As filed with the Securities and Exchange Commission on May 18, 1998
Registration No. 333-16535
----------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
AMERICAN BIO MEDICA CORPORATION
----------------------------------------------
(Name of small business issuer in its charter)
New York 5122 22-3378935
- ------------------------------- ---------------------------- -------------------
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) (Identification No.)
300 Fairview Avenue, Hudson, New York 12534 800-227-1243
-------------------------------------------------------------
(Address and telephone number of principal executive offices)
300 Fairview Avenue, Hudson, New York 12534 800-227-1243
- --------------------------------------------------------------------------------
(Address of principal place of business or intended principal place of business)
Stan Cipkowski, 300 Fairview Avenue, Hudson, New York 12534 800-227-1243
--------------------------------------------------------------------------
(Name, address and telephone number of agent for service)
Approximate date of commencement of proposed sale to the public:
As soon as practical after this Registration Statement becomes effective.
CALCULATION OF REGISTRATION FEE
Proposed Maximum
Title of each class Amount maximum aggregate Amount of
of securities to be offering price offering registration
to be registered registered per item price (1) fee
- --------------------------------------------------------------------------------
Common Shares (2)
Underlying conversion 625,000(3) $4.00 $2,500,000(3) $ 757.58
of "D" Preferred Shares Shares
Common Shares
Underlying exercise of
Common Share Purchase 107,355 $4.81 $516,377.55 156.48
Warrants
--------
Total registration fee $ 914.06
(1) Estimated for purposes of calculating the registration fee pursuant to Rule
457.
(2) Any additional Common Shares issuable pursuant to stock splits, stock
dividends, conversion ratio or similar transactions will be deemed
registered by this registration statement.
(3) Number of Common Shares underlying conversion of "D" Preferred Shares is
rounded up to nearest whole share. "Maximum aggregate offering price"
represents the actual gross proceeds received from the sale of the "D"
Preferred Shares.
The registrant ("Registrant") hereby amends this registration statement on
such date or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this registration statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
ii
AMERICAN BIO MEDICA CORPORATION
CROSS REFERENCE SHEET
Indicating the location in the Prospectus included in this Registration
Statement of the Information called for by the Items of Part I of Form SB-2
Item Heading Caption in Prospectus
- ------- ------------------------------- ---------------------
Item 1 Front of Registration Statement
and Outside Front Cover
of Prospectus Front Cover Page
Item 2 Inside Front and Outside Back
Cover Pages of Prospectus Inside Front Cover,
Inside Back Cover
Additional Information
Item 3 Summary Information
and Risk Factors Prospectus Summary,
The Company, Risk Factors
Item 4 Use of Proceeds Prospectus Summary,
Use of Proceeds
Item 5 Determination of Offering Price Front Cover Page,
Risk Factors,
Item 6 Dilution Dilution
Item 7 Selling Security-Holders Selling Securityholders
Item 8 Plan of Distribution Front Cover Page, Underwriting
Item 9 Legal Proceedings Litigation
Item 10 Directors, Executive Officers,
Promoters and Control Persons Management
Item 11 Security Ownership of Certain
Beneficial Owners and Principal Shareholders
Management
Item 12 Description of Securities Front Cover Page,
Prospectus Summary,
Description of Securities
Item 13 Interest of Named Experts
and Counsel Legal Matters, Experts
Item 14 Disclosure of Commission Position
on Indemnification For
Securities Act Liabilities Description of Securities--
Commission Position
on Indemnification
for Securities Act
Liabilities
Item 15 Organization Within Last Five Years Certain Transactions
Item 16 Description of Business Business
Item 17 Management's Discussion and
Analysis of Plan of Operation Management's Discussion
and Analysis of Results of
Operations
Item 18 Description of Property Business
Item 19 Certain Relationships
and Related Transactions Certain Transactions
Item 20 Market for Common Equity
and Related Stockholder Matters Market for Common Equity
and Related Shareholder
Matters
Item 21 Executive Compensation Management
Item 22 Financial Statements Financial Statements
Item 23 Changes in and Disagreement
With Accountants on Accounting
and Financial Disclosure Experts
iii
PROSPECTUS
AMERICAN BIO MEDICA CORPORATION
American Bio Medica Corporation (the "Company") is registering the
following securities: 625,000 common shares, $.01 par value each ("Common
Shares") (subject to conversion ratio, into which 2,500 Series "D" convertible
preferred shares, $.01 par value each, ("'D' Preferred Shares"), may be
converted) and 107,355 common share purchase warrants (the "Warrants"). Each "D"
Preferred Share is convertible at the lesser of (i) 95% of the "Market Price"
(the average of the closing bid prices of the Common Shares over any three
trading days, selected by the holder of the "D" Preferred Shares (the "Holder"),
in the 20 trading days immediately preceding the date of conversion ("Conversion
Date") and 125% of the price on the closing date ($3.70) (the "Closing Price"),
except that if the 10 day average closing bid price ending on the effective date
(the "Effective Price") of this registration statement (the "Registration
Statement") is greater than 125% of the Closing Price, the maximum Conversion
Price will be such Effective Price, not to exceed, in any case, 135% of the
Closing Price. Each Warrant entitles the holders ("Warrantholders") to purchase
one Common Share at a price of $4.81 per share until April 24, 2001. The
exercise price of the Warrants has been determined through negotiation between
the Company and the Warrantholders and such price does not necessarily bear any
direct relationship to the current market value, asset value or net book value
of the Company or other generally accepted criteria of value. The formula for
the conversion of the Preferred Shares and the exercise price of the Warrants
has been determined by the Company, the Holder and the selling agent (the
"Selling Agent") and bears no relation to the Company's assets, book value, or
any other customary investment criteria, including the Company's prior operating
history. (See "Risk Factors--Determination of Offering Price," "Certain
Transactions" and "Description of Securities.")
The Common Shares trade on the National Association of Securities Dealers,
Inc. Automatic Quotation Market ("Nasdaq SmallCap"). Nonetheless, there can be
no assurance that a public market in the Common Shares will be sustained during
the period of exercise of conversion of the "D" Preferred Shares. (See "Risk
Factors--No Assurance of Continued Public Market for Common Shares.")
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION TO INVESTORS. (SEE "RISK FACTORS" AND "DILUTION.")
--------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") OR
BY ANY STATE OR JURISDICTION, NOR HAS THE COMMISSION OR ANY STATE OR
JURISDICTION PASSED UPON THE ACCURACY OR ADEQUACY OF THE PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
Underwriting
Price to Discounts and Proceeds to
Public (1) Commissions(1) Company(2)
- --------------------------------------------------------------------------------
Per Share Underlying Con-
version of "D" Preferred Shares $4.00 (3) $0.30 $3.70
- --------------------------------------------------------------------------------
Total Shares Underlying
Conversion of "D" Preferred
Shares $2,500,000 $187,500 $2,312,500
- --------------------------------------------------------------------------------
Per Share Underlying
Exercise of Warrants $4.81 $-0- $4.81
- --------------------------------------------------------------------------------
Total Shares Underlying
Exercise of Warrants $ 516,377.55 $-0- $ 516,377.55
- --------------------------------------------------------------------------------
Total $3,016,377.55 $187,500 $2,828,877.55
- --------------------------------------------------------------------------------
AMERICAN BIO MEDICA CORPORATION
300 Fairview Avenue
Hudson, New York 12534
800-227-1243
<PAGE>
(1) Before deducting estimated expenses of the this offering (the "Offering"),
including, but not limited to, legal and accounting fees, fees to
regulatory authorities and printing and distribution expenses, which are
payable by the Company estimated at $20,000. ("Use of Proceeds.") In
addition to commissions of 7.5% of the funds raised, Shoreline Pacific, the
Selling Agent, received 7,355 of the Warrants registered herein.
(2) Commissions to selling agents were paid upon the sale of the Preferred
Shares. All proceeds from the sale of the Preferred Shares have been
received by the Company. This registration statement (the "Registration
Statement") relates to the conversion of the Preferred Shares into Common
Shares.
(3) Assumes conversion price of $4.00. The actual conversion price may be
greater or less than $4.00. (See "Description of Securities - Preferred
Shares.")
AVAILABLE INFORMATION
The Prospectus, which constitutes a part of a registration statement (the
"Registration Statement") filed by the Company with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"Securities Act"), omits certain information contained in the Registration
Statement, and reference is hereby made to the Registration Statement and to the
exhibits relating thereto for further information with respect to the Company
and the Preferred Shares offered hereby. Statements contained herein concerning
provisions of any documents are not necessarily complete, and each statement is
qualified in its entirety by reference to the copy of such document filed with
the Commission.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Securities Exchange Act"), and in
accordance therewith files reports, proxy statements, and other information with
the Commission. Such reports, proxy statements, and other information filed by
the Company can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549-1004; and at the following Regional Offices of the Commission:
Northeast Regional Office, 7 World Trade Center, New York, New York 10007; and
Chicago Regional Office, Northwest Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such material can be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549-1004 at prescribed rates. The Commission also maintains a
World Wide Web site on the Internet at http://www.sec.gov. that contains copies
of reports, proxy and information statements and other information regarding
registrants, including the Company, which electronically file reports with the
Commission.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information, financial statements and related notes appearing elsewhere
in the Prospectus including information under the caption "Risk Factors." Each
investor is urged to read the Prospectus in its entirety.
The Company
------------
The Company develops, manufactures and markets biomedical technologies and
products. The Company, from inception to date, has accumulated losses of
$3,534,922. 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 is marketing its workplace screening test, trademarked
"Rapid Drug Screen." It has installed equipment with an independent contractor
suitable for the mass production of the workplace screening test and has
purchased or produced inventories of reagents and other constituent parts of its
test kits.
The Company produces a marijuana/cocaine two panel Rapid Drug Screen test
kit, a five panel (marijuana, cocaine, opiates, PCP and amphetamines) test kit
and an eight panel (marijuana, cocaine, opiates, PCP, amphetamines,
benzodiazepines, methamphetamines and barbituates) kit. It has received Federal
Drug Administration ("FDA") approval of all the tests in its eight panel Rapid
Drug Screen test kit and has commenced marketing test kits to laboratories and
other medical facilities. It has also developed a test for tricyclic
antidepressants and intends to apply for FDA approval in the near future.
The Company also owns a patented low cost method for producing Keratin
proteins. The uses for such proteins include hardening of finger nails and
carrying topical lotions and medicines through the skin. In addition, the
Company is developing a saliva test for alcohol consumption. Although the
Company has been supplying Keratin proteins on a limited basis for testing by
potential customers, the further development or marketing of its Keratin
technology and its saliva test for alcohol consumption cannot be predicted. The
Company's present intention is to concentrate on production and marketing of its
workplace and laboratory drug tests.
The Company may develop or acquire additional drug testing or biomedical
technologies or products in the future and/or may acquire a technology-based
company or an interest in a technology-based company.
From its inception in 1986 until 1991, the Company, a New York corporation,
was involved in marketing educational books and software to schools and
municipal libraries and audiovisual educational packages to corporations
throughout the United States. In 1991, the Company reduced its concentration in
this market because of heightened competition, increasing costs of doing
business and slow collections from municipalities and commenced seeking new
technologies in emerging medical markets. However, the Company has continued one
small segment of its original business, that of selling audiovisual packages to
libraries.
The Company's headquarters are located at 300 Fairview Avenue, Hudson, New
York 12534. Its telephone number at that address is 800-227-1243 and its fax
number is 518-329-4156. Its e-mail address is [email protected].
3
<PAGE>
Securities
----------
Common Shares
-------------
The Company is authorized to issue 30,000,000 common shares, $.01 par value
per share. As of April 30, 1998, 14,432,039 Common Shares have been issued. (See
"Description of Securities - Common Shares.")
Preferred Shares
-----------------
The Company is authorized to issue 5,000,000 preferred shares, $.01 par
value per share, with such designations, rights and preferences as may be
determined by the Board of Directors. The Company has issued 2,500 "D" Preferred
Shares. Each "D" Preferred Share is convertible at the lesser of (i) 95% of the
"Market Price" (the average of the closing bid prices of the Common Shares over
any three trading days, selected by the Holder in the 20 trading days
immediately preceding the Conversion Date and 125% of the Closing Price of
$3.70, except that if the 10 day average closing bid price ending on the
Effective Date is greater than 125% of the Closing Price, the maximum Conversion
Price will be the Effective Price, not to exceed, in any case, 135% of the
Closing Price.(See Front Cover Page, "Description of Securities--Preferred
Shares" and Financial Statements--Footnotes.)
Options
-------
The Company has issued 500,000 Options which are exercisable at $1.00
through March 14, 1999 and 500,000 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
for 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. No $1.00 or $2.00 options have been exercised. (See "Description of
Securities--Options.")
The Company has adopted the Fiscal 1996 Nonstatutory Stock Option Plan (the
"Fiscal 1996 Plan") and the Fiscal 1998 Nonstatutory Stock Option Plan (the
"Fiscal 1998 Plan"). 2,000,000 Common Shares have been reserved under the Fiscal
1996 Plan and 1,000,000 Common Shares under the Fiscal 1998 Plan. Both plans are
administered by the Board of Directors which has established an options
committee of the Board of Directors consisting of Stan Cipkowski, President,
Edmund Jaskiewicz, Executive Vice-President and Secretary, and Jay Bendis,
Vice-President, for that purpose.
The Company has issued 1,957,000 options ("Plan Options") pursuant to the
Fiscal 1996 Plan. All Plan Options were exercisable for a period of three years
at $3.00 per share. As of April 30, 1998, 806,038 Plan Options have been
exercised for an aggregate exercise price of $2,418,114. 271,000 Plan Options
have been issued pursuant to the Fiscal 1998 Plan, 235,000 options exercisable
at $3.50 per share, 24,000 options at $4.00 per share and 12,000 options at
$3.00 per share. No Plan Options issued pursuant to the Fiscal 1998 Plan have
been exercised. (See "Certain Transactions.")
4
<PAGE>
Securities Registered
----------------------
Common Shares into which the 2,500 "D" Preferred Shares may be converted
and the 107,355 Warrants may be exercised are being registered herein. The
actual number of Common Shares into which the "D" Preferred Shares will be
converted, estimated at 625,000 Common Shares, will depend on the Market Price
of the Common Shares and may be greater or lesser than 625,000 Common Shares.
(See Front Cover Page, "Risk Factors" and "Description of Securities.")
Dilution
--------
If all the "D" Preferred Shares are converted into Common Shares at $4.00
per share and all 107,355 Warrants are exercised, there will be 15,164,394
Common Shares outstanding. Persons who convert their "D" Preferred Shares and
exercise the Warrants will own 732,355 Shares or 4.8% of the issued Common
Shares. The number of Common Shares into which the Preferred Shares are
convertible will vary depending on the Market Price of the Common Shares (See
"Description of Securities--Preferred Shares," "Dilution.")
Certain Risk Factors
--------------------
Conversion of the "D" Preferred Shares into Common Shares, exercise of the
Warrants and the purchase of the Common Shares involves substantial risks due to
the highly speculative nature of the Company's business. The Holder as well as
investors in the Common Shares should review the entire Prospectus, particularly
the "Risk Factors."
Determination of Conversion/Exercise Price
------------------------------------------
The formulas for the conversion of the "D" Preferred Shares and the
exercise of the Warrants were determined by the Company and the Holder and the
Selling Agent and bear no relation to the Company's assets, book value, or any
other customary investment criteria, including the Company's prior operating
history. (See "Determination of Offering Price.")
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
For the year ended April 30, 1997 and
the nine months ended January 31, 1998
--------------------------------------------------------------------
April 30, 1997 January 31, 1998
Unaudited
-------------- ----------------
Statement of Operations Data:
Sales $ 610,876 $ 1,773,948
Cost of sales 259,862 675,361
Gross Profit 351,014 1,098,587
Operating expenses 1,039,015 1,846,308
Operating loss (688,001) (747,721)
Other income (expense) - net 182,680 119,791
Net profit (loss) (505,321) (627,930)
Net loss per common share
primary $ (.04) $ .05
Shares used in computing
net profit (loss) per share 13,379,507 13,737,781
Net profit (loss) per common
share fully diluted $ (.04) $ .04
Shares used in computing
fully diluted 13,731,174 14,576,334
Cash dividends per share -0- -0-
Pro-forma Pro-forma Adjusted
As of January 31, 1998 As of January 31, 1998
(1) (2)
---------------------- -----------------------
Balance Sheet Data:
Current assets $ 4,429,143 $ 7,238,020
Current liabilities 142,449 142,449
Working capital 4,286,694 7,095,571
Total assets 4,605,629 7,414,506
Long term debt,
less current portion -0- -0-
Accumulated deficit (3,534,922) (3,534,922)
Stockholders' equity $ 4,475,180 $ 7,284,057
------------------------------
1. Stockholders' equity represents a pro-forma number consisting of the
balance as of January 31, 1998 of $4,463,180 plus $12,000 representing the
exercise of 4,000 Plan Options at $3.00 per share for an aggregate of
$4,475,180.
2. Assumes pro-forma stockholders' equity pursuant to footnote 1 and
conversion of the "D" Preferred Shares and exercise of the Warrants. The number
of Common Shares into which the "D" Preferred Shares may be converted has been
taken for purposes of this table as 625,000 Shares ($4.00 per share). The actual
number of Common Shares into which the Preferred Shares are converted may be
greater or less than 625,000 Common Shares. (See Front Cover Page and
"Securities - Preferred Shares" for the conversion formula.) The 107,355
Warrants are exercisable at $4.81 per share.
6
<PAGE>
RISK FACTORS
Except for the description of historical facts contained herein, the
Prospectus contains certain forward looking statements that involve risks and
uncertainties as detailed herein and from time to time in the Company's filings
with the Commission and elsewhere. Forward looking statements herein are made
pursuant to the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. Such statements are based on Management's current
expectations and are subject to a number of factors and uncertainties which
could cause actual results to differ materially from those described in the
forward-looking statements. These factors include, among others, the Company's
fluctuations in sales and operating results, risks associated with international
operations and regulatory, competitive and contractual risks and product
development.
CONVERSION OF THE PREFERRED SHARES INTO COMMON SHARES, EXERCISE OF THE
WARRANTS AND PURCHASE OF COMMON SHARES IS HIGHLY SPECULATIVE, INVOLVES A HIGH
DEGREE OF RISK AND SHOULD BE MADE ONLY BY INVESTORS WHO CAN AFFORD THE LOSS OF
THEIR ENTIRE INVESTMENT. A HOLDER OF PREFERRED SHARES OR A PROSPECTIVE
PURCHASER, PRIOR TO MAKING A CONVERSION OR AN INVESTMENT DECISION, SHOULD
CAREFULLY CONSIDER, ALONG WITH OTHER MATTERS REFERRED TO HEREIN, THE FOLLOWING
RISK FACTORS:
1. Limited Operating History.
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. (See "Business.") The Company's prospects must be considered in
light of the risks, expenses, delays, problems and difficulties frequently
encountered in the establishment of a new business, the development and
commercialization of new products based on innovative technology and the
competitive environment in which the Company operates. Since the Company's entry
into the biomedical business, the Company has generated limited revenues. There
can be no assurance that the Company will be able to generate significant
revenues or achieve profitable operations. (See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Financial
Statements.)
2. 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 completed, the Company is
continually seeking to refine and improve its design and performance and to
develop additional versions. 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
develop of production versions of its additional products. The Company's success
will depend upon such products meeting targeted product costs and performance,
7
<PAGE>
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, if at all, that they will meet
projected price or performance objectives, satisfactorily perform all of the
functions for which they are being designed, or prove to be sufficiently
reliable in widespread commercial application. Moreover, there can be no
assurance that unanticipated problems will not arise with respect to
technologies incorporated into its test kits or that product defects will not
become apparent after commercial introduction of its additional test kits. 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 revenues or earnings.
(See "Business.")
3. Uncertainty of Continued Market Acceptance.
The Company's workplace drug test kit has been well received by potential
customers, including corporations, distributors and correctional institutions.
To date, the Company has generated limited revenues from sales of its workplace
drug test kits. As is typically the case with 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 and customers of the distinctive
characteristics, benefits and advantages of its kits. There can be no assurance
that its drug test kits will become generally accepted or that the Company's
efforts will result in successful product commercialization or initial or
continued market acceptance for its drug testing products. (See "Business
- --Marketing and Sales.")
4. Competition in the Drug Testing Market; Technological Obsolescence.
The Company faces competition for every existing and proposed product from
drug manufacturers and other manufacturers of drug test kits. Some of its
competitors are well known and have far greater financial resources than the
Company. To the best of Management's knowledge, and in its opinion, no
competitors have introduced products which equal the ease of use combined with
the accuracy of the Company's drug test kits. (See "Business--Competition.") The
markets for drug test kits 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 test kits. Despite the protections which would be available to the Company
in the event its pending application for a design patent is granted, the Company
expects other companies to attempt to develop technologies or products which
will compete with the Company's products. See "Business--Competition.")
8
<PAGE>
5. Dilution as a Result of Conversion of Preferred Shares and Exercise of
Warrants.
The number of Common Shares into which the outstanding "D" Preferred
Shares, in the aggregate, will be convertible will be $2,500,000 divided by the
lesser of 95% of the Market Price or 125% of the Closing Price. There is a
distinct possibility that the Market Price will be less than the Closing Price
and, thus, the number of shares to be issued upon conversion of the "D"
Preferred Shares may represent a conversion price less than the purchase price
per share of many shareholders (See Front Cover Page and "Dilution.")
6. Possible Inability to Find and Attract Qualified Personnel.
The Company currently has sufficient management expertise and depth to
develop its business. It has recently added marketing and manufacturing
management and has added to its scientific advisory board. However, it will need
additional skilled and dedicated marketing personnel as well as technical and
production personnel in the future. There is no guarantee that the Company can
retain its present staff or that capable personnel with relevant skills will be
available. (See "Management.")
7. Dependence on Management.
The Company is dependent on the expertise and experience of Stan Cipkowski,
President, Jay Bendis, Vice-President-Marketing, and Douglas Casterlin,
Vice-President and General Manager, for its operations. The loss of Messrs.
Cipkowski, Bendis and Casterlin, or any of them, will seriously inhibit the
Company's operations. (See "Management.")
8. Possible Adverse Changes in Regulatory Framework.
Approval from the FDA is not required for the sale of a workplace drug test
kits, but is required for the clinical drug test kit. The Company has received
"510(k)" approval from the FDA for its two, five and eight panel drug test kits.
However, regulatory standards may change in the future and there is no assurance
that if and when the Company applies for additional approvals from the FDA they
will be granted. (See "Business--FDA Approval/Patent Applications.")
9. Sales of Common Shares at Below the Conversion Price/Dilution.
Principal shareholders and certain investors acquired their Common Shares
at prices substantially below the conversion price of the Preferred Shares.
Thus, when all the Preferred Shares are converted into Common Shares, there will
be an immediate substantial dilution to holders of Preferred Shares in the book
value of each Common Share, and the principal shareholders and certain investors
will realize an immediate increase thereon. (See "Dilution.")
9
<PAGE>
10. Restricted Resale of the Securities.
6,436,502 Common Shares presently issued and outstanding as of the date
hereof are "restricted securities" as that term is defined under the Securities
Act of 1933, as amended, (the "Securities Act") and in the future may be sold in
compliance with Rule 144 of the Securities Act, or pursuant to a Registration
Statement filed under the Securities Act. Rule 144 provides, in essence, that a
person holding restricted securities for a period of one year may sell those
securities in unsolicited brokerage transactions or in transactions with a
market maker, in an amount equal to one percent of the Company's outstanding
Common Shares every three months. Sales of unrestricted shares by affiliates of
the Company are also subject to the same limitation upon the number of shares
that may be sold in any three month period. Such information is deemed available
if the issuer satisfies the reporting requirements of sections 13 or 15(d) of
the Securities and Exchange Act of 1934 (the "Securities Exchange Act") or of
Rule 15c2-11 thereunder. Rule 144(k) also permits the termination of certain
restrictions on sales of restricted securities by persons who were not
affiliates of the Company at the time of the sale and have not been affiliates
in the preceding two months. Such persons must satisfy a one year holding
period. There is no limitation on such sales and there is no requirement
regarding adequate current public information. Investors should be aware that
sales under Rule 144 or 144(k), or pursuant to a registration statement filed
under the Act, may have a depressive effect on the market price of the Company's
securities in any market which may develop for such shares. (See "Description of
Securities.")
11. Preferred Shares; Convertibility into Common Shares; Dilution.
The Company has the authority to issue up to 5,000,000 Preferred Shares
with such designations, rights and preferences as may be determined by the Board
of Directors. The Company is empowered, without further shareholder approval, to
issue Preferred Shares with dividend, liquidation, conversion, voting or other
rights which could adversely affect the voting power or other rights of the
holders of the Common Shares. The Company, as of the date of the Prospectus, has
issued and outstanding 2,500 "D" Preferred Shares which are convertible into an
estimated 625,000 Common Shares. (See "Risk Factors--Dilution as a Result of
Conversion of Preferred Shares," "Certain Transactions" and "Description of
Securities--Preferred Shares.")
12. 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 from the date of the
Prospectus. 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 and maintaining a substantial market for the
Company's drug test kits and other technologies could make cash on hand
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 "Management's Discussion and Analysis of Financial condition and Results of
Operations.")
10
<PAGE>
13. 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.")
14. Control by Management.
After conversion of the Preferred Shares, assuming the Preferred Shares are
converted into 625,000 Common Shares and exercise of the Warrants into 107,355
Common Shares (see "Dilution"), Management of the Company will own in excess of
35% of the outstanding Common Shares and will be in a position to control the
election of the Board of Directors. The certificate of incorporation of the
Company does not provide for cumulative voting and, as a result, purchasers of
the Company's securities will not be able to elect any directors or exert any
control over the general policies of the Company. (See "Description of Company's
Securities--Description of Common Stock.")
15. Ability to Retain and Attract Market Makers.
The Common Shares trade on the Nasdaq SmallCap Market. In the event that
the market makers cease to function as such, public trading in the Common Shares
will be adversely affected or may cease entirely. Presently, market makers for
the Company's Common Shares include GVR Co., Fahnestock & Co., Inc., Hill
Thompson Magid & Co., J.B. Oxford & Co. Kalb Voorhis & Co., Nash Weiss & Co.,
Inc., Paragon Capital Corp., Troster Singer Corp., Comprehensive Capital Corp.,
Herzog, Heine, Geduld, Inc., Mayer & Schweitzer, Inc., Knight Securities, Ltd.,
Naib Trading Corp., National Financial Securities Corp., Sharpe Capital, Inc.
and Wien Securities Corp., Sherwood Securities Corp., H. J. Meyers & Co., Inc.,
M. H. Meyerson & Co., Inc., National Financial Service Corp.
16. Anti-Takeover Provisions in Certificate of Incorporation.
The Company's certificate of incorporation authorizes the issuance of
5,000,000 Preferred Shares. The Board of Directors has the authority, without
further action by the Common Shareholders, to issue Preferred Shares from time
to time in one or more classes or series, to fix the number of shares
constituting any class or series and the stated value thereof, if different from
the par value, and to fix the terms of any such series or class, including
dividend rights, dividend rates, conversion or exchange rights, voting rights,
rights and terms of redemption (including sinking fund provisions), the
redemption price and the liquidation preference of such class or series. Thus,
the Board of Directors, in order to avoid a hostile takeover, could issue
Preferred Shares with supervoting rights, conversion rights into Common Shares,
liquidation preference or a combination of rights and preferences which could
inhibit success of such attempt. (See "Description of Securities--Preferred
Shares.")
11
<PAGE>
17. Determination of Conversion/Exercise Prices.
The formula for the conversion of the "D" Preferred Shares and the exercise
of the Warrants into Common Shares has been determined by the Company and the
holders thereof and bears no relation to the Company's assets, book value, or
any other customary investment criteria, including the Company's prior operating
history. (See Front Cover Page.)
18. No Assurance of Continued Public Market for Common Shares
Although the Common Shares trade on the Nasdaq SmallCap market, there is no
assurance that an active trading market will be sustained. (See "Front Cover
Page and "Description of Securities--Common Shares.")
19. Patents and Trademarks
The Company has applied for design patents on its drug test kits and for a
trademark on "The Rapid Drug Screen" in the United States, European Common
Market and Japan. There is no assurance that the patents will be granted or the
trademark registered. (See "Business--Patents and Trademarks.")
DIVIDEND POLICY
Since its inception, the Company has not paid any dividends on its Common
Shares. The Company intends to retain future earnings, if any, that may be
generated from the Company's operations to help finance the operations and
expansion of the Company and accordingly does not plan to pay dividends to
Shareholders. Any decision as to the future payment of dividends will depend on
the results of operations and financial position of the Company and such other
factors as the Company's Board of Directors, in its discretion, deems relevant.
(See "Risk Factors--No Dividends.")
DILUTION
As of January 31, 1998, as adjusted for the issuance of Common Shares
between January 31, 1998 and April 30, 1998 and the consideration received
therefor, and assuming conversion of the Preferred Shares into 625,000 Common
Shares (15,057,039 shares), the net tangible book value of the Company would be
$6,728,603 or $.45 per share. After giving effect to exercise of the 107,355
Warrants and the receipt of the proceeds therefrom, the net tangible book value
would be $.48 per share. This represents an immediate increase in net tangible
book value of $.03 per share to the existing stockholders (including the Holder
of the "D" Preferred Shares after conversion), and an immediate dilution of
$4.33 to the holders of the Warrants upon exercise thereof.
12
<PAGE>
These figures are set forth in the following table:
Exercise Price per Warrant (1) $4.81
Pro forma net tangible book value per Share
before exercise (2) $0.45
Increase per Common Share
attributable to exercise of Warrants. $0.03
Pro forma net tangible book value per Share
after exercise $0.48
Dilution per Common Share attributable
to exercise $4.33
- ------------------------
(1) Net tangible book value per Common Share is determined by dividing the
tangible net worth of the Company by the number of Common Shares outstanding.
(2) Pro-forma net tangible book value per Common Share after
exercise/conversion is determined by dividing the tangible net worth of the
Company (taking into consideration registration expenses) by the number of
Common Shares outstanding after exercise of the Warrants.
(3) Dilution represents the difference between the amount per Common Share
paid by holders of Warrants who exercise them and the net tangible book value
after such exercise.
The following table sets forth, as of January 31, 1997, as adjusted for the
issuance of Common Shares between January 31, 1998 and April 30, 1998 and the
consideration received therefor, the differences among the existing shareholders
of the Company, including the Holder of the "D" Preferred Shares and the
Warrants after exercise the total consideration paid and the average price per
Common Share paid.
Common Shares Purchased Total Consideration
Percent Percent Average Price
Number of Total Amount of Total Per Share
---------- -------- ----------- -------- -------------
Common Shares 14,432,039 95.2% $ 8,010,100 72.9% $0.56
2,500 Convertible
Preferred Shares* 625,000 4.1 $ 2,500,000 22.7% $4.00
Total Common Shares*
prior to conversion 15,057,039 99.3 $10,510,100 95.6% $0.70
Exercise of Warrants 107,355 0.9 $ 481,000 4.4% $4.81
Total Common Shares
after exercise 15,164,394 100.0% $10,991,100 100.0% $0.72
----------------------
* The number of Common Shares into which the Preferred Shares may be
converted as been taken, for purposes of this table, at 625,000 Common Shares.
The actual number of Common Shares into which the "D" Preferred Shares are
converted may be greater or lesser than 625,000 Common Shares (see Front Cover
Page and "Securities -- "D" Preferred Shares").
13
<PAGE>
CAPITALIZATION
The table below sets forth the pro-forma capitalization of the Company as
at January 31, 1998 on an historical basis and as adjusted to give effect of the
exercise of the Warrants and conversion of the "D" Preferred Shares.
As Adjusted for
Exercise of Warrants
and Conversion of "D"
Historical Basis Preferred Shares*
---------------- -----------------
Long Term Liabilities $ 0 $ 0
Stockholders' Equity
Common Shares, $.01 par value
per share, authorized 30,000,000
Common Shares, issued and outstanding
14,432,039 shares at January 31,
1998; 15,164,394 Common Shares will
be issued and outstanding after
conversion of the Preferred Shares
and exercise of Warrants . 139,258 1451,644
"D" Preferred Shares, $.01 par value
per share, authorized 5,000,000
Shares, issued and outstanding
2,500,000 Preferred Shares as at January
31, 1998 (1); after conversion of
the Preferred Shares, there will be
-0- Preferred Shares outstanding. 2 0
Additional paid in capital 7,870,842 10,667,333
Accumulated deficit (3,534,922) (3,534,922)
------------ ------------
Total stockholders' equity $ 4,475,180 $ 7,284,055
------------ ------------
Total Capitalization $ 4,475,180 $ 7,284,055
============ ============
- --------------------
* Stockholders' equity represents a pro-forma number consisting of the
balance as of January 31, 1998 of $4,463,180 plus $12,000 representing the
exercise of 4,000 Plan Options at $3.00 per share for an aggregate of
$4,475,180.Assumes conversion of 2,500 "D" Preferred Shares and exercise of
107,355 Warrants. The number of Common Shares into which the Preferred Shares
may be converted as been taken for purposes of this table at 625,000 Common
Shares. The actual number of Common Shares into which the "D" Preferred Shares
are converted may be greater or less than 625,000 Common Shares. The Warrants
are exercisable at $4.81 per share. The total number of Common Shares
outstanding and Shareholders' Equity have been adjusted on a pro forma basis to
reflect Common Shares issued by the Company between February 1, 1998 and April
30, 1998 and the consideration received by the Company therefor.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
for the years ended April 30, 1996 and 1997 and
the nine-month periods ended January 31, 1997 and 1998
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements. In order to comply with the terms of the safe
harbor, the Company notes that except for the description of historical facts
contained herein, the Registration Statement contains certain forward looking
statements that involve risks and uncertainties as detailed herein and from time
to time in the Company's filings with the Securities and Exchange Commission and
elsewhere. Such statements are based on management's current expectations and
are subject to a number of factors and uncertainties which could cause actual
results to differ materially from those described in the forward-looking
statements. These factors include, among others: (a) the Company's fluctuations
in sales and operating results, risks associated with international operations
and regulatory, competitive and contractual risks and product development; (b)
the ability to achieve strategic initiatives, including but not limited to the
ability to achieve sales growth across the business segments through a
combination of increased pricing, enhanced sales force, new products, and
improved customer service; and acquisitions.
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 commencement of development of its
biomedical technologies which are its core business. These activities have been
funded through the sale of convertible debentures, exercise of options and
warrants and sale of four series of convertible preferred shares. Because the
Company's drug test kits are in commercial production and the Company has,
according to Management, adequate resources to fund its operations and has
completed research and development of its present product line, the Company no
longer considers itself a development stage company.
15
<PAGE>
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.
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, 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 and/or order
rescheduling. Because the Company is continuing to increase its operating
expenses for personnel, the Company's operating results would be adversely
affected if its sales did not correspondingly increase. 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 manufactures and inventories sufficient product prior to
receipt of orders and ships product shortly after receipt of orders and
anticipates that it will do so in the future. For large orders, deliveries are
generally staggered; and the Company manufactures and inventories prior to
shipping dates. The Company's computer and other systems will not be adversely
affected by the year 2000.
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 restructuring of its telemarketing
activities. Costs of goods sold for the year ended April 30, 1997, were $76,628
as compared to $96,444 for the year 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 in bulk at greatly reduced cost.
Revenues from 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% of revenues.
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 general and administrative costs were the result
of adding employees for positions in sales, marketing, accounting, management
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.
16
<PAGE>
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 expense is the result of
gradual completion of development of the drug testing delivery system.
Resolution of Friedenberg Litigation and Trial Date in Morris Litigation
------------------------------------------------------------------------
The Company is awaiting a judicial determination of the entitlement to
common shares by the estate of Robert Friedenberg, a former stockholder of two
companies the purchase of which the Company rescinded. A jury has determined in
favor of the Company on two of three fraud claims against the estate and has
awarded the Company $300,000 in damages. The judge is bound by the jury verdict.
In June, 1995, the Company filed a lawsuit against Jackson Morris, Esq. for
breach of the attorney-client relationship and of his fiduciary duty to the
Company for subsequently providing legal services to Dr. Friedenberg in his
dispute with the Company. 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.
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 of
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.
17
<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 April 30, 1996 for the research and development of its
biomedical products.
Other income consisted 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 had 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 respectively through the exercise of 175,000 options 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.
Results of operations for the nine months ended January 31, 1998 as
compared to the nine months ended January 31, 1997.
- --------------------------------------------------------------------------------
Revenues from the book segment of the business were $410,254 for the nine
months ended January 31, 1998 as compared to $237,538 for the nine months ended
January 31, 1997, representing an increase of $172,716 or 72.7%. This increase
in book sales is directly attributable to the Company's reorganization of its
telemarketing activities and a bulk inventory purchase. Cost of goods sold for
the nine months ended January 31, 1998, was $102,642 as compared to $87,820 for
the nine months ended January 31, 1997 representing a cost of goods sold
percentage of 25.0% of sales for the nine months ended January 31, 1998 as
compared to 37.0% of sales for the nine months ended January 31, 1997.
18
<PAGE>
Revenues from the sales of drug testing kits were $1,363,916 for the nine
months ended January 31, 1998 as compared to $ 192,963 for the nine months ended
January 31, 1997, representing an increase of $1,170,953 or 707%. This increase
in sales of drug testing kits is directly attributable to the implementation of
and positive response to the Company's marketing program. Cost of goods sold for
the nine months ended January 31, 1998 was $572,719 or 42.0% of sales as
compared to a cost of goods sold of $62,601 or 32.4% of sales. The increase in
the percentage of cost of goods sold is attributable to additional overhead.
General and administrative costs for the nine months ended January 31, 1998
were $1,676,176 or 99.9% of sales as compared to $583,569 or 135% of sales for
the nine months ended January 31, 1997, representing an increase of $1,092,627.
These increased costs are the result of hiring additional employees in sales,
marketing, accounting and executive positions. For the nine months ended January
31, 1998, personnel costs were $491,512, legal and professional expenses,
$143,712, office expense, $241,297, marketing expense, $502,255, product
development, $75,606, rent, $21,437 and bad debt expense of $200,377. Research
and development expense was $96,766 for the nine months ended January 31, 1998
compared to $74,978 for the nine months ended January 31, 1997. This increase in
research and development is the result of the development of three additional
drug tests during the quarter.
Results of operations for the three months ended January 31, 1998 as
compared to the three months ended January 31, 1997.
- --------------------------------------------------------------------------------
Revenues from the book segment of the business were $144,906 for the three
months ended January 31, 1998 as compared to $220,415 for the three months ended
January 31, 1997, representing an decrease of $75,509 or 34.3%. This decrease in
book sales is directly attributable to the Company's delayed delivery of a bulk
inventory purchase. Costs of goods sold for the three months ended January 31,
1998, were $36,171 as compared to $82,255 for the three months ended January 31,
1997 representing a cost of goods sold percentage of 25.0% of sales for the
three months ended January 31, 1998 as compared to 37.3% of sales for the three
months ended January 31, 1997.
Revenues from the sales of drug testing kits were $355,540 for the three
months ended January 31, 1998 as compared to $161,498 for the three months ended
January 31, 1997, representing an increase of $194,042 or 120.1%. This increase
in sales of drug testing kits is directly attributable to the implementation of
and positive response to the Company's marketing program. Cost of goods sold for
the three months ended January 31, 1998 was $137,852 or 38.8% of sales as
compared to a cost of goods sold of $40,288 or 24.9% of sales. The increase in
the percentage of cost of goods sold is attributable to additional overhead.
General and administrative costs for the three months ended January 31,
1998 were $934,720 or 186.8% of sales as compared to $247,456 or 64.8% of sales
for the three months ended January 31, 1997, representing an increase of
$734,878. These increased costs are the result of hiring additional employees in
sales, marketing, accounting and executive positions. For the three months ended
January 31, 1998, personnel costs were $138,298, legal and professional
expenses, $24,248, office expense, $143,140, marketing expense, $368,863,
product development, $48,536, rent, $11,258 and bad debt expense of $200,377.
Research and development expense was $47,614 for the three months ended January
31, 1998 compared to $8,228 during the three months ended January 31, 1997. This
increase in research and development is the result of the development of three
additional drug tests during the quarter.
19
<PAGE>
Liquidity and capital resources as of the end of the nine months ended
January 31, 1998.
- --------------------------------------------------------------------------------
The Company's cash balance was $303,939 and working capital was $4,286,694
as at January 31, 1998. The Company completed a series of private placements
generating additional cash aggregating $1,055,000 before payment of $ 93,500 in
commissions and issuing 138,305 Common Shares through the exercise of options
for an aggregate consideration of $414,915. Cash generated from financing
activities was utilized for the purchase of machinery and equipment for $49,093,
additional patent costs of $22,652 and an increase in the investment in
marketable securities of $846,609 and an increase in accounts receivable of
$795,159.
The Company's primary short-term needs for capital, which are subject to
change, are for expansion of its manufacturing capacity, an increase in
inventory levels to fill larger anticipated orders and an increase in associated
accounts receivables. As of January 31, 1998, two customers account for 44.2% of
the Company's accounts receivable and no one customer accounted for more than
10% of drug test kit sales during the quarter.
Management believes that the present cash balance will pay the immediate
ongoing cost of the biomedical business but the Company may seek additional
funding sources for continued research and development into new products. The
Company is in full scale commercial production of its drug testing kits.
Income tax: As of January 31, 1998, the Company had a tax loss
carry-forward of $3,534,922. The Company's ability to utilize its tax credit
carry-forward 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.
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 its marketing
program and the anticipated launch of the Company's new products currently under
development. Additionally, the Company will utilize 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 commences new research and development efforts, undertakes
new product development, increases sales and administration infrastructure and
embarks on increasing development efforts related to in-house 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.
20
<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.
BUSINESS
Summary
-------
The Company's primary business is acquiring, developing and marketing
biomedical technologies and products. The Company currently owns a technology
for screening drugs of abuse, trademarked the "Rapid Drug Screen."
The Company produces and markets its workplace screening test at its
manufacturing facility in Columbia County, New York. 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 preventing exposure of the test administrator to the
urine sample. In Management's opinion, the Company's drug test kit, which
requires no mixing of reagents, is easier to use than any competitive product.
In addition, hundreds of controlled tests conducted by independent laboratories
compared the Company's "Rapid Drug Screen Test" with results produced by EMIT
II, a standard laboratory test, 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 that laboratory test.
The Company manufactures and markets a two panel (cocaine and marijuana),
five panel (cocaine, marijuana, opiates, amphetamine and PCP) and an eight panel
(THC, cocaine, opiates, PCP, amphetamines, benzodiazepines, methamphetamines and
barbiturates) Rapid Drug Screen. All three tests have been cleared by the FDA
and can be sold in clinical markets as well as workplace markets. The Company
has also completed a test for tricyclic antidepressants which it intends to
submit to the FDA for approval and to market in the near future as part of a
nine-panel test.
The Company has installed and uses equipment suitable for the mass
production of the workplace drug screening test. The Company's output was
initially lowered by its inability to secure reliable supplies of reagents. This
problem was rectified in May, 1997 through improved reliability of its suppliers
and the addition of a third supplier.
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. The Company has no
intention of developing or marketing its laboratory test, its keratin technology
or its saliva test for alcohol consumption at this time, but intends to
concentrate on the production and marketing of its drug screen tests and
pursuing development and acquisition strategies related to substance abuse
testing. The Company has fully developed and is preparing to market its
anti-dilutant product which detects the presence of dilutants and added
detergents in the urine specimen and also tests for pH and specific gravity
levels.
21
<PAGE>
The Company may develop or acquire additional biomedical technologies or
products in the future unrelated to substance abuse.
From its inception in 1986 until 1991, 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 involvement 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. (See "Litigation.") The Company has no present
intention of entering into transactions in the future with related parties.
Since its inception to January 31, 1998, the Company has an accumulated
deficit of $$3,534,922 (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 not been profitable during its history and that there is no
assurance that the Company's biomedical operations will become profitable.
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 increases to
several factors, including Department of Transportation and Department of
Defense regulations which, in conjunction with local and state regulations,
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.
22
<PAGE>
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 screening
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.
The Common Shares were accepted for listing and began trading on the Nasdaq
SmallCap Market on December 24, 1997.
Workplace Drug Test
-------------------
Design
------
The first product, trademarked "The Rapid Drug Screen," developed and
marketed by the Company, is a workplace test for two, five or eight 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, touching or contaminating the urine inside.
Thus, the administrator is not exposed to the urine sample nor does he or she
have to mix reagents. Within five to eight minutes, the results can be read on
the card inserted 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 that the screen is negative for the presence of the
"NIDA 5" drugs of abuse.
23
<PAGE>
The Company has designed a five panel card, a two panel card and an eight
panel card and can produce, on special order or if the market demands, cards
which test for any combination of drugs of abuse. 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, includes barbiturates,
benzodiazepines and methamphetamines. These additional tests can be combined in
single unit with the NIDA 5 Card so that one sample can test simultaneously for
eight drugs of abuse. The Company's test for methamphetamine is also
incorporated in a two panel test for marijuana and methamphetamine and in a five
panel test for methamphetamine, amphetamine, cocaine, opiates and marijuana. The
Company has also completed a test for tricyclic antidepressants which it intends
to submit to the FDA and to market in the near future as part of a nine-panel
test.
Benzodiazepines, barbiturates, and tricyclic antidepressants are
prescription sedatives which are often abused and can be deadly. In fact, the
Florida Alcohol and Drug Abuse Association (FADAA) reports that barbiturates
account for approximately one-third of all reported drug-related deaths while
tricyclic antidepressants have been identified as a leading cause of fatality
from drug ingestion in Australia. Domestic concerns regarding trends of
barbiturate abuse focus on the drug's growing popularity among teenagers, as
evidenced by the 1996 Monitoring the Future Study which documents a 38% rise in
barbiturate use among high school seniors since 1992.
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 screens contains a temperature sensor
which helps prevent the substitution of another urine sample as the likelihood
is that the substituted sample would be of a lower temperature than a sample
produced from the body on the spot. 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 administrator is
instructed to void the test and "retest" the individual being tested by
obtaining another specimen sample.
The kit contains the following instructions: if only one horizontal band
changes color in any strip, the sample is positive for that drug and the sample
should be sent to a laboratory for confirmation. If both bands in any strip
change color, the sample has tested negative for that drug. If neither band
changes color, the sample is not urine or the test must be voided; and the
employee or other person being tested must submit another urine sample for
retesting.
24
<PAGE>
Manufacture
-----------
After the successful completion of clinical trials in May, 1996, the
Company initially subcontracted the manufacture of components, including the
test strips, of The Rapid Drug Screen to several outside manufacturers. These
components were then assembled for the Company by Columbia Advocacy and Resource
Center ("COARC"), an FDA-approved contract manufacturer in Mellenville, New
York, which is near the Company's headquarters. 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 installed equipment in a dedicated "white" room in the COARC
facility which allows 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 500,000 units per month utilizing one
shift five days a week.
FDA Approval/Patent Application
-------------------------------
Although FDA approval is not required for most forms of workplace drug
testing, including The Rapid Drug Screen, it is required for use in a clinical
setting which Management anticipates may become a future marketplace for the
Company's drug testing products. Testing to date has shown 100% correlation to
tests performed in a recognized testing laboratory. FDA "510K" clearances have
been granted for the Company tests included on its eight-panel Rapid Screen. The
Company intends to apply to the FDA for its test for tricyclic antidepressants.
Utility and application patents were filed on March 11, 1996, but have not yet
been granted.
Marketing and Sales
-------------------
The Company advertises through trade journals and direct mail campaigns;
and its representatives attend trade shows. The Company sells primarily to
distributors which then resell in the various marketplaces. The Company has
garnered orders from distributors, municipal bodies and corporate users as well
as from penal facilities. In November, 1997, the Company hired a national sales
manager, a director of marketing and five regional managers. (See
"Management--Significant Employees.") The Company has opened a national sales
office in Boca Raton, Florida. (See "Risk Factors--Marketing and Sales.")
25
<PAGE>
The Company has divided its marketplace into the following categories.
Corporate Workplace Drug Testing Programs
-----------------------------------------
The Company has developed a nationwide network of distributors and
administrators of workplace drug testing programs to sell its Rapid Drug Screen
testing kit.
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 shipped
orders to several agencies including the Broward County, Florida, Sheriff's
Department, the United States Probation Department and other similar facilities
and agencies. The Company has exhibited at the American Corrections Association
trade shows, winter and summer, for the past three years.
Rehabilitation Centers
----------------------
This market includes people in treatment for substance abuse in general
hospitals, mental health centers and outpatient programs. The importance of this
market relates to the high 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 exhibited at the 1997 Employee
Assistance Program convention in Chicago.
International Markets
---------------------
The Company has entered into distribution agreements with companies in
several countries and is pursuing a course of multinational distribution of its
products through both clinical and non-clinical distribution companies .
In September, 1997, the Mexican Secretary of Health approved and registered
the Rapid Drug Screen for sale in Mexico. In November, 1997, the Company entered
into a 36 month distribution agreement with Laborotorios Devor, S.A. De C.V. of
Mexico for a minimum of 603,000 Rapid Drug Screen kits.
Also, in September, 1997, the Company entered into a one year distribution
agreement with a Manila-based health product distributor. The agreement requires
a minimum annual order of 100,000 units, and grants the distributor the
exclusive right to market all of the Company's on-site substance abuse testing
products in the Philippines. The Company shipped the first 2,000 units to the
Philippine distributor in September, 1997.
In January, 1998, the Rapid Drug Screen was approved by the Hungarian
National Institute of Laborities for sale in Hungary. The Company intends to
market in Hungary through Health Products Marketing, LLC. In February, 1998, the
Company entered into a distribution agreement with Associated Process Controls,
Ltd, which distributes testing and monitoring equipment to businesses, hospitals
and police departments throughout New Zealand.
26
<PAGE>
Clinical, Physicians and Hospitals
----------------------------------
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.
The Company has entered into an exclusive distribution contract with and has
started shipments to a subsidiary of Murex International Technologies Corp.,
traded on Nasdaq, (majority owned by Abbott Laboratories (NYSE)) to market the
Rapid Drug Screen product line to hospitals and clinics in North America. The
Company hopes to expand this distribution to additional countries. In addition,
the Company has been selected to supply products to the Physicians Drug Test
Network which, in turn, markets to participating physicians who provide drug
screening for families, individuals, schools and employers.
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 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 upon
final FDA determination of on-site drug testing as a over-the-counter
alternative.
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 require
testing of 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 has found that the best way to
make sales is through demonstration and testing of the product's features.
27
<PAGE>
Competition
-----------
Competition to the Company's workplace drug test comes from tests by Roche
Diagnostic Systems, Medtox (formerly Editek, Inc.), Biosite Diagnostics and Drug
Testing Resources International. In the Roche test, the test administrator
inverts 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 Testing Resources test involves pipeting drops
of urine. In addition, Psychemedics introduced a test which requires that a lock
of hair taken from the subject be sent to its laboratory for analysis, 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. (See "Risk
Factors--Competition in the Drug Testing Market; Technological Obsolescence.")
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 necessary.
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 cards. 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 20 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.
On December 1, 1997, the Company announced that it intended to construct a
15,000 square foot manufacturing facility and headquarters in Columbia County,
New York. The Empire State Development Corporation, an agency of New York State,
has agreed in principle to provide financial assistance in the form of grants
and below market interest rate loans as well as financial assistance in employee
training. Columbia County has announced its intention to transfer 20 acres of
land to the Company. Manufacturing is intended to be divided between COARC and
the Company's facility. The Company believes that there is a likelihood that the
facility will be built; but there is no guarantee that all steps leading to
construction be completed.
28
<PAGE>
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, if granted, it will withstand challenge. The Company
has applied for patents and trademarks in the European Common Market and Japan.
(See "Risk Factors--Patents and Trademarks.")
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 20 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
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. The Company cannot
predict when the ABM Prescreen will be introduced.
29
<PAGE>
Alcohol/Saliva Test
-------------------
The Company has developed a technology that will detect alcohol levels in
individuals through a quick, one step, on-site, saliva test that can be
calibrated to specific sensitivity levels. Though at an advanced stage of
development, additional laboratory work and clinical evaluations will need to be
funded and completed prior to any patent applications or commercialization.
These activities are expected to commence during fiscal 1998. Law enforcement
and workplace testing would be the initial markets targeted by this Company. The
Company is only aware of one, nonspecific to sensitivity levels, two step
product now available.
KDMP (Keratin Derivative Modified Protein)
------------------------------------------
Keratin Derived Modified Protein ("KDMP") is a liquid keratin protein
complex containing water soluble peptides and is rich in cysteine. It can be
used as an active ingredient in varying concentrations in the formulations of
quality skin, nail, and hair care products. Pre-clinical trials have been
completed and the Company intends to license or sell the technology. Various
patents relating to this technology have been assigned to the Company by Edmund
Jaskiewicz, Executive Vice-President, as part of the consideration for his
receipt of Common Shares (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 the near future. 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 fulfill orders, to continue research and development on its
additional biomedical products.
The Company has entered into non-exclusive, non-clinical market
distribution agreements with a number of companies, including national companies
(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) distributors.
In addition, the Company, has entered into a non-exclusive distribution
agreement for Canada with Ammcan, Inc., Toronto, Ontario. The Company has also
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.
30
<PAGE>
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. 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 Company has also entered into a distribution agreement for its
drug test kits for the Philippines.
The Company has retained a national and five regional managers (in Fort
Lauderdale, Nashville, Los Angeles, Baltimore and Milwaukee). These
representatives call on accounts, such as corporations and correctional
institutions, directly and support the Company's worldwide distribution network.
The Company intends to continue its 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 demonstrated its products at trade shows
during fiscal 1997 and fiscal 1998.
The Company's present manufacturing equipment and personnel designated by
COARC is sufficient to produce 50,000 drug test kits each week, assuming one
shift per day, five days a week. In the event the Company desires to increase
production, its estimated costs for additional equipment are $40,000.
The Company's Rapid Drug Screen Test was featured on "Today's Health,"
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.
The Company has funded and will continue to fund its marketing, sales and
manufacturing activities from cash on hand. The Company does not now nor does it
intend to enter into any agreements with affiliated parties for the purchase of
technologies, the sale of product or the purchase of inventory. (See "Certain
Transactions.")
31
<PAGE>
MANAGEMENT
Directors and Executive Officers.
---------------------------------
The directors and executive officers of the Company and their respective
ages, positions with the Company, along with certain biographical information
are as set forth below.
Name Age Position Since
---- --- ---------------------------------- -----
Stan Cipkowski 49 President and a Director 1986
Edmund Jaskiewicz 75 Chairman of the Board of Directors,
Executive Vice-President and Secretary 1992
Jay Bendis 50 Vice-President-Marketing and a Director 1995
John F. Murray 53 Treasurer and a Director 1997
Henry J. Wells 65 Vice-President-Product Development 1995
Jasper R. Clay, Jr. 65 A Director 1997
Karen Russo 36 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.
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. 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.
32
<PAGE>
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
1992. Mr. Murray received his B.B.A. 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
Parolefrom 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. He received an Honorable Discharge from the United
States Army Infantry 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. 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.
Karen Russo has, since 1995, acted as an independent consultant to training
and consulting firms in topics including interpersonal and strategic selling,
sales management, service excellence, teamwork and collaboration, management,
leadership and prevention of workplace violence and sexual harassment. From 1989
to 1995, Ms. Russo was an account executive with The Forum Corporation, Los
Angeles, California, responsible for business development and client service.
She served as an Assistant Vice President at Bankers Trust Company from 1987 to
1989. Ms. Russo earned her M.B.A. from Columbia University in 1987 and her B.A.
from University of Maryland in 1981.
33
<PAGE>
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 University from 1965 to 1966 and received his B.A. degree
in Psychology in 1973 from the State University of New York at New Paltz.
Significant Employees
---------------------
Lester H. Cohen (50 years old) was from 1996 to 1997 President of Drug
Detective Systems, Inc. From 1994 to 1996, he was President and a founder of
DrugTest Resources International. He sold his interest in that company to his
partner. From 1992 to 1994, Mr. Cohen was Consultant to and Western Regional
Manager of Drug Screening Systems, Inc. and from 1985 to 1994, he was President
of Criminal Justice Resources, Inc. (formerly Emjay Associates Ltd.). From 1984
to 1985, Mr. Cohen served as Executive Director, American Probation and Parole
Association. He was Chief of Planning Policy and Program Development, New York
State Division of Probation from 1977 to 1984.
Winn Pollock (62 years old), National Sales Manager, served as Regional
Manager for Komputer Kingdom, Jacksonville, Florida from 1994 to 1996. From 1991
to 1994, he was Director of Sales and Marketing for ComputerLand of South
Florida, Fort Lauderdale, Florida. He served as Director of the Education
Division of Caber Systems, Fort Lauderdale, Florida from 1990 to 1991 and
Vice-President of Sales for Florida Micro Media, Pompano Beach, Florida from
1982 to 1990. Mr. Pollock received his B.A. from Boston University in 1954.
Martin R. Gould (47 years old), Technical Director, was consultant to the
president of Arista Biologicals Inc. from 1997 to 1998. From 1987 to 1994, he
was Chief Executive Office and a founder of Ampcor, Inc. which was sold to
Neogen Corporation in 1994. From 1994 to 1997, he was General Manager of Ampcor
Diagnostic Inc., a subsidiary of Ampcor Inc., where he was responsible for sales
and manuacturing of clinical and microbiological food testing products. From
1973 to 1987, Mr. Gould served E. Merck sucessively as Product Manager, R&D
Acting Director, R&D Manager, R&D Senior Scientist and Quality Assurance Senior
Scientist. Mr. Gould received his B.S. in Animal Science/Chemistry from Delaware
Valley College, and received his M.S. and is completing his Ph.D. in Biomedical
Sciences and Engineering at Drexel University.
Scientific Advisory Board
-------------------------
The Company has established a scientific advisory board of which Henry J.
Wells, Ph.D., Vice-President, is chairperson. The members of the scientific
advisory board are the following:
Anthony G. Costantino, Ph.D., earned his 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 currently serves as Director of
Clinical Toxicology at American Medical Laboratories in Chantilly, Virginia.
34
<PAGE>
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 Program 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 a member 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 Federal Aviation Administration Medical Examiner.
The Scientific Advisory Board will meet from time to time to consider the
Company's present technology and proposed technology development.
Executive Compensation
-----------------------
The following table sets forth certain information concerning compensation
paid or accrued for fiscal 1996 by the Company to or for the benefit of the
Company's President. No executive officer's total annual compensation for fiscal
year 1996 or 1997 exceeded $100,000. As permitted under the rules of the
Commission, no amounts are shown in the table below with respect to any
perquisites paid to a named officer because the aggregate amount of such
perquisites (e.g. auto allowance) did not exceed the lesser of (i) $50,000 or
(ii) 10% of the total annual salary and bonus of a named officer.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
Awards Payouts
- --------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name Other Res- All
and Annual tricted Other
Principal Compen- Stock Options LTIP Compen-
Position Year Salary Bonus sation Awards SARs Payouts sation
($) ($) ($) (#) (#) ($) ($)
- --------------------------------------------------------------------------------
Stan 1997 99,068 -0- -0- -0- 550,000 -0- 5,371
Cipkowski, 1996 44,000 -0- -0- -0- -0- -0- 5,232
President
All of the Company's current directors will serve as directors until the
next annual meeting of stockholders and until their respective successors have
been duly elected and qualified, subject to their earlier removal or
resignation. Each Director receives a fee of $500 for attendance at meetings of
directors. The Board of Directors has established an options committee, an audit
committee and a compensation committee. The Company's by-laws provide that the
size of the Board of Directors shall be determined by the Board of Directors and
shall be between three and nine members. There are presently five directors of
the Company. All present members of the Board of Directors were elected by the
stockholders in September, 1997, except Karen Russo, who was appointed in
November, 1997, to fill a vacancy in the board.
The Company's officers are elected by, and serve at the pleasure of, the
Board of Directors. The Company has granted stock options to various Management
employees and consultants (see "Certain Transactions" and Financial
Statements--Footnotes).
35
<PAGE>
Directors and Officers Liability Insurance
------------------------------------------
The Company currently does not have directors and officers liability
insurance. It does not anticipate obtaining such coverage unless such insurance
can be purchased at a reasonable cost to the Company, of which there can be no
assurance. Officers and directors are indemnified by the Company in accordance
with the provisions of its certificate of incorporation to the maximum extent
permissible by law.
PRINCIPAL SHAREHOLDERS
The following table sets forth information as to the number of Shares
beneficially owned as of the date of the Prospectus by (i) each person who is
deemed to be a beneficial owner of more than 5% of the outstanding Shares; (ii)
each director; (iii) each executive officer; and (iv) all directors and
executive officers as a group. A person is deemed to be a beneficial owner of
any securities of which that person has the right to acquire beneficial
ownership of such securities within sixty days. All Shares are owned both of
record and beneficially.
Percent Before Percent After
Name of Number Conversion of "D" Conversion of "D"
Beneficial Owner of Shares Preferred Share Preferred Shares(1)
and Exercise of and Exercise of
the Warrants the Warrants
---------------- --------- ----------------- -------------------
Edmund Jaskiewicz 2,005,572 13.9% 13.3%
1730 M Street, NW
Washington, DC 20036
Stan Cipkowski 2,599,250 18.0% 17.3%
300 Fairview Avenue
Hudson, New York 12534
Jay Bendis 645,999 4.5% 4.3%
71 Springcrest Drive
Akron, Ohio 44333
Henry J. Wells, Ph.D. -0- -0-% -0-%
9421 Book Row
Columbia, Maryland 21046
Jasper R. Clay, Jr. -0- -0-% -0-%
4964 Moonfall Way
Columbia, Maryland 21044
John F. Murray 3,620 -0-% -0-%
1821 Lyons Road
Pompano Beach, Florida 33063
Karen Russo 1,250 -0-% -0-%
8675 Falmouth Avenue
Playa del Rey, CA 90293
Douglas Casterlin 112,500 0.8% 0.7%
65 Malloy Road
Ghent, New York 12065
--------- ----- ------
All Officers and
Directors as a Group
(8 persons) 5,368,191 37.2% 35.6%
- --------------------
1. Assumes conversion of the total number of the "D" Preferred Shares into
625,000 Common Shares and exercise of 107,355 Warrants.
35
<PAGE>
CERTAIN TRANSACTIONS
In August, 1997, the Company issued 185,000 Plan Options pursuant to the
Fiscal 1996 Plan as follows: 10,000 to Jasper Clay, Jr., a Director, 10,000 to
John F. Murray, a Director, and 155,000 options to five non-management
employees. As of December 31, 1997, Edward Jaskiewicz, Executive Vice-President,
gifted a total of 964,300 Common Shares to members of his family. Stan Cipkowski
gifted an aggregate of 40,000 Common Shares to three trusts/foundations. During
fiscal 1998, Karen Russo and John Murray, Directors, purchased 1,250 and 3,620
Common Shares in brokerage transactions. As of December 31, 1997, Stan Cipkowski
gifted to Douglas Casterlin, Vice-President 112,500 Common Shares. Between
September 1, 1997 and April 30, 1998, the company issued 271,000 Plan Options
pursuant to the Fiscal 1998 Plan exercisable for a period of three years to 22
persons of which 12,000 options were exercisable at $3.00; 235,000 options at
$3.50 and 24,000 options at $4.00.
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 30,000,000 Common
Shares $.01 par value per share and 5,000,000 Preferred Shares $.01 par value
per share.
Common Shares
--------------
14,432,039 Common Shares were issued as of April 30, 1998. Stockholders (i)
have general ratable rights to dividends from funds legally available therefor,
when, as and if declared by the Company's Board of Directors; (ii) are entitled
to share ratably in all assets of American Bio Medica available for distribution
to shareholders upon liquidation, dissolution or winding up of its affairs;
(iii) do not have preemptive, subscription or conversion rights, nor are there
any redemption or sinking fund provisions applicable thereto; and (iv) are
entitled to one vote per Share on all matters on which shareholders may vote at
all shareholder meetings. All Common Shares now outstanding are fully paid and
nonassessable and all Common Shares to be sold will be fully paid and
nonassessable when issued.
Stockholders do not have cumulative voting rights. Thus, the holders of
more than 50% of such outstanding Common Shares, voting for the election of
Directors, can elect all of the Directors to be elected, if they so choose, and
in such event, the holders of the remaining Common Shares will not be able to
elect any of the Company's Directors.
Market for Common Equity and Related Shareholder Matters
--------------------------------------------------------
The table on the following page sets forth the range of high and low sales
prices for the Common Shares on the NASD Electronic Bulletin Board for each
quarter for the fiscal years 1996, 1997 and 1998. There are approximately 2,500
holders of Common Shares. As of April 30, 1998, there were outstanding
14,432,039 Common Shares and 2,500 "D" Preferred Shares each of which is
convertible into Common Shares at the lesser of (i) 95% of the "Market Price"
(the average of the closing bid prices of the Common Shares over any three
trading days, selected by the Holder, in the 20 trading days immediately
preceding the Conversion Date and 125% of $3.70, the Closing Price, except that
if the 10 day average closing bid price ending on the Effective Price is greater
than 125% of the Closing Price, the maximum Conversion Price will be such
Effective Price, not to exceed, in any case, 135% of the Closing Price. The
Common Shares trade on the Nasdaq SmallCap market (see Front Cover Page and
"Risk Factors--No Assurance of Continued Public Market for Common Shares").
36
<PAGE>
High Low
---- ---
Fiscal Year Ending April 30, 1998
Fourth Quarter $4.43 $3.40
Third Quarter 6.50 3.25
Second Quarter 3.97 2.69
First Quarter 4.13 3.00
Fiscal Year Ending April 30, 1997
Fourth Quarter 4.13 3.69
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 0.63 0.38
First Quarter 0.38 0.13
Preferred Shares
----------------
The Board of Directors of the Company has the authority, without further
action by the holders of the outstanding Common Shares, to issue Shares of
Preferred Stock from time to time in one or more classes or series, to fix the
number of Shares constituting any class or series and the stated value thereof,
if different from the par value, and to fix the terms of any such series or
class, including dividend rights, dividend rates, conversion or exchange rights,
voting rights, rights and terms of redemption (including sinking fund
provisions), the redemption price and the liquidation preference of such class
or series.
On April 24, 1998, the Company has sold 2,500 "D" Preferred Shares and
issued 100,000 Warrants (see "Warrants" herein) to the Holder, CC Investments,
LLD. Each of the "D' Preferred Shares is convertible into Common Shares at the
lesser of (i) 95% of the "Market Price" (the average of the closing bid prices
of the Common Shares over any three trading days, selected by the Holder, in the
20 trading days immediately preceding the Conversion Date and 125% of $3.70, the
Closing Price, except that if the 10 day average closing bid price ending on the
Effective Date is greater than 125% of the Closing Price, the maximum Conversion
Price will be such Effective Price, not to exceed, in any case, 135% of the
Closing Price. All accrued but unpaid dividends are payable in cash or Common
Shares. If, on or after the Effective Date, the average closing bid price of the
Common Shares over any 20 consecutive trading days is equal to or greater than
300% of the Closing Price, all outstanding Preferred Shares will be
automatically converted into shares of Common Stock at the lowest Conversion
Price in effect on such 20th trading day. The Registration Statement relates in
part to the Common Shares underlying the "D" Preferred Shares.
37
<PAGE>
Unless Shareholder approval is obtained, the Company shall not be obligated
to issue, in the aggregate, more than 2,745,000 Common Shares upon conversion of
the "D" Preferred Shares. In the absence of Shareholder approval, conversion by
the Holder shall be honored by payment to the Holder of cash in an amount equal
to the Closing Bid Price on the trading day of delivery of a notice of
conversion multiplied by the number of Common Shares which would be issuable in
satisfaction of such notice of conversion.
The Holder has committed to purchase from the Company an additional 2,000
"D" Preferred Shares (and receive 80,000 Warrants) in the event the Company
consummates an acquisition which conforms to certain economic parameters. There
is no assurance that a qualifying acquisition will be made.
Warrants
--------
On April 24, 1998, the Company issued 107,355 Warrants, 100,000 Warrants to
the Holder, CC Investments LLD, as part of the sale of securities, and 7,355
Warrants to Shoreline Pacific, the Selling Agent, as part of its compensation
for effecting the sale of the securities (see Front Cover Page). Each Warrant
entitles the holder to purchase one Common Share at a price of $4.81 per share
until April 24, 2001. The Registration Statement relates in part to the Common
Shares underlying the Warrants.
Options
-------
The Company has issued 500,000 Options which are exercisable at $1.00
through March 14, 1999 and 500,000 Options, which are exercisable at $2.00
through March 14, 1999. Until a registration statement relating to the Common
Shares underlying such options is effective, certificates representing the
shares into which these options are exercised will bear a legend restricting
transfer in the absence of an effective registration with the Commission or an
exemption therefrom.
The Company has adopted the Fiscal 1996 Plan and the Fiscal 1998 Plan.
2,000,000 Common Shares were reserved under the 1996 Plan and 1,000,000 Common
shares under the 1998 Plan. Each plan is administered by the Board of Directors.
Plan Options under either 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 of Plan Options under either Plan may be more, equal to or less
than the then current market price of the Common Shares as deemed to be
appropriate.
The Company has issued 1,957,000 options ("Plan Options") pursuant to the
Fiscal 1996 Plan. All Plan Options were exercisable for a period of three years
at $3.00 per share. As of April 30, 1998, 806,038 Plan Options have been
exercised for an aggregate exercise price of $2,418,114. 271,000 Plan Options
have been issued pursuant to the Fiscal 1998 Plan, 235,000 options exercisable
at $3.50 per share, 24,000 options at $4.00 per share and 12,000 options at
$3.00 per share. No Plan Options issued pursuant to the Fiscal 1998 Plan have
been exercised.(See "Certain Transactions.")
38
<PAGE>
Transfer, Option and Warrant Agent
----------------------------------
The transfer agent for the Common Shares and Warrants is United Stock
Transfer, Englewood, Colorado.
Plan of Distribution
--------------------
Common Shares acquired through conversion of the "D" Preferred Shares may
be sold from time to time by the holders thereof or their pledgees or donees.
Such sales may be made on Nasdaq or in negotiated transactions, at prices and on
terms then prevailing or at prices related to the then current market price or
at negotiated prices. The Common Shares may be sold by means of (a) purchases by
a broker or dealer as principal and resale by such broker or dealer for its
account pursuant to the Prospectus and/or (b) ordinary brokerage transactions
and transactions in which the broker solicits purchasers. In effecting sales,
brokers or dealers engaged by holders may arrange for other brokers or dealers
to participate. Brokers or dealers will receive commissions or discounts from
the holders in amounts to be negotiated immediately prior to the sale which
amounts will not be greater than that normally paid in connection with ordinary
trading transactions.
The Company will not receive any proceeds from the sale of securities by
Holder upon conversion of its shares. Common Shares may be sold from time to
time by the Selling Securityholder or its pledgees or donees.
Shares Eligible for Future Sale
-------------------------------
In general, under Rule 144, as currently in effect, a person (or persons
whose Shares are aggregated), including a person who may be deemed to be an
"affiliate" of the Company as that term is defined under the Securities Act,
will be entitled to sell within any three-month period a number of Shares
beneficially owned for at least one year that does not exceed the greater of (i)
one (1%) percent of the then outstanding Common Shares, or (ii) the average
weekly trading volume in the Shares during the four calendar weeks preceding
such sale. Sales under Rule 144 are also subject to certain requirements as to
the manner of sale, notice and the availability of current public information
about the Company. However, a person who is not deemed to have been an affiliate
of the Company during the 90 days preceding a sale by such person, and who has
beneficially owned Common Shares for at least three (3) years, may sell such
Shares without regard to the volume, manner of sale or notice requirements of
Rule 144.
The Company cannot predict the effect, if any, that sales of Common Shares
pursuant to Rule 144 or otherwise, or the availability of such shares for sale,
will have on the market price prevailing from time to time. Nevertheless, sales
by selling stockholders of substantial numbers of Common Shares in the public
market could adversely affect prevailing market prices for the Common Shares. In
addition, the availability for sale of a substantial number of Shares acquired
through the exercise of options under the 1996 or 1998 Plan could adversely
affect prevailing market prices for the Shares. (See "Risk Factors--Restricted
Resale of Securities.")
39
<PAGE>
Commission Position on Indemnification for Securities Act Liabilities
---------------------------------------------------------------------
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the Company's certificate of incorporation, by-laws or provisions of
the New York Business Corporation Law, the Company has been advised that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Company of expenses incurred or paid by a
director, officer or controlling person in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Company will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
LITIGATION
The Company is awaiting a judicial determination of the entitlement to
common shares by the estate of Robert Friedenberg, a former stockholder of two
companies the purchase of which the Company rescinded. A jury has determined in
favor of the Company on two of three fraud claims against the estate and has
awarded the Company $300,000 in damages. The judge is bound by the jury verdict.
In June, 1995, the Company filed a lawsuit against Jackson Morris, Esq. for
breach of the attorney-client relationship and of his fiduciary duty to the
Company for subsequently providing legal services to Dr. Friedenberg in his
dispute with the Company. 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.
No other legal proceedings are pending to which the Company or any of its
property is subject, nor to the knowledge of the Company are any other legal
proceedings threatened.
LEGAL MATTERS
The validity of the securities offered by the Prospectus is being passed
upon for the Company by Joel Pensley, Esq., 276 Fifth Avenue, New York, New York
10023. Joel Pensley is the owner of 35,000 Common Shares, 20,000 options issued
under the Fiscal 1996 Plan and 20,000 options under the Fiscal 1998 Plan.
EXPERTS
The audited consolidated financial statements of the Company as of April
30, 1997 included in the Prospectus and elsewhere in the Registration Statement
have been audited by Thomas P. Monahan, CPA, an independent public accountant,
as indicated in his report with respect thereto, and are included herein in
reliance upon the authority of Thomas P. Monahan, CPA as an expert in accounting
and auditing and in giving said reports.
On August 29, 1997, the Board of Directors of the Registrant appointed the
firm of Richard A. Eisner & Co., LLP as independent auditors for the fiscal year
ending April 30, 1998.
40
<PAGE>
There were no disagreements on any matters of accounting principles or
practices, financial statement disclosure, or auditing scope or procedures in
connection with audits of the Company's financial statements for the fiscal
years ended April 30, 1995, 1996 and 1997 which disagreements, if not resolved
to their satisfaction, would have caused Mr. Monahan to issue an adverse opinion
or a disclaimer of opinion, or were qualified or modified as to uncertainty,
audit scope or accounting principles.
ADDITIONAL INFORMATION
The Company has filed with the Commission, the Registration Statement on
Form SB-2 under the Securities Act with respect to the securities offered
hereby. The Prospectus, which constitutes part of the Registration Statement,
does not contain all of the information set forth in the Registration Statement
and the exhibits and schedules thereto. For further information with respect to
the Company and the securities offered hereby, reference is made to the
Registration Statement and the exhibits filed therewith. Statements contained in
the Prospectus as to the contents of any contract or any other document referred
to are not necessarily complete. In each instance reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement or otherwise filed with the Commission, each such statement being
qualified in all respects by such reference. The Registration Statement and the
exhibits and schedules thereto may be inspected without charge at the principal
offices of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and
copies of such material can be obtained from the Public Reference Section of the
Commission at prescribed rates. The Registration Statement and exhibits may also
be inspected a the Commission's regional offices at 500 West Madison Street,
Suite 1400, Chicago, Illinois and at 7 World Trade Center, Suite 1300, New York,
New York 10048. The Commission also maintains a World Wide Web site on the
Internet that contains copies of reports, proxy and information statements and
other information regarding registrants that file electronically on the
Commission's Electronic Data Gathering Analysis and Retrieval system ("EDGAR"),
including the Company, at http://www.sec.gov.
The Company's fiscal year ends on April 30. The Company distributes to its
stockholders annual reports containing audited financial statements with a
report therein by independent public accountants after the end of each fiscal
year. In addition, the Company furnishes to its stockholders quarterly reports
for the first three quarters of each fiscal year containing unaudited financial
statements and other information after the end of each fiscal quarter, upon
written request to the Secretary of the Company or otherwise as required by law.
41
<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.
/s/Thomas P. Monahan
Thomas P. Monahan, CPA
May 28, 1997
Paterson, New Jersey
F-1
<PAGE>
AMERICAN BIO MEDICA CORPORATION
BALANCE SHEET
April 30, January 31,
1997 1998
(Unaudited)
------------- -------------
Assets
Current assets
Cash and cash equivalents $ 1,762,506 $ 303,939
Marketable securities,
available for sale 1,053,000 1,899,609
Accounts receivable 337,759 1,132,918
Loan receivable 102,250 142,000
Inventory 668,723 936,858
Prepaid expenses 4,425 13,819
------------- -------------
Current assets 3,928,663 4,429,143
Fixed assets-net 110,834 137,409
Other assets
License rights 38,470
Patent costs 28,783 39,077
------------- -------------
Total other asset 67,253 39,077
------------- -------------
Total assets $ 4,106,750 $ 4,605,629
============= =============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and
accrued expenses $ 380,155 $ 142,449
------------- -------------
Total current liabilities 380,155 142,449
Capital stock
Common stock
-authorized 30,000,000
common shares, par value
$.01 per share, at April 30,
1997 and January 31, 1998
the common shares outstanding
were 13,379,507 and 13,921,846
respectively. 133,795 139,218
Preferred stock
-authorized 5,000,000
preferred shares, par value
$.01 per share, at April 30,
1997 and January 31, 1998 the
number of preferred shares
outstanding was 90 and 105.5
respectively 1 2
Additional paid in capital 6,499,791 7,858,882
Retained earnings (2,906,992) (3,534,922)
------------ -------------
Total stockholders' equity 3,726,595 4,463,180
------------ -------------
Total liabilities
and stockholders' equity $ 4,106,750 $ 4,605,629
============ =============
See accompanying notes to financial statements.
F-2
<PAGE>
AMERICAN BIO MEDICA CORPORATION
STATEMENT OF OPERATIONS
For the For the For the three For the three
year ended year ended months ended months ended
April 30, April 30, January 31, January 31,
1996 1997 1997 1998
(Unaudited) (Unaudited)
----------- ----------- ------------ ------------
Revenue $ 158,105 $ 610,876 $ 381,914 $ 500,224
Less cost of
goods sold 96,444 259,862 124,643 174,023
----------- ----------- --------- ---------
Gross profit 61,661 351,014 257,271 326,201
Operations:
General and
administrative 518,826 867,903 247,456 934,720
Depreciation and
amortization 77,600 96,134 49,490 24,673
Research and
development 358,844 74,978 8,228 47,614
-------- ------- ------- --------
Total expenses 955,270 1,039,015 305,174 1,007,007
Income (loss) from
operations (893,609) ( 688,001) ( 47,903) (680,806)
Other income and
expenses
Retirement of debt 126,500
Interest income 356 56,180 2,259 15,892
Interest expense (103,205)
-------- ------- -------- --------
Total other income
and expenses (102,849) 182,680 2,259 15,892
-------- ------- -------- --------
Net Profit (Loss)
from operations $(996,458) $(505,321) $ ( 45,644) $ (664,914)
========= ========== =========== ===========
Net income (loss)
per share $( .08) $( .04) $(.00) $(.05)
========= ========= ========= =========
Weighted number of
shares outstanding 12,528,266 12,728,180 13,718,265 13,737,781
========== ========== ========== ==========
See accompanying notes to financial statements.
F-3
<PAGE>
AMERICAN BIO MEDICA CORPORATION
STATEMENT OF OPERATIONS
For the nine For the nine
months ended months ended
January 31, January 31,
1997 1998
(Unaudited) (Unaudited)
------------ ------------
Revenue $ 430,501 $ 1,773,948
Less cost of
goods sold 150,421 675,361
------------ ------------
Gross profit 280,080 1,098,587
Operations:
General and
administrative 583,569 1,676,196
Depreciation and
amortization 72,490 73,346
Research and
development 74,978 96,766
------------ ------------
Total expenses 731,037 1,846,308
Income (loss) from
operations (450,957) (747,721)
Other income and
expenses
Retirement of
debt 126,500
Interest income 3,595 119,791
------------ ------------
Total other income
and expenses 130,095 119,791
------------ ------------
Net Profit (Loss)
from operations $ (320,862) $ (627,930)
============ ============
Net income (loss)
per share $(.02) ($.05)
============ ============
Weighted number of
shares outstanding 13,718,265 13,737,781
============ ============
See accompanying notes to financial statements.
F-4
<PAGE>
AMERICAN BIO MEDICA CORPORATION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For
the nine For the nine
For the year For the year
months ended months ended
ended ended
January 31, January 31,
April 30, April 30,
1997 1998
1996 1997
Unaudited Unaudited
-------- --------
- ------------ -----------
<S> <C> <C> <C>
<C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net profit (loss) $(996,458) $(505,321)
$(320,862) $(627,930)
Retirement of debt
(126,500)
Amortization and depreciation 77,600 96,134
72,490 73,346
Consulting fees 306,250
Compensation agreement 125,000
50,000
Retirement of debt (Note 9) (126,500)
126,500
Adjustments to reconcile net income to net cash
Loan receivable (102,250)
Accounts receivable 38,079 (303,259)
(301,342) (795,159)
Inventory 5,250 (646,422)
(247,726) (268,135)
Prepaid expenses 15,089 (4,425)
(4,425) (9,395)
Loan receivable
(100,000) ( 39,750)
Accounts payable (30,828) 346,907
149,289 237,705)
-------- -------
- ------- --------
TOTAL CASH FLOWS FROM OPERATIONS (460,018) (1,245,136)
(879,076)(1,904,728)
CASH FLOWS FROM FINANCING ACTIVITIES
Convertible debenture 693,000 (132,000)
(132,000)
Notes payable (89,289)
Sale of stock 150,000 3,877,686
3,983,436 1,364,515
Issuance of stock for services 61,006
------ ---------
- --------- -------
TOTAL CASH FLOWS FROM FINANCING ACTIVITIES 814,717 3,745,686
3,851,436 1,364,515
CASH FLOWS FROM INVESTING ACTIVITIES
Investment short term (1,053,000)
(1,021,867) ( 864,609)
Patent costs (7,783) (
2,725) ( 22,652)
Capital assets (114,793) (
82,734) ( 49,093)
---------
- ---------- ------
TOTAL CASH FLOWS FROM INVESTING ACTIVITIES (1,175,576)
(1,107,326) ( 918,354)
NET INCREASE (DECREASE) IN CASH 354,699 1,324,974
1,865,034 (1,458,567)
CASH BALANCE BEGINNING OF PERIOD 82,833 437,532
------ -------
- ---------- ---------
CASH BALANCE END OF PERIOD $437,532 $1,762,506
$2,302,566 $ 303,939
======== ==========
========== =========
See accompanying notes to financial statements.
</TABLE>
F-5
AMERICAN BIO MEDICA CORPORATION
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Common Common Preferred Preferred Paid in Retained
Date Stock Stock Shares Shares Capital Earnings
Total
---- ------- ------ --------- --------- -------- --------
--------
<S> <C> <C> <C> <C> <C> <C>
<C>
04-30-1994 11,238,174 $112,382 $ 726,294
$(1,099,885) $(261,209)
10-18-1995(1) (3,000,000) (30,000) 30,0000
4-30-1995
(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
06-04-1996(2) 11,333 113 8,387
8,500
06-04-1996(9) 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 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
(505,321) (505,321)
---------- -------- ------ ------ ------------
- ------------ -----------
04-30-1997 13,379,507 $133,795 $ 1 $ 1 $6,499,791
$(2,906,992) $3,726,595
UNAUDITED
07-31-1997(13) 301,120 3,011 (3,011)
10-31-1997 (1) (1) 1
10-31-1997(12) 10,000 100 29,900
30,000
10-31-1997(13) 102,914 1,029 (1,029)
10-31-1997(14) 105.5 2 949,598
949,600
01-31-1998(12) 128,305 1,283 383,632
384,915
01-31-1997 Net loss
(627,930) (627,930)
---------- --------- ------ ------- ------------
- ------------ -----------
01-31-1998 13,921,846 $ 139,218 105.5 $ 2 $ 7,858,882
$(3,534,922) $4,463,180
========== ========= ======= ======= ============
============ ===========
</TABLE>
F-6
<PAGE>
(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 150 Convertible "A" Preferred Shares.
(12) Common shares issued upon exercise of warrants.
(13) Conversion of convertible Convertible "A" Preferred Shares into common
shares.
(14) Sale of 60 Convertible "B" Preferred Shares and 45.5 Convertible "C"
Preferred Shares.
See accompanying notes to financial statements.
F-7
<PAGE>
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED APRIL 30, 1997
AND THE NINE MONTHS ENDED JANUARY 31, 1998 (UNAUDITED)
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 primarily in the business of acquiring, developing and
marketing biomedical technologies and products. The Company manufactures and
sells tests for screening drugs of abuse, a workplace screening test and a
preliminary test for use by laboratories and owns additional technologies which
it plans to develop and market in the future.
The Company was considered to be a development stage company with little
operating history subsequent to the commencement of development of its
biomedical technologies which are, at present, its core business. These
activities have been funded through the sale of convertible debentures which
were subsequently converted to Common Shares, the exercise of warrants and
options and the sale of convertible preferred shares. The Company is in full
scale commercial production of its drug test kits and has what management
maintains are adequate resources to fund its operations; and is thus no long
considered to be a development stage company.
F-8
<PAGE>
c. Issuance of Securities
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 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 100,000 Common Shares under Rule
504 of the Securities Act of 1933, as amended at $.50 per share for an aggregate
consideration of $50,000.
As of September 30, 1996, the Company sold 150 Series "A" Convertible
Preferred Shares for an agregate consideration of $1,500,000. (All of the Series
"A" Convertible Preferred Shares have been converted into 633,073 Common
Shares.)
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 30, 1997, 697,445 nonstatutory options were exercised for an
aggregate consideration of $2,092,186.
As of October 31, 1997, the Company sold 10,000 Common Shares through the
exercise of 10,000 options for an aggregate consideration of $30,000 or $3.00
per share.
As of January 31, 1998. the Company sold 60 "B" Preferred Shares and 45.5
"C" Preferred Shares at $10,000 per share for an aggregate of $1,055,500 less
commissions of $93,500.
As of January 31, 1998, option and warrant holders exercised 128,305
options and warrants for an aggregate consideration $384,915 ($3.00 per share).
F-9
<PAGE>
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 unaudited balance sheet dated January 31, 1998 and the related
statements of operations, retained earnings and cash flows for the years ended
April 30, 1996 and 1997 and the related unaudited statements of operations,
retained earnings and cash flows for the nine months and three months ended
January 31, 1997 and 1998.
b. Earnings per Share
Primary earnings per share are based on the weighted average number of
common and dilutive common equivalent shares outstanding during each quarter.
The weighted average shares for computing primary earnings per share were
13,718,265 and 13,737,781 for the quarters ended January 31, 1997 and 1998,
respectively
c. Revenue Recognition
Revenue is recognized when merchandise is shipped.
d. Organization Expense
The cost of organizing the Company was charged to operations on a straight
line basis over a five year period.
e. Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments
with a maturity of three months or less. Excess cash balances are primarily
invested in U.S. treasury bills with lesser amounts invested in high quality
commercial paper and time deposits.
f. Research and Development Expenses
Research and development costs are charged to operations when incurred.
g. Patents and License Agreements
Certain costs incurred to acquire exclusive licenses of patentable
technology are capitalized and amortized over a five year period or the term of
the license, whichever is shorter. The portion of these amounts determined to be
attributable to patents is amortized over their remaining lives and the
remainder is amortized over the estimated period of benefit but not more than 40
years.
F-10
<PAGE>
h. Concentration of Credit Risk
The Company sells its products primarily to United States distributors
(which resell to end-users in the United States and abroad) and to end-users in
the United States. 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.
i. Stock Options
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its stock options. Under APB 25, because the
exercise price of the Company's employee stock options is not less than the fair
value of the underlying stock on the date of grant, no compensation was recorded
j. Unaudited Financial Information
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments (consisting only of normal recurring items)
necessary to present fairly the financial position of the Company as of January
31, 1998. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission (the "Commission"). The results of
operations for the periods presented are not necessarily indicative of the
results to be expected for the full year.
F-11
<PAGE>
Note 3 - Marketable Securities, Available for Sale
The Company has 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 January
31, 1998, the Company had no investments that were classified as trading or
held-to-maturity as defined by the Statement.
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, 1997 January 31, 1998
-------------- ----------------
Books held for resale $ 43,528 $ 13,517
Workplace drug screening tests:
Raw materials 292,456 365,682
Work in process 183,500 205,115
Finished Goods 149,239 352,544
---------- ----------
Total workplace drug screening
tests: $ 625,195 $ 923,341
---------- ----------
Total inventory $ 668,723 $ 936,858
========== ==========
b. Property, equipment and leasehold improvements consist of the following:
April 30, 1997 January 31, 1998
-------------- ----------------
Office equipment $ 45,702 $ 55,882
Manufacturing and warehouse equipment 87,666 124,901
---------- ----------
Total 133,368 180,783
Less accumulated depreciation (22,534) ( 43,374)
---------- ----------
Total $ 110,834 $ 137,409
========== ==========
F-12
<PAGE>
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
========== ==== ==== ===========
The following is a summary of cash, cash equivalents and available-for-sale
securities by balance sheet classification at January 31, 1998:
Estimated
Gross Gross Fair
Unrealized Unrealized Market
Cost Gains Losses Value
--------- ------------- ----------- -----------
Cash $ 303,939 $-0- $-0- $ 303,939
Certificates of deposit
90 days and less -0- -0- -0- -0-
----------- -------------- ----------- -----------
Total cash and cash
equivalents $ 303,939 $-0- $-0- $ 303,939
=========== =============== =========== ===========
Marketable Securities
Due in one year or
less Certificates of
Deposit $ 1,899,609 $-0- $-0- $ 1,899,609
=========== =============== =========== ===========
F-13
<PAGE>
Note 5 - Related Party Transaction
a. Nonstatutory Option Plans
In June, 1996, the Company adopted its Fiscal 1996 Nonstatutory Stock
Option Plan (the "1996 Plan"). Options to purchase 2,000,000 Common Shares were
included in the 1996 Plan. 1,957,000 options have been issued. Shares have been
reserved for the exercise of all options under the 1996 Plan. All Nonstatutory
Options which the Company has issued are exercisable for a period of three years
at $3.00 per share.
In June, 1997, the Company adopted the Fiscal 1998 Nonstatutory Stock
Option Plan (the "1998 Plan"). Options to purchase 1,000,000 Common Shares are
included in the 1998 Plan. In June, 1997, 200,000 options were issued under the
1998 Plan. 150,000 options are exercisable at $3.00 per share and 50,000 options
are $3.50 per share.
b. Employment Agreement with Jay Bendis
On November 3, 1995, the Company entered into a three year employment
agreement with Jay Bendis, Vice-President-Marketing and Sales. Under this
agreement, Mr. Bendis received an annual salary of $24,000 per year until April
30, 1996 and $48,000 per year until the Company generated an aggregate of
$500,000 gross revenues from the sale of biomedical products. Mr. Bendis' salary
is presently $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 in excess 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 were held by the Company for vesting as
follows:
100,000 shares upon the Company achieving $1,000,00 in gross revenues from
sales of biomedical products (these shares have vested);
100,000 shares upon the Company achieving $2,000,00 in gross revenues from
sales of biomedical products;
100,000 shares upon the Company achieving $3,000,00 in gross revenues from
sales of biomedical products;
100,000 shares upon the Company 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 nor will 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, participate in stock option or similar plans or other benefits
offered generally to Management employees and reimbursement of out-of-pocket
expenses.
F-14
<PAGE>
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 $48,000 per year until the Company generated an aggregate of
$500,000 gross revenues from the sale of biomedical products. Mr. Jaskiewicz'
salary is presently $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 in excess
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, participate 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, $60,000 per
year until the Company generated an aggregate of $500,000 gross revenues from
the sale of biomedical products. Mr. Cipkowski's salary is presently $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 in excess 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. Cipkowski also is
entitled to receive health insurance, participate in stock option or similar
plans or other benefits offered generally to Management employees and
reimbursement of out-of-pocket expenses.
e. Employment Agreement with Douglas Casterlin
On May 15, 1997, the Company entered into a three year employment agreement
with Douglas Casterlin, Vice President and General manager. Under this
agreement, Mr. Casterlin receives an annual salary of $84,000 per year, and a
bonus equal to 1.0% of net sales of the Company and is entitled to receive
health insurance, participate in stock option programs or similar benefit
programs generally offered to management or employees. Pursuant to his
employment agreement, in June, 1997, Mr. Casterlin received 150,000 nonstatutory
options exercisable at $3.00 for a period of three years.
F-15
<PAGE>
Note 6 - Preferred Shares
a. Private Placement of Convertible A Preferred Shares
The Company sold 150 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. The Series A Preferred
Shares were converted into an aggregate of 633,073 Common Shares.
c. Private Placement of Series B and Series C Convertible Preferred Shares
In September, 1997, the Company sold 60 8% Series B Convertible Preferred
Shares, 45.5 Shares of Series C Convertible Preferred Shares at $10,000 each for
an aggregate gross consideration of $1,055,000 and net proceeds of $961,500.
Note 7 - 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, 1997 and January 31, 1998,
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 January 31, 1998, the Company had net operating loss carry forwards for
income tax purposes of $3,534,922. 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%.
F-16
<PAGE>
The components of the net deferred tax asset as of January 31, 1998 were as
follows:
Deferred tax asset:
Net operating loss carry forward $ 1,201,873
Valuation allowance $ (1,201,873)
---------
Net deferred tax asset $ -0-
The Company recognized no income tax benefit from the loss generated in the
year ended April 30, 1997 and for the nine months ended January 31, 1998. 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 8 - Commitments and Contingencies
a. Lawsuits
The Company is awaiting a judicial determination of the entitlement to
common shares by the estate of Robert Friedenberg, a former stockholder of two
companies the purchase of which the Company rescinded. A jury has determined in
favor of the Company on two of three fraud claims against the estate and has
awarded the Company $300,000 in damages. The judge is bound by the jury verdict.
In June, 1995, the Company filed a lawsuit against Jackson Morris, Esq. for
breach of the attorney-client relationship and of his fiduciary duty to the
Company for subsequently providing legal services to Dr. Friedenberg in his
dispute with the Company. 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.
b. 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 and/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.
F-17
<PAGE>
c. Nonstatutory Option Plans
The Company has adopted the Fiscal 1996 Nonstatutory Stock Option Plan (the
"1996 Plan") and the Fiscal 1998 Nonstatutory Stock Option Plan (the "1998
Plan"). 2,000,000 Common Shares were reserved under the 1996 Plan and 1,000,000
options under the 1998 Plan. Both plans are administered by the Option Committee
of the Board of Directors.
Stock options under the Plan may be granted to employees, officers,
directors, consultants of the Company or any other parties who have made a
significant contribution to the business and success of the Company. The
exercise price under the Plan may be more, equal to or less than the then
current market price of the Common Shares as deemed to be appropriate. All
Nonstatutory Options are exercisable for a period of three years at $3.00 per
share.
As of October 31, 1997, the Company had issued 1,957,000 options under the
1996 Plan and 150,000 options under the 1998 Plan. All options were exercisable
at $3.00 per share for a period of three years.
As of October 31, 1997, 697,445 nonstatutory stock options had been
exercised under the 1996 Plan for an aggregate consideration of $2,092,186.
Following is a further breakdown of the options outstanding under the
1996 and 1998 Plans as of January 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
WEIGHTED AVERAGE
REMAINING
EXERCISE PRICE OF
RANGE OF EXERCISE OPTIONS CONTRACTUAL LIFE WEIGHTED AVERAGE
OPTIONS OPTIONS
PRICE OUTSTANDING IN YEARS EXERCISE PRICE
EXERCISABLE EXERCISABLE
----- ----------- -------- --------------
- ----------- -----------------
<S> <C> <C> <C>
<C> <C>
$3.00 802,555 1.25 $3.00
802,555 $3.00
3.00 457,000 2.25 3.00
457,000 3.00
3.00 150,000 2.50 3.00
150,000 3.00
3.50 50,000 2.75 3.50
50,000 3.50
--------- ---- -----
- --------- -----
1,331,250 2.31 $3.12
1,331,250 $3.13
</TABLE>
F-18
<PAGE>
Adjusted pro forma information regarding net income is required by SFAS
123, and has been determined as if the Company had accounted for its employee
stock options under the fair value method of that Statement. The fair value for
these options was estimated at the date of grant using the Black-Scholes method
for option pricing with the following weighted-average assumptions for both 1996
and 1997: risk-free interest rates of 6%; volatility of 50%; dividend yields of
0%; and an expected life of the option of six years.
For purposes of adjusted pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. The
Company's adjusted pro forma information follows:
Years Ended Nine Months Ended
April 30, January 31
1996 1997 1997 1997
----------- ----------- ----------- -----------
Adjusted pro forma
net income $ (996,458) $ (505,321) $ (320,862) $ (667,212)
Adjusted pro forma
net income per share $ (0.08) $ (0.05) $ (.02) $ (.05)
The pro forma effects on net income for 1996 and 1997 is not likely to be
representative of the effects on reported net income or loss in future years. In
management's opinion, existing stock option valuation models do not provide a
reliable single measure of the fair value of employee stock options that have
vesting provisions and are not transferable. In addition, option valuation
models require the input of highly subjective assumptions, including expected
stock price volatility. Changes in such subjective input assumptions can
materially affect the fair value estimate of employee stock options.
e. 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 9 - Secured Loan
In April, 1996, a potential obligation aggregating $126,500 to a 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.
F-19
<PAGE>
Note 10 - 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.
The Company sells its products primarily to distributors located in the
United States. 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. At January 31, 1998, two
customers accounted for 42.2% of accounts receivable.
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
realized any losses on its marketable securities.
Note 11 - Development Stage Company
The Company was considered to be a development stage company with little
operating history subsequent to the commencement of development of bio-medical
technologies which are, at present, its core business. The Company is in
commercial production of its drug test kits and has what management maintains
are adequate resources to adequately fund its continuing operations. The Company
is no longer considered to be a development stage Company.
Note 12 - Subsequent Events
In April, 1998, the Company issued 2,500 Series "D" Preferred Shares and
107,355 common share purchase warrants. for gross consideration fo $2,500,000
less commissions of 7.5%. Each Series "D" Preferred Share is convertible at the
lesser of (i) 95% of the "Market Price" (the average of the closing bid prices
of the Common Shares over any three trading days, selected by the holder in the
20 trading days immediately preceding the conversion date and 125% of the
closing price of $3.70, except that if the 10 day average closing bid price
ending on the Effective Date is greater than 125% of the closing price, the
maximum conversion price will be the price on the effective date, not to exceed,
in any case, 135% of the closing price. Each warrant entitles the holder to
purchase one Common Share at a price of $4.81 per share until April 24, 2001.
On April 1 , 1998, the Company leased 15,000 square feet office, warehouse
and manufacturing premises in Hudson, New York from a non-affiliated party for a
period of one year at a monthly rent of $3,750. The Company has the option to
extend the lease for an additional year.
Subsequent to the date of the financial statements, the "B" an "C"
Preferred Shares were converted into an aggregate of 393,143 Common Shares.
F-20
<PAGE>
AMERICAN BIO MEDICA CORPORATION
Part II
Information Not Required in Prospectus
Item 24. Indemnification of Directors and Officers
The New York Business Corporation Law provides for the indemnification of
the Company's officers, directors and corporate employees and agents under
certain circumstances as follows:
721 NONEXCLUSIVITY OF STATUTORY PROVISIONS FOR INDEMNIFICATION OF DIRECTORS
AND OFFICERS.
The indemnification and advancement of expenses granted pursuant to, or
provided by, this article shall not be deemed exclusive of any other rights to
which a director or officer seeking indemnification or advancement of expenses
may be entitled, whether contained in the certificate of incorporation or the
by-laws or, when authorized by such certificate of incorporation or by-laws, (i)
a resolution of shareholders, (ii) a resolution of directors, or (iii) an
agreement providing for such indemnification, provided that no indemnification
may be made to or on behalf of any director or officer if a judgment or other
final adjudication adverse to the director or officer establishes that his acts
were committed in bad faith or were the result of active and deliberate
dishonesty and were material to the cause of action so adjudicated, or that he
personally gained in fact a financial profit or other advantage to which he was
not legally entitled. Nothing contained in this article shall affect any rights
to indemnification to which corporate personnel other than directors and
officers may be entitled by contract or otherwise under law.
722 AUTHORIZATION FOR INDEMNIFICATION OF DIRECTORS AND OFFICERS.
(a) A corporation may indemnify any person, made, or threatened to be made, a
party to an action or proceeding other than one by or in the right of the
corporation to procure a judgment in its favor, whether civil or criminal,
including an action by or in the right of any other corporation of any type
or kind, domestic or foreign, or any partnership joint venture, trust,
employee benefit plan or other enterprise, which any director or officer of
the corporation served in any capacity at the request of the corporation,
by reason of the fact that he, his testator or intestate, was a director or
officer of the corporation, or served such other corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise in any
capacity, against judgments, fines, amounts paid in settlement and
reasonable expenses, including attorneys' fees actually and necessarily
incurred as a result of such action or proceeding, or any appeal therein,
if such director or officer acted, in good faith, for a purpose which he
reasonably believed to be in, or, in the case of service for any other
corporation or any partnership, joint venture, trust, employee benefit plan
or other enterprise, not opposed to, the best interests of the corporation
and, in criminal actions or proceedings, in addition, had no reasonable
cause to believe that his conduct was unlawful.
(b) The termination of any such civil or criminal action or proceeding by
judgment, settlement, conviction or upon a plea of nolo contendere, or its
equivalent, shall not in itself create a presumption that any such director
or officer did not act, in good faith, for a purpose which he reasonably
believed to be in, or, in the case of service for any other corporation or
any partnership, joint venture, trust, employee benefit plan or other
enterprise, not opposed to, the best interests of the corporation or that
he had reasonable cause to believe that his conduct was unlawful.
iv
<PAGE>
(c) A corporation may indemnify any person made, or threatened to be made, a
party to an action by or in the right of the corporation to procure a
judgment in its favor by mason of the fact that he, his testator or
intestate, is or was a director or officer of the corporation, or is or was
seeing at the request of the corporation as a director or officer of any
other corporation of any type or kind, domestic or foreign, of any
partnership, joint venture, trust, employee benefit plan or other
enterprise, against amounts paid in settlement and reasonable expenses,
including attorneys' fees, actually and necessarily incurred by him in
connection with the defense or settlement of such action, or in connection
with an appeal therein if such director or officer acted, in good faith,
for a purpose which he reasonably believed to be in, or, in the case of
service for any other corporation or any partnership, joint venture, trust,
employee benefit plan or other enterprise, not opposed to, the best
interests of the corporation, except that no indemnification under this
paragraph shall be made in respect of (1) a threatened action, or a pending
action which is settled or otherwise disposed of, or (2) any claim issue or
matter as to which such person shall have been adjudged to be liable to the
corporation. unless and only to the extent that the court on which the
action was brought, or, if no action was brought, any court of competent
jurisdiction, determines upon application that, in view of all the
circumstances of the case, the person is fairly and reasonably entitled to
indemnity for such portion of the settlement amount and expenses as the
court deems proper.
(d) For the purpose of this section, a corporation shall be deemed to have
requested a person to serve an employee benefit plan where the performance
by such person of his duties to the corporation also imposes duties on, or
otherwise involves services by, such person to the plan or participants or
beneficiaries of the plan; excise taxes assessed on a person with respect
to an employee benefit plan pursuant to applicable law shall be considered
fines; and action taken or omitted by a person with respect to an employee
benefit plan in the performance of such person's duties for a purpose
reasonably believed by such person to be in the interest of the
participants and beneficiaries of the plan shall be deemed to be for a
purpose which is not opposed to the best interests of the corporation.
723 PAYMENT OF INDEMNIFICATION OTHER THAN BY COURT AWARD.
(a) A person who has been successful, on the merits or otherwise, in the
defense of a civil or criminal action or proceeding of the character
described in section 722 shall be entitled to indemnification as authorized
in such section.
(b) Except as provided in paragraph (a), any indemnification under section 722
or otherwise permitted by section 721, unless ordered by a court under
section 724 (Indemnification of directors and officers by a court), shall
be made by the corporation, only if authorized in the specific case:
(1) By the board acting by a quorum consisting of directors who are not
parties to such action or proceeding upon a finding that the director
or officer has met the standard of conduct set forth in section 722 or
established pursuant to section 721, as the case may be, or,
v
<PAGE>
(2) If a quorum under subparagraph (1) is not obtainable or, even if
obtainable, a quorum of disinterested directors so directs;
(A) By the board upon the opinion in writing of independent legal
counsel that indemnification is proper in the circumstances
because the applicable standard of conduct set forth in such
sections has been met by such director or officer, or
(B) By the shareholders upon a finding that the director or officer
has met the applicable standard of conduct set forth in such
sections.
(c) Expenses incurred in defending a civil or criminal action or proceeding may
be paid by the corporation in advance of the final disposition of such
action or proceeding upon receipt of an undertaking by or on behalf of such
director or officer to repay such amount as, and to the extent, required by
paragraph (a) of section 725.
724 INDEMNIFICATION OF DIRECTORS AND OFFICERS BY A COURT.
(a) Notwithstanding the failure of a corporation to provide indemnification,
and despite any contrary resolution of the board or of the shareholders in
the specific case under section 723 (Payment of indemnification other than
by court award), indemnification shall be awarded by a court to the extent
authorized under section 722 (Authorization for indemnification of
directors and officers) and paragraph (a) of section 723. Application
therefore may be made, in every case, either
(1) In the civil action or proceeding in which the expenses were incurred
or the amounts were paid, or
(2) to the supreme court in a separate proceeding, in which case the
application shall set forth the disposition of any previous
application made to any court for the same or similar relief and also
reasonable cause for the failure to make application for such relief
in the action or proceeding in which the expenses were incurred or
other amounts were paid
(b) the application shall be made in such manner and form as may be
required by the applicable rules of court or, in the absence thereof, by
direction of a court to which it is made. Such application shall be upon notice
to the corporation. The court may also direct that notice by given at the
expense of the corporation to the shareholder and such other person as it may
designate in such manner as it may require.
(c) Where indemnification is sought by judicial action, the court may allow
a person such reasonable expenses, including attorneys' fees, during the
pendency of the litigation as are necessary in connection with his defense
therein, if the court shall find that the defendant has by his pleadings or
during the course of the litigation raised genuine issues of fact or law.
725 OTHER PROVISIONS AFFECTING INDEMNIFICATION OF DIRECTORS AND OFFICERS.
(a) All expenses incurred in defending a civil or criminal action or proceeding
which are advanced by the corporation under paragraph (c) of section 723
(Payment of indemnification other than by court award) or allowed by a
court under paragraph (c) of section 724 (Indemnification of directors and
officers by a court) shall be repaid in case the person receiving such
advancement or allowance is ultimately found, under the procedure set forth
in this article, not to be entitled to indemnification or, where
indemnification is granted, to the extent the expenses so advanced by the
corporation or allowed by the court exceed the indemnification to which he
is entitled.
vi
<PAGE>
(b) No indemnification, advancement or allowance shall be made under this
article in any circumstance where it appears:
(1) That the indemnification would be inconsistent with the law of the
jurisdiction of incorporation of a foreign corporation which prohibits
or otherwise limits such indemnification
(2) That the indemnification would be inconsistent with a provision of the
certificate of incorporation, a by-law, a resolution of the board or
of the shareholders, an agreement or other proper corporate action, in
effect at the time of the accrual of the alleged cause of action
asserted in the threatened or pending action or proceeding in which
the expenses were incurred or other amounts were paid, which prohibits
or otherwise limits indemnification; or
(3) If there has been a settlement approved by the court, that the
indemnification would be inconsistent with any condition with respect
to indemnification expressly imposed by the court in approving the
settlement.
(c) If any expenses or other amounts are paid by way of indemnification,
otherwise than by court order or action by the shareholders, the
corporation shall, not later than the next annual meeting of shareholders
unless such meeting is held within three months from the date of such
payment, and in any event, within fifteen months from the date of such
payment, mail to its shareholders of record at the time entitled to vote
for the election of directors a statement specifying the persons paid, the
amounts paid, and the nature and status at the time of such payment of the
litigation or threatened litigation.
(d) If any action with respect to indemnification of directors and officers is
taken by way of amendment of the by-laws, resolution of directors, or by
agreement, then the corporation shall, not later than the next annual
meeting of shareholders, unless such meeting is held within three months
from the date of such action, and, in any event, within fifteen months from
the date of such action, mail to its shareholders of record at the time
entitled to vote for the election of directors a statement specifying the
action taken.
(e) Any notification required to be made pursuant to the foregoing paragraph
(c) or (d) of this section by any domestic mutual insurer shall be
satisfied by compliance with the corresponding provisions of section one
thousand two hundred sixteen of the insurance law.
726 INSURANCE FOR INDEMNIFICATION OF DIRECTORS AND OFFICERS.
a) Subject to paragraph (b), a corporation shall have power to purchase and
maintain insurance:
(1) To indemnify the corporation for any obligation which it incurs as a
result of the indemnification of directors and officers under the
provisions of this article, and
(2) To indemnify directors and officers in instances in which they may be
indemnified by the corporation under the provisions of this article,
and
vii
<PAGE>
(3) To indemnify directors and officers in instances in which they may not
otherwise be indemnified by the corporation under the provisions of
this article provided the contract of insurance covering such
directors and officers provides, in a manner acceptable to the
superintendent of insurance, for a retention amount and for
coinsurance.
(b) No insurance under paragraph (a) may provide for any payment, other than
cost of defense, to or on behalf of any director or officer:
(1) if a judgment or other final adjudication adverse to the insured
director or officer establishes that his acts of active and deliberate
dishonesty were material to the cause of action so adjudicated, or
that he personally gained in fact a financial profit or other
advantage to which he was not legally entitled, or
(2) in relation to any risk the insurance of which is prohibited under the
insurance law of this state.
(c) Insurance under any or all subparagraphs of paragraph (a) may be included
in a single contract or supplement thereto. Retrospective rated contracts
are prohibited.
(d) The corporation shall, within the time and to the persons provided in
paragraph (c) of section 725 (Other provisions affecting indemnification of
directors or officers), mail a statement in respect of any insurance it has
purchased or renewed under this section, specifying the insurance carrier,
date of the contract, cost of the insurance, corporate positions insured,
and a statement explaining all sums, not previously reported in a statement
to shareholders, paid under any indemnification insurance contract.
(e) This section is the public policy of this state to spread the risk of
corporate management, notwithstanding any other general or special law of
this state or of any other jurisdiction including the federal government.
Item 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses payable by the Registrant in connection with the issuance and
distribution of the securities are estimated as follows:
Amount
-----
SEC Registration Fee $ 900
Printing and Mailing $ 1,000
Legal Fees and Expenses $10,000
Accounting Fees $ 4,500
Transfer Agent Fees $ 1,000
Miscellaneous $ 2,600
-------
Total $20,000
viii
<PAGE>
Item 26. RECENT SALES OF UNREGISTERED SECURITIES
The following unregistered securities have been issued by the Registrant:
The title and amount of securities issued and the aggregate offering price
or other consideration are as follows:
In February, 1996, the Registrant sold, through a private placement, 25,000
units (the "Units") pursuant to Rule 504 ("Rule 504") to the Securities Act of
1933, as amended, (the "Securities Act") consisting of an aggregate of 25,000
Common Shares, 500,000 "A" Warrants and 50,000 "B" Warrants for an aggregate
consideration of $25,000. (All "A" and "B' Warrants have been exercised.)
As of April 30, 1996, the Registrant issued 489,181 restricted Common
Shares in consideration for past services to five individuals in the amount of
$60,975 or an average consideration of $.125 per share.
As of April 30, 1996, the Registrant issued to OTC Communications 100,000
Common Shares under Rule 504 as consideration for financial consulting services
rendered per contract at a value of $.65 per share.
As of April 30, 1996, the Registrant issued to Riverside Consulting Group,
Inc. 25,000 common shares under Rule 504 in consideration for financial
consulting services of $12,500 at $.50 per share.
As of April 30, 1996, the Registrant issued an aggregate of 100,000 Common
Shares to two persons under Rule 504 valued at $.50 per share in consideration
for financial consulting services.
As of April 30, 1996, the Registrant authorized the issuance to OTC
Communications 550,000 restricted Common Shares, 500,000 shares as consideration
for financial consulting services rendered per contract and 50,000 as expense
reimbursement at a value of $178,750 or $.325 per share
From 1993 through 1996, the Registrant sold an aggregate of $1,417,000 of
12% convertible debentures, under Rule 504, the principal amount of each
debenture convertible at the option of the holder into Common Shares at $.75 per
share. (All such debentures have been converted at $.75 per share into 1,888,333
Common Shares.)
All the "A" Warrants issued as part of the Units have been exercised at
$.50 each into Common Shares and all the "B" Warrants issued as part of the
Units have been exercised at $1.00 each into Common Shares pursuant to Rule 504.
In September, 1996, the Registrant issued 150 Series A Preferred Shares to
Midland Walwyn Capital, Inc. for a total purchase price of $1,500,000. (The
Series A Preferred Shares were converted into an aggregate of 633,073 Common
Shares.)
In September, 1996, the Registrant issued 24,712 warrants to a
non-management consultant. Each warrant was exercisable into one Common Share
originally at $6.07 and subsequently adjusted to $3.00 for a period of two years
commencing the effective date of a registration statement relating to the
underlying Common Shares. (All such warrants have been exercised.)
In March, 1996, the Registrant issued to OTC Communications 500,000 Options
exercisable until March 14, 1999 at $1.00 per share and 500,000 Options
exercisable until March 14, 1999 at $2.00 per share.
ix
<PAGE>
1,500,000 Nonstatutory Options ("Plan Options") were issued pursuant to the
Fiscal 1996 Nonstatutory Stock Option Plan ("Fiscal 1996 Plan") 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; and four non-management employees and consultants, 225,000 options
each. Each Nonstatutory Option entitles the holder to purchase one Common Share
for $3.00 for a period of three years. In November, 1996, 131,000 options were
issued to two consultants, each option exercisable at $3.00 until November 12,
1999.
On April 30, 1997, the Registrant issued 20,000 Plan Options to Jay Bendis,
Executive-Vice-President and 252,000 Plan Options to 15 non-Management employees
and consultants pursuant to the Fiscal 1996 Plan. Each Plan Option entitles the
holder to purchase one Common Share for $3.00 for a period of three years.
As of October 31, 1997, the Registrant had issued 150,000 Plan Options to
Douglas Casterlin, Vice-President pursuant to the Fiscal 1998 Stock Option Plan
("Fiscal 1998 Plan"). Each Plan Option entitles the holder to purchase one
Common Share for $3.00 for a period of three years.
As of October 31, 1997, 697,445 Plan Options pursuant to the Fiscal 1996
Plan had been exercised for an aggregate consideration of $2,092,186.
On August 29, 1997, the Registrant issued 185,000 Plan Options pursuant to
the Fiscal 1996 Plan as follows: 10,000 to Jasper Clay, Jr., a Director, 10,000
to John F. Murray, a Director, and 165,000 options to 5 non-management
employees.
In September, 1997, the Registrant issued 60 Series B and 44.5 Series C
Preferred Shares to a total of 12 investors for a total purchase price of
$1,055,000. (The Series B and Series C Preferred Shares have been converted into
an aggregate of 393,143 Common Shares.)
Between September 1, 1997 and April 30, 1998, the Registrant issued 271,000
Plan Options pursuant to the Fiscal 1998 Plan exercisable for a period of three
years to 22 persons of which 12,000 options were exercisable at $3.00; 235,000
options at $3.50 and 24,000 options at $4.00.
Between November 1, 1997 and April 30, 1998, 36,605 Plan Options pursuant
to the Fiscal 1996 Plan were exercised for an aggregate consideration of
$109,815.
In April, 1998, the Registrant issued 2,500 Series "D" Preferred Shares and
100,000 common share purchase warrants to CC Investments LDC for gross
consideration fo $2,500,000 less commissions of 7.5%. Each Series D Preferred
Share is convertible at the lesser of (i) 95% of the "Market Price" (the average
of the closing bid prices of the Common Shares over any three trading days,
selected by the holder in the 20 trading days immediately preceding the
conversion date and 125% of the closing price of $3.70, except that if the 10
day average closing bid price ending on the Effective Date is greater than 125%
of the closing price, the maximum conversion price will be the price on the
effective date, not to exceed, in any case, 135% of the closing price. In
addition, the Registrant issued to Shoreline Pacific 7,355 warrants. Each
warrant entitles the holder to purchase one Common Share at a price of $4.81 per
share until April 24, 2001.
x
<PAGE>
The Common Shares underlying the Plan Options have been registered under
the Securities Act.
Exemption from registration of the issue of said securities is claimed
under Section 4(2) of the Securities Act. Neither the Issuer nor any person
acting on its behalf offered or sold the securities by means of any form of
general solicitation or general advertising. Prior to the making any offer, the
Registrant had reasonable grounds to believe and believed that each subscriber
was capable of evaluating the merits and risks of the prospective investment or
was able to bear the economic risk of the investment. Prior to making any sale,
the issuer had reasonable grounds to believe and believed that each subscriber
was capable of evaluating the merits and risks of the prospective investment or
was able to bear the economic risk of the investment.
Each purchaser represented in writing that he acquired the securities for
his own account. Except for the securities sold under Rule 504 (prior to the
Registrant's becoming a "reporting company"), the certificates of which bore no
restrictive legend, a legend was placed on each certificate stating that the
securities have not been registered under the Securities Act; and setting forth
the restrictions on their transferability and sale. Each purchaser signed a
written agreement that the securities will not be sold without registration
under the Securities Act or an exemption therefrom.
xi
<PAGE>
Item 27. EXHIBITS
Exhibits
Exhibit List
3.07 Fifth Amendment to Certificate of Incorporation
4.09 Specimen Certificate, Series D Preferred Stock*
4.10 Form of Securities Purchase Agreement between the Company and the
purchaser*
4.11 Form of Registration Rights Agreement by and among the Company, the
placement agent and the purchaser*
4.12 Form of Common Stock Purchase Warrant Certificate*
4.13 Form of Certificate of Designation of Series D Preferred Stock of the
Company*
5.05 Opinion and Consent of Joel Pensley, Esq.
23.10 Consent of Joel Pensley, Esq. (contained in wxhibit 5.5)
23.11 Consent of Thomas P. Monahan, CPA
*Previously submitted as exhibits to Form 8-K filed on April 30, 1998
Financial Statement Schedules: None
- --------------------------
xii
<PAGE>
Item 28. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned hereby undertakes:
(a) to file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) to include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after the
effective date of this Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this Registration Statement; and
(iii)to include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement
or any material change to such information in this Registration
Statement;
(b) that, for the purposes of determining any liability under said Act, each
such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof;
(c) to remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
the offering;
Subject to the terms and conditions of Section 15(d) of the Securities and
Exchange Act of 1934, the undersigned hereby undertakes to file with the
Securities and Exchange Commission such supplementary and periodic information,
documents, and reports as may be prescribed by any rule or regulation of the
Commission heretofore or hereafter duly adopted pursuant to its authority.
xiii
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Town of Ancramdale and State of New York on the 13th day of
May, 1998.
AMERICAN BIO MEDICA CORPORATION
(Registrant)
By: /s/Stan Cipkowski
------------------
Stan Cipkowski,
President and Principal
Executive Officer
By: /s/John F. Murray
--------------------
John F. Murray,
Treasurer and Principal
Financial Officer
Date: May 14, 1998
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated:
/s/Stan Cipkowski
- --------------------- Director May 14, 1998
Stan Cipkowski
/s/Edmund Jaskiewicz
- ---------------------
Edmund Jaskiewicz Director May 14, 1998
/s/Jay Bendis
- ---------------------
Jay Bendis Director May 14, 1998
/s/John F. Murray
- ---------------------
John F. Murray Director May 14, 1998
- ---------------------
Jasper R.Clay,Jr. Director
- ---------------------
Karen Russo Director
xiv
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF AMERICAN BIO MEDICA CORPORATION
THE UNDERSIGNED, Stan Cipkowski and Edmund Jaskiewicz, being the President
and Secretary of American Biomedica Corporation (the "Company"), hereby certify
that:
Article 1. The name of the Company is American Biomedica Corporation, originally
known as American Micro Media, Inc.
Article 2. The Certificate of Incorporation was filed by the Department of State
on the 10th day of April, 1986.
Article 3. The Certificate of Incorporation is amended to establish the
designations, powers, preferences and rights of the Series D Convertible
Preferred Stock of the Company. To effect the foregoing, the Certificate of
Incorporation is hereby amended by adding the following provisions to the end of
Article Fourth.
I. DESIGNATION AND AMOUNT
The designation (this "Certificate of Designation") of this series, which
consists of Four Thousand Five Hundred (4,500) shares of Preferred Stock of
American Bio Medica Corporation a New York corporation together with any
additional shares of Preferred Stock issued as a dividend or otherwise in
payment of obligations hereunder, not to exceed, in the aggregate Six Thousand
(6,000) shares, is the Series D Preferred Stock (the "Preferred Stock" or
"Preferred Shares") and the face amount per share shall equal One Thousand U.S.
Dollars ($1,000) (the "Face Amount").
II. DIVIDENDS.
A. General. The holders of the Preferred Stock shall be entitled to receive
cumulative dividends at the rate of eight percent (8%) of the Face Amount per
annum (the "Dividend"). Such cumulative Dividends shall be payable quarterly in
arrears within three Business Days of the last day of each April, July, October
and January, commencing July, 1998, in cash or additional Preferred Shares, at
the Company's option. Dividends on the Preferred Stock shall accrue and be
cumulative on a daily basis from the date of issuance (with appropriate
proration for any partial dividend period), whether or not earned and whether or
not in any dividend period there shall be surplus or net profits of the Company
legally available for the payment of such dividends.
B. Payment of Dividend in Preferred Shares. Should the Company elect to pay
accrued but unpaid Dividends in additional shares of Preferred Stock, the number
of Preferred Shares to which the Holder shall be entitled will be equal to the
aggregate cash value of such unpaid Dividends, divided by the Face Amount.
1
C. Dividend Adjustment. Following the Effective Date, if the average
Closing Bid Price of the Common Stock over any 20 consecutive trading days is
greater than 145% of the Closing Price, the Dividend will thereafter be reduced
from eight percent (8%) to five percent (5%) per annum, with appropriate
pro-ration for partial dividend periods.
III. CERTAIN DEFINITIONS
For purposes of this Certificate of Designation, the following terms shall
have the following meanings.
A. "Business Day" means any day other than a Saturday, Sunday or a day on
which banks in New York, New York are permitted or required by law to
be closed.
B. "Closing Bid Price" means, for any security as of any date, the
closing bid price of such security on the principal securities
exchange or trading market where such security is listed or traded as
reported by Bloomberg Financial Markets or a comparable reporting
service of national reputation selected by the Company and reasonably
acceptable to the Holders then holding a majority of the then
outstanding shares of Preferred Stock ("Majority Holders") if
Bloomberg Financial Markets is not then reporting closing bid prices
of such security (collectively, "Bloomberg"), or if the foregoing does
not apply, the last reported sale price of such security in the
over-the-counter market on the electron ic bulletin board of such
security as reported by Bloomberg, or, if no sale price is reported
for such security by Bloomberg, the average of the bid prices of any
market makers for such security as reported in the "pink sheets" by
the National Quotation Bureau, Inc. If the Closing Bid Price cannot be
calculated for such security on such date on any of the foregoing
bases, the Closing Bid Price of such security on such date shall be
the fair market value as mutually determined by the Company and the
Majority Holders, or, if they are unable to agree on such value, it
shall be determined by an investment banking firm selected by the
Company and reasonably acceptable to the Majority Holders, with the
costs of such appraisal to be borne by the Company.
C. Closing Date" means the date of the "First Closing" as defined in the
Securities Purchase Agreement.
D. "Closing Price" means the average Closing Bid Price of the Company's
Common Stock over the five (5) consecutive trading days immediately
preceding the Closing Date.
E. "Common Stock" means the common stock, $0.01 par value, of the
Company.
2
<PAGE>
F. "Conversion Price" means the lesser of (i) 95% of the Market Price and
(ii) 125% of the Closing Price, except that if the 10 day average
Closing Bid Price ending on the Effective Date (the "Effective Price")
is greater than 125% of the Closing Price, the maximum Conversion
Price will be such Effective Price, not to exceed, in any case, 135%
of the Closing Price.
G. "Effective Date" means the date the registration statement registering
the resale of the shares of Common Stock into which the Preferred
Shares are convertible is declared effective by the Securities and
Exchange Commission.
H. "Holders" means the initial Holders of the Preferred Stock and their
transferees.
I. "Market Price" means the average of the Closing Bid Prices of the
Common Stock over any 3 trading days, selected by the Holder, in the
20 trading days immediately preceding the Conversion Date.
J. "Material Adverse Change" means the occurrence of a material adverse
change or development in the business, properties, operations,
financial condition, results of operation or prospects of the Company.
K. "Registration Deadline" means the 90th day following the Closing Date.
L. "Securities Purchase Agreement" means the Securities Purchase
Agreement dated as of April 24, 1998, among the Company and the
purchaser named therein, as amended from time to time in accordance
with the terms thereof.
M. "Warrants" means certain stock purchase warrants to acquire shares of
Common Stock issued by the Company to the initial Holders in
connection with the transactions contemplated by the Securities
Purchase Agreement.
IV. CONVERSION
A. Conversion at the Option of Holder. Beginning on the earliest to occur
of (i) the Effective Date, (ii) the Registration Deadline, (iii) the occurrence
of any event or circumstance that, with the passing of time or the giving of
notice, would constitute a Redemption Event, and (iv) any Material Adverse
Change, each Holder may, at any time and from time to time convert any or all of
its shares of Preferred Stock into a number of fully paid and nonassessable
shares of Common Stock determined by dividing the aggregate Face Amount of the
Preferred Shares being converted by the Conversion Price. The Conversion Price
is subject to adjustment as provided in Article X.
3
<PAGE>
B. Mechanics of Conversion. To convert the Preferred Shares, a Holder
shall: (i) fax (or otherwise deliver by other means resulting in notice) a copy
of the fully executed Notice of Conversion in the form of Exhibit A hereto to
the Company and (ii) within three (3) Business Days surrender or cause to be
surrendered to the Company (or satisfy the provisions of Section XIII(A), if
applicable) the certificates representing the Preferred Stock being converted
(the "Preferred Stock Certificates") accompanied by duly executed stock powers
and the original executed version of the Notice of Conversion. The date of the
Company's receipt of the Notice of Conversion described in clause (i) shall be
the "Conversion Date".
C. Conversion Disputes. In the case of any dispute with respect to a
conversion, the Company shall promptly issue such number of shares of Common
Stock as are not disputed in accordance with the other provisions of this
Article IV. If such dispute involves the calculation of the Conversion Price,
the Company shall submit the disputed calculations to an independent accounting
firm of national standing, acceptable to Holder, via facsimile within two (2)
Business Days of receipt of the Notice of Conversion. The accounting firm shall
audit the calculations and notify the Company and the Holder of the results no
later than two (2) Business Days from the date it receives the disputed
calculations. The accounting firm' s calculation shall be deemed conclusive,
absent manifest error. The Company shall then issue the appropriate number of
shares of Common Stock in accordance with this Article IV.
D. Timing of Conversion. No later than the third Business Day following the
Conversion Date (the "Delivery Period"), provided that the Company has received
prior to such date the Preferred Stock Certificates (or the Holder has satisfied
the provisions of Section XIII(A), if applicable), the Company shall deliver to
the Holder (or at its direction) (x) that number of shares of Common Stock
issuable upon conversion of the number of Preferred Shares being converted and
(y) a certificate representing the number of Preferred Shares not being
converted, if any. The person or persons entitled to receive shares of Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder of such shares at the close of business on the Conversion Date and
such shares shall be issued at such time, unless the Notice of Conversion is
revoked as provided in Section IV(D). The Delivery Period shall be extended
until the Business Day following the date of delivery to the Company of the
Preferred Stock Certificates to be converted or satisfaction of the provisions
of Section XIII(A), if applicable.
4
<PAGE>
E. Revocation of Notice of Conversion. In addition to any other remedies
which may be available to the Holder, in the event the Company fails for any
reason to effect delivery to the Holder of certificates representing the shares
of Common Stock receivable upon conversion of the Preferred Shares (or, solely
as expressly permitted pursuant to Sections V(B) and V(E), to effect a Cash
Conversion (as defined below)) by the Business Day following the expiration of
the Delivery Period (which certificates shall be unlegended after the Effective
Date), the Holder may revoke the Notice of Conversion by delivering a notice to
such effect to the Company. Upon receipt by the Company of such a revocation
notice, the Company shall immediately return the subject Preferred Stock
certificates and other conversion documents, if any, delivered by Holder, to the
Holder, and the Company and the Holder shall each be restored to their
respective positions held immediately prior to delivery of the Notice of
Conversion; provided however, that the Company shall remain liable for payment
of the amounts determined pursuant to Section VI(A) hereof for each day falling
between the trading day following the Delivery Period and the date of the
revocation notice is received by the Company, and shall also remain liable for
any damages suffered by Holder.
F. Mandatory Conversion. Notwithstanding the other provisions of this
Article IV, if on or after the Effective Date the average closing bid price of
the Common Stock over any 20 consecutive trading days is equal to or greater
than 300% of the Closing Price, all outstanding Preferred Shares will be
automatically converted into shares of Common Stock at the lowest Conversion
Price in effect on such 20th trading day, so long as, on the date of conversion
and for the 10 consecutive trading days prior to such date, (i) the shares of
Common Stock issued pursuant to such mandatory conversion are (a) authorized and
reserved for issuance, (b) registered under the Securities Act of 1933, as
amended, for resale by the Holder subject to such conversion, and registered
under the Securities Exchange Act of 1934 and (c) eligible to be traded on
either the Nasdaq National Market System, the Nasdaq Small Cap Market, the New
York Stock Exchange, the American Stock Exchange, or any successor national
exchange, (ii) no event or circumstance has occurred that, with the giving of
notice or the passage of time, would constitute a Redemption Event (as defined
below), (iii) such conversion would not result in any Holder holding shares in
excess of the 4.9% Limitation (as defined below), and (iv) the Company has not
disclosed to the Holder any material non-public information about the Company.
The Company shall give the Holders three (3) Business Days' notice of any
mandatory conversion pursuant to this Section IV(F).
G. Maturity; Required Redemption. All Preferred Shares outstanding on the
third anniversary of the Closing Date will be redeemed on such date in cash
equal to the aggregate Face Amount thereof. To the extent that the Preferred
Shares are not so redeemed in cash on such date, the Holder may continue to
convert such Preferred Shares in accordance with the other terms of this
Certificate of Designation.
H. Stamp, Documentary and Other Similar Taxes. The Company shall pay all
stamp, documentary, issuance and other similar taxes which may be imposed with
respect to the issuance and delivery of the shares of Common Stock pursuant to
conversion of the Preferred Stock; provided that the Company will not be
obligated to pay stamp, transfer or other taxes resulting from the issuance of
Common Stock to any person other than the registered holder of the Preferred
Stock.
5
<PAGE>
I. No Fractional Shares. No fractional shares of Common Stock are to be
issued upon the conversion of Preferred Stock, but the Company shall pay a cash
adjustment in respect of any fractional share which would otherwise be issuable
in an amount equal to the same fraction of the Closing Bid Price on the
Conversion Date of a share of Common Stock; provided that in the event that
sufficient funds are not legally available for the payment of such cash
adjustment any fractional shares of Common Stock shall be rounded up to the next
whole number.
J. Electronic Transmission. In lieu of delivering physical certificates
representing the Common Stock issuable upon conversion, provided the Company's
transfer agent is participating in the Depository Trust Company ("DTC") Fast
Automated Securities Transfer program (the "FAST Program"), upon request of a
Holder who shall have previously instructed such Holder's prime broker to
confirm such request to the Company's transfer agent and upon the Holder's
compliance with Section IV(B), the Company shall use its commercially reasonable
efforts to cause its transfer agent to electronically transmit the Common Stock
issuable upon conversion to the Holder by crediting the account of Holder's
prime broker with DTC through its Deposit Withdrawal Agent Commission ("DWAC")
system. Subject to the foregoing, the Company will use its commercially
reasonable efforts to maintain the eligibility of its Common Stock for the FAST
Program.
K. Five Percent Holdings. Notwithstanding anything to the contrary
contained herein, the Preferred Stock shall not be convertible by a Holder to
the extent (but only to the extent) that, if convertible by such Holder, such
Holder, or any of its affiliates (as defined under Rule 12b-2 of the Securities
Exchange Act of 1934, as amended), would beneficially own in excess of 4.9% of
the shares of Common Stock (the "4.9% Limitation"). To the extent the foregoing
limitation applies, the determination of whether Preferred Stock shall be
convertible (vis-a-vis other securities owned by such Holder) and of which
Preferred Stock shall be convertible (as among shares of Preferred Stock) shall
be in the sole discretion of the Holder and submission of the Preferred Stock
for conversion shall be deemed to be the Holder' s determination of whether such
Preferred Stock is convertible (vis-a-vis other securities owned by such Holder)
and of which shares of Preferred Stock are convertible (as among shares of
Preferred Stock), subject to such aggregate percentage limitation. No prior
inability to convert Preferred Stock pursuant to this Section shall have any
effect on the applicability of the provisions of this Section with respect to
any subsequent determination of convertibility. For the purposes of this
Section, beneficial ownership and all determinations and calculations, including
without limitation, with respect to calculations of percentage ownership, shall
be made in accordance with Section 13(d) of the Securities Exchange Act of 1934,
as amended, and regulation 13D and G thereunder. The provisions of this Section
6
<PAGE>
may be implemented in a manner otherwise than in strict conformity with the
terms of this Section with the approval of the Board of Directors of the Company
and a Holder: (i) with respect to any matter to cure any ambiguity herein, to
correct this subsection (or any portion thereof) which may be defective or
inconsistent with the intended 4.9% beneficial ownership limitation herein
contained or to make changes or supplements necessary or desirable to properly
give effect to such 4.9% limitation; and (ii) with respect to any other matter,
with the further consent of the holders of majority of the then outstanding
shares of Common Stock. The Provisions of this Section may be waived by a Holder
upon ninety (90) days prior written notice from such Holder to the Company,
including, without limitation, a limited waiver to increase the 4.9% limit
herein contained to any other percentage specified by Holder. The limitations
contained in this Section shall apply to a successor Holder of Preferred Stock
if, and to the extent, elected by such successor Holder concurrently with its
acquisition of such Preferred Stock, such election to be promptly confirmed in
writing to the Company (provided no transfer or series of transfers to a
successor Holder or Holders shall be used by a Holder to evade the limitations
contained herein).
V. RESERVATION OF AUTHORIZED SHARES OF
COMMON STOCK; LIMITATION ON NUMBER OF
CONVERSION SHARES
A. Reservation of Common Stock. Subject to the provisions of this Article
V, the Company shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock, solely for the purpose of
effecting the conversion of the Preferred Stock and the exercise of the Warrants
a sufficient number of shares of Common Stock to provide for the conversion of
all outstanding Preferred Shares upon issuance of shares of Common Stock and the
exercise of all Warrants (the "Reserved Amount"). The Reserved Amount shall be
allocated among the Holders as provided in Section V(C). If the Reserved Amount
for any three (3) consecutive trading days (the last of such three (3) trading
days being the Authorization Trigger Date) is less than one hundred seventy-five
percent (175%) of the number of shares of Common Stock issuable on such trading
days upon conversion of the outstanding Preferred Stock and exercise of the then
outstanding Warrants (in each case without giving effect to any limitation on
conversion or exercise thereof) then the Company shall immediately notify the
Holders of such occurrence and shall immediately take all necessary action
(including stockholder approval to authorize the issuance of additional shares
of Common Stock) to increase the Reserved Amount to two hundred percent (200%)
of the number of shares of Common Stock issuable upon conversion of the
outstanding Preferred Stock and exercise of all outstanding Warrants (in each
case, without giving effect to any limitation on conversion or exercise
thereof).
7
<PAGE>
B. Limitation on Number of Common Shares to be Issued.
(i) Unless the Stockholder Approval (as defined below) is obtained, the
Company shall not be obligated to issue, in the aggregate, more than 2,745,000
shares of Common Stock upon conversion of the Preferred Shares (the "Common
Share Limit" ), such amount to be proportionally and equitably adjusted from
time to time in the event of stock splits, stock dividends, combinations,
reverse stock splits, reclassifications, capital reorganizations and similar
events relating to the Common Stock). If the Stockholder Approval has not been
obtained at any time that the Common Share Limit with respect to any Holder has
been reached, Notices of Conversion by such Holder shall be honored by payment
to such Holder of cash in an amount equal to the Closing Bid Price on the
trading day of delivery of the applicable Notice of Conversion multiplied by the
number of shares of Common Stock which would be issuable in satisfaction of the
applicable Notice of Conversion (such payment being referred to herein as a Cash
Conversion.
(ii) If the Stockholder Approval has been obtained at any time, the Company
shall have the right, subject to delivery of the notice required by Section V(E)
below, to honor any Notices of Conversion for shares of Common Stock in excess
of the Common Share Limit by (a) delivery of shares of Common Stock or (b) by
Cash Conversion.
C. Allocation of Reserved Amount, Common Share Limit. The Reserved Amount
and the Common Share Limit shall be allocated among the Initial Holders
according to the number of Preferred Shares issued to each such Holder on the
Closing Date. Any shares of Common Stock which were initially allocated to any
Holder remaining after such Holder no longer owns any Preferred Shares shall be
allocated among the remaining Holders pro rata, based on the number of Preferred
Shares then held by such Holders.
D. Share Authorization. The Company shall solicit by proxy the
authorization (the "Stockholder Approval") by the stockholders of the Company of
the issuance of shares of Common Stock upon conversion of shares of Preferred
Stock pursuant to the terms hereof and the exercise of the Warrants pursuant to
the terms thereof in the aggregate in excess of twenty (20) percent of the
outstanding shares of Common Stock and to eliminate any prohibitions under the
rules or regulations of any stock exchange, interdealer quotation system or
other self-regulatory organization with jurisdiction over the Company or any of
its securities on the Company's ability to issue shares of Common Stock in
excess of the Common Share Limit and use its commercially reasonable efforts to
obtain the Stockholder Approval no later than one hundred and twenty (120) days
following the date of the First Closing.
8
<PAGE>
E. Obligation to Notify. If the Company has not received the Stockholder
Approval by the date that is one hundred and twenty (120) days following the
First Closing, the Company shall, on or prior to such date, notify the Holders.
The Company shall immediately notify the Holders if, at any time, the
Stockholder Approval is obtained. Following receipt of Stockholder Approval, the
Company shall have the right, by notice to all of the Holders not less than five
(5) Business Days prior to the first day of any month, to elect to honor all
Notices of Conversion solely by Cash Conversion (and not by delivery of Common
Stock) during such month. Each such notice (a "Notice of Cash Conversion") shall
be effective only with respect to the single month designated therein, and shall
specify, as of the date of delivery of such notice, the unissued portion of the
Common Share Limit of the Holder to whom such notice is being delivered.
VI. FAILURE TO CONVERT
A. Conversion Defaults. If, at any time, (x) the Conversion Date has
occurred and the Company fails for any reason to deliver, on or prior to the
second Business Day following the expiration of the Delivery Period for such
conversion (said period of time being the "Extended Delivery Period"), such
number of shares of Common Stock to which such Holder is entitled upon such
conversion, or (y) the Company provides notice (including by way of public
announcement) to any Holder at any time of its intention not to issue shares of
Common Stock upon exercise by any Holder of its conversion rights in accordance
with the terms of this Certificate of Designation (other than because such
issuance would exceed such Holder's allocated portion of the Reserved Amount)
(each of (x) and (y) being a "Conversion Default"), then the Company shall pay
to the affected Holder, in the case of a Conversion Default described in clause
(x) above, and to all Holders, in the case of a Conversion Default described in
clause (y) above, an amount equal to 1% of the Face Amount of the Preferred
Stock with respect to which the Conversion Default exists (which amount shall be
deemed to be the aggregate Face Amount of all outstanding Preferred Stock in the
case of a Conversion Default described in clause (y) above) for each day
thereafter until the Cure Date. "Cure Date" means (i) with respect to a
Conversion Default described in clause (x) of its definition, the date the
Company effects the conversion of the portion of the Preferred Stock submitted
for conversion and (ii) with respect to a Conversion Default described in clause
(y) of its definition, the date the Company undertakes in writing to issue
Common Stock in satisfaction of all conversions of Preferred Stock in accordance
with the terms of this Certificate of Designation (provided that the Company
thereafter so performs such obligations). The Company shall promptly provide
each Holder with notice of the occurrence of a Conversion Default with respect
to any of the other Holders. Notwithstanding anything in this Section VI(A) or
anywhere else in this Agreement to the contrary, no Conversion Default shall be
deemed to occur if, prior to expiration of the Delivery Period, the Company has
made to the Holder the cash payment permitted to be made pursuant to Section
V(B) following issuance to such Holder of such Holder's allocated portion of the
Common Share Limit.
9
<PAGE>
B. Conversion Default Payments. The payments to which a Holder shall be
entitled pursuant to Section VI(A) are referred to herein as "Conversion Default
Payments." Conversion Default Payments shall be paid in cash within two (2)
Business Days of written demand from a Holder. Such payment shall be made in
accordance with and be subject to the provisions of Section XIII(B).
C. Adjustments to Conversion Price. If a Holder has not received
certificates for all shares of Common Stock prior to the tenth (10th) day after
the expiration of the Delivery Period with respect to a conversion of Preferred
Stock (or, if applicable, the cash payment permitted to be made pursuant to
Section V(B)) for any reason (other than as a result of such conversion
exceeding such Holder's pro rata portion of the Reserved Amount) then the
Conversion Price in respect of any shares of Preferred Stock held by such Holder
shall thereafter be the lesser of (i) the Conversion Price on the Conversion
Date specified in the Notice of Conversion which resulted in the Conversion
Default and (ii) the lowest Conversion Price in effect during the period
beginning on, and including, such Conversion Date through but excluding the Cure
Date. If there shall occur a Conversion Default of the type described in clause
(y) of Section VI(A), then the Conversion Price with respect to any conversion
thereafter shall be the lower of the Conversion Price and the lowest Conversion
Price in effect at any time during the period beginning on, and including, the
date of the occurrence of such Conversion Default through but excluding the Cure
Date. The Conversion Price shall thereafter be subject to further adjustment as
described in Article X.
VII. REDEMPTION DUE TO CERTAIN EVENTS
A. Redemption Events. A "Redemption Event" means any one of the following:
(i) the Common Stock (including any of the shares of Common Stock issuable
upon conversion of the Preferred Stock or upon exercise of the Warrants or
required from time to time to be reserved pursuant to this Certificate of
Designation or the Warrants) is suspended from trading on, or is not listed (and
authorized) for trading on, the Nasdaq, the Nasdaq Small Cap Market, the
American Stock Exchange, or the New York Stock Exchange for an aggregate of ten
(10) trading days in any twelve (12) month period;
(ii) the Company fails, and any such failure continues uncured for seven
(7) Business Days after the Company has been notified thereof in writing by the
Holder, to remove any restrictive legend on any certificate for any shares of
Common Stock issued after the Effective Date to the Holders upon conversion of
the Preferred Stock or upon exercise of the Warrants as and when required by
this Certificate of Designation, the Warrants, the Securities Purchase Agreement
or the Registration Rights Agreement dated as of April 24, 1998, by and among
the Company and the other signatories thereto (the "Registration Rights
Agreement");
10
<PAGE>
(iii) the Company fails: (x) to file the registration statement required
pursuant to Section 2.1 of the Registration Rights Agreement on or before the
thirtieth (30th) day following Closing, and to cause the registration statement
to be declared effective on or before the one hundred fiftieth (150th) day
following Closing, in a manner which would allow the sale of all Registrable
Securities (as defined in the Registration Rights Agreement); or (y) to cause
the holders of Preferred Stock to be able to utilize such registration statement
for the resale of all of their Registrable Securities (as defined in the
Registration Rights Agreement), unless the Company is using its best efforts to
remedy such inability to utilize such registration statement, subject to the
Company's Board of Directors having determined in their good faith business
judgment by resolution that the continued effectiveness of such registration
statement would have a material adverse effect on the Company's ability to
consummate a financing, acquisition, merger or joint venture, in each case for
which substantive discussions are underway, the failure of which to consummate
would have a material adverse effect on the Company's financial condition,
results of operations or future prospects; provided that in no event shall such
failure exist for a total of more than twenty (20) days in any twelve (12) month
period; or
(iv) the Company fails for any reason to (A) issue shares of Common Stock
within ten (10) Business Days after the expiration of the Extended Delivery
Period with respect to any conversion of Preferred Stock, or (B) if applicable,
to make the cash payment to the extent permitted to be made pursuant to Section
V(B)).
(v) the Company provides notice to any Holder, including by way of public
announcement, at any time, of its intention not to issue shares of Common Stock
to any Holder upon conversion in accordance with the terms of this Certificate
of Designation (other than (i) because of unavailability of authorized shares,
or (ii) because such issuance would exceed such Holder's allocated portion of
the Common Share Limit, for which failures the Holders shall have the remedies
set forth elsewhere herein);
(vi) the Company breaches any material covenant or other material term of
this Certificate of Designation, the Securities Purchase Agreement, the Warrants
or the Registration Rights Agreement, the breach of which would have a material
adverse effect on the Company or the rights of the Holder with respect to its
shares of Preferred Stock or the shares of Common Stock issuable upon conversion
of the Preferred Stock or upon exercise of the Warrants, and such breach
continues for a period of five (5) Business Days after written notice thereof to
the Company;
(vii) any representation or warranty of the Company made in any agreement,
statement or certificate given in writing in connection with the issuance of the
Preferred Stock (including, without limitation, the Warrants, the Securities
Purchase Agreement or the Registration Rights Agreement), shall be false or
misleading in any material respect when made and the breach of which has had or
could reasonably be expected to have a material adverse effect on the Company or
on the Holder with respect to its investment in the shares of Preferred Stock or
Warrants or the shares of Common Stock issuable upon conversion of the Preferred
Stock or upon exercise of the Warrants; or
11
<PAGE>
(viii) the Company fails to increase the Reserved Amount (A) within ten
(10) days following an Authorization Trigger Date if such increase requires
solely approval of the Company's Board of Directors or (B) otherwise within
sixty (60) days thereafter.
B. Redemption By Holder. Following the occurrence of a Redemption Event,
each Holder shall have the right to elect at any time and from time to time by
delivery of a Redemption Notice (as defined herein) to the Company while such
Redemption Event continues, to require the Company to purchase for cash for an
amount per share equal to the Redemption Amount (as defined herein) any or all
of the then outstanding shares of Preferred Stock, together with accrued and
unpaid dividends thereon and any Conversion Default Payments applicable thereto,
held by such Holder. The "Redemption Amount" with respect to a share of
Preferred Stock means an amount equal to the greater of (i) 1.5 times the
aggregate Face Amount of the Preferred Shares for which a demand is being made
and (ii) an amount determined by the following formula:
Face Amount x M
----------------
CP
When: "CP" means the lowest Conversion Price during the period beginning on
the date of the Redemption Notice and ending on the date of redemption; and "M"
means the highest Closing Bid Price of the Company's Common Stock during the
period beginning on the date of the Redemption Notice and ending on the date of
the redemption, as reported in the principal securities exchange or trading
market in which the Common Stock is traded.
C. Optional Redemption by the Company. Beginning upon the earlier to occur
of (i) the date that the Company completes an underwritten public offering of
its Common Stock, or (ii) the first anniversary of the Closing Date, the Company
may, at its option, redeem for cash out of funds legally available therefor, all
of the outstanding Preferred Shares ("Optional Redemption") at a price per share
equal to the greater of (i) 125% of the Face Amount of the Preferred Stock or
(ii) the product of (X) 125% of the Closing Bid Price of the Common Stock on the
trading day preceding the Company's Optional Redemption Notice (as defined
below) to the Preferred Shareholders, multiplied by (Y) the number of shares of
Common Stock issuable upon conversion of the Preferred Stock being redeemed.
12
<PAGE>
The Company may not deliver an Optional Redemption Notice for a redemption
for cash unless such redemption is with respect to all then-outstanding shares
of Preferred Stock and unless the Company had ("Funding Availability"): (a) the
full amount to be paid for the Preferred Shares pursuant to the Optional
Redemption (the "Optional Redemption Amount") in cash, available in a demand or
other immediately available account in a bank or similar financial institution;
or (b) immediately available credit facilities, in the full amount of the
Optional Redemption Amount in cash with a bank or similar financial institution
(or binding commitment letters with respect thereto which commitment letters
shall be subject only to commercially reasonable conditions to closing as to
which the Company's Board of Directors has made a good faith business judgment
will be fulfilled to permit consummation of the redemption hereunder); or (c) an
agreement with a standby underwriter or qualified buyer ready, willing and able
to purchase from the Company a sufficient number of shares of stock to provide
proceeds necessary to redeem for the Optional Redemption Amount in cash any
stock that is not converted prior to redemption; or (d) a combination of the
items set forth in the preceding clauses (A), (B) and (C), aggregating the full
amount of the Optional Redemption Amount in cash. Any Optional Redemption Notice
delivered in accordance with the immediately preceding sentence shall be
accompanied by a statement executed by a duly authorized officer of the Company
certifying that the Company has Funding Availability and by other appropriate
documentation as evidence thereof. The Company shall provide each Holder with at
least 30 days' notice of any proposed optional redemption pursuant this Section
VII(C) (an "Optional Redemption Notice"). Any optional redemption pursuant to
this Section VII(C) shall be made ratably among Holders in proportion to the
Face Amount of Preferred Stock then outstanding and held by such Holders. The
Optional Redemption Notice shall state the Face Amount of Preferred Stock to be
redeemed and the date on which the Optional Redemption is to occur (which shall
not be less than thirty (30) or more than sixty (60) Business Days after the
date of delivery of the Optional Redemption Notice) and shall be delivered by
the Company to the Holders at the address of such Holder appearing on the
register of the Company for the Preferred Stock.
Within seven (7) business days after the date of delivery of the Optional
Redemption Notice, each Holder shall provide the Company with instructions as to
the account to which payments associated with such Optional Redemption should be
deposited. On the date of the Optional Redemption, provided for in the relevant
Optional Redemption Notice, (x) the Company will deliver the redemption amount
via wire transfer to the account designated by the Holders, (y) the Holders will
deliver the certificates relating to that number of shares of Preferred Stock
being redeemed, duly executed for transfer or accompanied by executed stock
powers, in either case, transferring that number of shares to be redeemed. Upon
the occurrence of the wire transfer (or, in the absence of a Holder designating
an account to which funds should be transferred, delivery of a certified check
in the amount due such Holder in connection with such Optional Redemption to the
address of such Holder appearing on the register of the Company for the
Preferred Stock), that number of shares to be redeemed pursuant to such Optional
Redemption as represented by the previously issued certificates will be deemed
no longer outstanding. Notwithstanding anything to the contrary in this
Certificate of Designation, each Holder may continue to convert Preferred Stock
in accordance with the terms hereof until the date such Preferred Stock is
actually redeemed pursuant to an Optional Redemption.
13
<PAGE>
D. Redemption Payment Defaults. If the Company fails to pay any Holder the
Redemption Amount with respect to any share of Preferred Stock, as provided in
this Article VII, within five (5) Business Days of its receipt or delivery, as
applicable, of a notice requiring such redemption, then each Holder (i) shall be
entitled to interest on the Redemption Amount at a floating per annum rate equal
to the lower of (x) eighteen percent (18%) and (y) the highest interest rate
permitted by applicable law from the date of the Redemption Notice until the
date of redemption hereunder, payable in cash within two (2) Business Days of
written demand from a Holder. In the event the Company is not able to redeem all
of the shares of Preferred Stock subject to Redemption Notices, the Company
shall redeem shares of Preferred Stock from each Holder pro rata, based on the
total number of shares of Preferred Stock included in the Redemption Notice
relative to the total number of shares of Preferred Stock in all of the
Redemption Notices.
E. Capital Impairment. In the event that any section of the New York
Business Corporation Law ("NYBCL"), would be violated by the redemption of any
shares of Preferred Stock that are otherwise subject to redemption pursuant to
this Article VII, the Company: (i) will redeem the greatest number of shares of
Preferred Stock possible without violation of said Section; (ii) the Company
thereafter shall use its best efforts to take all necessary steps permitted
pursuant to this Certificate of Designation and the agreements entered into in
connection with the issuance of Preferred Stock pursuant hereto in order to
remedy its capital structure in order to allow further redemptions without
violation of said Section (and not take any actions inconsistent therewith); and
(iii) from time to time thereafter as promptly as possible the Company shall
redeem shares of Preferred Stock at the request of the Holders to the greatest
extent possible without causing a violation of the NYBCL (such redemption to be
at the greater of the Redemption Price in effect at the time of the original
Redemption Event giving rise to such violation and the redemption price which
would be applicable for a Redemption Event at the time of such later election
under this clause (iii). In such case, any Holder shall have the right, at any
time and from time to time, to require the Company, upon written notice, to
immediately convert (in accordance with the terms of Article IV all or any
portion of the Redemption Amount plus any interest or other charges which have
accrued into shares of Common Stock on a dollar for dollar basis based upon the
most recently reported trading price for the Common Stock. In the event the
Company is not able to redeem all the shares of the stock subject to Redemption
Notices, the Company shall redeem shares of Preferred Stock from each Holder pro
rata, based on the total number of shares of Preferred Stock included by such
Holder in the Redemption Notice relative to the total number of Preferred Stock
in all Redemption Notices. In addition, and notwithstanding anything to the
contrary contained in this Section VII(E), so long as the Company is prevented
from redeeming shares of Preferred Stock pursuant to this Section VII(E) the
14
<PAGE>
Company shall be (and shall be deemed to be) in breach of the redemption
obligations set forth in this Section VII(E) and each Holder shall have all
rights and remedies under this Certificate of Designation or otherwise at law
for damages, with respect to such breach. Upon a Redemption Event described in
Section VII(A)(iv), to the extent that the Company has not yet obtained the
Stockholder Approval, any Holder who has not had its Preferred Stock converted
in accordance with the terms of this Certificate of Designation may elect one or
both of the following: (i) require, with the consent of the Holders, the Company
to terminate the listing of its Common Stock on Nasdaq or the Nasdaq Small Cap
Market and to cause its Common Stock to be listed on the over-the-counter
electronic bulletin board, at the option of the requesting Holder; and (ii)
require the Company to issue shares of Common Stock in accordance with such
holder's Notice of Conversion at a conversion price equal to the Conversion
Price in effect on the date of the Holder's written notice to the Company of its
election to receive shares of Common Stock pursuant to this subparagraph (ii).
VIII. RANK; PARTICIPATION
A. Rank. All shares of the Preferred Stock shall rank (i) prior to the
Common Stock; (ii) prior to any class or series of capital stock of the Company
now outstanding or hereafter created (unless, with the consent of a majority of
the Holders obtained in accordance with Article XII hereof, such hereafter
created class or series of capital stock specifically, by its terms, ranks
senior to or pari passu with the Preferred Stock) (collectively, with the Common
Stock, "Junior Securities"); and (iii) pari passu with any class or series of
capital stock of the Company hereafter created (with the consent of a majority
of the Holders obtained in accordance with Article XII hereof) specifically
ranking, by its terms, on parity with the Preferred Stock (the "Pari Passu
Securities"); and (iv) junior to any class or series of capital stock of the
Company hereafter created (with the consent of a majority of the Holders
obtained in accordance with Article XII hereof) specifically ranking, by its
terms, senior to the Preferred Stock (the "Senior Securities"), in each case as
to distribution of assets upon liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary.
B. Participation. Subject to the rights of the holders (if any) of Pari
Passu Securities and Senior Securities, the Holders shall, as such Holders, be
entitled to such dividends paid and distributions made to the holders of Common
Stock to the same extent as if such Holders had converted their shares of
Preferred Stock into Common Stock (without regard to any limitations on
conversion herein or elsewhere contained) and had been issued such Common Stock
on the day before the record date for said dividend or distribution. Payments
under the preceding sentence shall be made concurrently with the dividend or
distribution to the holders of Common Stock.
15
<PAGE>
IX. LIQUIDATION PREFERENCE
A. Liquidation of the Company. If the Company shall commence a voluntary
case under the U.S. Federal bankruptcy laws or any other applicable bankruptcy,
insolvency or similar law, or consent to the entry of an order for relief in an
involuntary case under any law or to the appointment of a receiver, liquidator,
assignee, custodian, trustee, sequestrator (or other similar official) of the
Company or of any substantial part of its property, or make an assignment for
the benefit of its creditors, or admit in writing its inability to pay its debts
generally as they become due, or if a decree or order for relief in respect of
the Company shall be entered by a court having jurisdiction in the premises in
an involuntary case under the U.S. Federal bankruptcy laws or any other
applicable bankruptcy, insolvency or similar law resulting in the appointment of
a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other
similar official) of the Company or of any substantial part of its property, or
ordering the winding up or liquidation of its affairs, and any such decree or
order shall be unstayed and in effect for a period of sixty (60) consecutive
days and, on account of any such event, the Company shall liquidate, dissolve or
wind up, or if the Company shall otherwise liquidate, dissolve or wind up (a
"Liquidation Event"), no distribution shall be made to the Holders of any shares
of capital stock of the Company (other than Senior Securities and, together with
the Holders of Preferred Stock the Pari Passu Securities) upon liquidation,
dissolution or winding up unless prior thereto the Holders shall have received
the Liquidation Preference (as herein defined) with respect to each share. If,
upon the occurrence of a Liquidation Event, the assets and funds available for
distribution among the Holders and holders of Pari Passu Securities shall be
insufficient to permit the payment to such Holders of the preferential amounts
payable thereon, then the entire assets and funds of the Company legally
available for distribution to the Preferred Stock and the Pari Passu Securities
shall be distributed ratably among such shares in proportion to the ratio that
the Liquidation Preference payable on each such share bears to the aggregate
Liquidation Preference payable on all such shares.
B. Certain Acts Not a Liquidation. The purchase or redemption by the
Company of stock of any class, in any manner permitted by law, shall not, for
the purposes hereof, be regarded as a liquidation, dissolution or winding up of
the Company. Neither the consolidation or merger of the Company with or into any
other entity nor the sale or transfer by the Company of less than substantially
all of its assets shall, for the purposes hereof, be deemed to be a liquidation,
dissolution or winding up of the Company.
C. Definition of Liquidation Preference. The "Liquidation Preference" with
respect to a share of Preferred Stock means an amount equal to the Face Amount
thereof plus any other amounts that may be due from the Company with respect
thereto pursuant to this Certificate of Designation through the date of final
distribution. The Liquidation Preference with respect to any Pari Passu
Securities shall be as set forth in the Certificate of Designation filed in
respect thereof.
16
<PAGE>
X. ADJUSTMENTS TO THE CONVERSION PRICE; CERTAIN PROTECTIONS
The Conversion Price shall, in order to accomplish the results contemplated
in this Certificate of Designation, be subject to adjustment from time to time
as follows:
A. Stock Splits, Stock Dividends, Etc. If at any time on or after the
Closing Date, the number of outstanding shares of Common Stock is increased by a
stock split, stock dividend, combination, reclassification or other similar
event, the number of shares of Common Stock issuable upon conversion of the
Preferred Stock shall be proportionately increased, or if the number of
outstanding shares of Common Stock is decreased by a reverse stock split,
combination or reclassification of shares, or other similar event, the number of
shares of Common Stock issuable upon conversion of the Preferred Stock shall be
proportionately reduced. In such event, the Company shall notify the Company's
transfer agent of such change on or before the effective date thereof.
B. Certain Public Announcements. In the event that (i) the Company makes a
public announcement that it intends to consolidate or merge with any other
entity (other than a merger in which the Company is the surviving or continuing
entity and its capital stock is unchanged and there is no distribution thereof)
or to sell or transfer all or substantially all of the assets of the Company or
(ii) any person, group or entity (including the Company) publicly announces a
tender offer in connection with which such person, group or entity seeks to
purchase 50% or more of the Common Stock (the date of the announcement referred
to in clause (i) or (ii) of this paragraph is hereinafter referred to as the
"Announcement Date"), then the Conversion Price shall, effective upon the
Announcement Date and continuing through the consummation of the proposed tender
offer or transaction or the Abandonment Date (as defined below), be equal to the
lesser of (x) the Conversion Price calculated as provided in Article IV the (y)
the Conversion Price which would have been applicable for Conversion occurring
on the Announcement Date. From and after the Abandonment Date, as the case may
be, the Conversion Price shall be determined as set forth in Article IV. The "
Abandonment Date" means with respect to any proposed transaction or tender offer
for which a public announcement as contemplated by this paragraph has been made,
the date which is seven (7) trading days after the date upon which the Company
(in the case of clause (i) above) or the person, group or entity (in the case of
clause (ii) above) publicly announces the termination or abandonment of the
proposed transaction or tender offer which causes this paragraph to become
operative.
17
<PAGE>
C. Major Transactions. If the Company shall consolidate with or merge into
any corporation or reclassify its outstanding shares of Common Stock (other than
by way of subdivision or reduction of such shares) (each a "Major Transaction"),
then each Holder shall thereafter be entitled to receive consideration, in
exchange for each share of Preferred Stock held by it, equal to the greater of,
as determined in the sole discretion of such Holder: (i) the number of shares of
stock or securities or property of the Company, or of the entity resulting from
such Major Transaction (the "Major Transaction Consideration"), to which a
Holder of the number of shares of Common Stock delivered upon conversion of such
shares of Preferred Stock would have been entitled upon such Major Transaction
had the Holder's Preferred Shares been converted (without regard to any
limitations on conversion herein contained) on the trading date immediately
preceding the public announcement of the transaction resulting in such Major
Transaction and had such Common Stock been issued and outstanding and had such
Holder been the holder of record of such Common Stock at the time of such Major
Transaction, and the Company shall make lawful provision therefore as a part of
such consolidation, merger or reclassification; and (ii) 125% of the Face Amount
of such shares of Preferred Stock in cash. No sooner than ten (10) days nor
later than five (5) days prior to the consummation of the Major Transaction, but
not prior to the public announcement of such Major Transaction, the Company
shall deliver written notice ("Notice of Major Transaction") to each Holder,
which Notice of Major Transaction shall be deemed to have been delivered one (1)
Business Day after the Company's sending such notice by telecopy (provided that
the Company sends a confirming copy of such notice on the same day by overnight
courier). Such Notice of Major Transaction shall indicate the amount and type of
the Major Transaction Consideration which such Holder would receive under clause
(i) of this Section X(C). If the Major Transaction Consideration does not
consist entirely of United States dollars, such Holder may elect to receive
United States dollars in an amount equal to the value, determined by a reputable
accounting firm selected by the Company that is reasonably acceptable to a
majority of the Holders of the Major Transaction Consideration in lieu of the
Major Transaction Consideration which does not consist entirely of United States
Dollars, by delivering notice of such election to the Company within five (5)
days of the Holder's receipt of the Notice of Major Transaction.
D. Issuance of Other Securities. If, at any time after the First Closing
the Company shall issue any securities which are convertible into or
exchangeable for Common Stock ("Convertible Securities") either (i) at a
conversion or exchange rate based on a discount from the market price of the
Common Stock at the time of conversion or exercise or (ii) with a fixed
conversion or exercise price less than the Conversion Price, then, at the
Holder's option: (x) in the case of clause (i), the Conversion Price in respect
of any conversion of Preferred Stock after such issuance shall be calculated
utilizing the greatest discount applicable to any such Convertible Securities,
to the extent such calculation would result in a lower Conversion Price; and (y)
in the case of clause (ii), the Conversion Price will be reduced to such lesser
conversion or exercise price, to the extent that this would result in a lower
Conversion Price.
18
<PAGE>
E. Adjustment Due to Distribution. If at any time after the Closing Date,
the Company shall declare or make any distribution of its assets (or rights to
acquire its assets) to holders of Common Stock as a partial liquidating
dividend, by way of return of capital or otherwise (including any dividend or
distribution to the Company's stockholders in cash or shares (or rights to
acquire shares) of capital stock of a subsidiary (i.e. a spin-off)) (a
"Distribution"), then the Conversion Price shall be equitably adjusted to take
account of such distribution.
F. Purchase Rights. If at any time after the Closing Date, the Company
issues any Convertible Securities or rights to purchase stock, warrants,
securities or other property (the "Purchase Rights") pro rata to the record
holders of any class of Common Stock, then the Holders will be entitled to
acquire, upon the terms applicable to such Purchase Rights, the aggregate
Purchase Rights which such Holder could have acquired if such Holder had held
the number of shares of Common Stock acquirable upon complete conversion of the
Preferred Stock (without regard to any limitations on conversion or exercise
herein or elsewhere contained) immediately before the date on which a record is
taken for the grant, issuance or sale of such Purchase Rights, or, if no such
record is taken, the date as of which the record holders of Common Stock are to
be determined for the grant, issue or sale of such Purchase Rights.
G. Notice of Adjustments. Upon the occurrence of each adjustment or
readjustment of the Conversion Price pursuant to this Article X, the Company, at
its expense, shall promptly compute such adjustment or readjustment and prepare
and furnish to each Holder a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Company shall, upon the written request at any time
of any Holder, furnish to such Holder a like certificate setting forth (i) such
adjustment or readjustment, (ii) the Conversion Price at the time in effect and
(iii) the number of shares of Common Stock and the amount, if any, of other
securities or property which at the time would be received upon conversion of a
share of Preferred Stock.
XI. VOTING RIGHTS
No holder of the Preferred Stock shall be entitled to vote on any matter
submitted to the shareholders of the Company for their vote, waiver, release or
other action, except as may be otherwise expressly required by law.
19
<PAGE>
XII. PROTECTION PROVISIONS
So long as any Preferred Shares are outstanding, the Company shall not,
without first obtaining the approval of a majority of the Holders: (a) alter or
change the rights, preferences or privileges of the Preferred Stock; (b) alter
or change the rights, preferences or privileges of any capital stock of the
Company so as to affect adversely the Preferred Stock; (c) create any Senior
Securities; (d) create any Pari Passu Securities; (e) increase the authorized
number of shares of Preferred Stock; (f) redeem or declare or pay any cash
dividend or distribution on any Junior Securities, or (g) do any act or thing
not authorized or contemplated by this Certificate of Designation which would
result in any taxation with respect to the Preferred Stock under Section 305 of
the Internal Revenue Code of 1986, as amended, or any comparable provision of
the Internal Revenue Code as hereafter from time to time amended, (or otherwise
suffer to exist any such taxation as a result thereof).
XIII. MISCELLANEOUS
A. Lost or Stolen Certificates. Upon receipt by the Company of (i) evidence
of the loss, theft, destruction or mutilation of any Preferred Stock
Certificate(s) and (ii) (y) in the case of loss, theft or destruction, of
indemnity reasonably satisfactory to the Company, or (z) in the case of
mutilation, upon surrender and cancellation of the Preferred Stock
Certificate(s), the Company shall execute and deliver new Preferred Stock
Certificate(s) of like tenor and date. However, the Company shall not be
obligated to reissue such lost, stolen, destroyed or mutilated Preferred Stock
Certificate(s) if the Holder contemporaneously requests the Company to convert
such Preferred Stock.
B. Statements of Available Shares. Upon request, the Company shall deliver
to each Holder a written report notifying the Holders of any occurrence which
prohibits the Company from issuing Common Stock upon any such conversion. The
report shall also specify (i) the total number of shares of Preferred Stock
outstanding as of the date of the request, (ii) the total number of shares of
Common Stock issued upon all conversions of Preferred Stock through the date of
the request, (iii) the total number of shares of Common Stock which are reserved
for issuance upon conversion of the Preferred Stock as of the date of the
request, and (iv) the total number of shares of Common Stock which may
thereafter be issued by the Company upon conversion of the Preferred Stock
before the Company would exceed the Common Share Limit and Reserved Amount. The
Company shall, within five (5) days after delivery to the Company of a written
request by any Holder, provide all of the information enumerated in clauses (i)-
(v) of this Section XIII(B) and, at the request of a Holder, make public
disclosure thereof.
C. Payment of Cash; Defaults. Whenever the Company is required to make any
cash payment to a Holder under this Certificate of Designation (as a Conversion
Default Payment, Redemption Amount or otherwise), such cash payment shall be
made to the Holder by the method (by certified or cashier's check or wire
transfer of immediately available funds) elected by such Holder. If such payment
is not delivered when due such Holder shall thereafter be entitled to interest
on the unpaid amount until such amount is paid in full to the Holder at a per
annum rate equal to the lower of (x) eighteen percent (18%) and (y) the highest
interest rate permitted by applicable law.
20
<PAGE>
D. Conversion of Default Amounts. In addition, and notwithstanding anything
to the contrary contained in this Certificate, a Holder may elect in writing to
convert all or any portion of accrued Default Amounts, at any time and from time
to time, into Common Stock at the lowest Conversion Price in effect during the
period beginning on the date of the default with respect thereto through the
cure date for such default. In the event that a Holder elects to convert all or
any portion of the Default Amounts into Common Stock, the Holder shall so notify
the Company on a Notice of Conversion of such portion of the Default Amounts
which such holder elects to so convert and such conversion shall otherwise be
effected in accordance with the provisions of, and subject to limitations
contained in, Article IV.
E. Remedies, Characterizations, Other Obligations, Breaches and Injunctive
Relief. The remedies provided in this Certificate of Designation shall be
cumulative and in addition to all other remedies available under this
Certificate of Designation, at law or in equity (including a decree of specific
performance and/or other injunctive relief), no remedy contained herein shall be
deemed a waiver of compliance with the provisions giving rise to such remedy and
nothing herein shall limit a Holder's right to pursue actual damages for any
failure by the Company to comply with the terms of this Certificate of
Designation (including, without limitation, damages incurred to effect "cover"
purchase of shares of Common Stock anticipated to be received upon a conversion
hereunder and not received in accordance with the terms hereof). Company
covenants to each Holder that there shall be no characterization concerning this
instrument other than as expressly provided herein; provided, however, that the
Company shall be entitled to prepare summaries of this Certificate of
Designation for purposes of complying with its disclosure obligations and in
connection with bona fide disputes as to the operations of the provisions of
this Certificate of Designation. Amounts set forth or provided for herein with
respect to payments, conversion and the like (and the computation thereof) shall
be the amounts to be received by the Holder hereof and shall not, except as
expressly provided herein, be subject to any other obligation of the Company (or
the performance thereof). The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the holders of Preferred
Stock and that the remedy at law for any such breach may be inadequate. The
Company therefore agrees that, in the event of any such breach or threatened
breach, the Holders shall be entitled, in addition to all other available
remedies, to an injunction restraining any breach, without the necessity of
showing economic loss and without any bond or other security being required.
F. Specific Shall Not Limit General; References to "Preferred Stock". No
specific provision contained in this Certificate of Designation shall limit or
modify any more general provision contained herein. This Certificate of
Designation shall be deemed to be jointly drafted by the Company and the Holders
and shall not be construed against any person as the drafter. Any reference
herein to Preferred Shares, Preferred Stock or an unspecified amount of
Preferred Shares or Preferred Stock shall be deemed to include, without
limitation, all shares of Preferred Stock issued or then issuable as a dividend
or otherwise in satisfaction of any obligation of the Company with respect to
any Preferred Stock issued on the date hereof.
21
<PAGE>
G. Failure or Indulgency Not Waiver. No failure or delay on the part of a
Holder in the exercise of any power, right or privilege hereunder shall operate
as a waiver thereof, not shall any single or partial exercise of any such power,
right or privilege preclude other or further exercise thereof or of any other
right, power or privilege.
IN WITNESS WHEREOF, this certificate has been subscribed to this 24th day
of April, 1998 by the undersigned, who affirm that the statements made herein
are true under penalties of perjury.
American Bio Medica Corporation
By: /s/Stan Cipkowski
Name: Stan Cipkowski
Title: President
By: /s/Edmund Jaskiewicz
Name: Edmund Jaskiewicz
Title: Secretary
22
Exhibit 5.4
Opinion and Consent of Joel Pensley
Joel Pensley
Attorney at Law
276 Fifth Avenue Suite 715
New York, New York 10001
212-725-7110
Fax: 212-725-7527
May 14, 1998
American Bio Medica Corporation
300 Fairview Avenue
Hudson, New York 12534
Re: Registration Statement on Form SB-2
Gentlemen:
I refer to the registration statement on Form SB-2 (the "Registration
Statement") of American Bio Medica Corporation, a New York corporation (the
"Company"), to be delivered for electronic filing to the Securities and Exchange
Commission, relating to xxx,xxx common shares, $.01 par value each ("Common
Shares") underlying Series "D" convertible preferred shares (the "Preferred
Shares") (subject to adjustment) and to 100,000 Common Shares underlying the
exercise of common share purchase warrants (the "Warrants").
In my capacity as counsel to the Company, I have examined the Company's
Certificate of Incorporation and By-laws, as amended to date, and the minutes
and other corporate proceedings of the Company.
With respect to factual matters, I have relied upon statements and
certificates of officers of the Company. I have also reviewed such other matters
of law and examined and relied upon such other documents, records and
certificates as we have deemed relevant hereto. In all such examinations I have
assumed conformity with the original documents of all documents submitted to us
as conformed or photostatic copies, the authenticity of all documents submitted
to me as originals and the genuineness of all signatures on all documents
submitted to me.
(i) The Company has been duly incorporated and is a validly existing
corporation in good standing under the laws of the State of New York.
(ii) The Common Shares to be issued upon conversion of the Preferred Shares and
exercise of the Warrants pursuant to the Registration Statement have been
duly authorized and, when issued, will be validly issued, fully paid and
nonassessable,
I hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference made to me under the caption "Legal
Matters" in the prospectus constituting the Registration Statement.
Very truly yours,
/s/Joel Pensley
---------------
Joel Pensley
Exhibit 23.11
Consent of Thomas P. Monahan, CPA
CONSENT
I, Thomas P. Monahan, CPA, hereby consent to the use of my report relating
to the audited financial statements for the years ended April 30, 1996 and 1997
in a registration statement on Form SB-2 of American Bio Medica Corporation to
be filed with the Securities and Exchange Commission.
Dated: May 14, 1998
/s/Thomas P. Monahan
--------------------
Thomas P. Monahan
