SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 2054
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FORM 10KSB
[/] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the fiscal year ended April 30, 1997
Commission File Number: 333-16535
AMERICAN BIO MEDICA CORPORATION
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(Name of Small Business Issuer in its charter )
New York 22-3378935
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(State or other Jurisdiction (IRS Employer Identification
of Incorporation or Organization) Number)
102 Simons Road
Ancramdale, New York 12503
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(Address of principal executive Offices) (Zip Code)
Issuer's telephone number: (800) 227-1243
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, $.01 par value per share
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
[x] Yes [ ] No
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [x]
State issuer's revenues for its most fiscal year $610,876.
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days.
As of July 2, 1997, there were 7,243,925 common shares held by
non-affiliates ("Shares") outstanding having an aggregate market value of
$28,975,700.
Documents incorporated by reference:
Proxy Statement for Fiscal 1998 Annual Meeting of Shareholders
2
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PART I
Item 1. Description of Business
Summary
-------
From its inception in 1986 until 1991, American Bio Medica Corporation,(the
"Company") 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, because of heightened competition, increasing costs of doing business
and slow collections from municipalities, reduced its concentration in this
market to that of selling audiovisual packages to libraries and commenced
seeking new technologies in emerging medical markets. 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.")
Since its inception, the Company has an accumulated deficit of $2,906,922
(see Financial Statements - Balance Sheet). 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 drugs of abuse which the Company's Rapid Drug Screen can test are
cocaine, marijuana, opiates, amphetamine and PCP. Prior to July, 1997, the
Company produced a five panel kit which tested for the above-listed substances
and a two panel kit which tested for cocaine and marijuana. The Company has
recently completed the development of a test for methamphetamine, a synthetic
stimulant and potent form of amphetamine, and, commencing July 1, 1997, has
started to produce kits containing a test for methamphetamine. The two kits are
a two panel test for marijuana and methamphetamine and a five panel test for
methamphetamine, amphetamine, cocaine, opiates and marijuana.
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 commenced in December, 1996
and increased to 13,000 units per week in June, 1997. The Company's output was
lowered by its inability to secure reliable supplies of reagents. This problem
was rectified in May, 1997 through increasing reliability of two of its
suppliers and the addition of a third supplier. Management predicts that a
production rate of 20,000 units per week will be achieved in the second quarter
of 1997.
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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 or its saliva test for alcohol consumption until after its
workplace screening test has been in full production of at least 20,000 units
per week for at least three months. The Company has fully developed and is
preparing to market its anti-dilutant product which detects the presence of
dilutants to the urine specimen, added detergents, and tests for ph and specific
gravity levels.
The Company may develop or acquire additional 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.
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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 drugs 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 Department of Defense contractors.
In April, 1997, the Company applied for a listing on the Nasdaq SmallCap
Market and has responded to comments from the NASD. There is no assurance that a
listing will result. (See "Risk Factors.")
Workplace Drug Test
- -------------------
Design
------
The first product, trademarked "The Rapid Drug Screen," 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 lid without the
danger of spilling or of touching the urine inside. Thus, the administrator is
not exposed to the urine sample nor does he or she have to mix reagents. Within
five minutes, the results can be read on the insert through the side of the cup.
A single line in the test area of the Rapid Drug Screen 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. A double line in the
test area of the Rapid Drug Screen indicates the screen is negative for the
presence of the "NIDA 5" drugs of abuse.
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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 most prevalent
method of avoiding adverse test results is the substitution by the person being
tested of a hidden "clean" urine sample which he or she brings to the test. As a
consequence, each of the Company's drug test strips contains a temperature
sensor which helps prevent the substitution of another urine sample as the
likelihood is that the substituted sample would not retain proper temperature.
Also, the Rapid Drug Screen contains a control line, designed to assure the
administrator of the test that the test is working properly. Should the control
line not appear, the user is instructed to void the test and "retest" the
sample.
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
during the first quarter of fiscal 1998. The two panel strip, designed for
juvenile corrections centers and educational institutions, tests only for
cocaine and marijuana. The eight panel strip, designed to rival two competitive
products, Biosite and Drug Screen Systems, adds barbiturates, benzodiazepines,
tricyclic antidepressants,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.
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 not-for-profit agency where
non-disabled employees work side by side with several hundred 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 presently produces its test strips using
the equipment. The equipment, as installed, is capable of producing up to
600,000 units per month utilizing two shifts five days a week.
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FDA Approval/Patent Application
-------------------------------
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. A Federal Drug Administration ("FDA")"510K"
application was filed on July 15, 1996 and was granted on April 15, 1997.
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 in the various marketplaces. It has, however,
retained two of its initial twelve representatives. The Company has completed
the development of the instructional and support materials surrounding the test
kit. The Company has developed 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.
Corporate Workplace Drug Testing Programs
-----------------------------------------
The Company has developed a network of 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.
An initial order of 50,000 test kits has been produced. CannAmm, Inc., a similar
company operating in Canada, has likewise become a distributor. Customers in the
workplace drug testing category include Pre-employment Testing Services, Inc.,
Employee Screening 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 entered into a distribution
agreement with Accuracy Testing Plus, Houston, Texas, which offers comprehensive
workplace programs, including testing, education and training.
6
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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 including 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 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 intends to exhibit 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.,
a U.S. distributor for Chile, and is negotiating for exclusive distribution for
Pacific Rim countries with a Canadian-based distributor. Nobel House has
committed to a minimum of 250,000 "two panel" tests for Chile, (to test
parochial high school students)and is negotiating purchase agreements with
relevant government agencies of other South Americda, Cental America and
Caribbean countries.
Clinical, Physicians and Hospitals
----------------------------------
The Company was approached and is negotiating an agreement with three major
drug companies to distribute the Rapid Drug Screen under a joint label to the
worldwide clinical market, including physicians, hospitals and laboratories. The
Company is actively pursuing this market now that the FDA has approved its drug
test kit for sale to clinics, laboratories, physicians and hospitals.
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 that of available
consumer kits. Since receiving its FDA 510(k) approval for clinical sales, the
Company has has been actively investigating the FDA requirements for 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 retail
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.
Samples
-------
The Company has found that one of its best marketing methods is the
shipping of samples to potential customers which have expressed interest through
responses to telemarketing, trade show demonstration, advertising or word of
mouth. Although initially expensive, the Company have found that the best way to
make sales is through demonstration and testing of the product's features.
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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 and the testing chemistry for those tests is
contained in the cup. 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 to its laboratory for evaluation, which takes
five to fifteen days. The test is several times as expensive as the Company's.
Its only advantage over 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
manufacture 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
temperature and humidity controlled. The Company has placed manufacturing
equipment in COARC's premises for use by COARC personnel for the production of
the Company's drug test kits.
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.
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Patents and Trademarks
----------------------
The Company has applied for registration of the following trademarks:
"American Bio Medica" and "Rapid Drug Screen" in the United States and in
foreign countries in which the Company's products are being marketed. 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, President,
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 has applied for
patents and trademarks in the European Common Market and Japan.
Government Regulations
----------------------
It is anticipated that the Company's business will benefit by Federal and
state regulations relating to drug free workplaces, particularly the Drug Free
Workplace Act of 1988. Clinical sales of the drug test kit which awaited final
FDA approval of the tests for two of the NIDA drugs of abuse have commenced and
sales are anticipated in due course.
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 urine sample contains 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 were conducted by American Medical Laboratories, Chantilly,
Virginia. The Company expects to introduce its ABM Prescreen to the market as an
inexpensive alternative to the products being offered by the current market
leaders, Roche Diagnostic Systems and Biosite Diagnostics.
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 expected to commence during fiscal 1998. 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.
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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, Executive 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 which 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 a license
is negotiated of which there is no assurance.
The Company's Plan of Operations
- --------------------------------
The Company intends to continue the establishment of a 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 June 20, 1997, the Company had entered into non-exclusive,
non-clinical market distribution agreements with a number of companies,
including national (such as Zee Services, Inc., a subsidiary of McKesson
Corporaton), regional (such as Accuracy Testing Plus, Houston, Texas ) 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. On June 10, 1997, the Company entered into a distribution
agreement with Quadrangle Research LLC, an affiliate of The American Association
of Medical Review Officers, to market the Rapid Drug Screen to its membership of
16,000 physicians, health care providers and other drug testing professionals.
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. In May, 1997, the Company entered into a purchase agreement with
PhamaGen S.A., a subsidiary of Zeltia, S.A., a holding company traded on the
Madrid Stock Exchange, for a minimum of 300,000 units per year of the Rapid Drug
Screen. Assuming the minimum annual purchases are achieved, the purchase
agreement is exclusive for Spain, Morocco, Portugal, France, Andorra and Italy.
The agreement was negotiated by Noble House and MYBC, Inc.
The Company has retained two regional managers, one in Fort Lauderdale,
Florida and one in Nashville, Tennessee. These representatives call on accounts,
such as corporations and correctional institutions directly and support the
Company's worldwide distribution network.
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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 Indianapolis, Indiana. 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 and the exercise of 732,645
nonstatutory options raising proceeds of $2,197,935.
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.
The Company and its Rapid Drug Screen will be featured on Today's Health
to be aired on CNBC in July, 1997.
Government Regulation
---------------------
The development, testing, manufacture and sale of the Company's laboratory
test kits and certain additional proposed products are subject to regulation by
United States and foreign regulatory agencies. Pursuant to the Federal Food,
Drug, and Cosmetic Act, and the regulations promulgated thereunder, the FDA
regulates the preclinical and clinical testing, manufacture, labeling,
distribution and promotion of medical devices. If the Company fails to comply
with applicable requirements it may be subject to fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, failure of the government to grant premarket clearance or premarket
approval for devices, withdrawal of marketing clearances or approvals and
criminal prosecution.
Risk Factors
------------
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 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. 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. There can be no assurance that the Company will be able to
generate significant revenues or achieve profitable operations in its biomedical
business.
11
<PAGE>
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 tests for
additional drugs of abuse. In addition, the Company plans to perfect its
laboratory drug test kit, 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 until 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.
Uncertainty of Continued Market Acceptance.
------------------------------------------
The Company's workplace drug test has been well received by potential and
actual 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. 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 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.
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. Moreover, such competitors offer broader product lines and have
greater name recognition than the Company, and offer discounts as a competitive
tactic. 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. 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.
12
<PAGE>
Inability to Find and Attract Qualified Personnel.
-------------------------------------------------
The Company currently has sufficient Management expertise and depth to
develop its business. However, it will need additional 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.
Dependence on Management.
-------------------------
The Company is dependent on the expertise and experience of Stan Cipkowski,
President, Jay Bendis, Executive Vice-President, and Douglas Casterlin,
Vice-President, for its operations. The loss of any of the Company's key
Management personnel will seriously inhibit the Company's operations. The
Company intends to but has not yet acquired "key man" insurance on its
Management. (See "Management.")
Need for Additional Financing.
------------------------------
The Company expects that its cash on hand will be sufficient to fund the
Company's proposed operations for at least 36 months. 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.")
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.")
Control by Management.
---------------------
Management of the Company owns 47.1% of the outstanding Common Shares and
is 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.")
13
<PAGE>
Anti-Takeover Provisions in Certificate of Incorporation.
---------------------------------------------------------
The Company's 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 attempted takeover.
Proprietary Technology and Patents.
-----------------------------------
The Company's ability to compete effectively will depend in part on its
ability to develop and maintain proprietary aspects of its technology, and to
operate without infringing the proprietary rights of others or to obtain rights
to such proprietary rights. The Company is currently prosecuting patent
applications in the United States and with certain foreign patent offices. There
can be no assurance that any of the Company's pending patent applications will
result in the issuance of any patents, that the Company's patent applications
will have priority over the applications of others, or that, if issued, any of
the Company's patents will offer protection against competitors with similar
technology. There can be no assurance that any patents issued to the Company
will not be challenged, invalidated or circumvented in the future or that the
rights created thereunder will provide a competitive advantage.
Dependence of the Company on the Rapid Drug Screen
--------------------------------------------------
Sales of Rapid Drug Screen have accounted for all of the Company's sales
biomedical sales; and Management anticipates that substantial revenues and
profitability will substantially depend on the sale of The Rapid Drug Screen for
the foreseeable future. A reduction in demand would have a material adverse
effect on the Company's business, financial condition and results of operations.
Competitive pressures could also erode the Company's profit margins. The
Company's continued growth will depend on its ability to successfully develop
and commercialize other products and to gain additional acceptance of The Rapid
Drug Screen. There can be no assurance that the Company will be able to
successfully develop and commercialize new products or that the Company will be
able to maintain or expand its share of the drug testing market.
Dependence on Distributors
--------------------------
The Company relies upon distributors and its own sales force to distribute
The Rapid Drug Screen and may rely upon distributors to distribute products
under development. The Company markets The Rapid Drug Screen primarily through
non-excluxive distribution agreements The loss or termination of any of its
distributors could have a material adverse effect on the Company's sales unless
suitable alternatives can be arranged. If any of the Company's distribution or
marketing agreements are terminated and the Company is unable to enter into
replacement agreements or if the Company elects to distribute new products
directly, the Company would have to invest in additional sales and marketing
resources, including additional field sales personnel, which would significantly
increase future sales and marketing expenses with no guarantee of success.
14
<PAGE>
Government Regulation
---------------------
The testing, manufacture and sale of the Company's products are subject to
regulation by numerous governmental authorities, principally the FDA and
corresponding state and foreign regulatory agencies. Pursuant to the Federal
Food, Drug, and Cosmetic Act, and the regulations promulgated thereunder, the
FDA regulates the preclinical and clinical testing, manufacture, labeling,
distribution and promotion of medical devices. Although The Rapid Drug Screen
test when applied to workplace testing is not considered a medical device and
does not need FDA approval, clinical aplications of this test and new products
may require clearance or approval prior to commencement of marketing.
Limited Manufacturing Experience
--------------------------------
To be successful, the Company must manufacture its current and future
products in compliance with regulatory requirements, in sufficient quantities
and on a timely basis, while maintaining product quality and acceptable
manufacturing costs. The Company has limited experience manufacturing products
other than The Rapid Drug Screen. To achieve the level of production necessary
for commercialization of the Company's products under development, the Company
will need to scale-up current manufacturing capabilities. There can be no
assurance that such work can be completed successfully.
The Company's manufacturing facilities and those of its contract
manufacturers may be subject to periodic regulatory inspections by the FDA and
other federal and state regulatory agencies. There can be no assurance that the
Company or its contractors will satisfy such regulatory requirements, and any
failure to do so would have a material adverse effect on the Company's business,
financial condition and results of operations.
Product Liability Exposure
--------------------------
The testing, manufacturing and marketing of medical diagnostic devices
entail an inherent risk of product liability claims. To date, the Company has
not experienced any material product liability claims, but any such claims
arising in the future could have a material adverse effect on the Company's
business, financial condition and results of operations. Potential product
liability claims may exceed the amount of the Company's insurance coverage or
may be excluded from coverage under the terms of the policy. There can be no
assurance that the Company's existing insurance can be renewed at a cost and
level of coverage comparable to that presently in effect, if at all. In the
event that the Company is held liable for a claim for which it is not
indemnified or for damages exceeding the limits of its insurance coverage, such
claim could have a material adverse effect on the Company's business, financial
condition and result of operations.
Item 2. Description of Property
The Company leases two self-standing buildings containing an aggregate of
3,300 square feet of office and warehouse space from an unrelated party on a
month to month basis at an aggregate rent of $1,100 per month.
15
<PAGE>
Item 3. Legal Proceedings
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 Share Exchange Agreement 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 Share Exchange Agreement. In November,
1995, after a trial, the court dismissed Dr. Friedenberg's lawsuit and allowed
the Company's cross-claim to proceed to trial. In September, 1996, Dr.
Friedenberg died. A pretrial hearing was held in December, 1996 which set a
trial date of April 28, 1997.
That trial was decided by a jury on May 5, 1997. The verdict determined
that Dr. Friedenberg breached various contracts by failing to deliver
technology to the Company. The jury also found in favor of the Company on two of
the three fraud claims against Dr. Friedenberg and awarded the Company
approximately $350,000 in damages. The trial judge, who is bound by the jury
verdict against Friedenberg, will decide Dr. Friedenberg's claim to the
Company's Common Shares which the Company refused to issued to him. Dr.
Friedenberg's previous claims for equitable relief against the Company had been
denied.
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. Mr. Morris has
counterclaimed for Common Shares. The court has set a trial date of September
14, 1998.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held a special meeting of shareholders on December 23, 1996 at
which its shareholders approved the adoption of the Company's 1996 Nonstatutory
Option Plan.
16
<PAGE>
PART II
Item 5. Market For Common Equity and Related Stockholder Matters
The table on the following page 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, 1996 and 1997. As of June 30, 1997, there were approximately
2,131 holders of Common Shares.
High Low
---- ---
Fiscal Year Ending April 30, 1997
---------------------------------
Fourth Quarter $4.25 $3.50
Third Quarter 4.75 2.75
Second Quarter 7.38 4.31
First Quarter 6.00 2.00
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
As of July 2, 1997, there were outstanding approximately 13,518,510 Common
Shares and 20 Preferred Shares each of which Preferred Shares is convertible
into the number of Common Shares calculated by dividing $10,000 by the lesser of
$6.07 or 75% of the average closing price of the Common Shares for the five
trading days preceeding conversion. There is one holder of the Preferred Shares
which do not trade.
The Company has not declared any dividends and does not expect to do so in
the foreseeable future.
3
<PAGE>
Item 6. Management's Discussion and Analysis or Plan of Operation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
for the years ended April 30, 1996 and and 1997
The matters discussed in this Management's Discussion and Analysis of
Financial Condition and Results of Operations contain forward-looking statements
that involve risks and uncertainties. The Company's actual results could differ
materially from those discussed here. Factors that could cause or contribute to
such differences include, but are not limited to, those discussed in the
sections entitled "Business" and " Risk Factors," as well as those discussed
elsewhere in this Annual Report on Form 10-KSB. The Company disclaims any intent
or obligation to update these forward-looking statements.
17
<PAGE>
Development Stage Activities
----------------------------
Until 1991, the Company was involved in marketing educational books and
software to schools and municipal libraries and audiovisual educational packages
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 audiovisual packages to libraries.
The Company was considered to be a development stage company with little
operating history subsequent to its reorganization and the commencement of
development of its newly acquired biomedical technolgies which are, at present,
its core business. These activities have been funded through the sale of
convertible debentures aggregating $1,425,500 which were subsequently converted
to Common Shares at $.75 per share, and through the exercise of 143,000 "A"
warrants at $1.00 and 32,000 "B" warrants at $1.00 per share aggregating
$175,000. The Company also sold 150 convertible preferred shares at $10,000 per
share for an aggregate consideration of $1,500,000 and net proceeds of
$1,405,000. As of April 30, 1997, the Company has sold 697,445 Common Shares for
an aggregate consideration of $2,092,186 through the exercise of nonstatutory
stock options. Because the Company has started commercial production of its drug
testing kits and has what Management maintains are adequate resources to
adequately fund its operations and has completed research and development of its
present product line, the Company no longer considers itself a development stage
company.
In order to support increased levels of sales in the future and to augment
its long-term competitive position, the Company anticipates that it will be
required to make significant additional expenditures in manufacturing, research
and development, sales and marketing and administration, both in absolute
dollars and as a percentage of sales. In addition, the Company anticipates
higher administrative expenses resulting from its obligations as a public
reporting company.
The Company anticipates that its results of operations may fluctuate for
the foreseeable future due to several factors, including whether and when new
products are successfully developed and introduced by the Company, market
acceptance of current or new products, regulatory delays, product recalls,
manufacturing delays, shipment problems, seasonal customer demand, the timing of
significant orders, changes in reimbursement policies, competitive pressures on
average selling prices, changes in the mix of products sold and patent
conflicts. Operating results would also be adversely affected by a downturn in
the market for the Company's current and future products, if any, order
cancellations or order rescheduling. Because the Company is continuing to
increase its operating expenses for personnel and new product development, the
Company's operating results would be adversely affected if its sales did not
correspondingly increase or if its product development efforts are unsuccessful
or are subject to delays. The Company's limited operating history makes accurate
prediction of future operating results difficult or impossible. Although the
Company has experienced growth in recent years, there can be no assurance that,
in the future, the Company will sustain revenue growth or remain profitable on a
quarterly or annual basis or that its growth will be consistent with predictions
made by securities analysts.
The Company currently manufactures and ships product shortly after receipt
of orders and anticipates that it will do so in the future. Accordingly, the
Company has not developed a significant backlog and does not anticipate it will
develop a material backlog in the future.
18
<PAGE>
Results of Operations for the Year Ended April 30, 1997 as Compared to the
Year Ended April 30, 1996.
- --------------------------------------------------------------------------------
Revenues from the book segment of the business were $274,678 for the year
ended April 30, 1997 as compared to $158,105 for the year ended April 30, 1996,
representing a increase of $116,573 or 73.7%. This increase in book sales is
directly attributable to the Company's reorganization of its telemarketing
activities and a bulk inventory purchase at significant savings. Costs of goods
sold for the year ended April 30, 1997, were $76,628 as compared to $96,444 for
the year ended ended April 30, 1996 representing a cost of goods sold percentage
of 27.9% for the year ended April 30, 1997 as compared to 61.0% for the year
ended April 30, 1996. This cost reduction is the result of the purchase of a
significant book inventory at a greatly reduced cost.
Revenues from the initial sales of drug testing kits were $317,864 for the
year ended April 30, 1997. Costs of goods sold for the year ended April 30, 1997
was $183,234 or 57.6%.
General and administrative costs for the year ended April 30, 1997 were
$867,903, an increase of 67.3% over expenses of $518,826 for the year ended
April 30, 1996. These increased costs are the result of adding additional
employees for positions in sales, marketing, accounting, executive and other
office personnel of $365,117, legal and professional expenses of $122,993,
office expense of $220,248, marketing expense of $120,266, product development
of $26,569 and rent of $12,710. Research and development expense of $74,978 for
the year ended April 30, 1997 was $283,866 less than the $358,844 expended
during the year ended April 30, 1996. This decrease in research and development
is the result of gradual completion of development of the drug testing delivery
system.
Resolution of Friedenberg Litigation and Trial Date in Morris 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 Share Exchange Agreement 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 Share Exchange Agreement. In November,
1995, after a trial, the court dismissed Dr. Friedenberg's lawsuit and allowed
the Company's cross-claim to proceed to trial. In September, 1996, Dr.
Friedenberg died. A pretrial hearing was held in December, 1996 which set a
trial date of April 28, 1997.
That trial was decided by a jury on May 5, 1997. The verdict determined
that Dr. Friedenberg breached various contracts when he failed to deliver
technology to the Company. The jury also found in favor of the Company on two of
the three fraud claims against Dr. Friedenberg and awarded the Registrant
approximately $350,000 in damages. The trial judge, who is bound by the jury
verdict against Friedenberg, will decide Dr. Friedenberg's claim to the
Company's Common Shares which the Company refused to issued to him. Dr.
Friedenberg's previous claims for equitable relief against the Company had been
denied.
19
<PAGE>
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. Mr. Morris has
counterclaimed for Common Shares. The court has set a trial date of September
14, 1998.
Since legal counsel had advised Management that the claims against it were
without merit, the Company did not recognize the claims against it as
liabilities. Thus, no adjustment has been made to the Balance Sheet or to the
Statement of Operations. The Company intends to recognize income when the
judgment against the estate of Robert Friedenberg is collected.
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 $223,432 or
165% 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. 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 as the result of the sale in the aggregate
of $1,407,000 convertible debentures over a three year period. The Company has
expended $565,186 to date for the research and development of its biomedical
products.
20
<PAGE>
Management believes that the present cash balance will pay the initial cost
of entering the biomedical 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.
Other income consists of the write off of $126,500 in secured debt which
counsel has advised Management is time barred as to collectibility.
Income tax: As of April 30, 1997, the Company has a tax loss carry-forward
of $2,906,992. The Company's ability to utilize its tax credit carry-forwards in
future years will be subject to an annual limitation pursuant to the "Change in
Ownership Rules" under Section 382 of the Internal Revenue Code of 1986, as
amended. However, any annual limitation is not expected to have a material
adverse effect on the Company's ability to utilize its tax credit
carry-forwards.
Liquidity And Capital Resources As Of The End Of Fiscal Year Ended April
30, 1997.
- --------------------------------------------------------------------------------
The Company's cash balance was $1,762,506 with $1,053,000 in treasury bills
and certificates of deposit invested for nine months and working capital was
$3,548,508 as at April 30, 1997. These balances are the result of the sale and
conversion of convertible debentures in the principal amount of $18,500 and
$175,000 through the exercise of 143,000 "A" Warrants and 32,000 "B" Warrants at
$1.00 per share. The Company also sold 150 convertible preferred shares at
$10,000 per share for an aggregate consideration of $1,500,000. Finally, as of
April 30, 1997, the Company sold 697,445 Common Shares for an aggregate
consideration of $2,092,186 through the exercise of nonstatutory stock options.
Cash generated from financing activities was utilized for investment in short
term marketable securities of $1,053,000, for additional patent applications of
$7,783 and for the purchase of machinery and equipment for $114,793 and a loan
of $100,000 to an unrelated party.
The Company's primary short-term needs for capital, which are subject to
change, are for expansion of its manufacturing to adequately deliver new
products, increase in inventory levels to fill larger anticipated orders and the
continued advancement of research and development efforts.
Management believes that the present cash balance will pay the ongoing cost
of the biomedical business. The Company has established commercial production of
its drug testing kits and no longer considers itself to be a development stage
company.
The Company currently plans to expend approximately $2.0 million for the
expansion and development of its manufacturing, marketing and general
administrative capabilities in connection with the fulfillment of the Company's
marketing program and the anticipated launch of the Company's products currently
under development. Additionally, the Company utilizes cash generated from
operating activities to meet its capital requirements.
The Company expects its capital requirements to increase over the next
several years as it expands its research and development efforts, new product
development, sales and administration infrastructure, manufacturing capabilities
and facilities. The Company's future liquidity and capital funding requirements
will depend on numerous factors, including the extent to which the Company's
products under development are successfully developed and gain market
acceptance, the timing of regulatory actions regarding the Company's potential
products, the costs and timing of expansion of sales, marketing and
manufacturing activities, facilities expansion needs, procurement and
enforcement of patents important to the Company's business, results of clinical
investigations and competition.
21
<PAGE>
The Company believes that its available cash and cash from operations will
be sufficient to satisfy its funding needs for at least the next 36 months.
Thereafter, if cash generated from operations is insufficient to satisfy the
Company's working capital and capital expenditure requirements, the Company may
be required to sell additional equity or debt securities or obtain additional
credit facilities. There can be no assurance that such financing, if required,
will be available on satisfactory terms, if at all.
Item 7. Financial Statements
a. Balance Sheet as of April 30, 1997
b. Statement of Operations for the two years ended April 30, 1996 and 1997
c. Statement of Cash Flows for the two years ended April 30, 1996 and 1997
d. Statement of Stockholders' Equity for the two years ended April 30, 1996
and 1997
e. Notes to Financial Statements
Item 8. Changes in and Disagreement With Accountants
Not applicable.
4
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons:
Compliance with Section 16(a) of the Exchange Act
Directors and Officers
- ----------------------
The following sets forth the names of the Company's directors and officers.
Directors of the Company are elected annually by the shareholders and the
oficers are appointed annually by the Board of Directors. Jasper R. Clay, Jr.
and John F. Murray were appointed by the Board of Directors to fill vacancies.
Name Age Position Since
- ---- --- -------- -----
Stan Cipkowski 49 President and a Director 1986
Edmund Jaskiewicz 74 Chairman of the Board of Directors,
Executive Vice-President and Secretary 1992
Jay Bendis 50 Vice-President-Marketing and a Director 1995
Henry J. Wells 65 Vice-President-Product Development 1995
Jasper R. Clay, Jr. 64 A Director 1997
John F. Murray 52 A Director 1997
Douglas Casterlin 50 Vice-President and General Manager 1997
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.
22
<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. He
received his J. D. in 1952 from George Washington University Law School and his
B. S. 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
B. A. 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 M.
A. from University of Pennsylvania and his B. S. in Chemistry from the
University of Pittsburgh.
John F. Murray has served as Chief Financial Officer of Federal Supply,
Inc., Pompano Beach, Florida since April, 1994. From 1988 to 1994, Mr. Murray
served as Controller for Bio Therapeutics, Inc., Woodbridge, New Jersey. He also
was Controller of Shortline, a group of transportation companies, from 1982 to
1988 and, from 1974 to 1982, of Kleber Tire & Rubber Corp. Mr. Murray was
Director of Accounting for Western Union Telegraph Company from 1972 to 1974 and
Senior Accountant for S.D. Leidesdorf & Co (now Ernst & Young) from 1969 to
1972. Mr. Murray received his BBA in Accounting from the Baruch School of the
City University of New York in 1968 and became a Certified Public Accountant in
the State of New York in 1974.
Jasper R. Clay, Jr. served as a United States Parole Commissioner from 1984
to 1996 and from 1991 to 1996, as Vice-Chairman of the United States Parole
Commission and Chairman of the National Appeals Board. He served as final
authority for all decisions relating to parole, revocation, imposition or
modification of parole conditions, or denial of discharge from supervision. From
1976 to 1984, Mr. Clay was State of Maryland Parole Commissioner and from 1969
to 1976, he was an Associate Member of the State of Maryland Board of Parole.
Mr. Clay served as an Associate Member of the State of Maryland Board of Parole
from 1969 to 1976, District Supervisor of the Baltimore City District Office in
1968, Staff Specialist-Training and Development for the Maryland Division of
Parole and Probation from 1966 to 1968, Parole and Probation Agent I and II,
Baltimore District, Office of the Maryland Division of Parole and Probation from
1958 to 1966 and as a Psychiatric Aide at the Spring Grove State Hospital from
1957 to 1958.
23
<PAGE>
Mr. Clay received an Honorable Discharge from the United States Army
Infrantry as a First Lieutenant in 1956. He is active in a number of
professional organizations including the American Correctional Association
(where he is presently a member of the Awards Committee), the Association of
Paroling Authorities International (where he serves as an officer) and the
National Council of Crime and Delinquency.
He is a member of the American Correctional Association, the National
Council of Crime and Delinquency and the Association of Paroling Authorities
International. Mr. Clay earned his B. A. in Psychology from Morgan State
University in 1954 and attended the graduate school at Loyola College in areas
such as Guidance, Counseling and Psychology.
Douglas Casterlin was General Manager of Coarc, Inc., the Company's product
assembling, packaging and shipping contractor, from 1979 to 1997. In that
capacity, he developed a contract manufacturing business involving plastic
injection molding and clean room assembly and packaging of FDA - regulated
medical products. He also negotiated a joint venture with a major German
healthcare product manufacture to establish its United States operations and
established a professional-format videocassette remanufacturing business serving
the television broadcase industry. Mr. Casterlin was Workshop Director, Putnam
Industries, Inc., from 1976 to 1979 and Production Manager, from 1973 to 1976,
of Occupatics, Inc. From 1966 to 1970, Mr. Casterlin served as an Air Force
Intelligence Officer and was honorably discharged as Sergeant. He studied
Engineering at Lehigh Universith from 1965 to 1966 and received his B.A. degree
in Psychology in 1973 from the State University of New York at New Paltz.
Scientific Advisory Board
--------------------------
The Company has established a scientif advisory board of which Henry J.
Wells, Ph.D., Vice-President, is chairperson. The members of the board as as
follows:
Anthony G. Costantino, Ph.D., has a degree in Pharmacy from Dukane
University and a Ph.D. in Toxicology from the University of Maryland. He is a
Board Certified Forensic Toxicologist and currenty serves as Director of
Clinical Toxicology at American Medical Laboratories in Chantilly, Virginia.
Delmiro A. Vazquez, B.S., M.T.,(ASCP), earned his Bachelor of Science
degree from the University of Miami and a completed his Medical Technology
Rotation in the American Society of Pathologists Approved Progam at the
University of Miami/Jackson Memorial Hospital. Mr. Vazquez holds postgraduate
certificates in Nuclear Medicine (Broward General Hospital) and Biomedical
Engineering (University of Miami). He is currently Co-RP of the Forensic
Toxicology Department at Columbia Cedars Medical Center.
Kenneth Steiner, M.D.received his M.D. from the University of Tennessee and
is Board Certified by the National Board of Medical Examiners. He is Board
Certified by the American Board of Emergency Medicine and by the American
Association of Medical Review Officers. Additionally, Dr. Steiner has been
designated as an FAA Medical Examiner.
The board will meet from time to time to consider the Company's present
technology and proposed technology development.
Item 10. Executive Compensation
See Proxy Statement for the Annual Meeting of Shareholders for the 1998
Fiscal Year.
24
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth as of July 2, 1997, the number and
percentage of shares of the common stock of the Company, owned of record and
beneficially, by each officer and directors of the Company and by any other
person owning more than 5% of the Company's outstanding common stock and by all
officers and directors as a group.
Shares of
Name and Address Common Stock Percentage(1)
- ---------------- ------------ ------------
Edmund Jaskiewicz 3,047,955 22.3%
1730 M Street, NW
Washington, DC 20036
Stan Cipkowski 2,742,748 20.0%
102 Simons Road
Ancramdale, NY 12503
Jay Bendis 645,999 4.7%
71 Springcrest Drive
Akron, Ohio 44333
Henry J. Wells, Ph.D. -0- -0-%
9421 Book Row
Columbia, Maryland 21046
Jasper R. Clay, Jr. -0- -0-%
4964 Moonfall Way
Columbia, Maryland 21044
John F. Murray -0- -0-%
1821 Lyons Road
Pompano Beach, Florida 33063
Douglas Casterlin
65 Malloy Road -0- -0-%
Ghent, New York 12065
------ -----
All Officers and
Officers and Directors
as a Group (7 persons) 6,436,702 47.1%
- --------------------
Item. 11 Certain Relationships and Related 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.
25
<PAGE>
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 the third by Edmund Jaskiewicz, Chairman of the Board,
in exchange for an aggregate of 15,099,700 Common Shares pursuant to a share
exchange agreement (the "Share Exchange Agreement"). Dr. Friedenberg had
requested that some shares be issued to two individuals, one of which was
Jackson L. Morris, former counsel to the Company. The assets of the Target
Companies were various purported 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 never issued. In February, 1994, Robert Friedenberg, as an owner of
the two Target Companies, through these corporations, filed suit to have the
Share Exchange Agreement 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 claims for damages
and allowed the Company's counterclaim to proceed.
That trial was decided by a jury on May 5, 1997. The verdict determined
that Dr. Friedenberg breached various contracts when he failed to deliver
technology to the Company. The jury also found in favor of the Company on two of
the three fraud claims against Dr. Friedenberg and awarded the Company
approximately $350,000 in damages. The trial judge, who is bound by the jury
verdict against Friedenberg, will decide Dr. Friedenberg's claim to the
Company's Common Shares which the Company refused to issued to him. Dr.
Friedenberg's previous claims for equitable relief against the Company had been
denied.
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. In addition, the Company has a claim pending against
its former counsel, Jackson L. Morris, Esq. on the grounds that Mr. Morris
breached his duty to the Company and its interests by providing legal advice to
Dr. Friedenberg. Mr. Morris has brought a counterclaim for Common Shares. The
court has set a trial date of September 14, 1998.
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.
26
<PAGE>
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 prior to April 30, 1997 as follows: Stan
Cipkowski, 550,000 options; Edmund Jaskiewicz, 250,000 options; Jay Bendis,
320,000 options; Henry Wells, 150,000 options; Joel Pensley, Esq. 180,000
options, and non-management employees, an aggregate of 282,000 options. An
agregate of 697,445 options have been exercised.
In September, 1996, the Company sold 150 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 registered with the Commission the Common Shares underlying Conversion
of the Preferred Shares. 130 Preferred Shares have been converted into Common
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.")
27
<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 as of April 30, 1997 and the related statements of operations, cash
flows and shareholders' equity for the years ended April 30, 1996 and 1997.
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 as of April 30, 1997 and the results of its operations, shareholders
equity and cash flows for the years ended April 30, 1996 and 1997 in conformity
with generally accepted accounting principles.
Thomas P. Monahan, CPA
May 28, 1997
Paterson, New Jersey
F-1
<PAGE>
AMERICAN BIO MEDICA CORPORATION
BALANCE SHEET
April 30, April 30,
1996 1997
---- ----
Assets
Current assets
Cash $437,532 $1,762,506
Marketable securities,
available for sale 1,053,000
Accounts receivable 34,500 337,759
Loan receivable 102,250
Inventory 22,301 668,723
Prepaid expenses 4,425
--------- --------
Current assets 494,333 3,928,663
Capital assets-net 20,575 110,834
Other assets
License rights 110,070 38,470
Patent-costs 21,000 28,783
------- ------
Total other assets 131,070 67,253
------- ------
Total assets $645,978 $4,106,750
========= ==========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued expenses $33,248 $380,155
Notes payable
Convertible debenture payable 132,000
------- -------
Total current liabilities 165,248 380,155
Long term liabilities
Convertible debenture payable
Note payable 126,500
Total long term liabilities 126,500
Capital stock
Capital stock-authorized
30,000,000 common shares,
par value $.01 each, at
April 30, 1996 and January 31, 1997,
the shares outstanding were 12,089,561
and 13,379,507 respectively. 120,895 133,795
Preferred stock-authorized 5,000,000
preferred shares, par value $.01 each,
at April 30, 1997, the number of shares
outstanding was 90 1
Additional paid in capital 2,635,006 6,499,791
Deficit accumulated during
development stage (2,401,671) (2,906,992)
----------- -----------
Total stockholders' equity 354,230 3,726,595
------- ---------
Total liabilities and stockholders' equity $645,978 $4,106,750
======== ==========
See accompanying notes to financial statements.
F-2
<PAGE>
AMERICAN BIO MEDICA CORPORATION
STATEMENT OF OPERATIONS
For the year For the year
ended ended
April 30, April 30,
1996 1997
------ --------
Income 158,105 $610,876
Less cost of goods sold 96,444 259,862
------- -------
Gross profit 61,661 351,014
Operations:
General and administrative 518,826 867,903
Depreciation and amortization 77,600 96,134
Research and development 358,844 74,978
-------- ------
Total expense 955,270 1,039,015
Income before other income and expenses (893,609) (688,001)
Other income and expenses
Retirement of debt (Note 9) 126,500
Interest income 356 56,180
Interest expense (103,205)
---------
Total other income and expenses (102,849) 182,680
--------- -------
Net Profit (Loss) from operations $(996,458) $(505,321)
========== ==========
Net income (loss) per share $(.08) $(.04)
===== =====
Number of shares outstanding 12,528,266 12,728,180
========== ==========
See accompanying notes to financial statements.
F-3
<PAGE>
AMERICAN BIO MEDICA CORPORATION
STATEMENT OF CASH FLOWS
For the year For the year
ended ended
April 30, April 30,
1996 1997
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net profit (loss) $(996,458) $1,996
Amortization and depreciation 77,600 96,134
Consulting fees 306,250
Compensation agreement 125,000
Retirement of debt (Note 9) (126,500)
---------- ---------
(487,608) (535,687)
Adjustments to reconcile net income to net cash
Loan receivable (102,250)
Accounts receivable 38,079 (303,259)
Inventory 5,250 (646,422)
Prepaid expenses 15,089 (4,425)
Accounts payable (30,828) 346,907
-------- -------
TOTAL CASH FLOWS FROM OPERATIONS (460,018) (1,245,136)
CASH FLOWS FROM FINANCING ACTIVITIES
Convertible debenture 693,000 (132,000)
Notes payable (89,258)
Sale of stock 150,000 3,877,686
Issuance of stock for services 61,006
------ ---------
TOTAL CASH FLOWS FROM FINANCING ACTIVITIES 814,717 3,745,686
CASH FLOWS FROM INVESTING ACTIVITIES
Investment short term (1,053,000)
Patent costs (7,783)
Capital assets (114,793)
---------
TOTAL CASH FLOWS FROM INVESTING ACTIVITIES (1,175,576)
NET INCREASE (DECREASE) IN CASH 354,699 1,324,974
CASH BALANCE BEGINNING OF PERIOD 82,833 437,532
------ -------
CASH BALANCE END OF PERIOD $437,532 $1,762,506
======== ==========
See accompanying notes to financial statements.
F-4
<PAGE>
AMERICAN BIO MEDICA CORPORATION
STATEMENT OF SHAREHOLDERS' EQUITY
Common Common Additional paid Retained
Date Stock Stock in capital Earnings Total
04-30-1994 11,238,174 112,382 726,294 (1,099,885) (261,209)
10-18-1995(1) (3,000,000) (30,000) 30,000
04-30-1995 (305,328) (305,328)
--------- ---------
04-30-1995 8,238,174 82,382 756,294 (1,405,213) (566,537)
11-03-1995 500,000 5,000 120,000 125,000
04-30-1996(2) 1,700,002 17,000 1,258,000 1,275,000
04-30-1996(3) 25,000 250 24,750 25,000
04-30-1996(4) 250,000 2,500 122,500 125,000
04-30-1996(5) 489,181 4,892 56,083 60,975
04-30-1996(6) 125,000 1,250 61,250 62,500
04-30-1996(7) 100,000 1,000 64,000 65,000
04-30-1996(8) 550,000 5,500 173,250 178,750
04-30-1996 Net loss (996,458) (996,458)
-------- --------- --------- --------
04-30-1996 11,977,357 $119,774 $2,636,127 $(2,401,671) $354,230
96-04-1996 11,333 113 8,387 8,500
06-04-1996 25,000 250 24,750 25,000
07-31-1996(2) 176,000 1,760 130,240 132,000
07-31-1996(2) 13,333 133 9,867 10,000
07-31-1996(6) 100,000 1,000 49,000 50,000
07-31-1996(9) 32,000 320 31,680 32,000
07-31-1996(10) 100,000 1,000 99,000 100,000
09-09-1996(9) 18,000 180 17,820 18,000
09-23-1996(11) $1 1,409,999 1,410,000
01-31-1996(12) 697,445 6,975 2,085,211 2,092,186
04-30-1997(13) 229,039 2,290 (2,290) -0-
04-30-1997 Net loss (578,673) (578,673)
-------- --------- --------- --------- ---------
04-30-1997 13,379,507 $133,795 $6,499,791 $(2,980,344) $3,653,243
========== ======== ========== ============ ==========
(1) Return of common shares by Edmund Jaskiewicz
(2) Common shares issued for conversion of debt
(3) Common shares issued pursuant to sale of 25,000 Units
(4) Common shares issued for Warrant conversion at $.50
(5) Common shares issued in consideration for services under Regulation D at
$.125 per share
(6) Common shares issued pursuant to Rule 504 at $.50 per share
(7) Common shares issued under Rule 504 at $.65 per share
(8) Common shares issued pursuant Regulation D at $.325 per share
(9) Common shares issued upon exercise of "B" Warrants
(10) Common shares issued upon exercise of "A" Warrants
(11) Shares of preferred stock for $1,500,000 less $90,000 in offering
expense
(12) Common shares issued upon exercise of warrants
(13) Coversion of convertible preferred shares into common
See accompanying notes to financial statements.
F-5
<PAGE>
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED APRIL 30, 1997
Note 1 - Organization of the 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. In
October, 1996, the Company amended its certificate of incorporation authorizing
the issuance of 5,000,000 Preferred Shares, ("Preferred Shares"), $.01 par value
each.
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 audiovisual 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 was considered to be a development stage company with little
operating history subsequent to its reorganization and the commencement of
development of its newly acquired bio-medical technologies which are, at
present, its core business. These activities have been funded through the sale
of convertible debentures aggregating $1,425,500 which were subsequently
converted to Common Shares at $.75 per share, and the receipt of $175,000
through the exercise of 143,000 "A" warrants at $1.00 and 32,000 "B" warrants at
$1.00 per share. The Company also sold 150 convertible Preferred Shares at
$10,000 per share for aggregate consideration of $1,500,000 and net proceeds of
$1,405,000. As of April 31, 1997, the Company sold 697,445 Common Shares for an
aggregate consideration of $2,092,186 through the exercise of nonstatutory stock
options. The Company has started commercial production of its drug testing kits
and has what managment maintains are adequate resources to adequately fund its
operations.
c. Issuance of Common Shares
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 30,1996, the Company had borrowed an aggregate of $2,121,000 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, the principal amount of all the convertible debentures had
been converted into an aggregate of 1,700,002 Common Shares.
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.
F-6
<PAGE>
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED APRIL 30, 1997
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.
On June 4, 1996, the Company sold $8,500 of convertible debentures and
converted them into 11,333 Common Shares.
On June 4, 1996, the Company sold 25,000 Common Shares at $1.00 through the
exercise of 25,000 "A" Warrants for an aggregate consideration of $25,000.
As of July 31, 1996, the Company had converted the balance of the
outstanding 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 $10,000 of convertible debentures and
converted them in to 13,333 shares of common stock.
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 for an aggregate consideration of
$100,000.
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 for an aggregate consideration
of $32,000.
As of July 31, 1996, the Company issued 50,000 Common Shares pursuant to a
private placement under Rule 504 of the Securities Act of 1933, as amended at
$.50 per share for an aggregate consideration of $25,000.
F-7
<PAGE>
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED APRIL 30, 1997
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 for an aggregate
consideration of $18,000.
As of April 31, 1997, 697,445 nonstatutory options were exercised for an
aggregate consideration of $2,092,186.
As of April 30, 1997, 60 convertible Preferred Shares had been converted
into 229,039 Common Shares.
Note 2 - Summary of Significant Accounting Policies
a. Basis of Financial Statement Presentation
The financial statements presented consist of the balance sheet dated April
30, 1997 and the related statements of operations, retained earnings and cash
flows for the years ended April 30, 1996 and 1997.
b. Earnings per Share
Earnings per share have been computed on the basis of weighted average
number of Common Shares outstanding. The total number of shares outstanding at
April 31, 1996 and April 30, 1997 was 12,528,266 and 12,728,180 respectively.
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.
F-8
<PAGE>
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED APRIL 30, 1997
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. h. Concentration of Credit Risk
The Company sells its products primarily to United States distributors.
Credit is extended based on an evaluation of the customer's financial condition,
and generally collateral is not required. Credit losses have been minimal and
within Management's expectations.
The Company invests its excess cash in debt instruments of financial
institutions and corporations with strong credit ratings. The Company has
established guidelines relative to diversification and maturities that maintain
safety and liquidity. These guidelines are periodically reviewed and modified to
take advantage of trends in yields and interest rates. The Company has not
experienced any realized losses on its marketable securities.
Note 3 - Marketable Securities, Available for Sale
The Company adopted Financial Accounting Standards Board ("FASB") Statement
No. 115, "Accounting for Certain Investments in Debt and Equity Securities",
which requires that investments in equity securities that have readily
determinable fair values and investments in debt securities be classified in
three categories: held-to-maturity, trading and available-for-sale. Based on the
nature of the assets held by the Company and Management's investment strategy,
the Company's investments have been classified as available-for-sale. Management
determines the appropriate classification of debt securities at the time of
purchase and reevaluates such designation as of each balance sheet date.
Securities classified as available-for-sale are carried at estimated fair
value, as determined by quoted market prices, with unrealized gains and losses,
net of tax, reported in a separate component of stockholders' equity. At April
30, 1997, the Company had no investments that were classified as trading or
held-to-maturity as defined by the Statement.
F-9
<PAGE>
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED APRIL 30, 1997
Note 4 - Balance Sheet Information
a. 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, 1996 April 31, 1997
Books held for resale $22,301 $ 43,527
Workplace drug screening tests:
Raw materials 292,456
Work in process 183,500
Finished Goods 149,239
Total workplace drug screening tests: -0- 625,195
------- -------
Total inventory $22,301 $668,722
b. Property, equipment and leasehold improvements consist of the following:
April 30, 1996 April 30, 1997
Office equipment $32,575 $ 45,702
Manufacturing and warehouse equipment 87,666
------- -------
Total 32,575 133,368
Less accumulated depreciation (12,000) (22,534)
-------- -------
Total $20,575 $110,834
c. Cash, Cash Equivalents and Marketable Securities, Available for Sale
The following is a summary of cash, cash equivalents and available-for-sale
securities by balance sheet classification at April 30, 1997:
Estimated
Gross Gross Fair
Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ ------
Cash $ 99,039 $-0- $-0- $ 99,039
Certificates of deposit
90 days and less 1,663,467 -0- -0- 1,663,467
Total cash and cash
equivalents $ 1,762,506 $-0- $-0- $1,762,506
========== === === =========
Marketable Securities
Due in one year or
less-Certificates of
Deposit $1,053,000 $-0- $-0- $1,053,000
========= === === =========
F-10
<PAGE>
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED APRIL 30, 1997
The following is a summary of cash, cash equivalents and available-for-sale
securities by balance sheet classification at April 30, 1996:
Estimated
Gross Gross Fair
Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -------
Cash $ 437,532 $-0- $-0- $ 437,532
------- --- --- ---------
Total cash and cash
equivalents $ 437,532 $-0- $-0- $ 437,532
======== === === =========
Note 5 - Related Party Transaction
a. Nonstatutory Option Plan
In June, 1996, the Company adopted its 1996 Nonstatutory Stock Option Plan
(the "1996 Plan"). Options to purchase 2,000,000 Common 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 and two
non-management employees, 25,000 options each.
On April 30, 1997, the Company issued 20,000 options to Jay Bendis, 15,000
options to Joel Pensley, Esq., 5,000 options to Steven Gutstein, Esq., and an
aggregate of 232,000 options to 15 non-management employees.
b. Emplyment 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 revenues of the Company
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 per year and 1% thereafter.
In consideration of past services valued at $125,000 or $.25 per share, Mr.
Bendis also 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;
F-11
<PAGE>
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED APRIL 30, 1997
100,000 shares upon the Company's achieving $3,000,00 in gross revenues
from sales of biomedical products;
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 agreement or his discharge for cause from
employment by the Company. Mr. Bendis also is entitled to receive health
insurance, participating in stock option or similar plans or other benefits
offered generally to Management employees and reimbursement of out-of-pocket
expenses.
c. 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' 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 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 per year and 1% thereafter. No bonuses will be paid or shares vest
subsequent to any election by Edmund Jaskiewicz to terminate this agreement or
his discharge for cause from employment by the Company. Mr. Jaskiewicz also is
entitled to receive health insurance, participating in stock option or similar
plans or other benefits offered generally to Management employees and
reimbursement of out-of-pocket expenses.
d. 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 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 per year and 1% thereafter. No
bonuses will be paid or shares vest subsequent to any election by Mr. Cipkowski
to terminate agreement or his discharge for cause from employment by the
Company. Mr. Jaskiewicz also is entitled to receive health insurance,
participating in stock option or similar plans or other benefits offered
generally to Management employees and reimbursement of out-of-pocket expenses.
F-12
<PAGE>
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED APRIL 30, 1997
Note 6 - 12% Convertible Subordinated Debentures
As of April 30,1996, the Company had borrowed an aggregate of $2,121,000 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, the principal amount of all the convertible debentures had
been converted into an aggregate of 1,700,002 Common Shares.
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, in October, 1996, 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, 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 sold 150 8% Convertible Series "A" Preferred Shares for $10,000
per share for an aggregate consideration of $1,500,000 less $90,000 in
commissions 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 registered the Common Shares underlying the Preferred
Shares with the Securities and Exchange Commission.
As of April 30, 1997, 60 convertible Preferred Shares had been converted
into 229,039 Common Shares.
As of April 30, 1997, the Company had reserved a maximum of 500,000 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 until January 21, 1998.
F-13
<PAGE>
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED APRIL 30, 1997
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 April 30, 1997,
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 April 30, 1997, the Company has net operating loss carry forwards for
income tax purposes of $2,906,992. 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 April 30, 1997 were as
follows:
Deferred tax asset:
Net operating loss carry forward $ 988,377
Valuation allowance $ (988,377)
-------
Net deferred tax asset $ -0-
The Company recognized no income tax benefit from the loss generated in the
year ended April 30, 1997. 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. 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.
F-14
<PAGE>
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED APRIL 30, 1997
b. Lawsuits
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 a Share Exchange Agreement 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 Share Exchange Agreement. In November,
1995, after a trial, the court dismissed Dr. Friedenberg's lawsuit and allowed
the Company's cross-claim to proceed to trial. In September, 1996, Dr.
Friedenberg died. A pretrial hearing was held in December, 1996 which set a
trial date of April 28, 1997.
That trial was decided by a jury on May 5, 1997. The verdict determined
that Dr. Friedenberg breached various contracts when he failed to deliver
technology to the Company. The jury also found in favor of the Company on two of
the three fraud claims against Dr. Friedenberg and awarded the Company
approximately $350,000 in damages. The trial judge, who is bound by the jury
verdict against Friedenberg, will decide Dr. Friedenberg's claim to the
Company's Common Shares which the Company refused to issued to him. Dr.
Friedenberg's previous claims for equitable relief against the Company had been
denied.
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. Mr. Morris has
counterclaimed for Common Shares. The court has set a trial date of September
14, 1998.
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, under Regulation D to the Securities Act of 1933, 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 an initial payment, monthly retainers or
expense reimbursement, including communications and mailing for a period of one
year. 550,000 Common Shares were granted for years 2 and 3 for a consideration
of $.325 per share representing one-half the market price of the Common Shares
at March 14, 1996, the date of the contract. This valuation reflects the receipt
of unregistered Common Shares and the market risk of the holding period until
they may be sold publicly. Of the 550,000 shares, 50,000 shares were allocated
to expense reimbursement and 500,000 shares allocated to public relations
consulting. Certificates representing the 100,000 Common Shares were issued in
July, 1996. 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.
F-15
<PAGE>
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED APRIL 30, 1997
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.
The Company issued 1,500,000 options 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 and two
non-Management employees, 25,000 options each.
On April 30, 1997, the Company issued 20,000 options to Jay Bendis, 15,000
options to Joel Pensley, Esq., 5,000 options to Steven Gutstein, Esq. and
232,000 options to 15 non-Management employees. .
As of April 30, 1997, 697,445 nonstatutory stock options had been exercised
for an aggregate consideration of $2,092,186.
f. Leased Office Space
The Company leases 4,000 square feet of office and warehouse space in two
locations from unrelated parties on a month to month basis at an aggregate rent
of $1,000 per month.
Note 10 - Secured Loan
On March 9, 1990, the Company entered into an security agreement with a
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.
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 finance company'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 finance company, 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 Company
wrote off the obligation during the second quarter of fiscal 1997.
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.
F-16
<PAGE>
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED APRIL 30, 1997
Note 12 - Development Stage Company
The Company was considered to be a development stage company with little
operating history subsequent to its reorganization and the commencement of
development of its newly acquired bio-medical technologies which are, at
present, its core business. The Company started commercial production of its
drug test kits and has what managment maintains are adequate resources to
adequately fund its continuing operations. The Company is no longer considered
to be a development stage Company.
Note 13 - Subsequent Events
Subsequent to April 30, 1997, 70 8% Series "A" Preferred Shares were
converted into 301,120 Common Shares.
F-17
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Financial Data Schedule for 10KSB - 04-30-97 for American Bio Medica
Corporation
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> MAY-1-1996
<PERIOD-END> APR-30-1997
<CASH> 1,762,506
<SECURITIES> 1,053,000
<RECEIVABLES> 337,759
<ALLOWANCES> 0
<INVENTORY> 668,723
<CURRENT-ASSETS> 3,928,663
<PP&E> 133,368
<DEPRECIATION> (22,534)
<TOTAL-ASSETS> 4,106,750
<CURRENT-LIABILITIES> 380,155
<BONDS> 0
0
1
<COMMON> 6,633,587
<OTHER-SE> (2,906,992)
<TOTAL-LIABILITY-AND-EQUITY> 4,106,750
<SALES> 610,876
<TOTAL-REVENUES> 610,876
<CGS> 259,862
<TOTAL-COSTS> 1,039,015
<OTHER-EXPENSES> 182,680
<LOSS-PROVISION> (505,321)
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (505,321)
<INCOME-TAX> 0
<INCOME-CONTINUING> (505,321)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (505,321)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
