIED PUBLIC ACCOUNTANT
208 LEXINGTON AVENUE
PATERSON, NEW JERSEY 07502
(201) 790-8775
To The Board of Directors and Shareholders
of American Bio Medica Corporation
I have audited the accompanying balance sheet of American Bio Medica
Corporation ( a development stage company) as of April 30, 1995 and 1996 and the
related statements of operations, cash flows and shareholders' equity for the
years ended April 30, 1995 and 1996. These financial statements are the
responsibility of the Company's management. My responsibility is to express an
opinion on these financial statements based on my audit.
I conducted my audit in accordance with generally accepted auditing
standards. Those standards require that I 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 and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of American Bio Medica
Corporation ( a development stage company) as of April 30, 1995 and 1996 and the
results of its operations, shareholders equity and cash flows for the years
ended April 30, 1995 and 1996 in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that
American Bio Medica Corporation (a development stage company) will continue as a
going concern. As more fully described in Note 2, the Company has incurred
operating losses since inception and requires additional capital to continue
operations. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans as to these matters are
described in Note 2. The financial statements do not include any adjustments to
reflect the possible effects on the recoverability and classification of assets
or the amounts and classifications of liabilities that may result from the
possible inability of American Bio Medica Corporation (a development stage
company) to continue as a going concern.
s/Thomas P. Monahan
----------------------
Thomas P. Monahan, CPA
July 15, 1996
Paterson, New Jersey
F-1
<PAGE>
AMERICAN BIO MEDICA CORPORATION
(A Development Stage Company)
BALANCE SHEET
<TABLE>
<CAPTION>
April 30, April 30, October 31,
1995 1996 1996
________ _________ ________
Assets
<S> <C> <C> <C>
Current assets
Cash $82,833 $437,532 $188,479
Investment-short term 1,411,866
Accounts receivable 72,579 34,500 48,214
Inventory 27,551 22,301 51,042
Prepaid expenses 15,089
_______ _______ _______
Total current assets 198,052 494,333 1,699,601
Capital assets - net 24,575 20,575 78,073
Other assets
License rights 183,670 110,070 92,070
Patent costs 21,000 21,000 22,595
Total other assets 204,670 131,070 114,665
_______ ________ ________
Total assets $427,297 $645,978 $1,892,339
======== ======== ==========
F-2
<PAGE>
AMERICAN BIO MEDICA CORPORATION
(A Development Stage Company)
BALANCE SHEET
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and
accrued expenses $64,076 $33,248 $27,827
Notes payable 89,258
Convertible debenture payable 500,000 132,000
_______ _______ ______
Total current liabilities 653,334 165,248 27,827
_______ _______ ______
Long term liabilities
Convertible debenture payable 214,000
Note payable 126,500 126,500
_______ _______
Total long term liabilities 340,500 126,500
Capital stock
Capital stock-authorized
30,000,000 common shares,
par value $.01 each, at
April 30, 1995 and 1996 and
October 31, 1996, the shares
outstanding were 8,350,378,
12,089,561 and 12,565,227
respectively. 83,503 120,895 125,651
Preferred stock-authorized
5,000,000 preferred shares,
par value $.01 each at
October 31, 1996, the
number of shares outstanding
was 150. 1
Additional paid in capital 755,173 2,635,006 4,415,749
Deficit accumulated during
development stage (1,405,213) (2,401,671) (2,676,889)
___________ ___________ ___________
Total stockholders' equity (566,537) 354,230 1,864,512
___________ ___________ ___________
Total liabilities and
stockholders' equity $427,297 $645,978 $1,892,339
======== ======== ==========
</TABLE>
See accompanying notes to financial statements.
F-3
AMERICAN BIO MEDICA CORPORATION
(A Development Stage Company)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For the six For the six Inception
For the For the months ended months ended, April 10,
year ended year ended October 31, October 31 1986 to
April 30, April 30, 1995 1996 October 31,
1995 1996 (unaudited) (unaudited) 1996
---- ---- ----------- ----------- -----
<S> <C> <C> <C> <C> <C>
Income $137,891 $158,105 $82,416 $48,587 $5,389,882
Less cost of
goods sold 45,204 96,444 26,373 25,778 3,149,900
------- ------ ------ ------ ---------
Gross profit 92,687 61,661 56,043 22,809 2,239,982
Operations:
General and
administrative 129,719 518,826 66,672 336,113 3,757,056
Depreciation and
amortization 75,600 77,600 37,800 23,000 312,664
Research and
development 135,412 358,844 98,401 66,750 631,936
------- ------- ------ ------
- --------
Total expense 340,731 955,270 202,873 425,863 4,701,656
Loss before
other income (248,044) (893,609) (146,830) (403,054) (2,461,674)
Other income
and expenses
Retirement of
debt (Note 9) 126,500 126,500
Interest income 10,145 356 1,200 1,336 15,356
Interest expense (67,429) (103,205) (47,566) (357,071)
------ ------- ------ ------ -------
Total other income(57,284) (102,849) (46,366) 127,836
(215,215)
and expenses
------- --------- -------- --------- ----------
Net Profit (Loss) $(305,328) $(996,458) $(193,196) $(275,218) $(2,676,889)
from operations
========= ========= ========== ==========
===========
Net income (loss)
per share $(0.02) $(0.08) $(0.02) $(0.02) $(0.21)
========= ========= ========== ========== ===========
Number of shares
outstanding 12,565,227 12,565,227 12,565,227 12,565,227 12,565,227
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
AMERICAN BIO MEDICA CORPORATION
(A Development Stage Company)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the For the
For the For the six months six months Inception
year year ended ended April 10,
ended ended October October 1986) to
April 30, April 30, 31, 1995 1996 October
1995 1996 (unaudited) (unaudited) 31, 1996
---- ---- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net profit (loss) $(305,328) $(996,458) $(193,196) $(275,218) $(2,676,889)
Amortization
and depreciation 75,600 77,600 37,800 23,000 312,664
Consulting fees 306,250 50,000 356,250
Compensation
agreement 125,000 125,000
Retirement of debt
(Note 9) 126,500 (126,500)
Adjustments to
reconcile net
income to net cash
Accounts receivable (55,234) 38,079 3,722 (13,714) (48,214)
Inventory (19,420) 5,250 2,923 (28,741) (51,042)
Prepaid expenses (40,683) 15,089 7,391
Accounts payable (36,151) (30,828) 5,489 (5,421) 27,827
-------- -------- ----- ------- ------
TOTAL CASH FLOWS
FROM OPERATIONS (381,216) (460,018) (135,871) (123,594) (2,080,904)
CASH FLOWS
FROM FINANCING
ACTIVITIES
Convertible
debenture 446,278 693,000 180,500 (132,000) 1,407,000
Notes payable (89,289) 126,500
Sale of stock 150,000 1,481,903 2,209,819
Issuance of
stock for services 61,006 99,253
------- ------- ------- --------- ---------
TOTAL CASH FLOWS
FROM FINANCING 446,278 814,717 180,500 1,349,903 3,842,572
ACTIVITIES
CASH FLOWS
FROM INVESTING
ACTIVITIES
Patent costs (2,000) (2,000)
Investments
short term (1,411,866) (1,411,866)
Capital assets (61,496) (159,323)
-------- ---------
TOTAL CASH FLOWS
FROM INVESTING (1,475,362) (1,573,189)
ACTIVITIES
NET INCREASE
(DECREASE) IN CASH 65,062 354,699 44,629 (249,053) 188,479
CASH BALANCE
BEGINNING OF PERIOD 147,895 82,833 82,833 437,532 -0-
------- ------ ------ ------- -------
CASH BALANCE
END OF PERIOD $82,833 $437,532 $38,204 $188,479 $188,479
======= ======== ======= ======== ========
See accompanying notes to financial statements.
</TABLE>
F-5
<PAGE>
AMERICAN BIO MEDICA CORPORATION
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Deficit
accumulated
Additiona during
Common Common Preferred paid-in Development
Date Stock Stock Stock capital Stage Total
---- ----- ----- ----- ------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
4-10-1986(1) 1,600,000 $16,000 $11,727 $27,727
4-11-1986(1) 200,000 2,000 2,000
4-30-1986 Net Loss $(612) (612)
-------- ----- ------ ------ -------
4-30-1986 1,800,000 18,000 11,727 (612) 29,115
7-9-1986(2) 200,000 2,000 42,888 44,888
4-30-1987(3) 360,935 3,609 357,326 360,935
4-30-1987(4) 74,854 74,854
4-30-1987 Net Loss (45,981) (45,981)
-------- ------ ------- ------- -------
4-30-1987 2,360,935 23,609 337,087 (45,369) 406,065
4-30-1988(5) 67,056 67,056
4-30-1988 Net loss (417,760) (417,760)
-------- ------ ------ --------- --------
4-30-1988 2,360,935 23,609 404,143 (372,391) 55,361
4-30-1989 25,000 250 6,000 6,250
4-30-1989 Net loss (51,677) (51,677)
4-30-1989(5) 19,520 19,520
--------- ------ ------- ------- -------
4-30-1989 2,385,935 23,859 429,663 (424,068) 29,454
4-30-1990 Net loss (13,352) (13,352)
--------- -------- ------- -------- -------
4-30-1990 2,385,935 23,859 429,663 (437,420) 16,102
4-30-1991(9) 742,000 7,420 193,229 200,649
4-30-1991 Net loss (419,654) (419,654)
-------- ----- ------- -------- --------
4-30-1991 3,127,935 31,279 622,892 (857,074) 202,903
4-30-1992(6) 474,800 4,748 4,748
4-30-1992 Net loss (51,194) (51,194)
-------- ------ ------- --------- --------
4-30-1992 3,602,735 36,027 622,892 (908,268) 249,349
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
Deficit
accumulated
Additiona during
Common Common Preferred paid-in Development
Date Stock Stock Stock capital Stage Total
---- ----- ----- ----- ------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
4-30-1992 3,602,735 36,027 622,892 (908,268) 249,349
4-30-1993(12) 1,717,771 17,177 11,833 29,010
4-30-1993(7) 6,029,872 60,299 90,448 150,747
4-30-1993 Net profit (42,374) (42,374)
---------- ------- ------- -------- -------
4-30-1993 11,350,378 $113,503 $725,173 (950,642) $111,966
4-30-1994 Net loss (149,243) (149,243)
-------- ------- ------- -------- ---------
4-30-1994 11,350,378 113,503 725,173 (1,099,885) 261,209
10-18-1995(8 (3,000,000) (30,000) (30,000)
4-30-1995 (305,328)
(305,328)
---------- ------- ------- --------- --------
4-30-1995 8,350,378 83,503 755,173 (1,405,213) 566,537
11-3-1995 500,000 5,000 120,000 125,000
4-30-1996(10) 1,700,002 17,000 1,258,000 1,275,000
4-30-1996(11) 25,000 250 24,750 25,000
4-30-1996(12) 250,000 2,500 122,500 125,000
4-30-1996(13) 489,181 4,892 56,083 60,975
4-30-1996(14) 125,000 1,250 61,250 62,500
4-30-1996(15) 100,000 1,000 64,000 65,000
4-30-1996(16) 550,000 5,500 173,250 178,750
4-30-1996 Net loss (996,458) (996,458)
-------- ------- --------- --------- ---------
4-30-1996 12,089,561 $120,895 $2,635,006 (2,401,671) $354,230
Unaudited
6-4-1996 11,333 113 8,387 8,500
6-4-1996 25,000 250 24,750 25,000
7-31-1996(10) 176,000 1,760 130,240 132,000
7-31-1996(10) 13,333 133 9,867 10,000
7-31-1996(14) 100,000 1,000 49,000 50,000
7-31-1996(17) 32,000 320 31,680 32,000
7-31-1996(18) 100,000 1,000 99,000 100,000
9-9-1996(17) 18,000 180 17,820 18,000
9-23-1996(19) $1 1,409,999 1,410,000
10-31-1996 Net loss (275,218) (275,218)
-------- ------- -- --------- --------- ---------
10-31-1996 12,565,227 $125,651 $1 $4,415,749$(2,676,889)$1,864,512
========== ======== == ======= ========== =========
</TABLE>
F-7
<PAGE>
(1) Issuance of Common Shares for initial capital contribution
(2) Sale of Common Shares through private placement at $.25 per share
(3) Sale of Common Shares through Unit offering at $1.00 per Unit plus
one warrant
(4) Write off of related offering expense
(5) Forgiveness of salary
(6) Sale of Common Shares at $.001 par value for cash
(7) Common Shares issued pursuant to acquisition
(8) Return of Common Shares by Edmund Jaskiewicz
(9) Issuance of Common Shares to Jay Bender pursuant to employment
contract at $.25 per share.
(10) Common Shares issued for conversion of debt
(11) Common Shares issued pursuant to sale of 25,000 Units
(12) Common Shares issued for Warrant conversion at $.50
(13) Common Shares issued in consideration for services under Regulation D
at $.125 per share
(14) Common Shares issued pursuant to Rule 504 at $.50 per share
(15) Common Shares issued under Rule 504 at $.65 per share
(16) Common Shares issued pursuant Regulation D at $.325 per share
(17) Common Shares issued upon exercise of "B" Warrants
(18) Common Shares issued upon exercise of "A" Warrants
(19) Shares of preferred stock for $1,500,000 less $90,000 in offering
expense
See accompanying notes to financial statements.
F-8
F-8
<PAGE>
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
FROM INCEPTION TO APRIL 30, 1996
Note 1 - Organization of Company and Issuance of Common Shares
a. Creation of the Company
--------------------------
American Bio Medica Corporation (the "Company") was formed under the laws
of the State of New York on April 10, 1986 under the name, American Micro Media,
Inc. The authorized capital was 200 Common Shares without par value. On May 20,
1986, the Company amended its certificate of incorporation to increase the
number of authorized common shares to 20,000,000 shares of $.01 par value per
share. On September 12, 1986, the Company amended its certificate of
incorporation to remove preemptive rights. On September 28, 1992, the Company
amended its certificate of incorporation to increase the aggregate number of
authorized common shares to 30,000,000 shares of $.01 par value per share
("Common Shares") and to change its name to American Bio Medica Corporation.
b. Description of the Company
-----------------------------
From inception until 1991, the Company was involved in marketing
educational books and software to schools and municipal libraries and
audio-visual educational packages to corporations throughout the United States.
In 1991, the Company reduced its concentration on this market because of
competition, increasing costs of doing business and slow collections from
municipalities and sought new technologies in emerging medical markets. The
Company has, however, continued to sell audio-visual packages to libraries.
The Company is currently in the business of acquiring, developing and
marketing biomedical technologies and products. The Company currently owns two
technologies for screening drugs of abuse, a workplace screening test and a
preliminary test for use by laboratories. The Company also owns a patented low
cost method for producing Keratin proteins. The uses for Keratin proteins
include hardening of nails and carrying topical lotions and medicines through
the skin.
c. Issuance of Common Shares
----------------------------
In fiscal 1995, the Company rescinded the right to have an aggregate of
9,044,808 Common Shares issued to Robert Friedenberg, Richard Davidson and
Jackson Morris, certain sellers of capital stock of companies which claimed to
own certain biomedical technologies, on the grounds of breach of contract. In
addition, 3,000,000 of the 6,029,872 Common Shares owned by Edmund Jaskiewicz,
Chairman of the Board, Executive Vice-President, Secretary and a Director, were
voluntarily returned by him to the Company for cancellation.
On November 3, 1995, the Company entered into a three year employment
agreement with Jay Bendis, Vice-President-Marketing. Pursuant to this agreement,
the Company is obligated to issue 500,000 Common Shares. 400,000 of such shares
are subject to vesting provisions.
As of April 30, 1995 and 1996, the Company had borrowed an aggregate of
$714,000 and $1,407,000, respectively, on a convertible debenture basis, the
principal amount of each debentures convertible at the option of the holder into
Common Shares at $.75 per share. As of April 30, 1996, $1,275,000 principal
amount of convertible debentures had been converted into an aggregate of
1,700,002 Common Shares. As of April 30, 1996, the principal amount of
convertible debentures which had not yet been converted into Common Shares was
$132,000.
F-9
<PAGE>
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
FROM INCEPTION TO APRIL 30, 1996
As of April 30, 1996, the Company sold, through a private placement, 25,000
Units consisting of 25,000 Common Shares, 500,000 "A" Warrants and 50,000 "B"
Warrants for an aggregate consideration of $25,000.
As of April 30, 1996, Unit holders exercised 250,000 "A" Warrants into
250,000 Common Shares at an exercise price of $.50, for an aggregate of
$125,000.
As of April 30, 1996, the Company issued 489,181 Common Shares in
consideration for past services to five individuals in the amount of $60,975 or
an average consideration of $.125 per share.
As of April 30, 1996, the Company issued to OTC Communications 100,000
Common Shares under Rule 504 ("Rule 504") to the Securities Act of 1933, as
amended, (the "Securities Act") as consideration for financial consulting
services rendered per contract at a value of $.65 per share.
As of April 30, 1996, the Company issued to Riverside Consulting Group,
Inc. 25,000 Common Shares under Rule 504 in consideration for financial
consulting services of $12,500 at $.50 per share.
As of April 30, 1996, the Company issued 100,000 Common Shares to two
persons at $.50 per share in consideration for financial consulting services.
As of April 30, 1996, the Company approved the issuance to OTC
Communications 500,000 Common Shares under Regulation D as consideration for
financial consulting services rendered per contract and 50,000 Common Shares for
expenses at a value of $178,750 or $.325 per share.
As of July 31, 1996, the Company had converted the balance of the
convertible debentures in the amount of $132,000 into 176,000 Common Shares at
$.75 per share.
As of July 31, 1996, the Company sold an additional convertible debenture
in the amount of $10,000 which was converted into 13,333 Common Shares at $.75
per share.
As of July 31, 1996, the Company sold 100,000 Common Shares at $1.00
through the exercise of 100,000 "A" Warrants.
As of July 31, 1996, the Company sold 32,000 Common Shares at $1.00 per
share through the exercise of 32,000 "B" Warrants.
As of September 30, 1996, the Company sold 18,000 Common Shares at $1.00
per share through the exercise of 18,000 "B" Warrants.
Note 2 - Summary of Significant Accounting Policies
a. Basis of Financial Statement Presentation
--------------------------------------------
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company incurred net losses of
$2,676,889 for period from inception (April 10, 1986) to October 31, 1996 and
$275,218 for the six month period ended October 31, 1996. These factors indicate
that the Company's continuation as a going concern is dependent upon its ability
to obtain adequate financing. As of October 31, 1996, $1,407,000 of debt was
converted into Common Shares at $.75 per share.
The Company has not yet generated sufficient revenues during its limited
operating history to meet its ongoing expenses. The Company sold additional
debentures in the principal amount of $18,500 and received $175,000 through
warrant exercise at $1.00 each and sold 150 converti ble preferred shares at
$10,000 each for an aggregate consideration of $1,500,000 and net proceeds of
$1,405,000 with this increase in working capital, the Company expects to finance
the marketing, sales and manufacturing of its workplace drug test kits.
F-10
<PAGE>
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
FROM INCEPTION TO APRIL 30, 1996
The Company will require substantial funds to finance its business
activities on an ongoing basis and will have a continuing long-term need to
obtain additional financing. The Company's future capital requirements will
depend on numerous factors including, but not limited to, continued progress
developing its source of inventory of parts supply, initiating marketing
penetration and signing hospitals and medical centers to maintenance contracts.
The Company plans to engage in such ongoing financing efforts on a continuing
basis.
The financial statements presented consist of the balance sheets dated
April 30, 1995 and 1996 the unaudited balance sheet as at October 31, 1996 and
the related statements of operations, retained earnings and cash flows for the
years ended April 30, 1995 and 1996 and the unaudited statements of operations,
retained earnings and cash flows for the six months ended October 31, 1995 and
1996 and the period from inception April 10, 1986 to October 31, 1996.
b. Earnings per Share
---------------------
Earnings per share have been computed on the basis of total number of
Common Shares outstanding as of October 31, 1996. On this date, 12,565,227
Common Shares were outstanding.
c. Revenue Recognition
----------------------
Revenue is recognized when merchandise is shipped or services are rendered.
d. Organization Expense
-----------------------
The cost of organizing the Company was charged to operations on a straight
line basis over a five year period.
e. Cash and Cash Equivalents
----------------------------
Cash and cash equivalents consist of all cash balances and highly liquid
investments with a maturity of three months or less. Excess cash balances are
primarily invested in U.S. treasury bills with lesser amounts invested in high
quality commercial paper and time deposits.
f. Research and Development Expenses
------------------------------------
Research and development costs are charged to operations when incurred.
g. Patents and License Agreements
---------------------------------
Certain costs incurred to acquire exclusive licenses of patentable
technology are capitalized and amortized over a five year period or the term of
the license, whichever is shorter. The portion of these amounts determined to be
attributable to patents is amortized over their remaining lives and the
remainder is amortized over the estimated period of benefit but not more than 40
years.
F-11
<PAGE>
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
FROM INCEPTION TO APRIL 30, 1996
h. Unaudited Financial Information
----------------------------------
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments (consisting only of normal recurring items)
necessary to present fairly the financial position of the Company as of October
31, 1996 and the results of its operations and its cash flows for the six months
ended October 31, 1995 and 1996. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
rules and regulations of the Commission. The results of operations for the
periods presented are not necessarily indicative of the results to be expected
for the full year.
Note 3 - Inventory
Inventory has been recorded at the lower of cost or market under the
first-in-first-out method. Inventory components were as follows:
April 30, 1995 April 30, 1996 October 31, 1996
______________ ______________ _____________
Finished Goods $27,551 $22,301 $51,042
Note 4 - Related Party Transactions
a. Issuance of Shares
---------------------
In September 1992, the Company entered into a share exchange agreement (the
"Share Exchange Agreement") by which it acquired all the issued and outstanding
common stock of three companies ("Target Companies") two of which were owned by
Robert M. Friedenberg, Richard Davidson and Jackson Morris and the third by
Edmund Jaskiewicz, the sole assets of which corporations were various biomedical
technologies, in exchange for an aggregate of 15,074,680 Common Shares. Dr.
Friedenberg became a director of the Company. As president of two of the Target
Companies, he failed, on behalf of the companies of which he was president, to
turn over the claimed technologies and/or misrepresented them and resigned as an
officer and director of the Company. The right to receive Common Shares by Dr.
Friedenberg and Messrs. Davidson and Morris (aggregating 9,044,808 shares) were
rescinded by the Company and the right of the Company to have capital stock of
two of the Target Companies issued to it were likewise rescinded. The 6,029,872
Common Shares due Mr. Jaskiewicz were duly issued to him. However, he rescinded,
in October, 1995, without consideration, 3,000,000 of his Common Shares the
actual cancellation of the certificates representing such shares was effected in
February, 1996.
b. Nonstatutory Option Plan
---------------------------
In June, 1996, the Company adopted its 1996 Nonstatutory Stock Option Plan
(the "1996 Plan"). Options to purchase 2,000,000 Shares are included in the 1996
Plan of which 1,500,000 were issued on June 28, 1996 as follows: Stan Cipkowski,
President, 550,000 options; Edmund Jaskiewicz, Executive Vice-President, 250,000
options; Jay Bendis, Vice-President-Marketing 300,000 options; Henry Wells,
Vice-President-Product Development, 150,000 options; Joel Pensley, Esq. 160,000
options, Michael Roy Fugler, Esq. 40,000 options (partners in Pensley & Fugler,
special securities counsel) and two non-management employees, 25,000 options
each.
F-12
<PAGE>
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
FROM INCEPTION TO APRIL 30, 1996
c. Employment Agreement with Jay Bendis
---------------------------------------
On November 3, 1995, the Company entered into a three year employment
agreement with Jay Bendis, Vice-President-Marketing and Sales. Under this
agreement, Mr. Bendis received an annual salary of $24,000 per year until April
30, 1996 and presently receives $48,000 per year. When the Company generates an
aggregate of $500,000 gross revenues from the sale of biomedical products, Mr.
Bendis' salary will be increased to $60,000 per year. In addition to his salary,
Mr. Bendis will receive a bonus equal to 2% of the gross revenus of the Company
above $1,000,000 per fiscal year until such annual revenues reach $3,000,000,
1.5% of gross revenues between $3,000,000 and $5,000,000 per year and 1%
thereafter.
In addition, in consideration of past services valued at $125,000 or $.25
per share, Mr. Bendis received the right to receive 500,000 Common Shares.
Certificates representing 400,000 Common Shares are being held by the Company
and shall not vest until the happening of the following events:
100,000 shares upon the Company's achieving $1,000,00 in gross revenues
from sales of biomedical products;
100,000 shares upon the Company's achieving $2,000,00 in gross revenues
from sales of biomedical products;
100,000 shares upon the Company's achieving $3,000,00 in gross revenues
from sales of biomedical products; and
100,000 shares upon the Company's achieving $4,000,00 in gross revenues
from sales of biomedical products.
Certificates representing shares which have not vested on or before April
30, 1998 (or the end of the next succeeding fiscal year in the event the Company
changes its fiscal year) will be returned to the Company's stock transfer agent
for cancellation. No bonuses will be paid or shares vest subsequent to any
election by Mr. Bendis to terminate his employment agreement or subsequent to
his discharge for cause from employment by the Company. Mr. Bendis also is
entitled to receive health insurance, to participate in stock option or similar
plans or other benefits offered generally to management employees and to have
out-of-pocket expenses reimbursed.
d. Employment Agreement with Edmund Jaskiewicz
----------------------------------------------
On November 3, 1995, the Company entered into a three year employment
agreement with Edmund Jaskiewicz, Executive Vice-President. Under this
agreement, Mr. Jaskiewicz received an annual salary of $24,000 per year until
April 30, 1996 and presently receives $48,000 per year. When the Company
generates an aggregate of $500,000 gross revenues from the sale of biomedical
products, Mr. Jaskiewicz's salary will be increased to $60,000 per year. In
addition to his salary, Mr. Jaskiewicz will receive a bonus equal to 2% of the
gross revenues of the Company above $1,000,000 per fiscal year until such annual
revenues reach $3,000,000, 1.5% of gross revenues between $3,000,000 and
$5,000,000 per year and 1% thereafter. No bonuses will be paid or shares vest
subsequent to any election by Edmund Jaskiewicz to terminate his employment
agreement or subsequent to his discharge for cause from employment by the
Company. Mr. Jaskiewicz also is entitled to receive health insurance, to
participate in stock option or similar plans or other benefits offered generally
to management employees and to have out-of-pocket expenses reimbursed.
F-13
<PAGE>
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
FROM INCEPTION TO APRIL 30, 1996
e. Employment Agreement with Stan Cipkowski
-------------------------------------------
On November 3, 1995, the Company entered into a three year employment
agreement with Stan Cipkowski, President. Under this agreement, Mr. Cipkowski
received an annual salary of $36,000 per year until April 30, 1996 and presently
receives $60,000 per year. When the Company generates an aggregate of $500,000
gross revenues from the sale of biomedical products, Mr. Cipkowski's salary will
be increased to $72,000 per year. In addition to his salary, Mr. Cipkowski will
receive a bonus equal to 2% of the gross revenues of the Company above
$1,000,000 per fiscal year until such annual revenues reach $3,000,000, 1.5% of
gross revenues between $3,000,000 and $5,000,000 per year and 1% thereafter. No
bonuses will be paid or shares vest subsequent to any election by Mr. Cipkowski
to terminate his employment agreement or subsequent to his discharge for cause
from employment by the Company. Mr. Cipkowski also is entitled to receive health
insurance, to participate in stock option or similar plans or other benefits
offered generally to management employees and to have out-of-pocket expenses
reimbursed.
Note 5 - Acquisition of Medical Technology
On September 3, 1992, the Company entered into the Share Exchange Agreement
with Dr. Friedenberg, Richard Davidson, Jackson Morris and Edmund M. Jaskiewicz
for the acquisition of the outstanding capital stock of Medical Diagnostics,
Inc. ("MDI") (wholly owned by Dr. Friedenberg, Gendex, Inc. ("Gendex, Inc.")
(wholly owned by Dr. Morris) and Protein Resources Corporation ("Protein
Resources") (wholly owned by Mr. Jaskiewicz), corporations owned by these
parties. Pursuant to the Share Exchange Agreement, the Company agreed to
exchange Common Shares or all of the issued and outstanding capital stock of
these companies as follows:
Robert Friedenberg 6,029,872 shares
Richard Davidson 1,130,601 shares
Edmund Jaskiewicz 6,029,872 shares
Jackson Morris 1,884,335 shares
Total 15,074,680 shares
Dr. Friedenberg and Mr. Jaskiewicz had, simultaneously with the
transaction, transferred their right to receive some Common Shares to Messrs.
Davidson and Morris.
The transactions relating to MDI and Gendex were rescinded by the Company
on the grounds of failure of consideration and breach of contract.
The acquisition of Protein Resources has been accounted for as an
acquisition using the purchase method. The basis of the consideration was the
exchange of 6,029,873 Common Shares for which no registration with the
Commission has or is intended to be filed, representing the historic cost
incurred by Dr. Jaskiewicz of $150,747. The Company agreed to value the common
used for the acquisition at one half the closing bid price at the date of the
agreement (or one/half of the closing bid price of $.05 per share or $.025 per
share) in consideration of receiving unregistered Common Shares and the risk of
the holding period before such shares could be publicly sold. This amount was
allocated to patent costs in the amount of $60,000 and license rights in the
amount of $90,747. Accordingly, the accompanying financial statements include
the results of operations of the consolidated operations from the date of
acquisition, September 3, 1992 to present.
F-14
<PAGE>
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
FROM INCEPTION TO APRIL 30, 1996
In February, 1994, Robert Friedenberg, as owner of the two medical
technology companies, MDI and Gendex, acquired by the Company, in the name of
these corporations, filed suit to have the Agreement of Exchange rescinded on
the grounds of breach of contract. In order to avoid the imposition of damages
against it, the Company filed cross claim, in July, 1994, against Dr.
Friedenberg, seeking enforcement of the Agreement of Exchange. In November,
1995, after a trial, the court dismissed Dr. Friedenberg's lawsuit and allowed
the Company's cross claim to proceed to trial. The Company never issued
certificates representing its Common Shares to Dr. Friedenberg, or Messrs.
Davidson or Morris pursuant to the Share Exchange Agreement due to its breach
and rescinded the acquisition of the outstanding capital stock of MDI and
Gendex.
Note 6 - 12% Convertible Subordinated Debentures
Beginning February, 1993, the Company offered and sold under Rule 504 12%
convertible subordinated debentures. Interest on each debenture was due and was
paid quarterly. The principal amounts of the debentures were convertible, in
whole or in part, into Common Shares, at the rate of $.75 per share. The Company
sold an aggregate of $714,000 of debentures as of April 30, 1995 and $1,407,000
as of April 30, 1996. As of April 30, 1996, $1,275,000 of convertible debentures
had been converted into 1,700,002. As of April 30, 1996, the balance due by the
Company to the holders of convertible debentures who had not elected to
converted to Common Shares was $132,000.
As of April 30, 1996, the Company has reserved sufficient authorized but
unissued Common Shares for conversion of the Debentures which shares, upon
issuance and delivery, would be duly and validly issued, fully paid and
nonassessable.
As of July 31, 1996, the Company had converted the balance of the
convertible debentures in the amount of $132,000 into 176,000 Common Shares at
$.75 per share.
As of July 31, 1996, the Company sold an additional convertible debenture
in the amount of $10,000 which was converted into 13,333 Common Shares $.75 per
share.
Note 7 - Preferred Shares
The Company amended its certificate of incorporation authorizing the
issuance of 5,000,000 preferred shares, $.01 par value each. The board of
directors of the Company has the authority, without further action by the
holders of the outstanding Common Shares, to issue preferred shares from time to
time in one or more classes or series, to fix the number of shares constituting
any class or series and the stated value thereof, if different from the par
value, and to fix the terms of any such series or class, including dividend
rights, dividend rates, con version or exchange rights, voting rights, rights
and terms of redemption (including sinking fund provisions), the redemption
price and the liquidation preference of such class or series.
The Company sold 150 8% Cumulative Convertible Series A Preferred Shares
for an aggregate of $1,500,000 ($10,000 per share) less commissions of $90,000
and $5,000 in offering expenses for a net consideration of $1,405,000. Each
Preferred Share is convertible into Common Shares pursuant to the following
formula: $10,000 divided by the lesser of $6.07 or 75% of the average of the
daily closing bid prices for the five consecutive trading days ending on the
trading day prior to the day on which preferred shares are converted to Common
Shares. All accrued but unpaid dividends are payable in cash. The Company has
agreed to register the Common Shares underlying the preferred shares within 180
days of the date of purchase, September 23, 1996.
F-15
<PAGE>
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
FROM INCEPTION TO APRIL 30, 1996
The Company has reserved a maximum of 600,000 Common Shares for the
conversion of Preferred Shares.
The Company has issued 24,712 Common Share purchase warrants. The Warrants
are exercisable at $3.00 per share for a period of two years from the date of an
effective registration statement relating to the underlying Common Shares.
Note 8 - Income Taxes
The Company provides for the tax effects of transactions reported in the
financial statements. The provision if any, consists of taxes currently due plus
deferred taxes related primarily to differences between the basis of assets and
liabilities for financial and income tax reporting. The deferred tax assets and
liabilities, if any, represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled. As of April 30, 1996 and October 31, 1996,
the Company had no material current tax liability, deferred tax assets, or
liabilities to impact on the Company's financial position because the deferred
tax asset related to the Company's net operating loss carry forward and was
fully offset by a valuation allowance.
At October 31, 1996, the Company has net operating loss carry forwards for
income tax purposes of $2,676,889. This carry forward is available to offset
future taxable income, if any, and expires in the year 2010. The Company's
utilization of this carry forward against future taxable income may become
subject to an annual limitation in the event that there is a cumulative change
in ownership of the Company of more than 50%.
The components of the net deferred tax asset as of October 31, 1996 are as
follows:
Deferred tax asset:
Net operating loss carry forward $ 910,029
Valuation allowance $(910,029)
Net deferred tax asset $ -0-
==========
The Company recognized no income tax benefit from the loss generated in the
year ended April 30, 1996 and for the six months ended October 31, 1996. SFAS
No. 109 requires that a valuation allowance be provided if it is more likely
than not that some portion or all of a deferred tax asset will not be realized.
The Company's ability to realize benefit of its deferred tax asset will depend
on the generation of future taxable income. Because the Company has yet to
recognize significant revenue from the sale of its products, the Company
believes that a full valuation allowance should be provided.
Note 9 - Commitments and Contingencies
a. Private Placement of Securities
----------------------------------
The Company offered, pursuant to Rule 504 of the Securities Act, 50,000
Units at $1.00 per Unit. Each Unit consisted of one Common Share, 20 common
share "A" purchase warrants exercisable for six months at $.50 and two common
share "B" purchase warrants exercisable at $1.00. The "B" Warrants were
exercisable for a period of three months, subject to extension by the Company,
beginning six months from January 2, 1996.
F-16
<PAGE>
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
FROM INCEPTION TO APRIL 30, 1996
As of April 30, 1996, the Company had closed that offering with the sale of
25,000 Units consisting of 25,000 Common Shares, 500,000 "A" Warrants and 50,000
"B" Warrants for an aggregate consideration of $25,000. As of April 30, 1996,
Unit holders had exercised 250,000 "A" Warrants into 250,000 Common Shares for
an aggregate of $125,000. As of April 30, 1996, the Company had reserved 300,000
Common Shares underlying the unexercised Unit Warrants.
As of April 30, 1996, the Company issued to OTC Communications 100,000
Common Shares under Rule 504 as consideration for financial consulting services
rendered per contract at valued at $178,750 or $.65 per share.
As of April 30, 1996, the Company issued to Riverside Consulting Group,
Inc. 25,000 Common Shares under 504 in consideration of financial consulting
services of $12,500 at $.50 per share.
As of July 31, 1996, the Company sold 100,000 Common Shares at $1.00
through the exercise of 100,000 "A" Warrants.
As of July 31, 1996, the Company sold 32,000 Common Shares at $1.00 per
share through the exercise of 32,000 "B" Warrants.
As of September 30, 1996, the Company sold 18,000 Common Shares at $1.00
per share through the exercise of 18,000 "B" Warrants.
b. 12% Convertible Subordinated Debentures
------------------------------------------
The Company is obligated to convert the outstanding Debentures at the
option of the holders into Common Shares at a ratio one share for each $.75
principal amount of each Debenture so converted. At April 30, 1996, the Company
had reserved 176,000 Common Shares for conversion of the aggregate principal
amount of $132,000 of the Debentures which had not been converted as of April
30, 1996.
As of July 31, 1996, the Company had converted the balance of the
convertible debentures in the amount of $132,000 into 176,000 Common Shares at
$.75 per share.
As of July 31, 1996, the Company sold an additional convertible debenture
in the amount of $10,000 and was converted into 13,333 Common Shares at $.75 per
share.
c. Lawsuits
-----------
1. In February, 1994, Robert Friedenberg, as owner of the two medical
technology companies, MDI and Gendex, acquired by the Company, in the name of
these corporations, filed suit to have the Agreement of Exchange rescinded on
the grounds of breach of contract. In order to avoid the imposition of damages
against it, the Company filed a cross claim, in July, 1994, against Dr.
Friedenberg, seeking enforcement of the Agreement of Exchange. In November,
1995, after a trial, the court dismissed Dr. Friedenberg's lawsuit and allowed
the Company's cross claim to proceed to trial. A pretrial hearing was held in
December, 1996 which set a trial date of April 28, 1997. In September, 1996, Dr.
Friedenberg died. The implications of his death vis-a-vis the lawsuit cannot be
assessed at this time.
2. In June, 1995, the Company filed a lawsuit against Mr. Morris, Dr.
Friedenberg's counsel, for the breach of attorney-client relationship and his
fiduciary duty and negligence in representing the Company in matters relating to
Dr. Friedenberg and in the preparation of the Share Exchange Agreement. The
Company's lawsuit demands damages in the amount of $1,000,000. The court has set
a trial date of September 14, 1998.
F-17
<PAGE>
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
FROM INCEPTION TO APRIL 30, 1996
d. Public Relations Agreement
-----------------------------
In February, 1996, the Company entered into an agreement with OTC
Communications ("OTC") for financial public relations and communications
services to the Company and to serve when requested as the Company's liaison and
spokesman to the financial and investment community. In March, 1996, the Company
granted to OTC the right to receive 100,000 Common Shares at a value of $.65 per
share for a total consideration of $65,000 in lieu of initial payment, monthly
retainers or expense reimbursement, including communications and mailing for a
period of one year and 550,000 Common Shares for years 2 and 3 under Reg. D for
a consideration of $.325 representing 1/2 the market price of the Common Shares
at the date of the Contract, March 14, 1996, 50,000 shares allocated to expense
reimbursement and 500,000 shares allocated to public relations consulting. The
Company agreed to value the 550,000 shares at 1/2 market price in consideration
of OTC receiving unregistered Common Shares and the risk of the holding period
until they may be sold publicly. Certificates representing the 100,000 Common
Shares were issued in July, 1996. As of October 31, 1996, certificates
representing the 550,000 Common Shares had been authorized but not issued. The
Company has also issued to OTC 500,000 "A" Options which are exercisable at
$1.00 through March 14, 1999 and 500,000 "B" Options, which are exercisable at
$2.00 through March 14, 1999. Until a registration statement relating to the
Common Shares underlying the Options is effective, certificates representing the
shares into which the Options are exercised will bear a legend restricting
transfer in the absence of an effective registration with the Commission or an
exemption therefrom.
e. Nonstatutory Option Plan
---------------------------
The Company has adopted the Fiscal 1996 Nonstatutory Stock Option Plan (the
"Plan"). 2,000,000 Common Shares were reserved under the Plan. The Plan is
administered by the Board of Directors.
Stock options under the Plan may be granted to employees, officers,
directors, consultants of the Company or any other parties who have made a
significant contribution to the business and success of the Company. The
exercise price under the Plan may be more, equal to or less than the then
current market price of the Common Shares as deemed to be appropriate.
As of October 31, 1996, the Company has issued 1,500,000 options pursuant
to the 1996 Nonstatutory Option Plan. All options are exercisable for a period
of three years at $3.00 per share. The company has reserved 1,500,000 Common
Shares for the exercise of these options.
f. Leased Office Space
----------------------
The Company leases 2,200 square feet of office and warehouse space from an
unrelated party on a month to month basis at $400 per month.
Note 10 - Secured Loan
On March 9, 1990, the Company entered into an security agreement with a
finance company (the "Finance Company"), to borrow money secured by the
Company's receivables evidenced by invoices. At the time, the Company was
engaged in selling educational books to municipal school districts and public
libraries throughout the United States. The Finance Company agreed to lend an
amount equal to 60% of the net value of all the Company's accounts receivable.
Accounts receivable funding ceased as of July 31, 1990.
F-18
<PAGE>
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
FROM INCEPTION TO APRIL 30, 1996
The Company instituted a lawsuit against the Finance Company on November
26, 1990 for damages due to its failure lend to the 60% credit limit based on
its calculations and for forgiveness of the loan based on the Factor's charging,
based on its own billings, at an interest rate in excess of the rate of 25% per
annum as prescribed in the sections dealing with usury in New York Penal State
Law. Although company counsel had opined that the Company would prevail in the
action and that all indebtedness incurred in the principal amount $126,500 plus
interest and fees would be voided by reason of the Finance Company's violation
of the usury provisions of the Penal Law, by agreement between the Company and
the Factor, the lawsuit was withdrawn without prejudice as the Company, at that
time, lacked the resources for protracted litigation. In April, 1996, the
obligation, if any, to the Finance Company became barred by New York State's
six-year statute of limitations. The Board of Directors of the Company has
elected to write-off the obligation.
Note 11 - Business and Credit Concentrations
The amount reported in the financial statements for cash represents fair
market value. Because the difference between cost and the lower of cost or
market is immaterial, no adjustment has been recognized and investments are
recorded at cost.
Note 12 - Development Stage Company
The Company is considered to be a development stage company with little
operating history subsequent to its reorganization and its commencement of
development of its newly acquired biomedical technologies which are, at present,
its core business. The Company was, as of October 31, 1996, dependent upon the
use of the net proceeds from the sale of the Units and the exercise of the Unit
Warrants to develop and market these technologies and bringing them to market.
Since its reorganization, the Company's activities have been limited to the sale
of Common Shares in connection with its organization, the acquisition of
patented technology, the preparation of a marketing plan and limited production,
test marketing of its products also setting up machinery for mass production,
designing first products, including chemistry, packaging and graphics.
Note 13 - Registration statements
On July 23, 1996, the Company filed a registration statement on Form 10-SB
pursuant to the Securities Exchange Act of 1934. That registration statement
became effective on September 21, 1996 and, as a result, the Company is subject
to the informational requirements of said act and files reports, proxy
statements, and other information with the Securities and Exchange Commission.
The Company is involved in the preparation of offering documents relating
to a registration statement on Form SB-2 the purpose of which is to register
600,000 Common Shares underlying the conversion of the Preferred Shares and
24,712 underlying the exercise of the Warrants.
Note 14 - Subsequent Events
In November, 1996, the Company amended the Warrants by reducing the
exercise price from $6.07 per share to $3.00 per share.
In November, 1996, the Company issued 131,000 Nonstatutory Options
exercisable at $3.00 for a period of three years.
F-19
<PAGE>
AMERICAN BIO MEDICA CORPORATION
Part II
Information Not Required in Prospectus
Item 24. Indemnification of Directors and Officers
The New York Business Corporation Law, as amended, provides for the
indemnification of the Company's officers, directors and corporate employees and
agents under certain circumstances as follows:
721 NONEXCLUSIVITY OF STATUTORY PROVISIONS FOR INDEMNIFICATION OF DIRECTORS
AND OFFICERS.
The indemnification and advancement of expenses granted pursuant to, or
provided by, this article shall not be deemed exclusive of any other rights to
which a director or officer seeking indemnification or advancement of expenses
may be entitled, whether contained in the certificate of incorporation or the
by-laws or, when authorized by such certificate of incorporation or by-laws, (i)
a resolution of shareholders, (ii) a resolution of directors, or (iii) an
agreement providing for such indemnification, provided that no indemnification
may be made to or on behalf of any director or officer if a judgment or other
final adjudication adverse to the director or officer establishes that his acts
were committed in bad faith or were the result of active and deliberate
dishonesty and were material to the cause of action so adjudicated, or that he
personally gained in fact a financial profit or other advantage to which he was
not legally entitled. Nothing contained in this article shall affect any rights
to indemnification to which corporate personnel other than directors and
officers may be entitled by contract or otherwise under law.
722 AUTHORIZATION FOR INDEMNIFICATION OF DIRECTORS AND OFFlCERS.
(a) A corporation may indemnify any person, made, or threatened to be made,
a party to an action or proceeding other than one by or in the right of the
corporation to procure a judgment in its favor, whether civil or criminal,
including an action by or in the right of any other corporation of any type or
kind, domestic or foreign, or any partnership joint venture, trust, employee
benefit plan or other enterprise, which any director or officer of the
corporation served in any capacity at the request of the corporation, by reason
of the fact that he, his testator or intestate, was a director or officer of the
corporation, or served such other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise in any capacity, against
judgments, fines, amounts paid in settlement and reasonable expenses, including
attorneys' fees actually and necessarily incurred as a result of such action or
proceeding, or any appeal therein, if such director or officer acted, in good
faith, for a purpose which he reasonably believed to be in, or, in the case of
service for any other corporation or any partnership, joint venture, trust,
employee benefit plan or other enterprise, not opposed to, the best interests of
the corporation and, in criminal actions or proceedings, in addition, had no
reasonable cause to believe that his conduct was unlawful.
(b) The termination of any such civil or criminal action or proceeding by
judgment, settlement, conviction or upon a plea of nolo contendere, or its
equivalent, shall not in itself create a presumption that any such director or
officer did not act, in good faith, for a purpose which he reasonably believed
to be in, or, in the case of service for any other corporation or any
partnership, joint venture, trust, employee benefit plan or other enterprise,
not opposed to, the best interests of the corporation or that he had reasonable
cause to believe that his conduct was unlawful.
(c) A orporation may indemnify any person made, or threatened to be made, a
party to an action by or in the right of the corporation to procure a judgment
in its favor by mason of the fact that he, his testator or intestate, is or was
a director or officer of the corporation, or is or was seeing at the request of
the corporation as a director or officer of any other corporation of any type or
kind, domestic or foreign, of any partnership, joint venture, trust, employee
benefit plan or other enterprise, against amounts paid in settlement and
reasonable expenses, including attorneys' fees, actually and necessarily
incurred by him in connection with the defense or settlement of such action, or
in connection with an appeal therein if such director or officer acted, in good
faith, for a purpose which he reasonably believed to be in, or, in the case of
service for any other corporation or any partnership, joint venture, trust,
employee benefit plan or other enterprise, not opposed to, the best interests of
the corporation, except that no indemnification under this paragraph shall be
made in respect of (1) a threatened action, or a pending action which is settled
or otherwise disposed of, or (2) any claim issue or matter as to which such
person shall have been adjudged to be liable to the corporation. unless and only
to the extent that the court on which the action was brought, or, if no action
was brought, any court of competent jurisdiction, determines upon application
that, in view of all the circumstances of the case, the person is fairly and
reasonably entitled to indemnity for such portion of the settlement amount and
expenses as the court deems proper.
(d) For the purpose of this section, a corporation shall be deemed to have
requested a person to serve an employee benefit plan where the performance by
such person of his duties to the corporation also imposes duties on, or
otherwise involves services by, such person to the plan or participants or
beneficiaries of the plan; excise taxes assessed on a person with respect to an
employee benefit plan pursuant to applicable law shall be considered fines; and
action taken or omitted by a person with respect to an employee benefit plan in
the performance of such person's duties for a purpose reasonably believed by
such person to be in the interest of the participants and beneficiaries of the
plan shall be deemed to be for a purpose which is not opposed to the best
interests of the corporation.
723 PAYMENT OF INDEMNIFICATION OTHER THAN BY COURT AWARD.
(a) A person who has been successful, on the merits or otherwise, in the
defense of a civil or criminal action or proceeding of the character described
in section 722 shall be entitled to indemnification as authorized in such
section.
(b) Except as provided in paragraph (a), any indemnification under section
722 or otherwise permitted by section 721, unless ordered by a court under
section 724 (Indemnification of directors and officers by a court), shall be
made by the corporation, only if authorized in the specific case:
(1) By the board acting by a quorum consisting of directors who are not
parties to such action or proceeding upon a finding that the director or officer
has met the standard of conduct set forth in section 722 or established pursuant
to section 721, as the case may be, or,
v
<PAGE>
(2) If a quorum under subparagraph (1) is not obtainable or, even if
obtainable, a quorum of disinterested directors so directs;
(A) By the board upon the opinion in writing of independent legal counsel
that indemnification is proper in the circumstances because the applicable
standard of conduct set forth in such sections has been met by such director or
officer, or
(B) By the shareholders upon a finding that the director or officer has met
the applicable standard of conduct set forth in such sections.
(c) Expenses incurred in defending a civil or criminal action or proceeding
may be paid by the corporation in advance of the final disposition of such
action or proceeding upon receipt of an undertaking by or on behalf of such
director or officer to repay such amount as, and to the extent, required by
pararaph (a) of section 725.
724 INDEMNIFICATION OF DIRECTORS AND OFFICERS BY A COURT.
(a) Notwithstanding the failure of a corporation to provide
indemnification, and despite any contrary resolution of the board or of the
shareholders in the specific case under section 723 (Payment of indemnification
other than by court award), indemnification shall be awarded by a court to the
extent authorized under section 722 (Authorization for indemnification of
directors and officers) and paragraph (a) of section 723. Application therefore
may be made, in every case, either
(1) In the civil action or proceeding in which the expenses were incurred
or the amounts were paid, or
(2) to the supreme court in a separate proceeding, in which case the
application shall set forth the disposition of any previous application made to
any court for the same or similar relief and also reasonable cause for the
failure to make application for such relief in the action or proceeding in which
the expenses were incurred or other amounts were paid
(b) the application shall be made in such manner and form as may be
required by the applicable rules of court or, in the absence thereof, by
direction of a court to which it is made. Such application shall be upon notice
to the corporation. The court may also direct that notice by given at the
expense of the corporation to the shareholder and such other person as it may
designate in such manner as it may require.
(c) Where indemnification is sought by judicial action, the court may allow
a person such reasonable expenses, including attorneys' fees, during the
pendency of the litigation as are necessary in connection with his defense
therein, if the court shall find that the defendant has by his pleadings or
during the course of the litigation raised genuine issues of fact or law.
725 OTHER PROVISIONS AFFECTING INDEMNIFICATION OF DIRECTORS AND OFFICERS.
(a) All expenses incurred in defending a civil or criminal action or
proceeding which are advanced by the corporation under paragraph (c) of section
723 (Payment of indemnification other than by court award) or allowed by a court
under paragraph (c) of section 724 (Indemnification of directors and officers by
a court) shall be repaid in case the person receiving such advancement or
allowance is ultimately found, under the procedure set forth in this article,
not to be entitled to indemnification or, where indemnification is granted, to
the extent the expenses so advanced by the corporation or allowed by the court
exceed the indemnification to which he is entitled.
vi
<PAGE>
(b) No indemnification, advancement or allowance shall be made under this
article in any circumstance where it appears:
(1) That the indemnification would be inconsistent with the law of the
jurisdiction of incorporation of a foreign corporation which prohibits or
otherwise limits such indemnification
(2) That the indemnification would be inconsistent with a provision of the
certificate of incorporation, a by-law, a resolution of the board or of the
shareholders, an agreement or other proper corporate action, in effect at the
time of the accrual of the alleged cause of action asserted in the threatened or
pending action or proceeding in which the expenses were incurred or other
amounts were paid, which prohibits or otherwise limits indemnification; or
(3) If there has been a settlement approved by the court, that the
indemnification would be inconsistent with any condition with respect to
indemnification expressly imposed by the court in approving the settlement.
(c) If any expenses or other amounts are paid by way of indemnification,
otherwise than by court order or action by the shareholders, the corporation
shall, not later than the next annual meeting of shareholders unless such
meeting is held within three months from the date of such payment, and in any
event, within fifteen months from the date of such payment, mail to its
shareholders of record at the time entitled to vote for the election of
directors a statement specifying the persons paid, the amounts paid, and the
nature and status at the time of such payment of the litigation or threatened
litigation.
(d) If any action with respect to indemnification of directors and officers
is taken by way of amendment of the by-laws, resolution of directors, or by
agreement, then the corporation shall, not later than the next annual meeting of
shareholders, unless such meeting is held within three months from the date of
such action, and, in any event, within fifteen months from the date of such
action, mail to its shareholders of record at the time entitled to vote for the
election of directors a statement specifying the action taken.
(e) Any notification required to be made pursuant to the foregoing
paragraph (c) or (d) of this section by any domestic mutual insurer shall be
satisfied by compliance with the corresponding provisions of section one
thousand two hundred sixteen of the insurance law.
726 INSURANCE FOR INDEMNIFICATION OF DIRECTORS AND OFFICERS.
a) Subject to paragraph (b), a corporation shall have power to purchase and
maintain insurance:
(1) To indemnify the corporation for any obligation which it incurs as a
result of the indemnification of directors and officers under the provisions of
this article, and
vii
<PAGE>
(2) To indemnify directors and officers in instances in which they may be
indemnified by the corporation under the provisions of this article, and
(3) To indemnify directors and officers in instances in which they may not
otherwise be indemnified by the corporation under the provisions of this article
provided the contract of insurance covering such directors and officers
provides, in a manner acceptable to the superintendent of insurance, for a
retention amount and for co-insurance.
(b) No insurance under paragraph (a) may provide for any payment, other
than cost of defense, to or on behalf of any director or officer:
(1) if a judgment or other final adjudication adverse to the insured
director or officer establishes that his acts of active and deliberate
dishonesty were material to the cause of action so adjudicated, or that he
personally gained in fact a financial profit or other advantage to which he was
not legally entitled, or
(2) in relation to any risk the insurance of which is prohibited under the
insurance law of this state.
(c) Insurance under any or all subparagraphs of paragraph (a) may be
included in a single contract or supplement thereto. Retrospective rated
contracts are prohibited.
(d) The corporation shall, within the time and to the persons provided in
paragraph (c) of section 725 (Other provisions affecting indemnification of
directors or officers), mail a statement in respect of any insurance it has
purchased or renewed under this section, specifying the insurance carrier, date
of the contract, cost of the insurance, corporate positions insured, and a
statement explaining all sums, not previously reported in a statement to
shareholders, paid under any indemnification insurance contract.
(e) This section is the public policy of this state to spread the risk of
corporate management, notwithstanding any other general or special law of this
state or of any other jurisdiction including the federal government.
Item 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses payable by the Registrant in connection with the issuance and
distribution of the securities are estimated as follows:
Amount
_____
SEC Registration Fee $500
Printing and Mailing $1,000
Legal Fees and Expenses $10,000
Accounting Fees $5,000
Transfer Agent Fees $1,000
Miscellaneous $2,500
-------
Total $20,000
viii
<PAGE>
Item 26. RECENT SALES OF UNREGISTERED SECURITIES
The following unregistered securities have been issued by the Registrant:
The title and amount of securities issued and the aggregate offering price
or other consideration are as follows:
a) All Common Shares have been registered as of September 25, 1996 pursuant
to a registration statement on Form 10-SB under the Securities Exchange Act of
1934, as amended (the "Exchange Act") and, as a consequence, there are no issued
and outstanding Common Shares which have not been registered under the Exchange
Act.
In February, 1996, the Registrant sold, through a private placement, 25,000
units (the "Units") pursuant to Rule 504 ("Rule 504") to the Securities Act of
1933, as amended, (the "Securities Act") consisting of an aggregate of 25,000
Common Shares, 500,000 "A" Warrants and 50,000 "B" Warrants for an aggregate
consideration of $25,000.
As of April 30, 1996, the Registrant issued 489,181 restricted Common
Shares in consideration for past services to five individuals in the amount of
$60,975 or an average consideration of $.125 per share.
As of April 30, 1996, the Registrant issued to OTC Communications 100,000
Common Shares under Rule 504 as consideration for financial consulting services
rendered per contract at a value of $.65 per share.
As of April 30, 1996, the Registrant issued to Riverside Consulting Group,
Inc. 25,000 common shares under Rule 504 in consideration for financial
consulting services of $12,500 at $.50 per share.
As of April 30, 1996, the Registrant issued an aggregate of 100,000 Common
Shares to two persons under Rule 504 valued at $.50 per share in consideration
for financial consulting services.
As of April 30, 1996, the Registrant authorized the issuance to OTC
Communications 550,000 restricted Common Shares, 500,000 shares as consideration
for financial consulting services rendered per contract and 50,000 as expense
reimbursement at a value of $178,750 or $.325 per share
b) From 1993 through 1996, the Company sold an aggregate of $1,417,000 of
12% convertible Debentures, under Rule 504, the principal amount of each
Debenture convertible at the option of the holder into Common Shares at $.75 per
share. All the Debentures have been converted at $.75 per share into 1,888,333
Common Shares which have been registered on Form 10. There are no outstanding
Debentures.
All the "A" Warrants issued as part of the Units have been exercised at
$.50 each into Common Shares and all the "B" Warrants issued as part of the
Units have been exercised at $1.00 each into Common Shares under Rule 504.
ix
<PAGE>
c) In September, 1996, the Registrant issued 150 Preferred Shares to
Midland Walwyn Capital, Inc. for a total purchase price of $1,500,000. Each
Preferred Share is convertible into Common Shares at the option of the holder
pursuant to the following formula: $10,000 (the purchase price of each Preferred
Share) divided by the lesser of $6.07 (which was the "Market Price" on the
closing date of the sale of the Preferred Shares) or 75% of the Market Price.
("Market Price" is defined as the average closing price of the Common Shares for
the five days prior to the date of purchase or conversion, as the case may be,
of the Preferred Shares.) The Common Shares underlying the Preferred Shares are
being registered herein.
d) In September, 1996, the Registrant issued 24,712 Warrants to Selwyn
Singer. Each warrant is exercisable into one Common Share originally at $6.07
and subsequently adjusted to $3.00 for a period of two years commencing the
effective date of a registration statement relating to the underlying Common
Shares. The Common Shares underlying these warrants are being registered herein.
e) In March, 1996, the Registrant issued to OTC Communications 500,000 "A"
Options exercisable until March 14, 1999 at $1.00 per share and 500,000 "B"
Options exercisable until March 14, 1999 at $2.00 per share. These warrants and
the shares underlying them are restricted.
In June, 1996, the Company adopted its 1996 Nonstatutory Stock Option Plan
under which a maximum of 2,000,000 Nonstatutory Options may be issued. 1,500,000
Nonstatutory Options were issued on June 28, 1996 as follows: Stan Cipkowski,
President, 550,000 options; Edmund Jaskiewicz, Executive Vice-President, 250,000
options; Jay Bendis, Vice-President-Marketing, 300,000 options; Henry Wells,
Director, 150,000 options; Joel Pensley, Esq. 160,000 options, Michael Roy
Fugler, Esq. 40,000 options and two non-management employees, 25,000 options
each. Each Nonstatutory Option entitles the holder to purchase one Common Share
for $3.00 until June 27, 1999. In November, 1996, 131,000 options were issued to
two consultants, each option exercisable at $3.00 until November 12, 1999, The
Common Shares underlying the Nonstatutory Options have not been registered under
the Securities Act.
Exemption from registration of the issue of said securities is claimed
under Section 4(2) of the Securities Act. Neither the Issuer nor any person
acting on its behalf offered or sold the securities by means of any form of
general solicitation or general advertising. Prior to the making any offer, the
Registrant had reasonable grounds to believe and believed that each subscriber
was capable of evaluating the merits and risks of the prospective investment or
was able to bear the economic risk of the investment. Prior to making any sale,
the issuer had reasonable grounds to believe and believed that each subscriber
was capable of evaluating the merits and risks of the prospective investment or
was able to bear the economic risk of the investment.
Each purchaser represented in writing that he acquired the securities for
his own account. Except for the the securities sold under Rule 504, the
certificates of which bear no restrictive legend, a legend was placed on each
certificate stating that the securities have not been registered under the
Securities Act; and setting forth the restrictions on their transferability and
sale. Each purchaser signed a written agreement that the securities will not be
sold without registration under the Securities Act of exemption therefrom.
x
<PAGE>
Item 27. EXHIBITS
Exhibits
Exhibit List
3.1 Certificate of Incorporation*
3.2 First Amendment to Certificate of Incorporation*
3.3 Second Amendment to Certificate of Incorporation*
3.4 Third Amendment to Certificate of Incorporation*
3.5 Bylaws*
3.6 Fourth Amendment to Certificate of Incorporation*
4.1 Specimen Common Stock Certificate*
4.2 Specimen "B" Warrant Certificate*
4.3 Terms of 8% Cumulative Convertible Preferred Stock, Series A*
4.4 Private Securities Subscription Agreement*
4.5 Registration Rights Agreement*
5.3 Opinion of Pensley & Fugler
10.1 Contract with OTC Communications*
10.2 Employment Contract with Stan Cipkowski*
10.3 Employment Contract with Edmund Jaskiewicz*
10.4 Employment Contract with Jay Bendis*
23.4 Consent of Thomas P. Monahan, CPA**
23.5 Consent of Pensley & Fugler**
23.7 Consent of Thomas P. Monahan, CPA to First Amendment
27 Financial Data Schedule*
*Previously submitted as exhibits to Form 10-SB
** Previously submitted
Financial Statement Schedules: None
__________________________
xi
<PAGE>
Item 28. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned hereby undertakes:
(a) to file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) to include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after the
effective date of this Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in this Registration Statement;
and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or any
material change to such information in this Registration Statement;
(b) that, for the purposes of determining any liability under said Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof;
(c) to remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering;
(d) to redeem the Warrants only when a current registration statement is in
effect;
The undersigned Registrant hereby undertakes to deposit into the Escrow
Account at the closing certificates in such denominations registered in such
names as required to permit prompt delivery to each purchaser upon release of
such securities from the Escrow Account in accordance with Rule 419 of
Regulation C under the Securities Act. Pursuant to Rule 419, these certificates
shall be deposited into an escrow account, not to be released until a business
combination is consummated.
Subject to the terms and conditions of Section 15(d) of the Securities and
Exchange Act of 1934, the undersigned hereby undertakes to file with the
Securities and Exchange Commission such supplementary and periodic information,
documents, and reports as may be prescribed by any rule or regulation of the
Commission heretofore or hereafter duly adopted pursuant to its authority.
xii
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Town of Amcramdale and State of New York on the 12th day of
November, 1996.
AMERICAN BIO MEDICA CORPORATION
(Registrant)
Date: December 20, 1996 By: s/Stan Cipkowski
-----------------
Stan Cipkowski,
President and Principal
Executive Officer and
Principal Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated:
s/Stan Cipkowski
- ---------------- Director December 20, 1996
Stan Cipkowski
Edmund Jaskiewicz Director
S/Jay Bendis Director December 20, 1996
- ----------------
Jay Bendis
Exhibit 5.3
Opinion of Pensley & Fugler
<PAGE>
Pensley & Fugler
Counselors at Law
2067 Broadway
New York, New York 10023
212-595-4955
Fax: 212-595-4966
November 12, 1996
American Bio Medica Corporation
102 Simons Road
Ancramdale, New York 12503
Re: Registration Statement on Form SB-2
Gentlemen:
We refer to the registration statement on Form SB-2 (the "Registration
Statement") of American Bio Medica Corporation, a New York corporation (the
"Company"), to be delivered for electronic filing to the Securities and Exchange
Commission by overnight delivery on or about November 14, 1996, relating to
600,000 common shares, $.01 par value each ("Common Shares") underlying
convertible preferred shares and 24,712 Common Shares underlying 24,712 common
share purchase warrants. We have reviewed such documents and records as we have
deemed necessary to enable us to express an informed opinion on the matters
covered thereby and we are of the opinion that:
(i) The Company has been duly incorporated and is a validly existing
corporation in good standing under the laws of the State of New York.
(ii) The Common Shares to be issued upon conversion of the Preferred Shares
have been duly authorized and, when issued, will be validly issued, fully paid
and nonassessable;
(iv) The Warrants have been duly and validly authorized, issued and
delivered, and are exercisable in accordance with their terms, and a sufficient
number of Common Shares have been duly and validly authorized and reserved for
issuance upon exercise of the Warrants and when issued and delivered upon the
exercise of the Warrants in accordance with their terms, will be duly and
validly issued, fully paid and nonassessable.
Very truly yours,
Pensley & Fugler
By: s/Joel Pensley
--------------
Joel Pensley
Exhibit 23.7
Consent of Thomas P. Monahan, CPA
<PAGE>
CONSENT
I, Thomas P. Monahan, CPA, hereby consent to the use of my report relating
to the audited financial statements for the period from inception to April 30,
1996 in a registration statement on Form SB-2/1A of American Bio Medica
Corporation.(a development company) to be filed with the Securities and Exchange
Commission.
Dated: December 20, 1996
s/Thomas P. Monahan
-------------------
Thomas P. Monahan
<PAGE>
