SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 2054
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FORM 10-KSB
[/] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the fiscal year ended April 30, 1998
Commission File Number: 333-16535
AMERICAN BIO MEDICA CORPORATION
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(Name of Small Business Issuer in its charter )
New York 22-3378935
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(State or other Jurisdiction (IRS Employer Identification
of Incorporation or Organization) Number)
300 Fairview Avenue, Hudson, New York 12534
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(Address of principal executive Offices) (Zip Code)
102 Simons Road, Ancramdale, New York 12503
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(Former name or former address, if changed since last report.)
Issuer's telephone number: (800) 227-1243
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, $.01 par value per share
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
[x] Yes [ ] No
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [x]
State issuer's revenues for its most fiscal year $2,154,000.
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days.
As of June 14, 1998, there were 9,064,418 common shares held by
non-affiliates ("Common Shares") outstanding having an aggregate market value of
$22,661,045.
Documents incorporated by reference:
Proxy Statement for the Annual Meeting of Shareholders for the 1999 Fiscal
Year.
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PART I
Item 1. Description of Business
Summary
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American Bio Medica Corporation (the "Company") is primarily engaged in
acquiring, developing and marketing biomedical technologies and products. The
Company owns a technology for screening drugs of abuse, trademarked the "Rapid
Drug Screen." The Company's common shares ("Common Shares") began trading on the
Nasdaq SmallCap Market on December 24, 1997.
The Company produces several versions of a drugs of abuse screening test,
called the "Rapid Drug Screen Test" at its manufacturing facility in Columbia
County, New York. The Rapid Drug Screen 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 thereby preventing exposure of
the test administrator to the urine sample. In the opinion of the Company's
management ("Management"), the Rapid Drug Screen Test, 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
Rapid Drug Screen Test with results produced by EMIT II, a standard laboratory
test, and found a 100% correlation of both positive and negative test results.
As a result, Management believes that the Rapid Drug Screen Test is as accurate
as that laboratory test.
Versions of the Rapid Drug Screen Tests include 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) test. All have been cleared by the Federal
Drug Administration (the "FDA") and can thus be sold in clinical as well as
workplace markets. The Company has also completed a test for tricyclic
antidepressants which it has submitted to the FDA for approval and which it
intends to market in the near future as part of a nine-panel test. The Company
has recently developed nine tests trademarked "Rapid One", each of which detects
one drug of abuse.
The Company has installed and uses equipment at its manufacturing facility
suitable for the mass production of its drug screening tests. The Company's
output was initially hampered 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 owns a patented low cost method for producing keratin proteins.
It has also developed a technology that will detect alcohol levels in
individuals through a quick, one step, on-site, saliva test. The Company has no
intention of developing or marketing 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.
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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, increased 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.
Since its inception to April 30, 1998, the Company has an accumulated
deficit of $7,342,000 (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, the Company has not been profitable
during its history; and 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," a
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. These factors include 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 its employees utilize a
medical review officer ("MRO") who analyzes test findings, judges them against
the test subject's medical profile and renders a verdict to the employer which
does not see the test results but only the MRO's report. The use of an MRO
offers significant protection to employees who may test positive due to the use
of prescription drugs or non-controlled substances which register as controlled
substances.
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The Substance Abuse and Mental Health Services Administration, Office of
Applied Studies of the United States Department of Health and Human Services,
Public Health Service, in its advance report number 18 released in August, 1996
entitled "Preliminary Estimates from the 1995 National Household Survey on Drug
Abuse," notes that 14.3% of unemployed adults, age 18 years and older, were
current illicit drug users in 1995 compared with 5.5% of full-time employed
adults and that the rate of drug use decreased from 1994's 6.7%. 71% of all
current illicit drug users 18 years old and older (7.4 million adults) were
employed, including 5.5 million full-time workers and 1.9 million part-time
workers. Because of the high incidence of workplace drug use, the testing of
employees for the most "popular" drugs has become widespread. Positive tests
often result in discharge of, or treatment for, the employee. In addition, the
threat of testing, particularly random testing, has the prophylactic effect of
reducing workplace drug use.
The Company believes that the drugs of abuse testing market is large and
growing and that the largest market opportunity for on-site drug screening
products is the private sector with an additional large public sector demand.
Management believes that 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 United States Department of Defense contractors.
Workplace Drug Test
-------------------
Design
------
The Company has developed and markets its trademarked "The Rapid Drug
Screen," a 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 test result is required. The product consists of a "NIDA 5
Card," ("NIDA" stands for the National Institute on Drug Abuse) a business-card
size card divided into two, five or eight lengthwise strips, or sections. The
person being tested urinates into a test cup, puts on the lid and hands it to
the 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 test
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 inserted card
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 specific drugs of abuse
designated by NIDA 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 tested drugs of abuse.
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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 sold primarily to hospital and physician markets includes barbiturates,
benzodiazepines and methamphetamines. These additional tests can be combined in
single unit with the NIDA 5 Card, which tests for PCP, marijuana, cocaine,
amphetamines and opiates, 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 has submitted to
the FDA) and intends to market it 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 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.
In July, 1998, the Company began marketing "Rapid One," a line of nine drug
tests, each of which screens for the present or absence of a substance of abuse.
Rapid One utilizes the same technology as the Rapid Drug Screen. It includes a
single dip platform, an identification and date area and does not require the
use of pipettes or reagents. Rapid One is designed for correction facilities and
other markets where the person subject to substance abuse testing is known to
abuse a specific drug. Market acceptance of the Rapid One drug test cannot be
assured.
One of the problems which can occur in 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. In addition, 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 re-test the individual by obtaining another
specimen sample.
5
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FDA Approval
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FDA "510K" clearances have been granted for each of the Company's tests
included on its eight-panel Rapid Screen. The Company has applied to the FDA for
its test for tricyclic antidepressants, but approval has not yet been granted.
The Company intends to apply to the FDA for its Rapid One tests which, although
they use the same methodology and chemistries as the Rapid Screen test, employ a
different delivery device. 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 major
marketplace for the Company's drug testing products.
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. The Company employs a national sales director, a
director of marketing, five regional managers, an international sales director,
a government and corrections sales director and a major account sales director.
The Company has opened a national sales office in Boca Raton, Florida.
The Company has divided its marketplace into the following categories.
Corporate Workplace Drug Testing Programs
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The Company has developed a nationwide network of distributors and
administrators of workplace drug testing programs to sell its Rapid Drug Screen
testing kit.
6
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Government, Corrections and Law Enforcement
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This market includes federal, state and county level agencies, including
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. In addition, the Company exhibits at the winter and
summer trade shows of American Corrections Association.
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. As of
July, 1998, the Company has granted distribution rights for its drug screening
products in countries through out the world, including Mexico, Ireland,
Australia, New Zealand, Hungary, and Sweden.
Clinical, Physicians and Hospitals
----------------------------------
The Company is actively pursuing hospital and physician markets for its
entire product line. The Company has entered into an exclusive distribution
contract with, and has started shipping to, a subsidiary of Murex International
Technologies Corp. (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 distributes its products to physicians through specific
distribution companies that specifically deal with that market. The Company
supports physicians offices in their marketing programs through the Physicians
Drug Test Network, an advertising and support program that makes available
materials to participating physicians who provide drug screening for families,
individuals, schools and employers.
Consumer and Over-the-Counter
-----------------------------
The 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 an over-the-counter
alternative.
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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
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The Company has found that one of its best marketing methods is the
shipping of samples to potential customers which had 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 its products' features.
Competition
-----------
Competition to the Rapid Drug Screen comes from on-site tests developed by
companies including Roche Diagnostic Systems, Medtox (formerly Editek, Inc.),
Biosite Diagnostics and Drug Testing Resources International. In all cases that
the Company is aware of, competitive products use a collection or delivery
method different than the Rapid Drug Screen. Management believes the Rapid Drug
Screen provides an easier option to the user. There is no pipetting of reagents,
stirring or other manipulation of the device by the user.
Other available drug testing options, aside from on-site tests with
immediate results, include traditional laboratory testing where a urine sample
is sent to a laboratory for analysis and hair testing where a har sample is sent
to a laboratory for analysis. These forms of drug testing are more expensive and
take longer than the Rapid Drug Screen.
Manufacturing
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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. The
Company found that the use of subcontractors to produce the test strips was
unsatisfactory from a pricing, delivery and quality control standpoint and began
a program of in-house manufacturing to supplement product subcontracted.
Originally, these components were assembled for the Company by Columbia Advocacy
and Resource Center ("COARC"), an FDA-approved contract manufacturer in
Mellenville, New York. During May, 1998 the Company moved manufacturing of its
products from COARC to its own facility in Hudson, New York. The Company
contracts out the printing and manufacture of specimen cup components. The
Company's equipment, as installed, is capable of producing up to 500,000 units
per month utilizing one shift per day, five days per week.
On December 1, 1997, the Company announced its intention 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. The Company intends to begin construction on this facility,
expanded to 28,000 square feet, in September, 1998. The Company believes that it
is likely that the facility will be built; but there is no guarantee that the
promised financial assistance will be consummated without which the Company will
not build the facility.
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Patents and Trademarks
----------------------
The Company has registered "ABM" and its logo in the United States, Canada,
Chile and Mexico and has registered "Rapid Drug Screen" in Mexico. The Company
has additional trademark applications pending in the United States, Canada,
Philippines and in 15 European countries. 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. The Company has applied for various patents directly in
numerous countries, including the United States, Canada, Australia, Argentina,
Brazil, China, Japan, Germany, Mexico, Philippines, Poland and the United
Kingdom and has filed patent applications with three regional associations
covering 33 additional member countries. 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. (See "Risk
Factors--Patents and Trademarks.")
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. Negative test results 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 into the market.
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. Law
enforcement and workplace testing would be the initial markets targeted by this
Company.
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KDMP (Keratin Derivative Modified Protein)
------------------------------------------
Keratin Derived Modified Protein ("KDMP") is a liquid keratin protein
complex containing water soluble peptides and is rich in cysteine. It can be
used as an active ingredient in varying concentrations in the formulations of
quality skin, nail, and hair care products. Pre-clinical trials have been
completed and the Company intends to license or sell the technology. Various
patents relating to this technology have been assigned to the Company by Edmund
Jaskiewicz, Executive Vice-President, as part of the consideration for his
receipt of Common Shares. 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 substantial economic or
personnel resources to the development or marketing of this product for the
foreseeable 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 to establish a network of distributors
which service customers in non-clinical workplace, correctional institution and
drug rehabilitation areas, to market and sell its drug testing kits, to
manufacture and ship such kits and to continue research and development on its
additional biomedical products.
The Company has entered into national and international non-exclusive,
non-clinical market distribution agreements with a number of companies. These
agreements permit the distributors also 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.
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.
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 Rapid Drug Screen Test was featured on "Today's Health," aired on CNBC
in July, 1997.
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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.
Year 2000
---------
The Company has completed a review of its operational and financial systems
and believes all areas to be Year 2000 compliant. New software has been acquired
for the accounting systems and will be fully implemented prior to December 31,
1999.
Risk Factors
------------
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.)
Technological Factors; Uncertainty of Product Development; Unproven
Technology.
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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 production versions of its additional products. The Company's success
will depend upon such products meeting targeted product costs and performance,
and may also depend upon their timely introduction into the marketplace. There
can be no assurance that development of the Company's proposed products will be
successfully completed on a timely basis, 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.")
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Uncertainty of Continued Market Acceptance.
-------------------------------------------
The Company's drug test kits have been well received by customers,
including corporations, distributors and correctional institutions. 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 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 other drug testing products. (See "Business--Marketing and Sales.")
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.")
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.")
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. The Company does not maintain key man insurance for any of
its management employees. (See "Management.")
12
<PAGE>
Possible Adverse Changes in Regulatory Framework.
-------------------------------------------------
Approval from the FDA is not required for the sale of workplace drug test
kits, but is required for clinical drug test kits. The Company has received
"510(k)" approval from the FDA for its two, five and eight panel drug test kits.
It is awaiting FDA approval of one test of its nine panel drug test kit and is
preparing the application for its Rapid One drug test kit. 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," "Business--Government Regulation" and
"Business--Patents and Trademarks.")
Patents and Trademarks
----------------------
The Company has applied for design patents on its drug test kits and for
certain trademarks in the United States, South and Central America, European
Common Market and Japan. Certain trademarks have been granted and others are
pending (see "Business--Patents and Trademarks"). Although its patent/trademark
counsel who is also Executive Vice President, has opined that there are no
competing designs or marks, there is no assurance that the patents will be
granted or that additional trademarks will be registered. (See "Business--"FDA
Approval" and "Business--Patent and Trademarks.")
Dilution as a Result of Conversion of Series "D" Preferred Shares and
Exercise of Warrants.
---------------------------------------------------------------------------
Investors hold 2,500 Series "D" Preferred Shares of the Company, which are
convertible into Common Shares. Only 250 Series "D" Preferred Shares have been
converted in Common Shares. Each Series "D" Preferred Share is convertible into
a number of Common Shares equal to (i) $1,000 (ii) divided by a conversion price
which is the lesser of (a) 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 Series "D" Preferred Shares in the 20 trading days immediately
preceding the date of conversion) and (b) $4.625, except that if the 10 day
average closing bid price ending on the effective date of a registration
statement (the "Effective Price") is greater than $4.625, the maximum conversion
price will be such Effective Price, not to exceed in any case, $4.995. Under the
applicable conversion formulas of the Series "D" Preferred Shares, the number of
Common Shares issuable upon conversion is inversely proportional to the market
price of the Common Shares at the time of conversion (i.e., the number of shares
increases as the market price of the Common Shares decreases); and except with
respect to certain redemption rights of the Company for the Series "D" Preferred
Shares and the limitation under Nasdaq Small Cap regulations which limit the
aggregate amount of Common Shares which the Company may issue at a discount from
market price upon conversion of the Series "D" Preferred Shares and Warrants
without shareholder approval, (such shareholder approval is being requested by
the Company), there is no cap on the number of shares of Common Shares which may
be issued. In addition, the number of Common Shares issuable upon the conversion
of the Series "D" Preferred Shares and the exercise of Warrants is subject to
adjustment upon the occurrence of certain dilutive events. Holders also hold
outstanding Warrants to acquire a total of 107,355 Common Shares at a price of
$4.81 share. The exercise of such Warrants and conversion of such Series "D"
Preferred Shares and the sale of such Common Shares could have a significant
negative effect on the market price of the Common Shares and could materially
impair the Company's ability to raise capital through the future sale of equity
securities.
13
<PAGE>
Resale of Restricted Securities.
---------------------------------
5,220,571 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 three months. Such persons must satisfy a two 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.
Preferred Shares.
-----------------
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 Common Shares. 2,500 Series "D" Preferred Shares which are
convertible to Common Shareswere issued and 2,250 are presently outstanding.
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 12 months. This estimate is based on
certain assumptions and there can be no assurance that unanticipated unbudgeted
costs will not be incurred. Future events, including the problems, delays,
expenses and difficulties which may be encountered in establishing 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.")
14
<PAGE>
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.
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.
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.
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.
15
<PAGE>
Item 2. Description of Property
On April 1, 1998, the Company leased 15,000 square feet office, warehouse,
manufacturing and administrative offices 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.
Item 3. Legal Proceedings
In February 1994, Robert Freidenberg, as owner of the two medical
technology companies, MDI and Gendex, acquired by the Company, in the name of
these corporations, filed suit to have a Share Exchange Agreement rescinded on
the grounds of breach of contract. In order to preserve a claim for damages, the
Company filed a third-party claim against Dr. Freidenberg, for breach of the
Share Exchange Agreement. In November 1995, after a trial, the court dismissed
Dr. Friedenberg's lawsuit and allowed the Company's third-party claim to proceed
to trial.In September, 1996, Dr. Friedenberg died. A pretrail hearing was held
in December 1996 which set a trial date of April 28, 1997.
That trial was decided by a jury on May 5, 1997. The verdict determined
that Dr. Friedenberg breached various contracts, including the Share Exchange
Agreement, when he failed to deliver technology to the Company. The jury also
found in favor of the Company on two of the three fraud claims against Dr.
Friedenberg and awarded the Company approximately $321,000 in damages. Dr.
Friedenberg's estate, just prior to the jury trial, filed a supplemental claim
for the shares of the Company's stock which he would have received under the
Share Exchange Agreement which the trial judge took under advisement. The trial
judge, on July 17, 1998 ruled that the estate of Dr. Friedenberg is entitled to
5,907,154 common shares of the Company. The Company has taken an appeal.
Management, in consultation with counsel, is of the opinion that the trial
judge's award of the shares to Dr. Friedenberg's estate will be reversed on
appeal.
In June 1995, the Company filed a lawsuit against Mr. Morris, Dr.
Friedenberg's counsel, for the breach of attorney-client relationship and his
fiduciary duty and negligence in representing the Company in matters relating to
Dr. Friedenberg and in the preparation of the Share Exchange Agreement. The
Company's lawsuit demands damages in the amount of $1,000,000. Mr. Morris has
counterclaimed for common shares. No trial date has been set. The Company is
vigorously contesting the Morris claim.
Item 4. Submission of Matters to a Vote of Security Holders
None.
16
<PAGE>
PART II
Item 5. Market For Common Equity and Related Stockholder Matters
The table on the following page sets forth the range of high and low sales
prices for the Common Shares on the NASD Bulletin Board for each quarter for the
fiscal years 1997 and 1998. As of July 31, 1998, there were approximately 3,822.
holders of Common Shares.
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 4.25 3.50
Third Quarter 4.75 2.75
Second Quarter 7.38 4.31
First Quarter 6.00 2.00
As of July 31, 1998, there were outstanding approximately 14,282,989 Common
Shares and 2,250 convertible Series "D" Preferred Shares. There is one holder of
the Preferred Shares which do not trade.
The Company has not declared any dividends on the Common Shares and does
not expect to do so in the foreseeable future.
Item 6. Management's Discussion and Analysis or Plan of Operation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
for the years ended April 30, 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 enhanced sales force, new products, and customer service; and
acquisitions.
17
<PAGE>
Results of Operations for the Year Ended April 30, 1998 as Compared to the
Year Ended April 30, 1997
- --------------------------------------------------------------------------------
During the current year, the Company undertook an extensive program to
market and distribute its primary product, the Rapid Drug Test kit. As a result,
revenues from the sale of the test kits were $1,991,000 for the year ended April
30, 1998 as compared to $318,000 for the year ended April 30, 1997, representing
an increase of $1,673,000 or 526.2%. Cost of goods sold for the year ended April
30, 1998 was $971,000 or 48.8% of drug test revenues as compared to $183,000 or
57.6% of drug test revenues for the year ended April 30, 1997. In an effort to
lower this cost, the Company has undertaken to develop a cost reduction program
aimed specifically at its in-place production process and expects further
savings in the coming year.
Revenues from book sales were $164,000 for the year ended April 30, 1998 as
compared to $275,000 for the year ended April 30, 1997 representing a decrease
of $111,000 or 40.4%. It is expected that with continued strong sales in the
drug test market, book sales as a percent of overall revenue will continue to
decline. Cost of goods sold for the year ended April 30, 1998 was $79,000 (48.2.
% of book sales) as compared to $77,000 (28.1% of book sales) for the year ended
April 30, 1997.
General and administrative costs for the year ended April 30, 1998 were
$2,739,000, an increase of 215.6% over expenses of $868,000 for the year ended
April 30,1997. The following table sets forth the percentage relationship of
general and administrative costs to sales for both years:
April 30, % April 30, %
1998 Sales 1997 Sales
--------- ----- -------- -----
Sales salaries & commissions $ 572,000 26.5 $ 41,000 6.7
Marketing & promotion 869,000 40.3 112,000 18.3
Legal & professional 112,000 5.2 117,000 19.2
Investor relations costs 241,000 11.2 105,000 17.2
Office salaries 340,000 15.8 275,000 45.0
Telephone 51,000 2.4 19,000 3.1
Insurance 35,000 1.6 28,000 4.6
Other administrative costs 519,000 24.1 171,000 28.0
--------- ---- --------- -----
Total general & administrative costs $ 2,739,000 127.1 $ 868,000 142.1
----------- ----- --------- -----
These increased general and administrative costs were undertaken to create
the necessary infrastructure to meet the Company's worldwide drug test marketing
and production goals. As an outgrowth of increasing sales the Company expects
general and administrative costs to continue to increase but at a slower rate.
As a percent of sales, this cost declined 15.0% during the current year and
Management expects this trend to continue in future.
Bad debt expense representing the write-off of amounts owing from two
companies amounted to $380,000 or 17.6% of sales for the year ended April
30,1998. The company has implemented a stronger credit review process to reduce
this cost in future.
Depreciation and amortization was $101,000 and $96,000 for the years ended
April 30,1998 and 1997 respectively.
18
<PAGE>
Research and development expense of $150,000 for the year ended April 30,
1998 was $75,000 more than the $75,000 expended during the year ended April 30,
1997. This increase in research and development is the result of ongoing
development of both new products and improved methods to reduce the costs of the
drug testing delivery system.
Non-cash compensation charges
-----------------------------
As an inducement and in lieu of cash outlays, the Company granted 260,000
options to employees at exercise prices below market price on date of grant. The
Company also granted 89,000 options as compensation for consulting and
professional fees in lieu of cash. The Company decided to eliminate certain
vesting requirements contained in its employment contracts of the Vice President
of Marketing and the Vice President and General Manager. As a result and in
addition to certain milestones having been reached under these employment
contracts, the Company recorded an aggregate non-cash charge for both options
and stock of $2,214,000.
Liquidity and Capital Resources As of the End of Fiscal Year Ended April
30, 1998
- --------------------------------------------------------------------------------
The Company's cash and cash equivalents amounted to $3,239,000 for the year
ended April 30, 1998 representing an increase of $1,476,000 or 84.0% over
$1,763,000 as of the year ended April 30, 1997. Of this amount, $3,135,000 was
invested in interest bearing certificates of deposit. Working capital increased
$931,000 or 26.2% over $3,549,000 recorded as of the year ended April 30, 1997.
The increase in working capital resulted from the sale of convertible preferred
shares (Series B, C, & D) in the principal amounts of $600,000, $455,000 and
$2,500,000 respectively, plus proceeds from the exercise of 106,305 warrants and
options for $309,000 during the year. Cash generated from financing activities
was utilized to finance operations and for the purchase of machinery and
equipment for $71,000.
As a result of strong fourth quarter sales of drug test kits, accounts
receivable increased $374,000 or 110.7% to $712,000 for the year ended April 30,
1998 compared to $338,000 for the year ended April 30, 1997.
Inventories rose 48.1% to $991,000 for the year ended April 30, 1998 or
$322,000 above $669,000 reported for the year ended April 30, 1997.
The Company's primary short-term needs are to increase its manufacturing
capabilities, increase inventory levels and continue to support its research and
development programs. The Company currently plans to expend approximately $2.0
million for the expansion and development of its manufacturing facilities in
addition to its marketing and general administrative programs.
The Company expects its capital requirements to increase over the next
several years as it expands its research and development efforts, new product
development, sales and administration infrastructure, manufacturing capabilities
and facilities. The Company's future liquidity and capital funding requirements
will depend on numerous factors, including the extent to which the Company's
products under development are successfully developed and gain market
acceptance, the timing of regulatory actions regarding the Company's potential
products, the costs and timing of expansion of sales, marketing and
manufacturing activities, facilities expansion needs, procurement and
enforcement of patents important to the Company's business, results of clinical
investigations and competition.
19
<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 12 months.
Thereafter, if cash generated from operations is insufficient to satisfy the
Company's working capital and capital expenditure requirements, the Company may
be required to sell additional equity or debt securities or obtain additional
credit facilities. There can be no assurance that such financing, if required,
will be available on satisfactory terms, if at all.
Item 7. Financial Statements
a. Balance Sheet as of April 30, 1998
b. Statement of Operations for the two years ended April 30, 1997 and 1998
c. Statement of Cash Flows for the two years ended April 30, 1997 and 1998
d. Statement of Stockholders' Equity for the two years ended April 30, 1997
and 1998
e. Notes to Financial Statements
Item 8. Changes in and Disagreement With Accountants
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons:
Compliance with Section 16(a) of the Exchange Act
Directors and Officers
- ----------------------
The following sets forth the names of the Company's directors and officers.
Directors of the Company are elected annually by the shareholders and the
officers are appointed annually by the Board of Directors. Jasper R. Clay, Jr.
and John F. Murray were appointed by the Board of Directors to fill vacancies.
Name Age Position Since
- ---- --- -------- -----
Stan Cipkowski 50 President and a Director 1986
Edmund Jaskiewicz 75 Chairman of the Board of Directors,
Executive Vice-President and Secretary 1992
Jay Bendis 51 Vice-President-Marketing and a Director 1995
Henry J. Wells 66 Vice-President-Product Development 1995
Jasper R. Clay, Jr. 65 A Director 1997
John F. Murray 53 Chief Financial Officer and a Director 1997
Karen Russo 37 A Director 1997
Douglas Casterlin 51 Vice-President and General Manager 1997
20
<PAGE>
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 where he was a principal and
Vice-President of Sales and Marketing. From 1985 to 1990, Mr. Bendis served as
National Sales Manager of the XANAR Laser Corp., a division of Johnson &
Johnson, where he directed its national sales force and developed its marketing
strategy for integrating high power lasers into the hospital market. From 1979
to 1984, he was the Eastern Area Sales and Marketing Manager for the IVAC Corp.,
a division of Eli Lilly. Prior to 1979, Mr. Bendis held sales management
positions with Xerox Corporation and A.M. International. Mr. Bendis earned his
B.A. in Marketing/Management from Kent State University and is currently a
member of the Edison BioTechnology Center Advisory Council for the State of
Ohio.
Henry Wells, Ph.D. has served since 1990 as a contract chemist with the
title of Vice-President-Science and Technology for New Horizons Diagnostics,
Inc. where he adapts immuno-chemical technologies for detection of infectious
diseases. From 1989 to 1990, he was director of production for Espro, Inc., a
producer of in-vivo pesticides. From 1985 to 1989, Dr. Wells was
Vice-President-Science and Technology for Keystone Diagnostics, Inc. From 1984
to 1985, he was Director of Research and Development for Hill-Wells Research
Corporation, a developer of diagnostics products. From 1981 to 1984, he was
Vice-President-Research and Development of Hematec Corporation. From 1979 to
1981, Dr. Wells was Director of Biochemistry for Helena Laboratories. From 1973
to 1979, he was Manager of Chemical Chemistry at Smith Kline Diagnostics. Dr.
Wells earned his Ph.D. in Biochemistry from the University of Pittsburgh, his M.
A. from University of Pennsylvania and his B.S. in Chemistry from the
University of Pittsburgh.
21
<PAGE>
John F. Murray has served as Chief Financial Officer of Federal Supply,
Inc., Pompano Beach, Florida since April, 1994. From 1988 to 1994, Mr. Murray
served as Controller for Bio Therapeutics, Inc., Woodbridge, New Jersey. He also
was Controller of Shortline, a group of transportation companies, from 1982 to
1988 and, from 1974 to 1982, of Kleber Tire & Rubber Corp. Mr. Murray was
Director of Accounting for Western Union Telegraph Company from 1972 to 1974 and
Senior Accountant for S.D. Leidesdorf & Co (now Ernst & Young) from 1969 to
1972. Mr. Murray received his 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 Parole
from 1969 to 1976, District Supervisor of the Baltimore City District Office in
1968, Staff Specialist-Training and Development for the Maryland Division of
Parole and Probation from 1966 to 1968, Parole and Probation Agent I and II,
Baltimore District, Office of the Maryland Division of Parole and Probation from
1958 to 1966 and as a Psychiatric Aide at the Spring Grove State Hospital from
1957 to 1958.
Mr. Clay 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. He is a member of the American
Correctional Association, the National Council of Crime and Delinquency and the
Association of Paroling Authorities International. Mr. Clay earned his B. A. in
Psychology from Morgan State University in 1954 and attended the graduate school
at Loyola College in areas such as Guidance, Counseling and Psychology.
Douglas Casterlin was General Manager of Coarc, Inc., the Company's product
assembling, packaging and shipping contractor, from 1979 to 1997. In that
capacity, he developed a contract manufacturing business involving plastic
injection molding and clean room assembly and packaging of FDA - regulated
medical products. He also negotiated a joint venture with a major German
health care product manufacture to establish its United States operations and
established a professional-format videocassette remanufacturing business serving
the television broadcast 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.
22
<PAGE>
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 board are as
follows:
Anthony G. Costantino, Ph.D., received a degree in Pharmacy from Dukane
University and a Ph.D. in Toxicology from the University of Maryland. He is a
Board Certified Forensic Toxicologist and currently serves as Director of
Clinical Toxicology at American Medical Laboratories in Chantilly, Virginia.
Delmiro A. Vazquez, B.S., M.T.,(ASCP), earned his B. S. 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 Co-RP of the Forensic Toxicology Department at Columbia Cedars
Medical Center.
Kenneth Steiner, M.D. received his M.D. from the University of Tennessee
and is Board Certified by the National Board of Medical Examiners. He is Board
Certified by the American Board of Emergency Medicine and by the American
Association of Medical Review Officers. Additionally, Dr. Steiner has been
designated as an FAA Medical Examiner.
The board meets from time to time to consider the Company's present
technology and proposed technology development.
Item 10. Executive Compensation
See Proxy Statement for the Annual Meeting of Shareholders for the 1999
Fiscal Year.
23
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth as of July 31, 1998, the number and
percentage of shares of the common stock of the Company, owned of record and
beneficially, by each officer and directors of the Company and by any other
person owning more than 5% of the outstanding Common Shares and by all officers
and directors as a group.
Name and Address Common Shares Percentage(1)
- ---------------- ------------- ------------
Edmund Jaskiewicz 2,005,572 13.9%
1730 M Street, NW
Washington, DC 20036
Stan Cipkowski 2,599,250 18.0%
300 Fairview Avenue
Hudson, New York 12534
Jay Bendis 545,999 3.8%
71 Springcrest Drive
Akron, Ohio 44333
Henry J. Wells, Ph.D. -0- -0-%
9421 Book Row
Columbia, Maryland 21046
Jasper R. Clay, Jr. -0- -0-%
4964 Moonfall Way
Columbia, Maryland 21044
John F. Murray 6,000 -0-%
300 Fairview Avenue
Hudson, New York 12534
Karen Russo 1,250 -0-%
8675 Falmouth Avenue
Playa del Rey, CA 90293
Douglas Casterlin
300 Fairview Avenue
Hudson, New York 12534 112,500 0.8%
------- -----
All Officers and
Officers and Directors
as a Group (8 persons) 5,220,571 36.5%
- ---------------------
24
<PAGE>
Item. 12 Certain Relationships and Related Transactions
----------------------------------------------
In August, 1997, the Company issued 150,000 options pursuant to its Fiscal
1997 Nonstatutory Option Plan as follows: 10,000 to Jasper Clay, Jr., a
Director, 10,000 to John F. Murray, a Director, and 130,000 options to four
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,
150,000 Common Shares. Between September 1, 1997 and April 30, 1998, the Company
issued 417,000 options, pursuant to its Fiscal Nonstatutory 1998 Plan,
exercisable for a period of three years to 18 persons of which 162,000 options
were exercisable at $3.00; 245,000 options at $3.50 and 10,000 options at $4.00.
25
<PAGE>
AMERICAN BIO MEDICA CORPORATION
Contents
Page
----
Financial Statements
Independent auditors' report F-2
Independent auditors' report F-3
Balance sheet as of April 30, 1998 F-4
Statements of operations for the years ended April 30, 1998 and 1997 F-5
Statements of changes in stockholders' equity
for the years ended April 30, 1998 and 1997 F-6
Statements of cash flows for the years ended April 30, 1998 and 1997 F-7
Notes to financial statements F-8
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
of American Bio Medica Corporation
Hudson, New York
We have audited the accompanying balance sheet of American Bio Medica
Corporation as of April 30, 1998 and the related statements of operations, cash
flows and changes in stockholders' equity for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our 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, 1998 and the results of its operations and cash
flows for the year then ended, in conformity with generally accepted accounting
principles.
/s/Richard A. Eisner & Company, LLP
Richard A. Eisner & Company, LLP
New York, New York
June 14, 1998
With respect to the second paragraph of Note K[3]
July 23, 1998
F-2
<PAGE>
Independent Auditor's Report
THOMAS P. MONAHAN
CERTIFIED PUBLIC ACCOUNTANT
208 LEXINGTON AVENUE
PATERSON, NEW JERSEY 07502
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 year ended April 30, 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 year ended April 30, 1997 in conformity with
generally accepted accounting principles.
/s/Thomas P. Monahan
Thomas P. Monahan, CPA
May 28, 1997
Paterson, New Jersey
F-3
<PAGE>
AMERICAN BIO MEDICA CORPORATION
Balance Sheet
April 30, 1998
ASSETS
Current assets:
Cash and cash equivalents $ 3,239,000
Accounts receivable -
net of allowance for doubtful accounts of $40,000 712,000
Inventory 991,000
Prepaid expenses and other current assets 24,000
------------
Total current assets 4,966,000
Property, plant and equipment, net 147,000
Due from officer 235,000
Other assets 8,000
------------
$ 5,356,000
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 486,000
------------
Stockholders' equity:
Preferred stock; par value $.01 per share;
5,000,000 shares authorized; 2,500 shares
Series D, 8% cumulative, convertible
issued and outstanding (face value $2,500,000)
Common stock; par value $.01 per share
30,000,000 shares authorized; 14,282,989 shares
issued and outstanding 143,000
Additional paid-in capital 12,102,000
Subscription receivable (9,000)
Unearned portion of compensatory options (24,000)
Accumulated deficit (7,342,000)
------------
4,870,000
------------
$ 5,356,000
============
See notes to financial statements.
F-4
<PAGE>
AMERICAN BIO MEDICA CORPORATION
Statements of Operations
Year Ended April 30,
----------------------
1998 1997
--------- ---------
Net sales $ 2,154,000 $ 611,000
Cost of goods sold 1,051,000 260,000
------------ -----------
Gross profit 1,103,000 351,00
------------ -----------
Operating expenses:
Selling, general and administrative 2,739,000 868,000
Noncash compensation charges 2,214,000
Depreciation and amortization 101,000 96,000
Research and development 150,000 75,000
Write-off of bad debts 380,000
------------ -----------
5,584,000 1,039,000
------------ -----------
Operating loss (4,481,000) (688,000)
------------ -----------
Other income:
Retirement of debt 127,000
Interest income 91,000 56,00
------------ -----------
91,000 183,000
------------ -----------
Net loss $ (4,390,000) $ (505,000)
Adjustments:
Preferred stock beneficial conversion feature (359,000)
Preferred stock dividends (45,000)
------------
Net loss attributable to common stockholders $ (4,794,000)
============
Basic and diluted loss per common share $(.35) $(.04)
===== =====
Weighted average number of shares outstanding
- basic and diluted 13,768,000 12,728,000
========== ==========
See notes to financial statements.
F-5
<PAGE>
AMERICAN BIO MEDICA CORPORATION
Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Unearned
Preferred
Additional Compen-
Stock Common Stock
Paid-in Subscription satory Accumulated
Shares Shares Amount
Capital Receivable Options Deficit Total
------ ------ ------
- ------- ---------- ------- ------- -----
<S> <C> <C> <C> <C>
<C> <C> <C> <C>
Balance - April 30, 1996 11,977,357 $ 120,000 $
2,636,000 $(2,402,000) $ 354,000
Proceeds from exercise of warrants and
options 872,445 9,000
2,258,000 2,267,000
Shares issued for conversion of debt 200,666 2,000
148,000 150,000
Shares issued in private placement 100,000 1,000
49,000 50,000
Proceeds from private placement of
Preferred "A" shares
(net of costs of $90,000) 150
1,410,000 1,410,000
Preferred "A" shares converted to
common shares (60) 229,039 2,000
(2,000)
Net loss
(505,000) (505,000)
----- ---------- ---------
- --------- ---------- ---------
Balance - April 30, 1997 90 13,379,507 134,000
6,499,000 (2,907,000) 3,726,000
Proceeds from exercise of warrants
and options 106,305 1,000
317,000 $(9,000) 309,000
Preferred "A" shares converted to
common shares (90) 404,034 4,000
(4,000)
Proceeds from private placement of
Preferred "B" shares
(net of costs of $48,000) 60
552,000 552,000
Preferred "B" shares converted to
common shares (60) 226,037 2,000
(2,000)
Cash dividend paid to holders of
Preferred "B" shares
(26,000) (26,000)
Proceeds from private placement
of Preferred "C" shares
(net of costs of $57,000) 45.5
398,000 398,000
Preferred "C" shares converted to
common shares (45.5) 160,359 2,000
(2,000)
Stock dividend paid to holders of
Preferred "C" shares 6,747
19,000 (19,000)
Proceeds from private placement of
Preferred "D" shares and warrants
(net of costs of $188,000) 2,500
2,312,000 2,312,000
Purchase of options previously granted
(225,000) (225,000)
Issuance of compensatory stock
1,896,000 1,896,000
Value assigned to compensatory
stock options
342,000 $(24,000) 318,000
Net loss
(4,390,000) (4,390,000)
------ ---------- ---------
- ----------- ------- -------- ---------- ----------
Balance - April 30, 1998 2,500 14,282,989 $ 143,000
$12,102,000 $(9,000) $(24,000) $(7,342,000) $4,870,000
====== ========== =========
=========== ======= ======== =========== ==========
</TABLE>
See notes to financial statements.
F-6
<PAGE>
AMERICAN BIO MEDICA CORPORATION
Statements of Cash Flows
Year Ended April 30,
--------------------
1998 1997
------------ ------------
Cash flows from operating activities:
Net loss $ (4,390,000) $ (505,000)
Adjustments to reconcile net loss
to net cash used in operating activities:
Amortization and depreciation 101,000 96,000
Retirement of debt (127,000)
Provision for bad debts 40,000
Issuance of compensatory stock options 318,000
Issuance of compensatory stock 1,896,000
Changes in:
Loan receivable 102,000 (102,000)
Accounts receivable (414,000) (303,000)
Inventory (322,000) (646,000)
Prepaid expenses and other current assets (20,000) (4,000)
Other assets (8,000)
Accounts payable and accrued expenses 106,000 347,000
------------ ------------
Net cash used in operating activities (2,591,000) (1,244,000
------------ ------------
Cash flows from investing activities
Purchase of property, plant and equipment (71,000) (115,000)
Purchase of investments (1,053,000)
Maturity of investments 1,053,000
Patent costs (8,000)
Loans to officer (235,000)
------------ ------------
Net cash provided by
(used in) investing activities 747,000 (1,176,000)
------------ ------------
Cash flows from financing activities:
Convertible debenture (132,000)
Proceeds from private placements 3,262,000
Proceeds from exercise of warrants and options 309,000 3,878,000
Cash dividends paid (26,000)
Purchase of Company's options (225,000)
------------ ------------
Net cash provided by financing activities 3,320,000 3,746,000
------------ ------------
Net increase in cash and cash equivalents 1,476,000 1,326,000
Cash and cash equivalents - beginning of period 1,763,000 437,000
------------ ------------
Cash and cash equivalents - end of period $ 3,239,000 $ 1,763,000
============ ============
Noncash activities:
Stock dividends paid to
holders of preferred stock $ 19,000
Conversion of convertible debt
into common stock $ 150,000
See notes to financial statements.
F-7
<PAGE>
AMERICAN BIO MEDICA CORPORATION
Notes to Financial Statements
April 30, 1998
Note A - The Company and its Significant Accounting Policies
American Bio Medica Corporation (the "Company") was formed under the laws
of the State of New York on April 10, 1986 and is in the business of acquiring,
developing and marketing biomedical technologies and products. The Company
currently owns two technologies for screening drugs of abuse, a workplace
screening test and a preliminary test for use by laboratories. The Company's
products are manufactured and assembled by outside contract manufacturers. The
Company is also involved in marketing educational books and software to schools
and municipal libraries and audio-visual educational packages to corporations
throughout the United States.
[1] Cash equivalents:
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
[2] Inventory:
Inventory is stated at the lower of cost or market; cost is determined by
the first-in-first-out method.
[3] Income taxes:
The Company uses the liability method of accounting for income taxes. The
liability method measures deferred income taxes by applying enacted statutory
rates in effect at the balance sheet date to the differences between the tax
bases of assets and liabilities and their reported amounts in the financial
statements. The resulting asset or liability is adjusted to reflect changes in
the tax law as they occur.
[4] Depreciation and amortization:
Property and equipment are depreciated on the straight-line method over
their estimated useful lives. Leasehold improvements are amortized by the
straight-line method over the shorter of their estimated useful lives or the
term of the lease.
[5] Patents and license agreements:
Costs incurred to acquire exclusive licenses of patentable technology are
capitalized and amortized over the shorter of a five year period or the term of
the license. 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.
[6] Revenue recognition:
The Company recognizes revenue when products are shipped or services are
rendered. Revenues from book sales with the right of return, are recognized net
of a provision for estimated returns.
[7] Research an development:
Research and development costs are charged to operations when incurred.
F-8
<PAGE>
Note A - The Company and its Significant Accounting Policies (continued)
[8] Loss per common share:
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No.128, Earnings Per Share," in the year ended April 30, 1998 and has
retroactively applied the effects thereof for all periods presented.
Accordingly, the presentation of per share information includes calculations of
basic and dilutive loss per share. The impact on the per share amounts
previously reported (primary and fully diluted) was not significant. The effects
of potential common shares such as warrants, options, and convertible preferred
stock has not been included, as the effect would be antidilutive.
When preferred stock is convertible to common stock at a conversion rate
that is the lower of a rate fixed at issuance or a fixed discount from the
common stock market price at the time of conversion, the discounted amount is an
assured incremental yield, the "beneficial conversion feature", to the preferred
shareholders and should be accounted for as an embedded dividend to preferred
shareholders. As such, the loss per common share was adjusted for this feature.
[9] Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
[10] Impairment of long-lived assets:
The Company adopted SFAS No.121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" during the year
ended April 30, 1998. SFAS 121 establishes accounting standards for the
impairment of long-lived assets, certain identifiable assets, and goodwill
related to those assets. There was no effect of the adoption of SFAS 121 on the
financial statements.
[11] Financial instruments:
The carrying amounts of cash and cash equivalents, accounts receivable -
net, accounts payable and accrued expenses approximate their fair value based on
the nature of those items.
Estimated fair value of financial instruments are determined using
available market information. In evaluating the fair value information,
considerable judgment is required to interpret the market data used to develop
the estimates. The use of different market assumptions and/or different
valuation techniques may have a material effect on the estimated fair value
amounts. Accordingly, the estimates of fair value presented herein may not be
indicative of the amounts that could be realized in a current market exchange.
Due to the related party nature of due from officer the Company is unable to
determine its fair value.
[12] Stock-based compensation:
The Financial Accounting Standards Board has issued SFAS No.123,
"Accounting for Stock-Based Compensation", which encourages, but does not
require, companies to record compensation cost for stock-based employee
compensation under a fair value based method. The Company has elected to
continue to account for its stock-based employee compensation using the
intrinsic value method prescribed by Accounting Principles Board Opinion No.25
("APB No.25"), "Accounting for Stock Issued to Employees" and disclose the pro
forma effects on net loss and loss per share basic and diluted had the fair
value of such compensation been expensed. Under the provisions of APB No.25,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Company's common stock at the date of the grant over
the amount an employee must pay to acquire the stock.
F-9
<PAGE>
Note A - The Company and its Significant Accounting Policies (continued)
[13] Concentration of credit risk:
The Company sells its products primarily to United States distributors.
Credit is extended based on an evaluation of the customer's financial condition,
and generally collateral is not required. The Company establishes an allowance
for doubtful accounts based on factors surrounding the credit risk of specific
customers and other information.
[14] Recent accounting pronouncements:
The Financial Accounting Standards Board has recently issued statements of
Financial Accounting Standards No.130, "Reporting Comprehensive Income," and
No.131, "Disclosures about Segments of an Enterprise and Related Information,"
and No.132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits." The above pronouncements will not have a significant effect on the
information presented in the financial statements.
Note B - Investments
The estimated fair value of available-for-sale investments at April 30,
1997 was $1,053,000 and consisted of certificate of deposits with maturities
greater than three months. The estimated fair value of each investment was
approximately equal to the amortized cost at April 30, 1997 and, therefore,
there were no unrealized gains or losses, at that date. The Company did not hold
any investments at April 30, 1998.
Note C - Inventory
Inventory is comprised of the following:
Books held for resale $ 118,000
------------
Workplace drug screening tests:
Raw materials 447,000
Work in process 148,000
Finished goods 278,000
------------
Total workplace drug screening tests 873,000
------------
$ 991,000
============
Note D - Plant and Equipment
Plant and equipment, at cost, are summarized as follows:
Office equipment $ 60,000
Manufacturing and warehouse equipment 144,000
------------
204,000
Less accumulated depreciation 57,000
------------
$ 147,000
============
F-10
<PAGE>
Note E - Due From Officer
At April 30, 1998 the Company has a note receivable from an officer for
$235,000. The note bears interest at 6% per annum and is payable on demand.
Note F - Income Taxes
At April 30, 1998 the Company has approximately $4,894,000 of net operating
loss carryforwards expiring through 2013.
At April 30, 1998 the Company has a deferred tax asset of approximately
$1,883,000 representing the benefits of its net operating loss carryforward and
certain expenses not currently deductible. The Company's deferred tax asset has
been fully reserved by a valuation allowance since realization of its benefit is
uncertain. The difference between the statutory tax rate of 34% and the
Company's effective tax rate of 0% is substantially due to the increase in the
valuation allowance of $986,000 and $172,000 for the years ended April 30, 1998
and 1997, respectively. The Company's ability to utilize its net operating loss
carryforwards may be subject to an annual limitation in future periods pursuant
to Section 382 of the Internal Revenue Code of 1986, as amended.
Note G - Stockholders' Equity
[1] Preferred stock:
In October 1996 the Company amended its certificate of incorporation
authorizing the issuance of 5,000,000 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 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.
During 1996 the Company completed a private placement in which it netted
proceeds of approximately $1,410,000 through the sale of 150 8% Convertible
Series A Preferred Shares for $10,000 per share. Each Preferred Share is
convertible into Common Shares pursuant to the following formula: $10,000
divided by the lesser of $6.07 or 75% of the average of the daily closing bid
prices for the five consecutive trading days ending on the trading day prior to
the day on which the Preferred Shares are converted to Common Shares. All
accrued but unpaid dividends are payable in cash. The Series A Preferred Shares
were converted into an aggregate of 633,073 Common Shares.
During September 1997 the Company completed a private placement in which it
netted proceeds of approximately $950,000 through the sale of 60 8% Series B
Convertible Preferred Shares and 45.5 Shares of Series C Convertible Preferred
Shares for $10,000 per share. Each Preferred Share was convertible into Common
Shares pursuant to the following formula: $10,000 divided by lesser of $3.50 or
75% of the average of the daily closing bid prices for the twenty consecutive
trading days ending on the trading day prior to the day on which the Preferred
Shares are converted to Common Shares. Dividends were payable in cash or shares
of common stock at the election of the Company on the date the Preferred Shares
are converted to common shares. The Series B Preferred Shares and the Series C
Preferred Shares were converted into an aggregate of 226,037 and 160,359 Common
Shares respectively.
F-11
<PAGE>
Note G - Stockholders' Equity (continued)
[1] Preferred stock: (continued)
During April 1998 the Company completed a private placement in which it
netted proceed of approximately $2,312,000 through the sale of 2,500 8% Series D
Convertible Preferred Shares for $1,000 per share. Each Preferred Share is
convertible at the lesser of (i) 95% of the average of the closing bid prices of
the common shares over any three trading days selected by the holder of the
Preferred Shares in the 20 trading days immediately preceding the date of
conversion or (ii) $4.625 based on a formula as provided. Dividends are payable
in cash or additional Preferred Shares at the Company's option.
[2] Stock option plans:
The Company adopted the Fiscal 1997 Nonstatutory Stock Option Plan (the
"1997 Plan") and the Fiscal 1998 Nonstatutory Plan (the "1998 Plan"). The 1997
Plan provides for the granting of options to purchase up to 2,000,000 shares of
common stock and the 1998 Plan provides for the granting of options to purchase
1,000,000 shares of common stock. Both Plans are administered by the Option
Committee of the Board of Directors, which determine the terms of options
exercised, including the exercise price, the number of shares subject to the
option and the terms and conditions of exercise.
[3] Other stock options:
During March 1996 the Company entered into an agreement with a public
relations and communications firm to serve as the Company's liaison and
spokesman to the financial and investment community. Under the agreement the
Company granted under Regulation D of the Securities Act of 1933, to the public
relations firm the right to receive 100,000 common shares at a value of $0.65
per share for a total consideration of $65,000 in lieu of an initial payment,
monthly retainers or expense reimbursement, including communications and mailing
for a period of one year. In addition, the Company granted 550,000 common shares
valued at $0.325 per share representing one-half the market price of the common
shares at March 14, 1996, the date of the contract. The valuation reflected 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. The Company also granted 500,000 options exercisable at
$1.00 through March 15, 1999 and 500,000 options exercisable at $2.00 through
March 15, 1999. During March 1998 the Company purchased from the public
relations firm 75,000 options exercisable at $1.00 per common share and 75,000
options exercisable at $2.00 per common share for $225,000. The remaining
850,000 options cannot be exercised until a registration statement relating to
the common shares underlying the options is effective.
F-12
<PAGE>
Note G - Stockholders' Equity (continued)
[4] Stock options:
Stock option activity is summarized as follows:
Year Ended April 30,
---------------------------------------------------
1998 1997
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ --------- -------- -----
Options outstanding
at beginning of year 2,174,000 $ 2.31 1,000,000 $ 1.50
Granted 567,000 $ 3.25 1,802,000 $ 3.00
Exercised (81,000) $ 3.00 (628,000) $ 3.00
Canceled (150,000) $ 1.50
---------- ---------
Options outstanding
at end of year 2,510,000 $ 2.55 2,174,000 $ 2.31
========== =========
Options exercisable
at end of year 1,439,000 $ 3.05 1,123,000 $ 3.00
========== =========
The following table presents information relating to stock options
outstanding at April 30, 1998.
Options outstanding Options Exercisable
------------------------------------ -------------------
Weighted Weighted Weighted
Average Average Average
Range of Exercise Remaining Exercise
Exercise Price Shares Price Life in Year Shares Price
-------------- ------ -------- ------------ ------- -----
$1.00 - $2.00 850,000 $1.50 .87 .0 $ 0
$3.00 - $4.00 1,660,000 $3.09 1.76 1,439,000 $3.05
--------- ---------
2,510,000 $2.55 1.46 1,439,000 $3.05
========= =========
As of April 30, 1998 48,000 options are available for future grant under
the 1997 Plan, 583,000 options are available for future grant under the 1998
Plan.
[5] Warrants:
In connection with the Private Placement of the Series A Convertible
Preferred Shares the Company granted 24,712 common share warrants entitling the
holder to purchase one share of common stock at a price of $3.00 per share. The
warrants were exercised during the fiscal year ended April 30, 1998.
In connection with the Private Placement of the 8% Series D Convertible
Preferred Shares the Company granted 107,355 common share purchase warrants
entitling the holder to purchase one share of common stock at a price of $4.81
per share until April 24, 2001. 100,000 of the purchase warrants were issued to
preferred stockholders and 7,355 of the purchase warrants were issued to the
selling agent as additional commission. The weighted average fair value of
warrants granted during the year ended April 30, 1998 was $1.67 on the date of
grant using the Black-Scholes option-pricing model using the following
assumptions: dividend yield 0%; volatility of 59%, risk free rate of 5.61% and
expected life of three years.
F-13
<PAGE>
Note G - Stockholders' Equity (continued)
[6] Stock-based compensation:
The Company applies APB No. 25 in accounting for its stock option plans
and, accordingly, recognizes compensation expense for the difference between the
fair value of the underlying common stock and the exercise price of the option
at the date of grant. The effect of applying SFAS No. 123 on pro forma net loss
as stated above is not necessarily representative of the effects on reported net
loss for future years due to, among other things (1) the vesting period of the
stock options and (2) the fair value of additional stock options in future
years. The average fair value of options granted during the year was
approximately $1.78. The following pro forma information gives effect to fair
value of the options on the date of grant using the Black-Scholes option-pricing
model with the following assumptions: dividend yield of 0%, volatility of 59%,
risk free interest rates of ranging from 5.38% - 6.40% and expected life of 3
years.
Net loss:
As reported $ (4,390,000)
Pro forma (4,755,000)
Basic and diluted loss per share:
As reported ($0.35)
Pro forma ($0.37)
During the year ended April 30, 1998 the Company granted 260,000 options to
employees at exercise prices less than the fair value ($342,000) of the
underlying common stock at the dates of grant. The Company recorded a one-time
noncash charge of $318,000 and the difference of $24,000 as unearned
compensation which is being amortized over the shorter of the vesting period or
period of employment.
During the year ended April 30, 1998 the Company granted 89,000 options as
compensation for consulting and professional services. The Company determined
the fair value of these options to be approximately $139,000 and a one-time
noncash charge was recorded.
Note H - 12% Convertible Subordinated Debentures
During the year ended April 30, 1997 the Company converted $150,000 of
convertible debentures into 200,666 shares of common stock.
Note I - Loan Receivable
During December 1996 the Company entered into a promissory note receivable
with a public relations and communications firm. The principal amount of
$100,000 and accrued interest at 6% were satisfied through the performance of
services. The amount of $102,000 (including interest) was charged to expense
during the year ended April 30, 1998.
F-14
<PAGE>
Note J - Secured Loan
On March 9, 1990, the Company entered into a security agreement with a
finance company to borrow money secured by the Company's receivables evidenced
by invoices. At the time, the Company was engaged in selling educational books
to municipal school districts and public libraries throughout the United States.
The finance company agreed to lend an amount equal to 60% of the net value of
all the Company's accounts receivable. Accounts receivable funding ceased as of
July 31, 1990.
The Company instituted a lawsuit against the finance company on
November 26, 1990 for damages due to its failure to lend to the 60% credit limit
based on its calculations and for forgiveness of the loan based on the finance
company's charging, based on its own billings, at an interest rate in excess of
the rate of 25% per annum as prescribed in the sections dealing with usury in
New York Penal State Law. Although company counsel had opined that the Company
would prevail in the action and that all indebtedness incurred in the principal
amount $126,500 plus interest and fees would be voided by reason of the finance
company's violation of the usury provisions of the Penal Law, by agreement
between the Company and the finance company, the lawsuit was withdrawn without
prejudice as the Company, at that time, lacked the resources for protracted
litigation. In April 1996, the obligation, if any, to the finance company became
barred by New York State's six-year statute of limitations. The Company wrote
off the obligation during the second quarter of fiscal 1997.
Note K - Commitments and Contingencies
[1] Operating leases:
The Company leases office and warehouse facilities under an operating lease
expiring in March 2000. At April 30, 1998, the future minimum rental payments
under the operating lease are as follows:
1999 $ 46,000
2000 55,000
------------
$ 101,000
============
Rent expense was $37,000 and $13,000 for the years ended April 30, 1998 and
1997, respectively.
[2] Employment agreements:
On November 3, 1995, the Company entered into a three year employment
agreement with its President. Under the agreement, the President received an
annual salary of $36,000 per year until April 30, 1996 and $60,000 thereafter.
The base annual salary was increased to $72,000 when the Company generated
aggregate gross revenues from the sale of biomedical products of $500,000.
On November 3, 1995, the Company entered into a three year employment
agreement with its Executive Vice-President. The agreement provided for an
annual salary of $24,000 until April 30, 1996 and $48,000 thereafter. The base
annual salary was increased to $60,000 when the Company generated aggregate
gross revenues from the sale of biomedical products of $500,000.
F-15
<PAGE>
Note K - Commitments and Contingencies (continued)
[2] Employment agreements: (continued)
On November 3, 1995 the Company entered into a three year employment
agreement with its Vice-President of Marketing. Under the agreement the
Vice-President received an annual salary of $24,000 until April 30, 1996 and
$48,000 thereafter. The base annual salary was increased to $60,000 when the
Company generated aggregate gross revenues from the sale of biomedical products
of $500,000. In consideration of past services valued at $125,000 or $0.25 per
share the Vice-President received the right to receive 500,000 common shares.
Upon execution of the agreement the Vice President of Marketing received 100,000
shares. Certificates representing 400,000 common shares were being held by the
Company subject to the following vesting:
100,000 shares upon the Company's achieving $1,000,000 in gross revenues
from sales of biomedical products; 100,000 shares upon the Company's achieving
$2,000,000 in gross revenues from sales of biomedical products 100,000 shares
upon the Company's achieving $3,000,000 in gross revenues from sales of
biomedical products; 100,000 shares upon the Company's achieving $4,000,000 in
gross revenues from sales of biomedical products.
During the year ended April 30, 1998 the Vice President of Marketing
received 200,000 shares upon the Company achieving $2,000,000 in gross revenues
of biomedical products. Additionally in April 1998, the Board of Directors voted
to remove the vesting restrictions on the remaining 200,000 shares. In
connection therewith, the Company recorded a noncash charge of $1,356,000. The
amount of the charge was based on the closing price of the common stock on the
date the milestones were achieved and the date the Board of Directors voted to
remove the vesting restrictions.
In addition, the above agreements provide for bonuses based on graduated
rates at specified levels of gross revenues in the aggregate as follows: 6% of
gross revenues of the Company of $1,000,000 per fiscal year until such revenues
reach $3,000,000, 4.5% of gross revenues between $3,000,000 and $5,000,000 per
year and 3% thereafter.
On May 26, 1997 the Company entered into a three year employment agreement
with its Vice-President/General Manager. The employment agreement provides for a
base annual salary of $84,000 per annum and a bonus of 1% of net sales after
gross revenue of $1,000,000 per fiscal year. Additionally the employee shall
receive 150,000 options at $3.00 per share vesting immediately. The President of
the Company gave the Vice-President/General Manager 150,000 shares of the
Company's common stock vesting as follows: 25% upon effective date of employment
and 25% additional upon each of the three subsequent anniversaries of
employment. During the year ended April 30, 1998 the Board of Directors voted to
remove the vesting restrictions. In connection therewith, the Company recorded a
noncash charge of $540,000 during the year ended April 30, 1998. The amount of
the charge was based on the closing price for the common stock for the shares
received on the effective date and the shares received when the vesting
restrictions were removed.
During the year ended April 30, 1998 the Company recorded approximately
$80,000 in bonuses based on revenue in accordance with employment agreements.
F-16
<PAGE>
Note K - Commitments and Contingencies (continued)
[3] Litigation
In February 1994, Robert Freidenberg, as owner of the two medical
technology companies, MDI and Gendex, acquired by the Company, in the name of
these corporations, filed suit to have a Share Exchange Agreement rescinded on
the grounds of breach of contract. In order to preserve a claim for damages, the
Company filed a third-party claim against Dr. Freidenberg, for breach of the
Share Exchange Agreement. In November 1995, after a trial, the court dismissed
Dr. Friedenberg's lawsuit and allowed the Company's third-party claim to proceed
to trial.In September, 1996, Dr. Friedenberg died. A pretrail hearing was held
in December 1996 which set a trial date of April 28, 1997.
That trial was decided by a jury on May 5, 1997. The verdict determined
that Dr. Friedenberg breached various contracts, including the Share Exchange
Agreement, when he failed to deliver technology to the Company. The jury also
found in favor of the Company on two of the three fraud claims against Dr.
Friedenberg and awarded the Company approximately $321,000 in damages. Dr.
Friedenberg's estate, just prior to the jury trial, filed a supplemental claim
for the shares of the Company's stock which he would have received under the
Share Exchange Agreement which the trial judge took under advisement. The trial
judge, on July 17, 1998 ruled that the estate of Dr. Friedenberg is entitled to
5,907,154 common shares of the Company. Management of the Company in
consultation with counsel is of the opinion that the trial judge's award of the
shares to Dr. Friedenberg's estate will be reversed on appeal.
In June 1995, the Company filed a lawsuit against Mr. Morris, Dr.
Friedenberg's counsel, for the breach of attorney-client relationship and his
fiduciary duty and negligence in representing the Company in matters relating to
Dr. Friedenberg and in the preparation of the Share Exchange Agreement. The
Company's lawsuit demands damages in the amount of $1,000,000. Mr. Morris has
counterclaimed for common shares. No trial date has been set. The Company is
vigorously contesting the Morris claim.
Note L - Reclassification
Certain amounts at April 30, 1997 have been reclassified to conform to the
current year presentation.
Note M - Fourth Quarter Transactions and Adjustments (Unaudited):
During the fourth quarter of fiscal 1998, the Company made various
adjustments aggregating approximately $1,883,000 representing charges to the
results of operations previously reported. The effects of such adjustments on
each of the first three quarters of the year have not been determined.
F-17
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Financial Data Schedule for 10KSB - 04-30-98 for American Bio Medica
Corporation
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-1-1997
<PERIOD-END> APR-30-1998
<CASH> 3,239,000
<SECURITIES> 0
<RECEIVABLES> 752,000
<ALLOWANCES> (40,000)
<INVENTORY> 991,000
<CURRENT-ASSETS> 4,966,000
<PP&E> 205,000
<DEPRECIATION> (58,000)
<TOTAL-ASSETS> 5,356,000
<CURRENT-LIABILITIES> 486,000
<BONDS> 0
0
0
<COMMON> 143,000
<OTHER-SE> 4,727,000
<TOTAL-LIABILITY-AND-EQUITY> 5,356,000
<SALES> 2,154,000
<TOTAL-REVENUES> 2,245,000
<CGS> 1,051,000
<TOTAL-COSTS> 5,584,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,390,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,390,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,390,000)
<EPS-PRIMARY> (.35)
<EPS-DILUTED> (.35)
</TABLE>
