As filed with the Securities and Exchange Commission on January , 1998
Registration No. 333-16535
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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
AMERICAN BIO MEDICA CORPORATION
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(Name of small business issuer in its charter)
New York 5122 22-3378935
- ------------------------------- ---------------------------- -------------------
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) (Identification No.)
102 Simons Road, Ancramdale, New York 12503 800-227-1243
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(Address and telephone number of principal executive offices)
102 Simons Road, Ancramdale, New York 12503 800-227-1243
- --------------------------------------------------------------------------------
(Address of principal place of business or intended principal place of business)
Stan Cipkowski, 102 Simons Road, Ancramdale, New York 12503 800-227-1243
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(Name, address and telephone number of agent for service)
Approximate date of commencement of proposed sale to the public:
As soon as practical after this Registration Statement becomes effective.
<PAGE>
CALCULATION OF REGISTRATION FEE
Proposed Maximum
Title of each class Amount maximum aggregate Amount of
of securities to be offering price offering registration
to be registered registered per item price (1) fee
- --------------------------------------------------------------------------------
Common Shares (2)
Underlying conversion 171,429(3) $3.50 $600,000(3) $ 181.82
of "B" Preferred Shares Shares
Common Shares (2)
Underlying conversion 130,000 $3.50 $455,000 $ 137.88
of "C" Preferred Shares Shares
--------
Total registration fee $ 319.70
(1) Estimated for purposes of calculating the registration fee pursuant to Rule
457.
(2) Any additional Common Shares issuable pursuant to stock splits, stock
dividends, conversion ratio or similar transactions will be deemed
registered by this registration statement.
(3) Number of Common Shares underlying conversion of "B" Preferred Shares is
rounded up to nearest whole share. Maximum aggregate offering price
represents the actual gross proceeds received from the sale of the "B"
Preferred Shares.
The registrant ("Registrant") hereby amends this registration statement on
such date or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this registration statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to said Section 8(a), may determine.
ii
<PAGE>
AMERICAN BIO MEDICA CORPORATION
CROSS REFERENCE SHEET
Indicating the location in the Prospectus included in this Registration
Statement of the Information called for by the Items of Part I of Form SB-2
Item Heading Caption in Prospectus
- ------- ------------------------------- ---------------------
Item 1 Front of Registration Statement
and Outside Front Cover
of Prospectus Front Cover Page
Item 2 Inside Front and Outside Back
Cover Pages of Prospectus Inside Front Cover,
Inside Back Cover
Additional Information
Item 3 Summary Information
and Risk Factors Prospectus Summary,
The Company, Risk Factors
Item 4 Use of Proceeds Prospectus Summary,
Use of Proceeds
Item 5 Determination of Offering Price Front Cover Page,
Risk Factors,
Item 6 Dilution Dilution
Item 7 Selling Security-Holders Selling Securityholders
Item 8 Plan of Distribution Front Cover Page, Underwriting
Item 9 Legal Proceedings Litigation
Item 10 Directors, Executive Officers,
Promoters and Control Persons Management
Item 11 Security Ownership of Certain
Beneficial Owners and Principal Shareholders
Management
Item 12 Description of Securities Front Cover Page,
Prospectus Summary,
Description of Securities
Item 13 Interest of Named Experts
and Counsel Legal Matters, Experts
Item 14 Disclosure of Commission Position
on Indemnification For
Securities Act Liabilities Description of Securities--
Commission Position
on Indemnification
for Securities Act
Liabilities
Item 15 Organization Within Last Five Years Certain Transactions
Item 16 Description of Business Business
Item 17 Management's Discussion and
Analysis of Plan of Operation Management's Discussion
and Analysis of Results of
Operations
Item 18 Description of Property Business
Item 19 Certain Relationships
and Related Transactions Certain Transactions
Item 20 Market for Common Equity
and Related Stockholder Matters Market for Common Equity
and Related Shareholder
Matters
Item 21 Executive Compensation Management
Item 22 Financial Statements Financial Statements
Item 23 Changes in and Disagreement
With Accountants on Accounting
and Financial Disclosure Experts
iii
<PAGE>
PROSPECTUS
AMERICAN BIO MEDICA CORPORATION
American Bio Medica Corporation (the "Company") is registering the
following securities: up to 171,429 common shares, $.01 par value each ("Common
Shares"), subject to conversion ratio, into which 60 series "B" convertible
preferred shares, $.01 par value each, ('"B" Preferred Shares'), and 130,000
Common Shares into which 45.5 series "C" convertible preferred shares, $.01 par
value each ('"C" Preferred Shares'), subject to conversion ratio, may be
converted. (The "B" and "C" Preferred Shares are hereinafter collectively
referred to as the "Preferred Shares."). Each Preferred Share is convertible
pursuant to the following formula: $10,000 (the purchase price of a Preferred
Share) divided by the lesser of $3.50 or 75% of the Market Price. ("Market
Price" is defined throughout this prospectus (the "Prospectus") as the average
closing price of the Common Shares for the 20 days prior to the date of
conversion of the Preferred Shares.) The formula for the conversion of the
Preferred Shares has been determined by the Company and the holders thereof and
bears no relation to the Company's assets, book value, or any other customary
investment criteria, including the Company's prior operating history. (See
""Risk Factors--Determination of Offering Price," "Certain Transactions" and
"Description of Securities.")
The Common Shares have been accepted for trading on the National
Association of Securities Dealers, Inc. Automatic Quotation Market ("Nasdaq
SmallCap"). Nonetheless, there can be no assurance that a public market in the
Common Shares will be sustained during the period of exercise of conversion of
the Preferred Shares. (See "Risk Factors--No Assurance of Continued Public
Market for Common Shares.")
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION TO INVESTORS. (SEE "RISK FACTORS" AND "DILUTION.")
--------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") OR
BY ANY STATE OR JURISDICTION, NOR HAS THE COMMISSION OR ANY STATE OR
JURISDICTION PASSED UPON THE ACCURACY OR ADEQUACY OF THE PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
Underwriting
Price to Discounts and Proceeds to
Public (1) Commissions(1) Company(2)
- --------------------------------------------------------------------------------
Per Share Underlying Con-
version of "B" Preferred Shares $3.50 (3) $0.28 $3.22
- --------------------------------------------------------------------------------
Per Share Underlying Con-
version of "C" Preferred Shares $3.50 (3) $0.35 $3.15
- --------------------------------------------------------------------------------
Total Shares Underlying
Conversion of "B" Preferred
Shares $600,000 $48,000 $ 552,000
- --------------------------------------------------------------------------------
Total Shares Underlying
Conversion of "C" Preferred
Shares $455,000 $45,500 $ 409,500
- --------------------------------------------------------------------------------
Total $1,055,000 $93,500 $ 961,500
- --------------------------------------------------------------------------------
(1) Before deducting estimated expenses of the this offering (the "Offering"),
including, but not limited to, legal and accounting fees, fees to
regulatory authorities and printing and distribution expenses, which are
payable by the Company estimated at $20,000. ("Use of Proceeds.")
(2) Commissions to selling agents were paid upon the sale of the Preferred
Shares. All proceeds from the sale of the Preferred Shares have been
received by the Company. This registration statement (the "Registration
Statement") relates to the conversion of the Preferred Shares into Common
Shares.
(3) Assumes conversion price of $3.50. The actual conversion price may be less
than $3.50. (See "Description of Securities - Preferred Shares.")
AMERICAN BIO MEDICA CORPORATION
102 Simons Road
Ancramdale, New York 12503
800-227-1243
<PAGE>
AVAILABLE INFORMATION
The Prospectus, which constitutes a part of a registration statement (the
"Registration Statement") filed by the Company with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"Securities Act"), omits certain information contained in the Registration
Statement, and reference is hereby made to the Registration Statement and to the
exhibits relating thereto for further information with respect to the Company
and the Preferred Shares offered hereby. Statements contained herein concerning
provisions of any documents are not necessarily complete, and each statement is
qualified in its entirety by reference to the copy of such document filed with
the Commission.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Securities Exchange Act"), and in
accordance therewith files reports, proxy statements, and other information with
the Commission. Such reports, proxy statements, and other information filed by
the Company can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549-1004; and at the following Regional Offices of the Commission:
Northeast Regional Office, 7 World Trade Center, New York, New York 10007; and
Chicago Regional Office, Northwest Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such material can be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549-1004 at prescribed rates. The Commission also maintains a
World Wide Web site on the Internet at http://www.sec.gov. that contains copies
of reports, proxy and information statements and other information regarding
registrants, including the Company, which electronically file reports with the
Commission.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information, financial statements and related notes appearing elsewhere
in the Prospectus including information under the caption "Risk Factors." Each
investor is urged to read the Prospectus in its entirety.
The Company
------------
The Company is currently in the business of developing, manufacturing and
marketing biomedical technologies and products. The Company, from inception to
date, has accumulated losses of $2,870,007. The Company currently owns two
technologies for screening drugs of abuse, a workplace screening test and a
preliminary test for use by laboratories. The Company is marketing its workplace
screening test and has produced and delivered in excess of 300,000 units of this
test. It has installed equipment with an independent contractor suitable for the
mass production of the workplace screening test and has purchased or produced
inventories of reagents and other constituent parts of its test kits. It
commenced producing its marijuana/cocaine test kit and its five drug (marijuana,
cocaine, opiates, PCP and amphetamines) test kit using this machinery in
November, 1996. It has secured several significant orders for its workplace
screening tests and many smaller orders. On April 14, 1997, the Company received
Federal Drug Administration ("FDA") approval of its preliminary laboratory drug
test kit and has commenced marketing test kits to laboratories and other medical
facilities. In November, 1997, the Company completed development of drug
screening tests for benzodiazepines, barbiturates, and tricyclic anti-
depressants.
2
<PAGE>
The Company also owns a patented low cost method for producing Keratin
proteins. The uses for such proteins include hardening of finger nails and
carrying topical lotions and medicines through the skin. In addition, the
Company is developing a saliva test for alcohol consumption. Although the
Company has been supplying Keratin proteins on a limited basis for testing by
potential customers, the further development or marketing of its Keratin
technology and its saliva test for alcohol consumption cannot be predicted. The
Company's present intention is to concentrate on production and marketing of its
workplace and laboratory drug tests.
The Company may develop or acquire additional drug testing or biomedical
technologies or products in the future and/or may acquire a technology-based
company or an interest in a technology-based company. However, as of the date of
the Prospectus, it has not yet identified any technologies which it desires to
develop or acquire or companies or interests in companies it desires to acquire.
From its inception in 1986 until 1991, the Company, a New York corporation,
was involved in marketing educational books and software to schools and
municipal libraries and audiovisual educational packages to corporations
throughout the United States. In 1991, the Company reduced its concentration in
this market because of heightened competition, increasing costs of doing
business and slow collections from municipalities and commenced seeking new
technologies in emerging medical markets. However, the Company has continued one
small segment of its original business, that of selling audiovisual packages to
libraries.
The Company's headquarters are located at 102 Simons Road, Ancramdale, New
York 12503. Its telephone number at that address is 800-227-1243 and its fax
number is 518-329-4156. Its e-mail address is [email protected].
Securities
----------
Common Shares
-------------
The Company is authorized to issue 30,000,000 common shares, $.01 par value
per share. As of October 31, 1997, 13,793,541 Common Shares have been issued.
(See "Description of Securities - Common Shares.")
Preferred Shares
-----------------
The Company is authorized to issue 5,000,000 preferred shares, $.01 par
value per share, with such designations, rights and preferences as may be
determined by the Board of Directors. In September, 1996, the Company sold 150
"A" Preferred Shares, all of which were converted into an aggregate of 633,073
Common Shares. The Company has sold 60 "B" Preferred Shares and 45.5 "C"
Preferred Shares. Each Preferred Share may be converted into Common Shares
pursuant to the following formula: $10,000 divided by the lesser of $3.50 or 75%
of the Market Price of the Common Shares at the date of conversion. As of the
date of the Prospectus, no "B" or "C" Preferred Shares have been converted into
Common Shares. (See Front Cover Page, "Description of Securities--Preferred
Shares" and Financial Statements--Footnotes.)
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<PAGE>
Options
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The Company has issued 500,000 "A" Options which are exercisable at $1.00
through March 14, 1999 and 500,000 "B" Options, which are exercisable at $2.00
through March 14, 1999. Until a registration statement relating to the Common
Shares underlying the Options is effective, certificates representing the shares
for which the Options are exercised will bear a legend restricting transfer in
the absence of an effective registration with the Commission or an exemption
therefrom. No "A" or "B" Options have been exercised. (See "Description of
Securities--Options.")
The Company has adopted the Fiscal 1996 Nonstatutory Stock Option Plan (the
"Fiscal 1996 Plan") and the Fiscal 1998 Nonstatutory Stock Option Plan (the
"Fiscal 1998 Plan"). 2,000,000 Common Shares have been reserved under the Fiscal
1996 Plan and 1,000,000 Common Shares under the 1998 Plan. The Plan is
administered by the Board of Directors which has established an options
committee of the Board of Directors consisting of Stan Cipkowski, President,
Edmund Jaskiewicz, Executive Vice-President and Secretary, and Jay Bendis,
Vice-President, for that purpose.
The Company has issued 1,957,000 options pursuant to the Fiscal 1996 Plan.
All options were exercisable for a period of three years at $3.00 per share. As
of the date of the Prospectus, 732,645 options have been exercised for an
aggregate exercise price of $2,197,935. No options have been issued pursuant to
the Fiscal 1998 Plan. (See "Certain Transactions.")
Warrants
--------
The Company has issued 24,712 common share purchase warrants (the
"Warrants"). The Warrants are exercisable at $3.00 per share for a period of two
years from the date of an effective registration statement relating to the
underlying Common Shares. A registration statement was filed with the Commission
and has become effective. However, as of the date of the Prospectus, no Warrants
have been exercised. (See "Description of Securities--Warrants.")
Securities Registered
---------------------
The Common Shares into which the "B" and "C" Preferred Shares may be
converted are being registered herein. The minimum number of shares will be
301,249; the maximum number of shares will depend on the Market Price of the
Common Shares. (See Front Cover Page, "Risk Factors," and "Description of
Securities").
Dilution
--------
If all the Preferred Shares are converted into Common Shares at $3.50 per
share, there will be 14,145,208 Common Shares outstanding. Persons who convert
their Preferred Shares will own 301,429 Shares or 2.1% of the issued Common
Shares. The number of Common Shares into which the Preferred Shares are
convertible will vary depending on the Market Price of the Common Shares (See
"Description of Securities--Preferred Shares," "Dilution" and "Capitalization.")
Certain Risk Factors
--------------------
Conversion of the Preferred Shares into Common Shares and the purchase of
the Common Shares involves substantial risks due to the highly speculative
nature of the Company's business. Holders of Preferred Shares ("Selling
Securityholders") as well as investors in the Common Shares should review the
entire Prospectus, particularly the "Risk Factors."
Determination of Conversion Price
---------------------------------
The formula for the conversion of the Preferred Shares has been determined
by the Company and the holders thereof and bears no relation to the Company's
assets, book value, or any other customary investment criteria, including the
Company's prior operating history. (See "Determination of Offering Price.")
4
<PAGE>
SUMMARY FINANCIAL INFORMATION
For the year ended April 30, 1997 and
the six months ended October 31, 1997
--------------------------------------------------------------------
April 30, 1997 October 31, 1997
Unaudited
-------------- ----------------
Statement of Operations Data:
Sales $ 610,876 $ 1,273,724
Cost of sales 259,862 501,338
Gross Profit 351,014 772,386
Operating expenses 1,039,015 839,301
Operating loss (688,001) (66,915)
Other income (expense) - net 182,680 103,900
Net profit (loss) (505,321) 36,985
Net loss per common share
primary $ (.04) $ .00
Shares used in computing
net profit (loss) per share 13,379,507 13,793,541
Net profit (loss) per common
share fully diluted $ (.04) $ .00
Shares used in computing
fully diluted 13,731,174 14,145,208
Cash dividends per share -0- -0-
As adjusted (1)
As of October 31, 1997 As of October 31, 1997
---------------------- ----------------------
Balance Sheet Data:
Current assets $ 4,740,281 $ 4,740,281
Current liabilities 168,691 168,691
Working capital 4,571,590 4,571,590
Total assets 4,911,871 4,911,871
Long term debt,
less current portion -0- -0-
Accumulated deficit (2,870,007) (2,870,007)
Stockholders' equity 4,743,180 $4,743,180
- ------------------------------
1. Assumes conversion of Preferred Shares. The number of Common Shares into
which the Preferred Shares may be converted has been taken for purposes of
this table as 301,429 Common Shares ($3.50 per share). The formula for
conversion per Preferred Share is $10,000 (the purchase price of a
Preferred Share) divided by the lesser of $3.50 or 75% of the Market Price
on the date(s) of conversion. The actual number of Common Shares into which
the Preferred Shares are converted may be greater than this number.
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<PAGE>
RISK FACTORS
Except for the description of historical facts contained herein, the
Prospectus contains certain forward looking statements that involve risks and
uncertainties as detailed herein and from time to time in the Company's filings
with the Commission and elsewhere. Forward looking statements herein are made
pursuant to the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. Such statements are based on Management's current
expectations and are subject to a number of factors and uncertainties which
could cause actual results to differ materially from those described in the
forward-looking statements. These factors include, among others, the Company's
fluctuations in sales and operating results, risks associated with international
operations and regulatory, competitive and contractual risks and product
development.
CONVERSION OF THE PREFERRED SHARES INTO COMMON SHARES AND PURCHASE OF
COMMON SHARES IS HIGHLY SPECULATIVE, INVOLVES A HIGH DEGREE OF RISK AND SHOULD
BE MADE ONLY BY INVESTORS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. A
HOLDER OF PREFERRED SHARES OR A PROSPECTIVE PURCHASER, PRIOR TO MAKING A
CONVERSION OR AN INVESTMENT DECISION, SHOULD CAREFULLY CONSIDER, ALONG WITH
OTHER MATTERS REFERRED TO HEREIN, THE FOLLOWING RISK FACTORS:
1. Limited Operating History.
Although the Company was formed in 1986, as far as the development,
manufacture and sale of drug testing kits are concerned, it has extremely
limited operational history upon which investors may base an evaluation of its
performance or any assumption as to the likelihood that the Company will be
profitable. (See "Business.") The Company's prospects must be considered in
light of the risks, expenses, delays, problems and difficulties frequently
encountered in the establishment of a new business, the development and
commercialization of new products based on innovative technology and the
competitive environment in which the Company operates. Since the Company's entry
into the biomedical business, the Company has generated limited revenues. There
can be no assurance that the Company will be able to generate significant
revenues or achieve profitable operations. (See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Financial
Statements.)
2. Technological Factors; Uncertainty of Product Development; Unproven
Technology.
Although the Company's development efforts relating to the technological
aspects of the workplace drug testing kit are completed, the Company is
continually seeking to refine and improve its design and performance and to
develop additional versions. In addition, the Company plans to perfect its
laboratory drug test kit, its saliva alcohol level test kit and its Keratin
production technology. The Company's efforts remain subject to all of the risks
inherent in new product development, including unanticipated technical,
regulatory or other problems which could result in material delays in product
development or commercialization or significantly increased costs. The Company
may be required to commit considerable additional efforts, time and resources to
develop of production versions of its additional products. The Company's success
will depend upon such products meeting targeted product costs and performance,
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 tests. 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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<PAGE>
3. Uncertainty of Continued Market Acceptance.
The Company's workplace drug test kit has been well received by potential
customers, including corporations, distributors and correctional institutions.
However, although the Company has received and is confident of receiving
additional large initial orders from customers in those categories, its success
is contingent on the receipt of reorders from these customers and orders from
new customers. (See "Business.") To date, the Company has generated limited
revenues from sales of its workplace drug test kits. As is typically the case
with an emerging company, demand and market acceptance for newly introduced
products is subject to a high level of uncertainty. Achieving continued market
acceptance for its workplace drug tests will require substantial marketing
efforts and expenditure of significant funds to inform potential distributors
and customers of the distinctive characteristics, benefits and advantages of its
kits. There can be no assurance that its drug test kits will become generally
accepted or that the Company's efforts will result in successful product
commercialization or initial or continued market acceptance for its drug testing
products. (See "Business--Marketing and Sales.")
4. Competition in the Drug Testing Market; Technological Obsolescence.
The Company faces competition for every existing and proposed product from
drug manufacturers and other manufacturers of drug test kits. Some of its
competitors are well known and have far greater financial resources than the
Company. To the best of Management's knowledge, and in its opinion, no
competitors have introduced products which equal the ease of use combined with
the accuracy of the Company's drug test kits. (See "Business--Competition.") The
markets for drug test kits and related products are highly competitive. There
can be no assurance that other technologies or products which are functionally
similar to those of the Company are not currently under development. In
addition, there can be no assurance that other companies with the expertise or
resources that would encourage them to attempt to develop or market competing
products will not develop new products directly competitive with the Company's
drug test kits. Despite the protections which would be available to the Company
in the event its pendind application for a esign 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.")
5. Dilution as a Result of Conversion of Preferred Shares.
The number of Common Shares into which the outstanding Preferred Shares, in
the aggregate, will be convertible will be $1,055,500 divided by the lesser of
$3.50 or 75% of the Market Price. The number of Common Shares into which the
Preferred Shares will be convertible assumes that the average Market Price on
the date(s) of conversion will be at least $4.67. Since the market price on the
date of the Prospectus exceeds $4.67, it is assumed that the number of Common
Shares into which the Preferred Shares will be convertible is 301,429. However,
there is a distinct possibility that the Market Price will be less than $4.67
and, thus, the number of shares to be issued upon conversion of the Preferred
Shares will exceed 301,429 representing a conversion price less than the
purchase price per share of many shareholders (See Front Cover Page and
"Dilution.")
6. Possible Inability to Find and Attract Qualified Personnel.
The Company currently has sufficient management expertise and depth to
develop its business. It has recently added marketing and manufacturing
management and has added to its scientific advisory board. However, it will need
additional skilled and dedicated marketing personnel as well as technical and
production personnel in the future. There is no guarantee that the Company can
retain its present staff or that capable personnel with relevant skills will be
available. (See "Management.")
8
<PAGE>
7. Dependence on Management.
The Company is dependent on the expertise and experience of Stan Cipkowski,
President, Jay Bendis, Vice-President-Marketing, and Douglas Casterlin,
Vice-President and General Manager, for its operations. The loss of Messrs.
Cipkowski, Bendis and Casterlin, or any of them, will seriously inhibit the
Company's operations. (See "Management.")
8. Possible Adverse Changes in Regulatory Framework.
Approval from the FDA is not required for the sale of a workplace drug test
kits, but is required for the clinical drug test kit. The Company has applied
for approval for and has received "510(k)" approval from the FDA for its 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/Patent Applications.")
9. Sales of Common Shares at Below the Conversion Price/Dilution.
Principal shareholders and certain investors acquired their Common Shares
at prices substantially below the conversion price of the Preferred Shares.
Thus, when all the Preferred Shares are converted into Common Shares, there will
be an immediate substantial dilution to holders of Preferred Shares in the book
value of each Common Share, and the principal shareholders and certain investors
will realize an immediate increase thereon. (See "Dilution.")
10. Restricted Resale of the Securities.
6,436,702 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. If all the Preferred Shares are
converted into Common Shares, the holders of the restricted shares may each sell
58,623 shares during any three month period. Additionally, Rule 144 requires
that an issuer of securities made available adequate current public information
with respect to the issuer. Such information is deemed available if the issuer
satisfies the reporting requirements of sections 13 or 15(d) of the Securities
and Exchange Act of 1934 (the "Securities Exchange Act") or of Rule 15c2-11
thereunder. Rule 144(k) also permits the termination of certain restrictions on
sales of restricted securities by persons who were not affiliates of the Company
at the time of the sale and have not been affiliates in the preceding three (3)
months. Such persons must satisfy a two (2) year holding period. There is no
limitation on such sales and there is no requirement regarding adequate current
public information. Investors should be aware that sales under Rule 144 or
144(k), or pursuant to a Registration Statement filed under the Act, may have a
depressive effect on the market price of the Company's securities in any market
which may develop for such shares. (See "Description of Securities.")
9
<PAGE>
11. Preferred Shares; Convertibility into Common Shares; Dilution.
The Company has the authority to issue up to 5,000,000 Shares of Preferred
Stock with such designations, rights and preferences as may be determined by the
Board of Directors. The Company is empowered, without further shareholder
approval, to issue Preferred Shares with dividend, liquidation, conversion,
voting or other rights which could adversely affect the voting power or other
rights of the holders of the Common Shares. The Company, as of the date of the
Prospectus, has issued and outstanding 105.5 Preferred Shares which are
convertible into a minimum of 301,429 Common Shares. (See "Risk
Factors--Dilution as a Result of Conversion of Preferred Shares," "Certain
Transactions" and "Description of Securities--Preferred Shares.")
12. Need for Additional Financing.
The Company expects that its cash on hand will be sufficient to fund the
Company's proposed operations for at least 36 months from the date of the
Prospectus. This estimate is based on certain assumptions and there can be no
assurance that unanticipated unbudgeted costs will not be incurred. Future
events, including the problems, delays, expenses and difficulties which may be
encountered in establishing and maintaining a substantial market for the
Company's drug test kits and other technologies could make cash on hand
insufficient to fund the Company's proposed operations. There can be no
assurance that the Company will be able to obtain any necessary additional
financing on terms acceptable to it, if at all. In addition, financing may
result in further dilution to the Company's then existing stockholders. The
Company has no established borrowing arrangements or available lines of credit.
(See "Management's Discussion and Analysis of Financial condition and Results of
Operations.")
13. No Dividends.
The payment of dividends rests within the discretion of the Company's Board
of Directors. No dividends have been paid on the Common Shares and the Company
does not anticipate the payment of cash dividends in the foreseeable future. If
the operations of the Company become profitable, it is anticipated that, for the
foreseeable future, any income received therefrom would be devoted to the
Company's future operations and that cash dividends would not be paid to the
Company's shareholders. (See "Business--Dividend Policy.")
14. Control by Management.
After conversion of the Preferred Shares, assuming the Preferred Shares are
converted into 301,429 Common Shares (see "Dilution"), Management of the Company
will own approximately 45.2% of the outstanding Common Shares and will be in a
position to control the election of the Board of Directors. The certificate of
incorporation of the Company does not provide for cumulative voting and, as a
result, purchasers of the Company's securities will not be able to elect any
directors or exert any control over the general policies of the Company. (See
"Description of Company's Securities--Description of Common Stock.")
15. Ability to Retain and Attract Market Makers.
The Common Shares have recently begun trading on the Nasdaq SmallCap
Market. In the event that the market makers cease to function as such, public
trading in the Company's Shares will be adversely affected or may cease
entirely. Presently, market makers for the Company's Common Shares include 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.
10
<PAGE>
16. Anti-Takeover Provisions in Certificate of Incorporation.
The Company's certificate of incorporation authorizes the issuance of
5,000,000 Preferred Shares. The Board of Directors has the authority, without
further action by the Common Shareholders, to issue Preferred Shares from time
to time in one or more classes or series, to fix the number of shares
constituting any class or series and the stated value thereof, if different from
the par value, and to fix the terms of any such series or class, including
dividend rights, dividend rates, conversion or exchange rights, voting rights,
rights and terms of redemption (including sinking fund provisions), the
redemption price and the liquidation preference of such class or series. Thus,
the Board of Directors, in order to avoid a hostile takeover, could issue
Preferred Shares with supervoting rights, conversion rights into Common Shares,
liquidation preference or a combination of rights and preferences which could
inhibit success of such attempt. (See "Description of Securities--Preferred
Shares.")
17. Determination of Conversion Price.
The formula for the conversion of the Preferred Shares into Common Shares
has been determined by the Company and the holders thereof and bears no relation
to the Company's assets, book value, or any other customary investment criteria,
including the Company's prior operating history. (See Front Cover Page.)
18. No Assurance of Continued Public Market for Common Shares
Although the Common Shares have been accepted for trading on the Nasdaq
SmallCap market, there is no assurance that an active trading market will be
sustained. (See "Front Cover Page and "Description of Securities--Common
Shares."
19. Patents and Trademarks
The Company has applied for design patents on its drug test kits and for a
trademark on "The Rapid Drug Screen" in the United States, European Common
Market and Japan. There is no assurance that the patents will be granted or the
trademark registered. (See "Business--Patents and Trademarks.")
DIVIDEND POLICY
Since its inception, the Company has not paid any dividends on its Common
Shares. The Company intends to retain future earnings, if any, that may be
generated from the Company's operations to help finance the operations and
expansion of the Company and accordingly does not plan to pay dividends to
Shareholders. Any decision as to the future payment of dividends will depend on
the results of operations and financial position of the Company and such other
factors as the Company's Board of Directors, in its discretion, deems relevant.
(See "Risk Factors--No Dividends.")
DILUTION
The following table sets forth the differences among the existing
shareholders of the Company, including holders of Preferred Shares, the total
consideration paid and the average price per Common Share paid.
Number Average
of Common Percent Dollar Percent Price
Shares of Total Amount of Total Per Share
---------- -------- ---------- -------- ---------
Common Shares 13,793,541, 97.5% $6,558,187 66.3% $0.48
105.5 Convertible
Preferred Shares* 301,429 2.5% $1,055,000 33.7% $3.50
---------- ------ ---------- ----- -----
Total Common Shares* 14,094,970 100.0% $7,613,187 100.0% $0.54
- ----------------------
* The number of Common Shares into which the Preferred Shares may be
converted has been taken, for purposes of this table, as 301,429 Common
Shares, assuming an average conversion price of $3.50 per share. The
formula for conversion is $1,055,000 (the aggregate purchase price of the
Preferred Shares) divided by the lesser of $3.50 or 75% of the Market Price
on the date(s) of conversion. The actual number of Common Shares into which
the Preferred Shares are converted may be greater than this number.
11
<PAGE>
CAPITALIZATION
The table below sets forth the capitalization of the Company as at October
31, 1997 on an historical basis and as adjusted to give effect of the exercise
of the Warrants and conversion of the Preferred Shares.
As Adjusted for
Exercise of
Conversion of
Historical Basis Preferred Shares*
---------------- -----------------
Long Term Liabilities $ 0 $ 0
Stockholders' Equity
Common Shares, $.01 par value
per share, authorized 30,000,000
shares, issued and outstanding
13,793,541 shares at October 31,
1997; 14,094,978 Common Shares will
be issued and outstanding after
conversion of the Preferred Shares. 137,935 140,950
Preferred Shares, $.01 par value
per share, authorized 5,000,000
Shares, issued and outstanding
105.5 Preferred Shares at October
31, 1997 (1); after conversion of
the Preferred Shares, there will be
-0- Preferred Shares outstanding. 2 0
Additional paid in capital 7,475,250 7,472,237
Accumulated deficit (2,870,007) (2,870,007)
------------ ------------
Total stockholders' equity $ 4,743,180 $ 4,743,180
------------ ------------
Total Capitalization $ 4,743,180 $ 4,743,180
============ ============
- --------------------
* Assumes conversion of Preferred Shares. The number of Common Shares into
which the Preferred Shares may be converted as been taken for purposes of
this table at 301,429 Common Shares. The actual number of Common Shares
into which the Preferred Shares are converted may be greater than this
number
12
<PAGE>
SELECTED FINANCIAL DATA
The selected unaudited financial data of the Company set forth below for
the six months ended October 31, 1997.
Six Months Ended October 31, 1997
---------------------------------
Statement of Income Data:
Net Sales $ 1,273,724
Cost of Goods Sold 501,338
Gross Profit 772,386
Total Operating Expenses 839,301
Profit (Loss) From Operations ( 66,915)
Other Income (Expenses) 103,900
Net profit 36,985
Net Loss Per Share Primary $ .00
Common Shares Outstanding 13,793,541
Net Loss Per Share Diluted $ .00
Common Shares Outstanding
Assuming conversion of
convertible preferred shares 14,094,970
As of October 31, 1997 As Adjusted (Pro-forma)*
---------------------- ------------------------
Balance Sheet Data
Working Capital $ 4,571,590 $ 4,571,590
Total Assets 4,911,871 4,911,871
Total Liabilities 168,691 168,691
Shareholders' Equity 4,743,180 4,743,180
- ------------------------
* Assumes conversion of Preferred Shares. The number of Common Shares into
which the Preferred Shares may be converted has been taken for purposes of
this table at 301,429 Common Shares. The formula for calculating the number
of Common Shares is $1,055,000 (the aggregate purchase price of the
Preferred Shares) divided by the lesser of $3.50 or 75% of the Market Price
on the date(s) of conversion. The actual number of Common Shares into which
the Preferred Shares are converted may be greater than this number.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
for the years ended April 30, 1996 and 1997 and
the six-month periods ended October 31, 1996 and 1997
Development Stage Activities
----------------------------
Until 1991, the Company was involved in marketing educational books and
software to schools and municipal libraries and audiovisual educational packages
throughout the United States. In 1991, the Company reduced its concentration on
this market because of competition, increasing costs of doing business and slow
collections from municipalities and sought new technologies in emerging markets.
The Company has continued one small segment of its original business, that of
selling audiovisual packages to libraries.
13
<PAGE>
The Company was considered to be a development stage company with little
operating history subsequent to its commencement of development of its newly
acquired biomedical technologies which are, at present, its core business. These
activities have been funded through the sale of convertible debentures
aggregating $1,425,500 which were subsequently converted to Common Shares at
$.75 per share, and through the exercise of 143,000 "A" Options at $1.00 per
share and 32,000 "B" Options at $1.00 per share aggregating $175,000. In
addition, the Company sold 150 Preferred Shares at $10,000 per share for an
aggregate consideration of $1,500,000 and net proceeds of $1,405,000, all of
which were converted into an aggregate of 633,073 Common Shares. As of October
31, 1997, the Company had also issued 697,445 Common Shares for an aggregate
consideration of $2,092,186 through the exercise of nonstatutory stock options.
The Company also sold 105.5 "B" and "C" Preferred Shares for an aggregate gross
consideration of $1,055,000 and net consideration of $949,600. Because the
Company's drug test kits are in commercial production and the Company has,
according to Management, adequate resources to adequately fund its operations
and has completed research and development of its present product line, the
Company no longer considers itself a development stage company.
In order to support increased levels of sales in the future and to augment
its long-term competitive position, the Company anticipates that it will be
required to make significant additional expenditures in manufacturing, research
and development, sales and marketing and administration, both in absolute
dollars and as a percentage of sales.
The Company anticipates that its results of operations may fluctuate for
the foreseeable future due to several factors, including whether and when new
products are successfully developed and introduced by the Company, market
acceptance of current or new products, regulatory delays, product recalls,
manufacturing delays, shipment problems, the timing of significant orders,
changes in reimbursement policies, competitive pressures on average selling
prices, changes in the mix of products sold and patent conflicts. Operating
results would also be adversely affected by a downturn in the market for the
Company's current and future products, if any, order cancellations and/or order
rescheduling. Because the Company is continuing to increase its operating
expenses for personnel, the Company's operating results would be adversely
affected if its sales did not correspondingly increase. The Company's limited
operating history makes accurate prediction of future operating results
difficult or impossible. Although the Company has experienced growth in recent
years, there can be no assurance that, in the future, the Company will sustain
revenue growth or remain profitable on a quarterly or annual basis or that its
growth will be consistent with predictions made by securities analysts.
The Company manufactures and inventories sufficient product prior to
receipt of orders and ships product shortly after receipt of orders and
anticipates that it will do so in the future. Accordingly, the Company has
developed neither a significant backlog nor inventory and does not anticipate it
will develop a significant backlog or inventory in the future. For large orders,
deliveries are generally staggered; and the Company manufactures and inventories
prior to shipping dates. The Company's computer and other systems will not be
adversely affected by the year 2000.
14
<PAGE>
Results of Operations for the Year Ended April 30, 1997 as Compared to the
Year Ended April 30, 1996.
- --------------------------------------------------------------------------------
Revenues from the book segment of the business were $274,678 for the year
ended April 30, 1997 as compared to $158,105 for the year ended April 30, 1996,
representing a increase of $116,573 or 73.7%. This increase in book sales is
directly attributable to the Company's restructuring of its telemarketing
activities. Costs of goods sold for the year ended April 30, 1997, were $76,628
as compared to $96,444 for the year ended April 30, 1996 representing a cost of
goods sold percentage of 27.9% for the year ended April 30, 1997 as compared to
61.0% for the year ended April 30, 1996. This cost reduction is the result of
the purchase of a significant book inventory in bulk at greatly reduced cost.
Revenues from sales of drug testing kits were $317,864 for the year ended
April 30, 1997. Costs of goods sold for the year ended April 30, 1997 was
$183,234 or 57.6% of revenues.
General and administrative costs for the year ended April 30, 1997 were
$867,903, an increase of 67.3% over expenses of $518,826 for the year ended
April 30, 1996. These increased costs were the result of adding employees for
positions in sales, marketing, accounting, management and other office personnel
of $365,117, legal and professional expenses of $122,993, office expense of
$220,248, marketing expense of $120,266, product development of $26,569 and rent
of $12,710. Research and development expense of $74,978 for the year ended April
30, 1997 was $283,866 less than the $358,844 expended during the year ended
April 30, 1996. This decrease in research and development is the result of
gradual completion of development of the drug testing delivery system.
Resolution of Friedenberg Litigation and Trial Date in Morris Litigation
------------------------------------------------------------------------
In February, 1994, Robert Friedenberg, as owner of the two medical
technology companies, MDI and Gendex, acquired by the Company, in the name of
these corporations, filed suit to have the Share Exchange Agreement underlying
the acquisitions rescinded on the grounds of breach of contract. In order to
avoid the imposition of damages against it, the Company filed a cross-claim, in
July, 1994, against Dr. Friedenberg, seeking enforcement of the Share Exchange
Agreement. In November, 1995, after a trial, the court dismissed Dr.
Friedenberg's lawsuit and allowed the Company's cross-claim to proceed to trial.
In September, 1996, Dr. Friedenberg died. A pretrial hearing was held in
December, 1996 which set a trial date of April 28, 1997.
That trial was decided by a jury on May 5, 1997. The verdict determined
that Dr. Friedenberg breached various contracts when he failed to deliver
technology to the Company. The jury also found in favor of the Company on two of
the three fraud claims against Dr. Friedenberg and awarded the Company
approximately $350,000 in damages. The trial judge, who is bound by the jury
verdict against Friedenberg, will decide Dr. Friedenberg's claim to the
Company's Common Shares which the Company had refused to issue to him. Dr.
Friedenberg's previous claims for equitable relief against the Company had been
denied.
In June, 1995, the Company filed a lawsuit against Jackson Morris, Dr.
Friedenberg's counsel, for the breach of attorney-client relationship and breach
of his fiduciary duty and negligence in representing the Company in matters
relating to Dr. Friedenberg and in the preparation of the Share Exchange
Agreement. The Company's lawsuit demands damages in the amount of $1,000,000.
Mr. Morris has counterclaimed for Common Shares. The court has set a trial date
of September 14, 1998.
15
<PAGE>
Since legal counsel had advised Management that the claims against the
Company were without merit, the Company did not recognize the claims against it
as liabilities. Thus, no adjustment has been made to the Balance Sheet or to the
Statement of Operations. The Company intends to recognize income when the
judgment against the estate of Robert Friedenberg is collected.
Results of Operations for the Year ended April 30, 1996 as Compared to the
Year ended April 30, 1995.
- --------------------------------------------------------------------------------
The only revenues for fiscal 1996 were revenues from the audio-visual
segment of the Company's operations. The Company had no revenues as of April 30,
1996 from the Company's drug testing products. Revenues from the audio-visual
segment of the business were $137,891 for the year ended April 30, 1995 as
compared to $158,105 for the year ended April 30, 1996 representing an increase
of $20,214 or 14.7%. This increase is directly attributable to the increased
effectiveness of the Company's use of telemarketing to reach the Company's
defined market of schools and libraries, as substantially all marketing of
audio-visual materials is through telemarketing. Costs of good sold for the year
ended April 30, 1995 were $45,204 as compared to $96,444 for the year ended
April 30, 1996, representing a cost of goods sold percentage of 32.8 % for the
year ended April 30, 1995 as compared to 61% for the year ended April 30, 1996.
The increase in costs is attributable to the product mix of the items sold
having a higher wholesale cost. Increases in the wholesale price of products
caused a reduction in gross profits of $31,026 from $92,687 for the year ended
April 30, 1995, as compared to $61,661 for the year ended April 30, 1996.
General and administrative costs for the year ended April 30, 1996 were
$518,826, an increase of 300% over expenses of $129,719 for the year ended April
30, 1995. These increased costs are the result of increased labor costs for
office personnel and consulting expenses of $427,225. Research and development
expenses of $358,844 for the year ended April 30, 1996 increased by $223,432 or
165% over the amount expended of $135,412 for the year ended April 30, 1995.
This increase in expenses is the result of increasing amounts expended for
development, experimentation and improvement of test chemicals and laboratory
and field trial testing of the workplace drug testing delivery system and
research and development relating to the Company's other biomedical products.
Liquidity and Capital Resources as of the End of Fiscal Year, April 30, 1996
- --------------------------------------------------------------------------------
The Company increased its cash balance to $437,532 and working capital to
$329,085 as of the end of fiscal 1996 as the result of the sale in the aggregate
of $1,407,000 convertible debentures over a three year period. The Company has
expended $565,186 to April 30, 1996 for the research and development of its
biomedical products.
Other income consisted of the write off of $126,500 in secured debt which
counsel has advised Management is time barred as to collectibility.
Income tax: As of April 30, 1997, the Company had a tax loss carry-forward
of $2,906,992. The Company's ability to utilize its tax credit carry-forwards in
future years will be subject to an annual limitation pursuant to the "Change in
Ownership Rules" under Section 382 of the Internal Revenue Code of 1986, as
amended. However, any annual limitation is not expected to have a material
adverse effect on the Company's ability to utilize its tax credit
carry-forwards.
16
<PAGE>
Liquidity and Capital Resources as of the End of Fiscal Year Ended April
30, 1997.
- --------------------------------------------------------------------------------
The Company's cash balance was $1,762,506 with $1,053,000 in treasury bills
and certificates of deposit invested for nine months; and working capital was
$3,548,508 as at April 30, 1997. These balances are the result of the sale and
conversion of convertible debentures in the principal amount of $18,500 and
$175,000 respectively through the exerci*e of 143,000 "A" Options and 32,000 "B"
Options respectively at $1.00 per share. The Company also sold 150 convertible
preferred shares at $10,000 per share for an aggregate consideration of
$1,500,000. Finally, as of April 30, 1997, the Company sold 697,445 Common
Shares for an aggregate consideration of $2,092,186 through the exercise of
nonstatutory stock options. Cash generated from financing activities was
utilized for investment in short term marketable securities of $1,053,000, for
additional patent applications of $7,783 and for the purchase of machinery and
equipment for $114,793 and a loan of $100,000 to an unrelated party.
Results of Operations for the Six Months Ended October 31, 1997 as Compared
to the Six Months Ended October 31, 1996.
- --------------------------------------------------------------------------------
Revenues from the book segment of the business were $265,348 for the six
months ended October 31, 1997 as compared to $17,123 for the six months ended
October 31, 1996, representing an increase of $248,225 or 1,451%. This increase
in book sales was directly attributable to the Company's restructuring of its
telemarketing activities and a bulk inventory purchase. Costs of goods sold for
the six months ended October 31, 1997, were $66,471 as compared to $5,565 for
the six months ended October 31, 1996 representing a cost of goods sold
percentage of 25% of sales for the six months ended October 31, 1997 as compared
to 32.5% of sales for the six months ended October 31, 1996.
Revenues from the sales of drug test kits were $1,008,376 for the six
months ended October 31, 1997 as compared to $31,464 for the six months ended
October 31, 1996, representing an increase of $976,912 or 3,105%. This increase
in sales of drug test kits is directly attributable to the implementation and
positive response to the Company's marketing program. Cost of goods sold for the
six months ended October 31, 1997 was $434,867 or 43.1% of sales as compared to
a cost of goods sold of $22,313 or 64.2% of sales. The reduction in the
percentage of cost of goods sold is attributable to price reductions from
substantially increased purchases of raw materials and the economy of mass
production.
17
<PAGE>
General and administrative costs for the six months ended October 31, 1997
were $790,628 or 62.1% of sales as compared to $336,113 or 691% of sales for the
six months ended October 31, 1996, representing an increase of $454,515. These
increased costs are the result of hiring additional employees in sales,
marketing, accounting and executive positions. For the six months ended October
31, 1997, office personnel costs were $385,470, legal and professional expenses,
$119,464, office expense, $98,157, marketing expense, $150,288, product
development $27,070 and rent, $10,179. Research and development expense was $-0-
for the six months ended October 31, 1997 compared to $ 66,750 during the six
months ended October 31, 1996. This decrease in research and development is the
result of the completion of development of the existing drug testing system.
Liquidity and capital resources as of October 31, 1997.
- --------------------------------------------------------------------------------
The Company's cash balance was $1,362,238 and working capital was
$4,571,591 as at October 31, 1997. The Company completed a series of private
placements generating additional cash aggregating $1,055,000 before payment of
$93,500 in commissions. Cash generated from financing activities was utilized
for the purchase of machinery and equipment for $39,366, additional patent costs
of $2,810 and increasing the investment in marketable securities by $23,610.
The Company's primary short-term needs for capital, which are subject to
change, are for expansion of its manufacturing capacity, and an increase in
inventory levels to fill larger anticipated orders and increase in receivables.
Management believes that the present cash balance will pay the ongoing cost
of the biomedical business. As of October 31, 1997, two customers accounted for
42.2% of accounts receivable.
Income tax: As of October 31, 1997, the Company had a tax loss
carry-forward of $2,906,922. The Company's ability to utilize its tax credit
carry-forwards in future years will be subject to an annual limitation pursuant
to the "Change in Ownership Rules" under Section 382 of the Internal Revenue
Code of 1986, as amended. However, any annual limitation is not expected to have
a material adverse effect on the Company's ability to utilize its tax credit
carry-forwards.
The Company currently plans to expend approximately $2.0 million for the
expansion and development of its manufacturing, marketing and general
administrative capabilities in connection with the fulfillment of the Company's
marketing program and the anticipated launch of the Company's products currently
under development. Additionally, the Company utilizes cash generated from
operating activities to meet its capital requirements.
18
<PAGE>
The Company expects its capital requirements to increase over the next
several years as it commences new research and development efforts, undertakes
new product development, increases sales and administration infrastructure and
embarks on developing in-house manufacturing capabilities and facilities. The
Company's future liquidity and capital funding requirements will depend on
numerous factors, including the extent to which the Company's products under
development are successfully developed and gain market acceptance, the timing of
regulatory actions regarding the Company's potential products, the costs and
timing of expansion of sales, marketing and manufacturing activities, facilities
expansion needs, procurement and enforcement of patents important to the
Company's business, results of clinical investigations and competition.
The Company believes that its available cash and cash from operations will
be sufficient to satisfy its funding needs for at least the next 36 months.
Thereafter, if cash generated from operations is insufficient to satisfy the
Company's working capital and capital expenditure requirements, the Company may
be required to sell additional equity or debt securities or obtain additional
credit facilities. There can be no assurance that such financing, if required,
will be available on satisfactory terms, if at all.
BUSINESS
Summary
-------
From its inception in 1986 until 1991, the Company was involved in
marketing educational books and software to schools and municipal libraries and
audiovisual educational packages to educational institutions and to corporations
throughout the United States. In 1991, the Company, because of heightened
competition, increasing costs of doing business and slow collections from
municipalities, reduced its concentration in this market to that of selling
audiovisual packages to libraries and commenced seeking new technologies in
emerging medical markets. The Company purchased certain biomedical technologies
from its Executive Vice-President and purchased and rescinded the purchase of
other technologies from another party who became and then resigned as an officer
and director of the Company. The Company has no present intention of entering
into transactions in the future with related parties. (See "Certain
Transactions.")
Since its inception, the Company has an accumulated deficit of $2,906,922
(see Financial Statements - Balance Sheet). Management believes that the
Company's accumulated deficit is the result of discontinued operations, the
development of its workplace drug test kits and the development of other
biomedical products. However, investors should be aware that the Company has not
been profitable during its ten year history and that there is no assurance that
the Company's biomedical operations will become profitable.
19
<PAGE>
The Company is currently in the business of acquiring, developing and
marketing biomedical technologies and products. The Company currently owns two
technologies for screening drugs of abuse - a workplace screening test and a
preliminary test for use by laboratories. The Company produces and markets its
workplace screening test and has produced and delivered in excess of 150,000
units of this test. The Company's workplace screening test is a one-step test
kit that allows a small urine sample to be tested for the presence or absence of
drugs of abuse. The competitively priced test is self-contained with no exposure
of the test administrator to the urine sample. In Management's opinion, the
Company's drug test kit is easier to use than any competitive product and
requires no mixing of reagents. In addition, hundreds of controlled tests
conducted by independent laboratories compared the Company's "Rapid Drug Screen
Test" with results produced by EMIT II, a standard laboratory test, with 100%
correlation of both positive and negative test results. As a result, Management
believes that the Company's Rapid Drug Screen Test is as accurate as those
laboratory tests.
The Company markets a five panel Rapid Drug Screen which tests for cocaine,
marijuana, opiates, amphetamine and PCP. It also markets a two panel kit which
tests for cocaine and marijuana. The Company has recently completed the
development of a test for methamphetamine, a synthetic stimulant and potent form
of amphetamine, and has started to produce kits containing a test for
methamphetamine. In November, 1997, the Company completed development of tests
for benzodiazepines, barbiturates, and tricyclic antidepressants which it
intends to market in the near future.
The Company has installed and uses equipment suitable for the mass
production of the workplace drug screening test. The Company's output was
initially lowered by its inability to secure reliable supplies of reagents. This
problem was rectified in May, 1997 through increasing reliability of two of its
suppliers and the addition of a third supplier.
The Company also owns a patented low cost method for producing Keratin
proteins. The uses for such proteins include hardening of finger nails and
carrying topical lotions and medicines through the skin. In addition, the
Company is developing a saliva test for alcohol consumption. Existing saliva
tests for alcohol consumption require exposure to the saliva sample and the
addition of reagents. The Company's test is self-contained, involves no
additional reagents and can be priced lower than existing competitive products.
The Company has no intention of developing or marketing its laboratory test, its
Keratin technology or its saliva test for alcohol consumption at this time, but
intends to concentrate on the production and marketing of its drug screen tests.
The Company has fully developed and is preparing to market its anti-dilutant
product which detects the presence of dilutants in the urine specimen, added
detergents, and tests for pH and specific gravity levels.
The Company may develop or acquire additional biomedical technologies or
products in the future. However, it has not yet located any technologies which
it desires to develop or acquire.
20
<PAGE>
Background
----------
According to the "1996 AMA (American Management Association) Survey
Workplace Drug Testing and Drug Abuse Policies Summary of Key Findings," an
annual report on drug testing in the workplace, 81% of major United States firms
now test employees and/or job applicants for drug use, an increase of 277% since
1987 and an increase of 3% since 1995. The AMA attributed the increase to
several factors, including Department of Transportation and Department of
Defense regulations which, in conjunction with local and state regulations,
mandate testing in certain job categories, the Federal Drug-Free Workplace Act
of 1988, court decisions recognizing an employer's right to test both employees
and job applicants in the private sector for drugs of abuse, action by insurance
carriers to reduce accident liability and control health care costs and
corporate requirements that vendors and contractors certify that their
workplaces are drug-free.
The AMA found that business category was the most important determinant in
drug testing. The percentages in each category which tests for drugs of abuse
are manufacturers (89%), transportation (100%), wholesalers and retailers (79%),
general service providers (77%), business service providers (60%) and financial
service providers (56%).
The survey states that the usual and recommended procedure for urine
samples calls for a retesting of positive samples by the gas-chromatography
method. It also states that 76% of firms that test utilize a medical review
officer ("MRO") who analyzes test findings, judges them against the test
subject's medical profile and renders a verdict to the employer which does not
see the test results but only the MRO's report. The use of an MRO offers
significant protection to employees who may test positive due to the use of
prescription drugs or non-controlled substances which register as controlled
substances.
The Substance Abuse and Mental Health Services Administration, Office of
Applied Studies of the United States Department of Health and Human Services,
Public Health Service, in its advance report number 18 released in August, 1996
entitled "Preliminary Estimates from the 1995 National Household Survey on Drug
Abuse," notes that 14.3% of unemployed adults, age 18 years and older, were
current illicit drug users in 1995 compared with 5.5 % of full-time employed
adults and that the rate of drug use decreased from 1994's 6.7%. 71% of all
current illicit drug users 18 years old and older (7.4 million adults) were
employed, including 5.5 million full-time workers and 1.9 million part-time
workers. Because of the high incidence of workplace drug use, the testing of
employees for the most "popular" drugs has become widespread. Positive tests
often result in discharge of, or treatment for, the employee. In addition, the
threat of testing, particularly random testing, has the prophylactic effect of
reducing workplace drug use.
The Company believes that the drugs of abuse testing market is large and
growing and that the largest market opportunity for on-site drug screening
products is the private sector with an additional large public sector demand.
According to Management, drug testing performed in an on-site facility using
technologies designed for on-site use can be just as accurate as testing
performed in a full-service lab. Drug screening tests are now performed in
markets which include: preemployment testing, random testing of employees, drug
rehabilitation programs, hospital laboratories, emergency rooms, private
security agencies, public transportation, law enforcement agencies, probation
and parole programs and Department of Defense contractors.
In April, 1997, the Company applied to list its Common Shares on the Nasdaq
SmallCap Market. The Common Shares were accepted for listing and began trading
on the Nasdaq SmallCap Market on December 24, 1997.
21
<PAGE>
Workplace Drug Test
- -------------------
Design
------
The first product, trademarked "The Rapid Drug Screen," developed and
marketed by the Company, is a workplace test for five drugs of abuse which can
be used in offices, factories, "halfway" houses, remote locations and in all
situations where an immediate result is required. The product consists of a
"NIDA 5 Card," a business-card size card divided into five lengthwise strips, or
sections. The person being tested urinates into a test cup, puts on the lid, and
hands it to a supervisor or other person administering the test. The test
administrator inserts the card into a pre-punched slit in the lid without the
danger of spilling, touching or contaminating the urine inside. Thus, the
administrator is not exposed to the urine sample nor does he or she have to mix
reagents. Within five minutes, the results can be read on the insert 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 five specific drugs of
abuse - PCP, marijuana, cocaine, amphetamines and opiates - designated by NIDA
("National Institute on Drug Abuse") in the "Drug-Free Workplace Act of 1989" as
those to be tested for in most federally regulated drug testing programs. If the
results are positive, the cup is sealed with provided materials and sent to a
laboratory for confirmation. No adverse action is taken by the test
administrator unless confirmation of a positive test is received from an
independent laboratory. A double line in the test area of the Rapid Drug Screen
indicates that the screen is negative for the presence of the "NIDA 5" drugs of
abuse.
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 develops, cards
which test for any combination of the NIDA drugs of abuse. The two panel strip,
designed for juvenile corrections centers and educational institutions, tests
only for cocaine and marijuana. The eight panel strip, designed to rival two
competitive products, Biosite and Drug Screen Systems, includes barbiturates,
benzodiazepines, tricyclic antidepressants and methamphetamines. These
additional tests can be combined in single unit with the NIDA 5 Card so that one
sample can test for eight drugs of abuse simultaneously. The Company's test for
methamphetamine is incorporated in a two panel test for marijuana and
methamphetamine; and the other is a five panel test for methamphetamine,
amphetamine, cocaine, opiates and marijuana.
In November, 1997, the Cmpany completed development of tests for
benzodiazepines, barbiturates, and tricyclic antidepressants making the
Company's Rapid Drug Screen capable of detecting various combinations of
cocaine, opiates, THC, PCP, amphetamines, methamphetamines, benzodiazepines,
barbiturates, and tricyclic antidepressants. In addition to standard two, five,
eight, and nine panel versions, the Company is able to customize the test to
meet individual customer needs, if given a lead time ranging from two weeks to
two months depending on specifications.
22
<PAGE>
Benzodiazepines, barbiturates, and tricyclic antidepressants are
prescription sedatives which are often abused and can be deadly. In fact, the
Florida Alcohol and Drug Abuse Association (FADAA) reports that barbiturates
account for approximately one-third of all reported drug-related deaths while
tricyclic antidepressants have been identified as a leading cause of fatality
from drug ingestion in Australia. Domestic concerns regarding trends of
barbiturate abuse focus on the drug's growing popularity among teenagers, as
evidenced by the 1996 Monitoring the Future Study which documents a 38% rise in
barbiturate use among high school seniors since 1992.
One of the problems which often occurs in the use of workplace drug testing
is fraud or evasion practiced by the person being tested. The most prevalent
method of avoiding adverse test results is the substitution by the person being
tested of a hidden "clean" urine sample which he or she brings to the test. As a
consequence, each of the Company's drug test strips contains a temperature
sensor which helps prevent the substitution of another urine sample as the
likelihood is that the substituted sample would not retain proper temperature.
Also, the Rapid Drug Screen contains a control line, designed to assure the
administrator of the test that the test is working properly. Should the control
line not appear, the administrator is instructed to void the test and "retest"
the individual being tested by obtaining another specimen sample.
The kit contains the following instructions: if only one horizontal band
changes color in any NIDA strip, the sample is positive for that drug and the
sample should be sent to a laboratory for confirmation. If both bands in any
NIDA strip change color, the sample has tested negative for that drug. If
neither band changes color, the sample is not urine or the test must be voided;
and the employee or other person being tested must submit another urine sample
for retesting.
Manufacture
-----------
After the successful completion of clinical trials in May, 1996, the
Company initially subcontracted the manufacture of components, including the
test strips, of The Rapid Drug Screen to several outside manufacturers. These
components were then assembled for the Company by Columbia Advocacy and Resource
Center ("COARC"), an FDA-approved contract manufacturer in Mellenville, New
York, which is near the Company's headquarters. COARC is a federal and state
licensed not-for-profit agency where non-disabled employees work side by side
with several hundred developmentally disabled employees to manufacture a wide
variety of products and services.
The Company found that the use of subcontractors to produce the test strips
was unsatisfactory from a pricing, delivery and quality control standpoint. The
Company has installed equipment in a dedicated "white" room in the COARC
facility which allows COARC to manufacture the test strip component of the
product as well as to undertake its assembly operations on the Company's behalf.
The white room dedicated to the workplace drug screening test is temperature and
humidity controlled and has an airborne particulate filtering system. The
Company owns the equipment which is being be used by employees of COARC. Other
employees of COARC assemble, pack and ship the units. COARC has established a
stringent Quality Assurance/Quality Control ("QA/QC") Program to insure data
reliability and product consistency. The Company intends to continue to contract
out the printing and manufacture of specimen cup components. The Company
presently produces its test strips using the equipment. The equipment, as
installed, is capable of producing up to 500,000 units per month utilizing one
shift five days a week.
23
<PAGE>
FDA Approval/Patent Application
-------------------------------
Though FDA approval is not required for most forms of workplace drug
testing, including The Rapid Drug Screen, it is required for use in a clinical
setting which Management anticipates may become a future marketplace for the
Company's drug testing products. Testing of one hundred samples was completed in
July, 1996 and showed 100% correlation to tests performed in a recognized
testing laboratory. A Federal Drug Administration ("FDA") "510K" application was
filed on July 15, 1996 and was granted on April 15, 1997. Utility and
application patents were filed on March 11, 1996.
Marketing and Sales
-------------------
The Company advertising through trade journals direct mail campaigns; and
its representatives attend trade shows. The Company sells primarily to
distributors which then resell in the various marketplaces. The Company has
garnered orders from distributors, municipal bodies and corporate users as well
as from penal facilities. In November, 1997, the Company hired a national sales
manager, a director of marketing and five regional managers. (See
"Management--Significant Employees.") Also in November, 1997, the Company
announced its intention to open a national sales office in Boca Raton, Florida.
(See "Risk Factors--Marketing and Sales.")
The Company has divided its marketplace into the following categories.
Corporate Workplace Drug Testing Programs
-----------------------------------------
The Company has developed a network of distributors and administrators of
workplace drug testing programs to sell its Rapid Drug Screen testing kit. Its
largest initial order for this marketplace is from Zee Services, Inc., a
division of McKesson Corp. Zee Services, Inc. utilizes a network of 80 regional
distributors which, in turn, employ 1,300 sales representatives each with a
well-stocked company van to sell to 350,000 small and medium sized industrial
clients a variety of products, ranging from first aid kits to drug testing kits.
An initial order of 50,000 test kits has been produced. CannAmm, Inc., a similar
company operating in Canada, has likewise become a distributor of the Company's
products. In addition, the Company has sold to many regional distributors in
this marketplace.
Corrections and Law Enforcement
-------------------------------
This market includes federal, state and county level correctional
facilities, pretrial agencies, probation and parole departments at the federal
and state levels and juvenile correction facilities. The Company has received
orders from several agencies including the Broward County, Florida, Sheriff's
Department, the United States Probation Department and other similar facilities
and agencies. The Company has exhibited at the American Corrections Association
summer trade show in Nashville in August, 1996 and at the January, 1997 winter
show.
Rehabilitation Centers
----------------------
This market includes 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 a non-exclusive distribution agreement with
CanAmm, Inc., a Canadian distributor, an exclusive distribution agreement with
Nobel House., a U.S. distributor for Chile, and is negotiating for exclusive
distribution for Pacific Rim countries with a Canadian-based distributor. Nobel
House has committed to a minimum of 250,000 "two panel" tests for Chile, (to
test parochial high school students) and is negotiating purchase agreements with
relevant government agencies of other South America, Cental America and
Caribbean countries.
24
<PAGE>
In September, 1997, the Mexican Secretary of Health approved and registered
the Rapid Drug Screen for sale in Mexico. In November, 1997, the Company entered
into a 36 month distribution agreement with Laborotorios Devor, S.A. De C.V. of
Mexico for a minimum of 603,000 Rapid Drug Screen kits.
Also, in September, 1997, the Company entered into a one year distribution
agreement with a Manila-based health product distributor. The agreement requires
a minimum annual order of 100,000 units, and grants the distributor the
exclusive right to market all of the Company's on-site substance abuse testing
products in the Philippines. The Company shipped the first 2,000 units to the
Philippine distributor in September, 1997.
Clinical, Physicians and Hospitals
----------------------------------
The Company was approached and is negotiating an agreement with three major
drug companies to distribute the Rapid Drug Screen under a joint label to the
worldwide clinical market, which includes physicians' offices, hospitals and
laboratories. The Company is actively pursuing this market now that the FDA has
approved its drug test kit for sale to clinics, laboratories, physicians and
hospitals.
Consumer and Over-the-Counter
-----------------------------
The Company's Rapid Drug Screen test is ideal for consumer use as it leads
to immediate and accurate results at a price less than half that of available
consumer kits. Since receiving its FDA 510(k) approval for clinical sales, the
Company has been actively investigating the FDA requirements for this market. It
has been approached by several store and pharmacy chains. The Company intends to
market through distributors or to sell directly to larger retail chains.
Additional Markets
------------------
As reported in the "New York Times," October 20, 1996, President Clinton
has called for drug testing of all teenagers by state motor vehicle departments
prior to granting driving licenses to them. In addition, certain low-income
housing funded by the Department of Housing and Urban Development require
testing of residents as a condition for continued occupancy. Finally, many high
school and college sports programs are requiring random testing for drugs of
abuse as a condition of student participation.
Samples
-------
The Company has found that one of its best marketing methods is the
shipping of samples to potential customers which have expressed interest through
responses to telemarketing, trade show demonstration, advertising or word of
mouth. Although initially expensive, the Company has found that the best way to
make sales is through demonstration and testing of the product's features.
25
<PAGE>
Competition
-----------
Competition to the Company's workplace drug test comes from tests by Roche
Diagnostic Systems, Editek, Inc., Biosite Diagnostics, Drug Test Resources
International and Drug Screening Systems, Inc. In the Roche test, the tester
inverts the cup for ten seconds; and the testing chemistry for those tests is
contained in the cup. Editek's Easy Screen involves six steps, including
pipeting a drop of urine for each test, applying drops of enzyme conjugates,
applying drops of wash buffer and wiping and applying drops of substrate before
the test results can be read. Biosite's Triage product involves pipeting drops
of urine and reagents. The Drug Test Resources test involves pipeting drops of
urine. The Drug Screening Systems test involves pipeting drops of urine and
reagents. In addition, Psychemedics introduced a test which requires the
subject's lock of hair be sent to its laboratory for analysis, which takes five
to fifteen days. The test is several times as expensive as the Company's. Its
only advantage over the Company's test is that drug residues remain in the hair
longer than in urine so that an employer or parent can gain a perspective of
drug use over a longer period of time. (See "Risk Factors--Competition in the
Drug Testing Market; Technological Obsolescence.")
Principal Suppliers
-------------------
The Company's major suppliers are as follows: IVEK Corporation,
Springfield, VT, produces the equipment which is used in the manufacture of the
test strips; Kinematic Automation, Twin Harte, CA, produces the cutting
equipment for the test strip backing; Arpak Plastics, Inc., Plattsburgh, NY,
supplies specimen cups and covers; Monarch Plastics, Mount Laurel, NY, prints
the plastic test card. The Company has located additional sources of components
from which it could purchase if necessary.
The Company subcontracts the manufacture of the test strips and the
assembly, packaging and fulfillment to COARC, Mellenville, NY, a medical device
manufacturer registered with the Federal Drug Administration. This registration
requires that COARC submit to periodic "audits" of its facilities to ensure
compliance with FDA standards. The COARC facility contains 70,000 square feet of
manufacturing, office and assembly space, including a white room specifically
designated to the manufacture of the Company's products which has airborne
particulate removal equipment and is temperature and humidity controlled. The
Company has placed manufacturing equipment in COARC's premises for use by COARC
personnel for the production of the Company's drug test kits.
The Company places purchase orders with COARC for specific quantities of
the test cards. It also pays COARC a per unit fee to assemble the test kits and
to pick, pack and ship the kits to the Company's designated customers. Although
the Company prefers COARC because it is located within 20 miles of its premises,
because of its quality of production, because of its ability to respond quickly
to orders and because of its experience in biomedical production, the Company
has located additional subcontractors which could, if needed, perform
substantially the same services as COARC at similar prices.
On December 1, 1997, the Company announced that it intended to construct a
15,000 square foot manufacturing facility and headquarters in Columbia County,
New York. The Empire State Development Corporation, an agency of New York State,
has agreed in principle to provide financial assistance in the form of grants
and below market interest rate loans as well as financial assistance in employee
training. Columbia County has announced its intention to transfer 20 acres of
land to the Company. Manufacturing is intended to be divided between COARC and
the Company's facility. The Company believes that there is a likelihood that the
facility will be built; but there is no guarantee that all steps leading to
construction be completed.
26
<PAGE>
Patents and Trademarks
----------------------
The Company has applied for registration of the following trademarks:
"American Bio Medica" and "Rapid Drug Screen" in the United States and in
foreign countries in which the Company's products are being marketed. The
Company's trademark counsel, Edmund Jaskiewicz, Esq., Executive Vice-President,
has opined that there are no similar marks and, as a consequence, the Company
feels confident that such marks will be registered. Stan Cipkowski, President,
has assigned to the Company for no consideration, his application for a utility
and design patent in the United States and Canada on the drug screen kit as an
entity. Mr. Jaskiewicz, as patent counsel, has opined that a search has revealed
no competing patented products. However, there can no assurance that a patent
will be granted or that, if granted, it will withstand challenge. The Company
has applied for patents and trademarks in the European Common Market and Japan.
(See "Risk Factors--Patents and Trademarks.")
Government Regulations
----------------------
It is anticipated that the Company's business will benefit by Federal and
state regulations relating to drug free workplaces, particularly the Drug Free
Workplace Act of 1988. Clinical sales of the drug test kit which awaited final
FDA approval of the tests for two of the NIDA drugs of abuse have commenced and
sales are anticipated in due course.
Drugs of Abuse Preliminary Screen ("ABM Prescreen")
---------------------------------------------------
The second of the Company's products is a preliminary drug screen which is
an easy to use, accurate and cost effective test paper for the drug testing
market. This test will, if the results are negative, eliminate the possibility
that the urine sample contains any of 20 drugs. The laboratory technician places
a few drops of pretreated urine on a test paper and reads the results visually
within a few minutes. Over 90% of tests submitted to laboratories yield negative
results. Thus, the primary use for this product in laboratories is as a means of
inexpensively and quickly eliminating, through negative results, over 90% of the
testing required. A patent application is in process. Pre-clinical trials for
the preliminary drug screen have been completed at two independent laboratories
contracted by the Company. Pre-clinical tests include laboratory evaluation of
product chemistry and observation of results of addict urine samples tested with
the product over a period of time. These tests were conducted under the
supervision of John Questal, principal of one of the contract laboratories and
were reviewed by Dr. Henry Wells, the Company's Vice-President-Product
Development. Based on the success of pre-clinical evaluations, independent
clinical tests were conducted by American Medical Laboratories, Chantilly,
Virginia. The Company expects to introduce its ABM Prescreen to the market as an
inexpensive alternative to the products being offered by the current market
leaders, Roche Diagnostic Systems and Biosite Diagnostics. The Company cannot
predict when the ABM Prescreen will be introduced.
Alcohol/Saliva Test
-------------------
The Company has developed a technology that will detect alcohol levels in
individuals through a quick, one step, on-site, saliva test that can be
calibrated to specific sensitivity levels. Though at an advanced stage of
development, additional laboratory work and clinical evaluations will need to be
funded and completed prior to any patent applications or commercialization.
These activities are expected to commence during fiscal 1998. Law enforcement
and workplace testing would be the initial markets targeted by this Company. The
Company is only aware of one, nonspecific to sensitivity levels, two step
product now available.
27
<PAGE>
KDMP (Keratin Derivative Modified Protein)
------------------------------------------
Keratin Derived Modified Protein ("KDMP") is a liquid keratin protein
complex containing water soluble peptides and is rich in cysteine. It can be
used as an active ingredient in varying concentrations in the formulations of
quality skin, nail, and hair care products. Pre-clinical trials have been
completed and the Company intends to license or sell the technology. Various
patents relating to this technology have been assigned to the Company by Edmund
Jaskiewicz, Executive Vice-President, as part of the consideration for his
receipt of Common Shares (see "Certain Transactions"). The Company is currently
manufacturing this product in small quantities for several companies which have
requested samples for evaluation. The Company does not intend to devote any
substantial economic or personnel resources to the development or marketing of
this product for the near future. As a result, no revenue is expected to be
derived from this product until a license is negotiated, of which there is no
assurance.
The Company's Plan of Operations
--------------------------------
The Company intends to continue the establishment of a network of
distributors which service customers in non-clinical workplace, correctional
institution or drug rehabilitation areas, to market and sell its drug testing
kits, to manufacture and ship such kits and, once manufacturing has reached the
capacity needed to fulfill orders, to continue research and development on its
additional biomedical products.
The Company has entered into non-exclusive, non-clinical market
distribution agreements with a number of companies, including national companies
(such as Zee Services, Inc., a subsidiary of McKesson Corporaton), regional
(such as Accuracy Testing Plus, Houston, Texas ) and local distributors (such as
Western Pathology Consultants, Scottsbluff, Nebraska, Business Medical Services,
Columbus, Ohio and Prima Healthcare Group, Springfield, Missouri) distributors.
In addition, the Company, has entered into a non-exclusive distribution
agreement for Canada with Ammcan, Inc., Toronto, Ontario. The Company has also
entered into a distribution agreement with Quadrangle Research LLC, an affiliate
of The American Association of Medical Review Officers, to market the Rapid Drug
Screen to its membership of 16,000 physicians, health care providers and other
drug testing professionals.
These agreements permit the distributors to sell the products of other
manufacturers and permit the Company to sell its test kits to other distributors
within and outside the territory of each distributor. The agreements are
cancelable by either the Company or the distributor upon 30 days' written
notice. Each of the Company's domestic distributors has submitted purchase
orders which the Company is in the process of fulfilling.
The Company intends to enter into distribution agreements on an
international basis as such distributors are identified. The Company has entered
into an agreement with Noble House, Miami, Florida for representation of the
Company in foreign countries, Noble House is negotiating sales on behalf of the
Company in Colombia, Argentina, Panama, Costa Rica and Caribbean countries as
well as in Puerto Rico. Noble House has secured a contract in Chile to sell, for
a two year period, a yearly minimum of 250,000 kits which test for two drugs of
abuse - cocaine and marijuana. In May, 1997, the Company entered into a purchase
agreement with PhamaGen S.A., a subsidiary of Zeltia, S.A., a holding company
traded on the Madrid Stock Exchange, for a minimum of 300,000 units per year of
the Rapid Drug Screen. Assuming the minimum annual purchases are achieved, the
purchase agreement is exclusive for Spain, Morocco, Portugal, France, Andorra
and Italy. The Company has also entered into a distribution agreement for its
drug test kits for the Philippines.
28
<PAGE>
The Company has retained a national and five regional managers (in Fort
Lauderdale, Nashville, Los Angeles, Baltimore and Milwaukee). These
representatives call on accounts, such as corporations and correctional
institutions directly and support the Company's worldwide distribution network.
The Company intends to continue its extensive direct mail campaign and
participation in trade shows such as the Employee Assistance Program held in
Chicago, in November, 1996 and the American Correctional Show in January, 1997
in Indianapolis, Indiana. The Company demonstrated its products at 14 trade
shows during fiscal 1997 and intends to participate in 24 trade shows in fiscal
1998.
The Company's present manufacturing equipment and personnel designated by
COARC is sufficient to produce 50,000 drug test kits each week, assuming one
shift per day, five days a week. In the event the Company desires to increase
production, its estimated costs for additional equipment are $40,000.
The Company's Rapid Drug Screen Test was featured on "Today's Health,"
aired on CNBC in July, 1997.
Government Regulation
---------------------
The development, testing, manufacture and sale of the Company's laboratory
test kits and certain additional proposed products are subject to regulation by
United States and foreign regulatory agencies. Pursuant to the Federal Food,
Drug, and Cosmetic Act, and the regulations promulgated thereunder, the FDA
regulates the preclinical and clinical testing, manufacture, labeling,
distribution and promotion of medical devices. If the Company fails to comply
with applicable requirements it may be subject to fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, failure of the government to grant premarket clearance or premarket
approval for devices, withdrawal of marketing clearances or approvals and
criminal prosecution.
The Company has funded and will continue to fund its marketing, sales and
manufacturing activities from cash on hand. The Company does not now nor does it
intend to enter into any agreements with affiliated parties for the purchase of
technologies, the sale of product or the purchase of inventory. (See "Certain
Transactions.")
29
<PAGE>
MANAGEMENT
Directors and Executive Officers.
---------------------------------
The directors and executive officers of the Company and their respective
ages, positions with the Company, along with certain biographical information
are as set forth below.
Name Age Position Since
---- --- ---------------------------------- -----
Stan Cipkowski 49 President and a Director 1986
Edmund Jaskiewicz 75 Chairman of the Board of Directors,
Executive Vice-President and Secretary 1992
Jay Bendis 50 Vice-President-Marketing and a Director 1995
John F. Murray 53 Treasurer and a Director 1997
Henry J. Wells 65 Vice-President-Product Development 1995
Jasper R. Clay, Jr. 65 A Director 1997
Karen Russo 36 A Director 1997
Douglas Casterlin 50 Vice-President and General Manager 1997
Stan Cipkowski founded the predecessor of the Company in 1982 and has been
an officer and director of the Company since its incorporation in April 1986.
From 1982 to 1986, he was sole proprietor of American Micro Media, the
predecessor, which was acquired by the Company. In addition, from 1983 to 1987,
Mr. Cipkowski was a general partner of Florida Micro Media, a Fort
Lauderdale-based marketer of educational software and was a principal
shareholder and Chief Financial Officer of Southeast Communications Group, Inc.,
a publisher of direct response media. In 1982, he became a consultant to
Dialogue Systems, Inc., a New York-based developer of training and
communications materials, where he served as Vice President of Sales and
Marketing. From 1977 to 1982, he was employed by Prentice-Hall Publishing
Company, reaching the position of National Sales Manager. Prior to 1977 he was
employed as an accountant for the New Seabury Corporation and as Mid-West Area
Manager for the Howard Johnson Company.
Edmund Jaskiewicz is a lawyer-engineer. He has practiced international
patent and corporate law as a sole practitioner since 1963 and has served as
Chairman of the Board of Directors since 1992. From 1953 to 1963 Mr. Jaskiewicz
was associated with Toulmin and Toulmin, Esqs., Washington, D.C. From 1960 to
1962, he resided in Frankfurt, Germany managing that firm's local office. From
1952 to 1953 he was with the Patent Section of the Bureau of Ordinance of the
Department of the Navy working on patent infringement and licensing matters. He
received his J.D. in 1952 from George Washington University Law School and his
B.S. in Engineering from the University of Connecticut in 1947.
Jay Bendis has been an independent consultant to biomedical companies since
1990, specializing in commercializing new concept products in both domestic and
international markets. From 1990 to 1992, he served as Vice-President of Sales
and Marketing for Scientific Imaging Instruments. From 1985 to 1990, Mr. Bendis
served as National Sales Manager of the XANAR Laser Corp., a division of Johnson
& Johnson, where he directed its national sales force and developed its
marketing strategy for integrating high power lasers into the hospital market.
From 1979 to 1984, he was the Eastern Area Sales and Marketing Manager for the
IVAC Corp., a division of Eli Lilly. Prior to 1979, Mr. Bendis held sales
management positions with Xerox Corporation and A.M. International. Mr. Bendis
earned his B.A. in Marketing/Management from Kent State University and is
currently a member of the Edison BioTechnology Center Advisory Council for the
State of Ohio.
30
<PAGE>
Henry Wells, Ph.D. has served since 1990 as a contract chemist with the
title of Vice-President-Science and Technology for New Horizons Diagnostics,
Inc. where he adapts immuno-chemical technologies for detection of infectious
diseases. From 1989 to 1990, he was director of production for Espro, Inc., a
producer of in-vivo pesticides. From 1985 to 1989, Dr. Wells was
Vice-President-Science and Technology for Keystone Diagnostics, Inc. From 1984
to 1985, he was Director of Research and Development for Hill-Wells Research
Corporation, a developer of diagnostics products. From 1981 to 1984, he was
Vice-President-Research and Development of Hematec Corporation. From 1979 to
1981, Dr. Wells was Director of Biochemistry for Helena Laboratories. From 1973
to 1979, he was Manager of Chemical Chemistry at Smith Kline Diagnostics. Dr.
Wells earned his Ph.D. in Biochemistry from the University of Pittsburgh, his
M.A. from University of Pennsylvania and his B.S. in Chemistry from the
University of Pittsburgh.
John F. Murray has served as Chief Financial Officer of Federal Supply,
Inc., Pompano Beach, Florida since April, 1994. From 1988 to 1994, Mr. Murray
served as Controller for Bio Therapeutics, Inc., Woodbridge, New Jersey. He also
was Controller of Shortline, a group of transportation companies, from 1982 to
1988 and, from 1974 to 1982, of Kleber Tire & Rubber Corp. Mr. Murray was
Director of Accounting for Western Union Telegraph Company from 1972 to 1974 and
Senior Accountant for S.D. Leidesdorf & Co. (now Ernst & Young) from 1969 to
1992. Mr. Murray received his B.B.A. in Accounting from the Baruch School of the
City University of New York in 1968 and became a Certified Public Accountant in
the State of New York in 1974.
Jasper R. Clay, Jr. served as a United States Parole Commissioner from 1984
to 1996 and from 1991 to 1996, as Vice-Chairman of the United States Parole
Commission and Chairman of the National Appeals Board. He served as final
authority for all decisions relating to parole, revocation, imposition or
modification of parole conditions, or denial of discharge from supervision. From
1976 to 1984, Mr. Clay was State of Maryland Parole Commissioner and from 1969
to 1976, he was an Associate Member of the State of Maryland Board of Parole.
Mr. Clay served as an Associate Member of the State of Maryland Board of 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. He received an Honorable Discharge from the United States Army
Infantry as a First Lieutenant in 1956. He is active in a number of professional
organizations including the American Correctional Association (where he is
presently a member of the Awards Committee), the Association of Paroling
Authorities International (where he serves as an officer) and the National
Council of Crime and Delinquency. Mr. Clay earned his B.A. in Psychology from
Morgan State University in 1954 and attended the graduate school at Loyola
College in areas such as Guidance, Counseling and Psychology.
Karen Russo has, since 1995, acted as an independent consultant to training
and consulting firms in topics including interpersonal and strategic selling,
sales management, service excellence, teamwork and collaboration, management,
leadership and prevention of workplace violence and sexual harassment. From 1989
to 1995, Ms. Russo was an account executive with The Forum Corporation, Los
Angeles, California, responsible for business development and client service.
She served as an Assistant Vice President at Bankers Trust Company from 1987 to
1989. Ms. Russo earned her M.B.A. from Columbia University in 1987 and her B.A.
from University of Maryland in 1981.
31
<PAGE>
Douglas Casterlin was General Manager of Coarc, Inc., the Company's product
assembling, packaging and shipping contractor, from 1979 to 1997. In that
capacity, he developed a contract manufacturing business involving plastic
injection molding and clean room assembly and packaging of FDA - regulated
medical products. He also negotiated a joint venture with a major German
healthcare product manufacture to establish its United States operations and
established a professional-format videocassette remanufacturing business serving
the television broadcase industry. Mr. Casterlin was Workshop Director, Putnam
Industries, Inc., from 1976 to 1979 and Production Manager, from 1973 to 1976,
of Occupatics, Inc. From 1966 to 1970, Mr. Casterlin served as an Air Force
Intelligence Officer and was honorably discharged as Sergeant. He studied
Engineering at Lehigh University from 1965 to 1966 and received his B.A. degree
in Psychology in 1973 from the State University of New York at New Paltz.
Significant Employees
---------------------
Lester H. Cohen (50 years old) was from 1996 to 1997 President of Drug
Detective Systems, Inc. From 1994 to 1996, he was President and a founder of
DrugTest Resources International. He sold his interest in that company to his
partner. From 1992 to 1994, Mr. Cohen was Consultant to and Western Regional
Manager of Drug Screening Systems, Inc. and from 1985 to 1994, he was President
of Criminal Justice Resources, Inc. (formerly Emjay Associates Ltd.). From 1984
to 1985, Mr. Cohen served as Executive Director, American Probation and Parole
Association. He was Chief of Planning Policy and Program Development, New York
State Division of Probation from 1977 to 1984.
Winn Pollock (62 years old), National Sales Manager, served as Regional
Manager for Komputer Kingdom, Jacksonville, Florida from 1994 to 1996. From 1991
to 1994, he was Director of Sales and Marketing for ComputerLand of South
Florida, Fort Lauderdale, Florida. He served as Director of the Education
Division of Caber Systems, Fort Lauderdale, Florida from 1990 to 1991 and
Vice-President of Sales for Florida Micro Media, Pompano Beach, Florida from
1982 to 1990. Mr. Pollock received his B.A. from Boston University in 1954.
Scientific Advisory Board
-------------------------
The Company has established a scientific advisory board of which Henry J.
Wells, Ph.D., Vice-President, is chairperson. The members of the scientific
advisory board are the following:
Anthony G. Costantino, Ph.D., earned his degree in Pharmacy from Dukane
University and a Ph.D. in Toxicology from the University of Maryland. He is a
Board Certified Forensic Toxicologist and currently serves as Director of
Clinical Toxicology at American Medical Laboratories in Chantilly, Virginia.
Delmiro A. Vazquez, B.S., M.T., (ASCP), earned his Bachelor of Science
degree from the University of Miami and a completed his Medical Technology
Rotation in the American Society of Pathologists Approved Program at the
University of Miami/Jackson Memorial Hospital. Mr. Vazquez holds postgraduate
certificates in Nuclear Medicine (Broward General Hospital) and Biomedical
Engineering (University of Miami). He is currently a member of the Forensic
Toxicology Department at Columbia Cedars Medical Center.
Kenneth Steiner, M.D., received his M.D. from the University of Tennessee
and is Board Certified by the National Board of Medical Examiners. He is Board
Certified by the American Board of Emergency Medicine and by the American
Association of Medical Review Officers. Additionally, Dr. Steiner has been
designated as an Federal Aviation Administration Medical Examiner.
The Scientific Advisory Board will meet from time to time to consider the
Company's present technology and proposed technology development.
32
<PAGE>
Executive Compensation
-----------------------
The following table sets forth certain information concerning compensation
paid or accrued for fiscal 1996 by the Company to or for the benefit of the
Company's President. No executive officer's total annual compensation for fiscal
year 1996 or 1997 exceeded $100,000. As permitted under the rules of the
Commission, no amounts are shown in the table below with respect to any
perquisites paid to a named officer because the aggregate amount of such
perquisites (e.g. auto allowance) did not exceed the lesser of (i) $50,000 or
(ii) 10% of the total annual salary and bonus of a named officer.
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
Awards Payouts
- --------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name Other Res- All
and Annual tricted Other
Principal Compen- Stock Options LTIP Compen-
Position Year Salary Bonus sation Awards SARs Payouts sation
($) ($) ($) (#) (#) ($) ($)
- --------------------------------------------------------------------------------
Stan 1997 99,068 -0- -0- -0- 550,000 -0- 5,371
Cipkowski, 1996 44,000 -0- -0- -0- -0- -0- 5,232
President
All of the Company's current directors will serve as directors until the
next annual meeting of stockholders and until their respective successors have
been duly elected and qualified, subject to their earlier removal or
resignation. Each Director receives a fee of $500 for attendance at meetings of
directors. The Board of Directors has established an options committee, an audit
committee and a compensation committee. The Company's by-laws provide that the
size of the Board of Directors shall be determined by the Board of Directors and
shall be between three and nine members. There are presently five directors of
the Company. All present members of the Board of Directors were elected by the
stockholders in September, 1997, except Karen Russo, who was appointed in
November, 1997, to fill a vacancy in the board.
The Company's officers are elected by, and serve at the pleasure of, the
Board of Directors.
The Company has granted stock options to various Management employees and
consultants (see "Certain Transactions" and Financial Statements-- Footnotes).
Directors and Officers Liability Insurance
------------------------------------------
The Company currently does not have directors and officers liability
insurance. It does not anticipate obtaining such coverage unless such insurance
can be purchased at a reasonable cost to the Company, of which there can be no
assurance. Officers and directors are indemnified by the Company in accordance
with the provisions of its certificate of incorporation to the maximum extent
permissible by law.
33
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth information as to the number of Shares
beneficially owned as of the date of the Prospectus by (i) each person who is
deemed to be a beneficial owner of more than 5% of the outstanding Shares; (ii)
each director; (iii) each executive officer; and (iv) all directors and
executive officers as a group. A person is deemed to be a beneficial owner of
any securities of which that person has the right to acquire beneficial
ownership of such securities within sixty days. All Shares are owned both of
record and beneficially.
Percent Before Percent After
Name of Number Conversion of Conversion of
Beneficial Owner of Shares Preferred Shares Preferred Shares(1)
---------------- --------- ---------------- -------------------
Edmund Jaskiewicz 3,047,955 22.5% 21.5%
1730 M Street, NW
Washington, DC 20036
Stan Cipkowski 2,742,748 20.3% 19.4%
102 Simons Road
Ancramdale, NY 12503
Jay Bendis 645,999 4.8% 4.6%
71 Springcrest Drive
Akron, Ohio 44333
Henry J. Wells, Ph.D. -0- -0-% -0-%
9421 Book Row
Columbia, Maryland 21046
Jasper R. Clay, Jr. -0- -0-% -0-%
102 Simons Road
Ancramdale, NY 12503
John F. Murray -0- -0-% -0-%
102 Simons Road
Ancramdale, NY 12503
Karen Russo -0- -0-% -0-%
8675 Falmouth Avenue
Playa del Rey, CA 90293
Douglas Casterlin -0- -0-% -0-%
65 Malloy Road
Ghent, New York 12065
--------- ----- ------
All Officers and
Directors as a Group
(6 persons) 6,436,702 47.6% 45.5%
- --------------------
1. Assumes conversion of the total number of the "B" and "C" Preferred Shares
into 301,429 Common Shares.
34
<PAGE>
CERTAIN TRANSACTIONS
In June, 1996, the Company adopted its 1996 Nonstatutory Stock Option Plan
(the "1996 Plan"). Options to purchase 2,000,000 Shares are included in the 1996
Plan of which 1,500,000 were issued on June 28, 1996 as follows: Stan Cipkowski,
550,000 options; Edmund Jaskiewicz, 250,000 options; Jay Bendis, 300,000
options; Henry Wells, 150,000 options; Joel Pensley, Esq. 160,000 options,
Michael Fugler, Esq. 40,000 options and two non-management employees, 25,000
options each. Each option entitles the holder to purchase one Common Share for
$3.00 until June 27, 1999. Options were exercised as follows: Mr. Jaskiewicz,
126,583; Mr. Cipkowski, 246,750; Mr. Bendis, 146,009; Mr. Wells, 76,416, Mr.
Fugler, 21,000 and Mr. Pensley, 81,433.
On April 30, 1997, the Company issued 20,000 options to Jay Bendis, and an
aggregate of 252,000 options to 15 non-management employees and consultants.
On August 29, 1997, the Company issued 185,000 options as follows: 10,000
to Jasper Clay, Jr., a Director, 10,000 to John F. Murray, a Director, and
155,000 options to 5 non-management employees.
On May 15, 1997, the Company entered into a three year employment agreement
with Douglas Casterlin, Vice President and General manager. Under this
agreement, Mr. Casterlin will receive an annual salary of $84,000 per year and a
bonus equal to 1.0% of net sales of the Company and is entitled to receive
health insurance, participate in stock option programs or similar benefit
programs generally offered to management or employees. On that date, the Company
issued 150,000 options to Mr. Casterlin exercisable at $3.00 per share for a
period of three years.
The Company does not now nor does it intend to enter into any agreements
with affiliated parties for the purchase of technologies, the sale of product or
the purchase of inventory.
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 30,000,000 Common
Shares $.01 par value and 5,000,000 Preferred Shares.
Common Shares
--------------
13,793,541 Common Shares were issued as of October 31, 1997. Stockholders
(i) have general ratable rights to dividends from funds legally available
therefor, when, as and if declared by the Company's Board of Directors; (ii) are
entitled to share ratably in all assets of American Bio Medica available for
distribution to shareholders upon liquidation, dissolution or winding up of its
affairs; (iii) do not have preemptive, subscription or conversion rights, nor
are there any redemption or sinking fund provisions applicable thereto; and (iv)
are entitled to one vote per Share on all matters on which shareholders may vote
at all shareholder meetings. All Common Shares now outstanding are fully paid
and nonassessable and all Common Shares to be sold will be fully paid and
nonassessable when issued.
Stockholders do not have cumulative voting rights. Thus, the holders of
more than 50% of such outstanding Common Shares, voting for the election of
Directors, can elect all of the Directors to be elected, if they so choose, and
in such event, the holders of the remaining Common Shares will not be able to
elect any of the Company's Directors.
Market for Common Equity and Related Shareholder Matters
--------------------------------------------------------
The table on the following page sets forth the range of high and low sales
prices for the Common Shares on the NASD Electronic Bulletin Board for each
quarter for the fiscal years 1996 and 1997 and the first and second quarters of
1998. There are approximately 2,350 holders of Common Shares. As of October 31,
1997, there were outstanding 13,793,541 Common Shares and 105.5 Preferred Shares
each of which is convertible into Common Shares at $10,000 divided by lesser of
$3.50 or 75% of the average closing price for the 20 trading days preceding
conversion. There are 20 holders of the Preferred Shares which do not trade. The
Common Shares have been accepted for trading on the Nasdaq SmallCap market (see
Front Cover Page and "Risk Factors--No Assurance of Continued Public Market for
Common Shares").
35
<PAGE>
High Low
---- ---
Fiscal Year Ending April 30, 1998
Second Quarter $3.97 $2.69
First Quarter 4.13 3.00
Fiscal Year Ending April 30, 1997
Fourth Quarter 4.13 3.69
Third Quarter 4.75 2.75
Second Quarter 7.38 4.31
First Quarter 6.00 2.00
Fiscal Year Ended April 30, 1996
Fourth Quarter 2.00 0.75
Third Quarter 1.00 0.63
Second Quarter 0.63 0.38
First Quarter 0.38 0.13
Preferred Shares
----------------
The Board of Directors of the Company has the authority, without further
action by the holders of the outstanding Common Shares, to issue Shares of
Preferred Stock from time to time in one or more classes or series, to fix the
number of Shares constituting any class or series and the stated value thereof,
if different from the par value, and to fix the terms of any such series or
class, including dividend rights, dividend rates, conversion or exchange rights,
voting rights, rights and terms of redemption (including sinking fund
provisions), the redemption price and the liquidation preference of such class
or series.
The Company has sold 60 "B" Convertible Preferred Shares and 45.5 "C"
Preferred Shares at $10,000 per share for an aggregate of $1,055,500 less
commissions of $93,500. The Series "B" and Series "C" Preferred Shares are
convertible into Common Shares pursuant to the following formula: $10,000
divided by the lesser of $3.50 or 75% of the average of the daily closing bid
prices for the 20 consecutive trading days ending on the trading day prior to
the day on which Preferred Shares are converted to Common Shares. All accrued
but unpaid dividends are payable in cash.
Options
-------
The Company has issued 500,000 "A" Options which are exercisable at $1.00
through March 14, 1999 and 500,000 "B" Options, which are exercisable at $2.00
through March 14, 1999. Until a registration statement relating to the Common
Shares underlying such options is effective, certificates representing the
shares into which these options are exercised will bear a legend restricting
transfer in the absence of an effective registration with the Commission or an
exemption therefrom.
The Company has adopted the Fiscal 1996 Nonstatutory Stock Option Plan (the
"1996 Plan") and the Fiscal 1998 Nonstatutory Stock Option Plan (the "1998
Plan"). 2,000,000 Common Shares were reserved under the 1996 Plan and 1,000,000
Common shares under the 1998 Plan. The Plan is administered by the Board of
Directors.
Stock options under either Plan ("Plan Options") may be granted to
employees, officers, directors, consultants of the Company or any other parties
who have made a significant contribution to the business and success of the
Company. The exercise price of Plan Options under either Plan may be more, equal
to or less than the then current market price of the Common Shares as deemed to
be appropriate.
36
<PAGE>
The Company has issued 1,957,000 options pursuant to the 1996 Nonstatutory
Option Plan. All Nonstatutory Options are exercisable for a period of three
years at $3.00 per share. (See "Certain Transactions.") As of the date of the
Prospectus, 697,445 options had been exercised for an aggregate consideration of
$2,092,335.
Warrants
--------
The Company has issued 24,712 Common Share purchase warrants. The Warrants
are exercisable at $3.00 per share until January 21, 1999.
Transfer, Option and Warrant Agent
----------------------------------
The transfer agent for the Common Shares, Options and Warrants is United
Stock Transfer, Englewood, Colorado.
Plan of Distribution
--------------------
Common Shares acquired through conversion of the Preferred Shares may be
sold from time to time by the holders thereof or their pledgees or donees. Such
sales may be made in the over-the counter market or in negotiated transactions,
at prices and on terms then prevailing or at prices related to the then current
market price or at negotiated prices. The Common Shares may be sold by means of
(a) purchases by a broker or dealer as principal and resale by such broker or
dealer for its account pursuant to the Prospectus and/or (b) ordinary brokerage
transactions and transactions in which the broker solicits purchasers. In
effecting sales, brokers or dealers engaged by holders may arrange for other
brokers or dealers to participate. Brokers or dealers will receive commissions
or discounts from the holders in amounts to be negotiated immediately prior to
the sale which amounts will not be greater than that normally paid in connection
with ordinary trading transactions.
The Company will not receive any proceeds from the sale of securities by
holder(s) of Preferred Shares who convert their shares. Common Shares may be
sold from time to time by selling securityholders or their pledgees or donees.
Shares Eligible for Future Sale
-------------------------------
In general, under Rule 144, as currently in effect, a person (or persons
whose Shares are aggregated), including a person who may be deemed to be an
"affiliate" of the Company as that term is defined under the Securities Act,
will be entitled to sell within any three-month period a number of Shares
beneficially owned for at least one year that does not exceed the greater of (i)
one (1%) percent of the then outstanding Common Shares, or (ii) the average
weekly trading volume in the Shares during the four calendar weeks preceding
such sale. Sales under Rule 144 are also subject to certain requirements as to
the manner of sale, notice and the availability of current public information
about the Company. 64,367 Common Shares may be sold pursuant to Rule 144 in each
three month period. However, a person who is not deemed to have been an
affiliate of the Company during the 90 days preceding a sale by such person, and
who has beneficially owned Common Shares for at least three (3) years, may sell
such Shares without regard to the volume, manner of sale or notice requirements
of Rule 144.
37
<PAGE>
The Company cannot predict the effect, if any, that sales of Common Shares
pursuant to Rule 144 or otherwise, or the availability of such shares for sale,
will have on the market price prevailing from time to time. Nevertheless, sales
by selling stockholders of substantial numbers of Common Shares in the public
market could adversely affect prevailing market prices for the Common Shares. In
addition, the availability for sale of a substantial number of Shares acquired
through the exercise of options under the 1996 or 1998 Plan could adversely
affect prevailing market prices for the Shares. (See "Risk Factors--Restricted
Resale of Securities.")
Commission Position on Indemnification for Securities Act Liabilities
---------------------------------------------------------------------
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the Company's certificate of incorporation, by-laws or provisions of
the New York Business Corporation Law, the Company has been advised that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Company of expenses incurred or paid by a
director, officer or controlling person in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Company will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
LITIGATION
In February, 1994, Robert Friedenberg, former stockholder of two medical
technology companies, MDI and Gendex, acquired by the Company, filed suit in the
name of the two subsidiaries to have the Share Exchange Agreement under which
those companies were acquired rescinded on the grounds of breach of contract.
The Company filed a third party claim in July, 1994, against Dr. Friedenberg,
seeking enforcement of the Share Exchange Agreement. In November, 1995, after a
bifurcated trial, the court dismissed Dr. Friedenberg's lawsuit brought in the
name of MDI and Gendex) and allowed the Company's third party claim to proceed
to trial. In September, 1996, Dr. Friedenberg died.
Trial on the third party claim was decided by a jury on May 5, 1997. The
verdict determined that Dr. Friedenberg (represented by his estate) breached
various contracts by failing to deliver certain technology to the Company. The
jury also found in favor of the Company on two of the three fraud claims against
Dr. Friedenberg and awarded the Company approximately $350,000 in damages. The
trial judge, who is bound by the jury verdict against Friedenberg, will decide
Dr. Friedenberg's Estate's pending claim to shares of Company common stock which
the Company refused to issue to Dr. Friedenberg.
In June, 1995, the Company filed a lawsuit against Jackson Morris, Esq. for
the breach of attorney-client relationship and of his fiduciary duty to the
Company for subsequently providing legal services to Dr. Friedenberg in his
dispute with the Company. The Company's lawsuit demands damages in the amount of
$1,000,000. Mr. Morris has counterclaimed for Common Shares. The court has set a
trial date of September 14, 1998.
No other legal proceedings are pending to which the Company or any of its
property is subject, nor to the knowledge of the Company are any other legal
proceedings threatened.
38
<PAGE>
LEGAL MATTERS
The validity of the securities offered by the Prospectus is being passed
upon for the Company by Joel Pensley, Esq., 276 Fifth Avenue, New York, New York
10023. Joel Pensley is the owner of 50,000 Common Shares and 93,567 Options
issued under the 1996 Plan.
EXPERTS
The audited consolidated financial statements of the Company as of April
30, 1997 included in the Prospectus and elsewhere in the Registration Statement
have been audited by Thomas P. Monahan, CPA, an independent public accountant,
as indicated in his report with respect thereto, and are included herein in
reliance upon the authority of Thomas P. Monahan, CPA as an expert in accounting
and auditing and in giving said reports.
On August 29, 1997, the Board of Directors of the Registrant appointed the
firm of Richard A. Eisner & Co., LLP as independent auditors for the fiscal year
ending April 30, 1998.
There were no disagreements on any matters of accounting principles or
practices, financial statement disclosure, or auditing scope or procedures in
connection with audits of the Company's financial statements for the fiscal
years ended April 30, 1995, 1996 and 1997 which disagreements, if not resolved
to their satisfaction, would have caused Mr. Monahan to issue an adverse opinion
or a disclaimer of opinion, or were qualified or modified as to uncertainty,
audit scope or accounting principles.
ADDITIONAL INFORMATION
The Company has filed with the Commission, the Registration Statement on
Form SB-2 under the Securities Act with respect to the securities offered
hereby. The Prospectus, which constitutes part of the Registration Statement,
does not contain all of the information set forth in the Registration Statement
and the exhibits and schedules thereto. For further information with respect to
the Company and the securities offered hereby, reference is made to the
Registration Statement and the exhibits filed therewith. Statements contained in
the Prospectus as to the contents of any contract or any other document referred
to are not necessarily complete. In each instance reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement or otherwise filed with the Commission, each such statement being
qualified in all respects by such reference. The Registration Statement and the
exhibits and schedules thereto may be inspected without charge at the principal
offices of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and
copies of such material can be obtained from the Public Reference Section of the
Commission at prescribed rates. The Registration Statement and exhibits may also
be inspected a the Commission's regional offices at 500 West Madison Street,
Suite 1400, Chicago, Illinois and at 7 World Trade Center, Suite 1300, New York,
New York 10048. The Commission also maintains a World Wide Web site on the
Internet that contains copies of reports, proxy and information statements and
other information regarding registrants that file electronically on the
Commission's Electronic Data Gathering Analysis and Retrieval system ("EDGAR"),
including the Company, at http://www.sec.gov.
The Company's fiscal year ends on April 30. The Company distributes to its
stockholders annual reports containing audited financial statements with a
report therein by independent public accountants after the end of each fiscal
year. In addition, the Company furnishes to its stockholders quarterly reports
for the first three quarters of each fiscal year containing unaudited financial
statements and other information after the end of each fiscal quarter, upon
written request to the Secretary of the Company or otherwise as required by law.
39
<PAGE>
THOMAS P. MONAHAN
CERTIFIED PUBLIC ACCOUNTANT
208 LEXINGTON AVENUE
PATERSON, NEW JERSEY 07502
(201) 790-8775
To The Board of Directors and Shareholders
of American Bio Medica Corporation
I have audited the accompanying balance sheet of American Bio Medica
Corporation as of April 30, 1997 and the related statements of operations, cash
flows and shareholders' equity for the years ended April 30, 1996 and 1997.
These financial statements are the responsibility of the Company's Management.
My responsibility is to express an opinion on these financial statements based
on my audit.
I conducted my audit in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles and significant estimates made by
Management, as well as evaluating the overall financial statement presentation.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of American Bio Medica
Corporation as of April 30, 1997 and the results of its operations, shareholders
equity and cash flows for the years ended April 30, 1996 and 1997 in conformity
with generally accepted accounting principles.
/s/Thomas P. Monahan
Thomas P. Monahan, CPA
May 28, 1997
Paterson, New Jersey
F-1
<PAGE>
AMERICAN BIO MEDICA CORPORATION
BALANCE SHEET
October 31,
April 30, 1997
1997 Unaudited
-------- ----------
Assets
Current assets
Cash and Marketable securities $1,762,506 $1,362,238
Marketable securities,
available for sale 1,053,000 1,076,860
Accounts receivable 337,759 1,186,948
Loan receivable 102,250 104,500
Inventory 668,723 981,311
Prepaid expenses 4,425 28,424
--------- --------
Current assets 3,928,663 4,740,281
Capital assets-net 110,834 135,205
Other assets
License rights 38,470 4,792
Patent-costs 28,783 31,593
------- ------
Total other assets 67,253 36,385
------- ------
Total assets $4,106,750 $4,911,871
========== ==========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued expenses $380,155 $168,691
-------- --------
Total current liabilities 380,155 168,691
Capital stock
Common Shares - authorized
30,000,000 common shares,
par value $.01 each, at
April 30, 1997 and October 31, 1997, the shares outstanding were 13,379,507
and 13,793,541 respectively.
133,795 137,935
Preferred shares - authorized 5,000,000
preferred shares, par value $.01 each, at April 30, 1997 and October 31,
1997, the number of shares outstanding was
90 and 105.5 respectively. 1 2
Additional paid in capital 6,499,791 7,475,250
Retained Earnings (2,906,992) (2,870,007)
----------- -----------
Total stockholders' equity 3,726,595 4,743,180
---------- ----------
Total liabilities and stockholders' equity $4,106,750 $4,911,871
========== ==========
See accompanying notes to financial statements.
F-2
<PAGE>
AMERICAN BIO MEDICA CORPORATION
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
For
the six For the six
For the year For the year
months ended months ended
ended ended
October 31, October 31,
April 30, April 30,
1996 1997
1996 1997
Unaudited Unaudited
--------- ---------
- ----------- -----------
<S> <C> <C> <C>
<C>
Income 158,105 $610,876 $
48,587 $1,273,724
Less cost of goods sold 96,444 259,862
25,778 501,338
------- -------
- --------- ---------
Gross profit 61,661 351,014
22,809 772,386
Operations:
General and administrative 518,826 867,903
336,113 790,628
Depreciation and amortization 77,600 96,134
23,000 48,673
Research and development 358,844 74,978
66,750
-------- ------
- ------- -------
Total expense 955,270 1,039,015
425,863 839,301
Loss before other income
and expenses (893,609) (688,001)
(403,054) (66,915)
Other income and expenses
Retirement of debt (Note 10) 126,500
126,500
Interest income 356 56,180
1,336 103,900
Interest expense (103,205)
--------- -------
- ------- -------
Total other income and expenses (102,849) 182,680
127,836 103,900
--------- -------
- ------- -------
Net Profit (Loss) from operations $(996,458) $(505,321)
$(275,218) $36,985
========== ==========
========== =======
Net income (loss) per share $(.08) $(.04)
$(.02) $(.00)
====== ======
====== ======
Number of shares outstanding 12,528,266 12,728,180
12,450,860 13,718,265
========== ==========
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
AMERICAN BIO MEDICA CORPORATION
STATEMENT OF OPERATIONS
For the three For the three
months ended months ended
October 31, October 31,
1996 1997
(Unaudited) (Unaudited)
------------ ------------
Revenue $ 21,143 $ 456,807
Less cost of
goods sold 19,552 144,556
------------ ------------
Gross profit 1,591 312,251
Operations:
General and administrative 161,166 401,073
Depreciation and amortization 3,600 24,474
Research an development 9,492
------- -------
Total expenses 174,258 425,547
Income (loss) from
operations (172,667) (113,296)
Other income and
expenses
Interest income 939 28,293
------------ ------------
Total other income
and expenses 939 28,293
------------ ------------
Net Profit (Loss)
from operations $ (171,728) $ (85,003)
============ ============
Net income (loss)
per share $(.01) $(.01)
============ ============
Weighted number of
shares outstanding 12,450,860 13,718,265
========== ==========
See accompanying notes to financial statements
<PAGE>
AMERICAN BIO MEDICA CORPORATION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For
the six For the six
For the year For the year
months ended months ended
ended ended
October 31, October 31,
April 30, April 30,
1996 1997
1996 1997
Unaudited Unaudited
-------- --------
- ----------- ----------
<S> <C> <C> <C>
<C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net profit (loss) $(996,458) $(505,321)
$(275,218) $36,985
Amortization and depreciation 77,600 96,134
23,000 48,673
Consulting fees 306,250
Compensation agreement 125,000
50,000
Retirement of debt (Note 9) (126,500)
126,500
---------- ---------
- -------- -------
(487,608) (535,687)
(75,718) 85,658
Adjustments to reconcile net income to net cash
Loan receivable (102,250)
(2,250)
Accounts receivable 38,079 (303,259)
(13,714) (849,189)
Inventory 5,250 (646,422)
(28,741) (312,588)
Prepaid expenses 15,089 (4,425)
( 23,999)
Accounts payable (30,828) 346,907
(5,421) (211,464)
--------- -----------
- --------- -----------
TOTAL CASH FLOWS FROM OPERATIONS (460,018) (1,245,136)
(123,594) (1,313,832)
CASH FLOWS FROM FINANCING ACTIVITIES
Convertible debenture 693,000 (132,000)
(132,000) 949,600
Notes payable (89,289)
Sale of stock 150,000 3,877,686
1,481,903 30,000
Issuance of stock for services 61,006
-------- ----------
- ---------- ---------
TOTAL CASH FLOWS FROM FINANCING ACTIVITIES 814,717 3,745,686
1,349,903 979,600
CASH FLOWS FROM INVESTING ACTIVITIES
Investment short term (1,053,000)
(1,411,866) (23,860)
Patent costs (7,783)
(2,000) (2,810)
Capital assets (114,793)
(61,496) (39,366)
-------- -----------
- ----------- --------
TOTAL CASH FLOWS FROM INVESTING ACTIVITIES (1,175,576)
(1,475,362) (66,036)
NET INCREASE (DECREASE) IN CASH 354,699 1,324,974
(249,053) (400,268)
CASH BALANCE BEGINNING OF PERIOD 82,833 437,532
437,532) 1,762,506
-------- ----------
- ----------- ----------
CASH BALANCE END OF PERIOD $437,532 $1,762,506
$188,479 $1,362,238
======== ==========
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
AMERICAN BIO MEDICA CORPORATION
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Common Common Preferred Preferred Paid in
Retained
Date Stock Stock Shares Shares Capital
Earnings Total
---- ------- ------ --------- --------- --------
- -------- --------
<S> <C> <C> <C> <C> <C> <C>
<C>
04-30-1994 11,238,174 $112,382 $ 726,294
$(1,099,885) $(261,209)
10-18-1995(1) (3,000,000) (30,000) 30,000
04-30-1995
(305,328) (305,328)
----------- -------- ------- --------
- ----------- ---------
04-30-1995 8,238,174 82,382 756,294
(1,405,213) (566,537)
11-03-1995 500,000 5,000 120,000
125,000
04-30-1996(2) 1,700,002 17,000 1,258,000
1,275,000
04-30-1996(3) 25,000 250 24,750
25,000
04-30-1996(4) 250,000 2,500 122,500
125,000
04-30-1996(5) 489,181 4,892 56,083
60,975
04-30-1996(6) 125,000 1,250 61,250
62,500
04-30-1996(7) 100,000 1,000 64,000
65,000
04-30-1996(8) 550,000 5,500 173,250
178,750
04-30-1996 Net loss
(996,458) (996,458)
---------- -------- -------- -------
- ------------ ---------
04-30-1996 11,977,357 $119,774 $2,636,127
$(2,401,671) $354,230
06-04-1996(2) 11,333 113 8,387
8,500
06-04-1996(9) 25,000 250 24,750
25,000
07-31-1996(2) 176,000 1,760 130,240
132,000
07-31-1996(2) 13,333 133 9,867
10,000
07-31-1996(6) 100,000 1,000 49,000
50,000
07-31-1996(9) 32,000 320 31,680
32,000
07-31-1996(10 100,000 1,000 99,000
100,000
09-09-1996(9) 18,000 180 17,820
18,000
09-23-1996(11) $ 1 $ 1 1,409,999
1,410,000
01-31-1996(12) 697,445 6,975 2,085,211
2,092,186
04-30-1997(13) 229,039 2,290 (2,290)
-0-
04-30-1997 Net loss
(505,321) (505,321)
---------- -------- ------ ------ -----------
- ------------ -----------
04-30-1997 13,379,507 $133,795 $ 1 $ 1 $6,499,791
$(2,906,992) $3,726,595
UNAUDITED
07-31-1997(13) 301,120 3,011 (3,011)
10-31-1997 (1) (1) 1
10-31-1997(12) 10,000 100 29,900
30,000
10-31-1997(13) 102,914 1,029 (1,029)
10-31-1997(14) 105.5 2 949,598
949,600
10-31-1997 Net profit
36,985 36,985
---------- ------- ------ ------ -----------
- ------------ ----------
10-31-1997 13,793,541 $137,935 $105.5 $ 2 $7,475,250
$(2,870,007) $4,743,180
========== ======= ====== ====== ===========
============ ==========
</TABLE>
(1) Return of common shares by Edmund Jaskiewicz.
(2) Common shares issued for conversion of debt.
(3) Common shares issued pursuant to sale of 25,000 Units.
(4) Common shares issued for Warrant conversion at $.50.
(5) Common shares issued in consideration for services under Regulation D at
$.125 per share.
(6) Common shares issued pursuant to Rule 504 at $.50 per share.
(7) Common shares issued under Rule 504 at $.65 per share.
(8) Common shares issued pursuant Regulation D at $.325 per share.
(9) Common shares issued upon exercise of "B" Warrants.
(10) Common shares issued upon exercise of "A" Warrants.
(11) Shares of preferred stock for $1,500,000 less $90,000 in offering
expense.
(12) Common shares issued upon exercise of warrants.
(13) Conversion of convertible preferred shares into common shares.
(14) Sale of 60 Convertible "B" Preferred Shares and 45.5 Convertible "C"
Preferred Shares.
See accompanying notes to financial statements.
F-5
<PAGE>
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED APRIL 30, 1997
AND THE SIX MONTHS ENDED OCTOBER 31, 1997 (UNAUDITED)
Note 1 - Organization of the Company and Issuance of Common Shares
a. Creation of the Company
American Bio Medica Corporation (the "Company") was formed under the laws
of the State of New York on April 10, 1986 under the name, American Micro Media,
Inc. The authorized capital was 200 common shares without par value. On May 20,
1986, the Company amended its certificate of incorporation to increase the
number of authorized common shares to 20,000,000 shares of $.01 par value per
share. On September 12, 1986, the Company amended its certificate of
incorporation to remove preemptive rights. On September 28, 1992, the Company
amended its certificate of incorporation to increase the aggregate number of
authorized common shares to 30,000,000 shares of $.01 par value per share
("Common Shares") and to change its name to American Bio Medica Corporation. In
October, 1996, the Company amended its certificate of incorporation authorizing
the issuance of 5,000,000 Preferred Shares, ("Preferred Shares"), $.01 par value
each.
b. Description of the Company
From inception until 1991, the Company was involved in marketing
educational books and software to schools and municipal libraries and
audio-visual educational packages to corporations throughout the United States.
In 1991, the Company reduced its concentration on this market because of
competition, increasing costs of doing business and slow collections from
municipalities and sought new technologies in emerging medical markets. The
Company has, however, continued to sell audiovisual packages to libraries.
The Company is currently in the business of acquiring, developing and
marketing biomedical technologies and products. The Company is currently
manufacturing and selling tests for screening drugs of abuse, a workplace
screening test and a preliminary test for use by laboratories and owns
additional technologies which it plans to develop and market in the future.
The Company was considered to be a development stage company with little
operating history subsequent to the commencement of development of its newly
acquired biomedical technologies which are, at present, its core business. These
activities have been funded through the sale of convertible debentures which
were subsequently converted to Common Shares, the exercise of warrants and
options and the sale of convertible preferred shares. The Company is in full
scale commercial production of its drug test kits and has what management
maintains are adequate resources to fund its operations.
c. Issuance of Securities
On November 5, 1995, the Company entered into a three year employment
agreement with Jay Bendis, Vice-President-Marketing. Pursuant to this agreement,
the Company has issued 500,000 Common Shares. 400,000 of such shares are subject
to vesting provisions.
As of April 30, 1996, the Company had borrowed an aggregate of $2,121,000
on a convertible debenture basis, the principal amount of each debentures
convertible at the option of the holder into Common Shares at $.75 per share. As
of April 30, 1996, the principal amount of all the convertible debentures had
been converted into an aggregate of 1,700,002 Common Shares.
F-6
<PAGE>
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED APRIL 30, 1997
AND THE SIX MONTHS ENDED OCTOBER 31, 1997 (UNAUDITED)
As of April 30, 1996, the Company sold, through a private placement, 25,000
Units consisting of 25,000 Common Shares, 500,000 "A" Options and 50,000 "B"
Options for an aggregate consideration of $25,000.
As of April 30, 1996, Unit holders exercised 250,000 "A" Warrants into
250,000 Common Shares at an exercise price of $.50, for an aggregate of
$125,000.
As of April 30, 1996, the Company issued 489,181 Common Shares in
consideration for past services to five individuals in the amount of $60,975 or
an average consideration of $.125 per share.
As of April 30, 1996, the Company issued to OTC Communications 100,000
Common Shares under Rule 504 ("Rule 504") to the Securities Act of 1933, as
amended, (the "Securities Act") as consideration for financial consulting
services rendered per contract at a value of $.65 per share.
As of April 30, 1996, the Company issued to Riverside Consulting Group,
Inc. 25,000 Common Shares under Rule 504 in consideration for financial
consulting services of $12,500 at $.50 per share.
As of April 30, 1996, the Company issued 100,000 Common Shares to two
persons at $.50 per share in consideration for financial consulting services.
As of April 30, 1996, the Company approved the issuance to OTC
Communications 500,000 Common Shares under Regulation D to the Securities Act as
consideration for financial consulting services rendered per contract and 50,000
Common Shares for expenses at a value of $178,750 or $.325 per share.
On June 4, 1996, the Company sold $8,500 of convertible debentures and
converted them into 11,333 Common Shares.
On June 4, 1996, the Company sold 25,000 Common Shares at $1.00 through the
exercise of 25,000 "A" Warrants for an aggregate consideration of $25,000.
As of July 31, 1996, the Company had converted the balance of the
outstanding convertible debentures in the amount of $132,000 into 176,000 Common
Shares at $.75 per share.
As of July 31, 1996, the Company sold an additional convertible debenture
in the amount of $10,000 which was converted into 13,333 Common Shares at $.75
per share.
As of July 31, 1996, the Company sold 100,000 Common Shares at $1.00
through the exercise of 100,000 "A" Warrants for an aggregate consideration of
$100,000.
As of July 31, 1996, the Company sold 32,000 Common Shares at $1.00 per
share through the exercise of 32,000 "B" Warrants for an aggregate consideration
of $32,000.
As of July 31, 1996, the Company issued 100,000 Common Shares under Rule
504 of the Securities Act of 1933, as amended at $.50 per share for an aggregate
consideration of $50,000.
F-7
<PAGE>
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED APRIL 30, 1997
AND THE SIX MONTHS ENDED OCTOBER 31, 1997 (UNAUDITED)
As of September 30, 1996, the Company sold 18,000 Common Shares at $1.00
per share through the exercise of 18,000 "B" Warrants for an aggregate
consideration of $18,000.
As of April 30, 1997, 697,445 nonstatutory options were exercised for an
aggregate consideration of $2,092,186.
As of October 31, 1997, the remaining 90 "A" Preferred Shares had been
converted into 404,034 Common Shares.
As of October 31, 1997, the Company sold 10,000 Common Shares through the
exercise of 10,000 options for an aggregate consideration of $30,000 or $3.00
per share.
The Company has sold 60 "B" Preferred Shares and 45.5 "C" Preferred Shares
at $10,000 per share for an aggregate of $1,055,500 less commissions of $93,500.
The "B " and "C" Preferred Shares are convertible into Common Shares pursuant to
the following formula: $10,000 divided by the lesser of $3.50 or 75% of the
average of the daily closing bid prices for the 20 consecutive trading days
ending on the trading day prior to the day on which Preferred Shares are
converted to Common Shares. All accrued but unpaid dividends are payable in
cash.
Note 2 - Summary of Significant Accounting Policies
a. Basis of Financial Statement Presentation
The financial statements presented consist of the balance sheet dated April
30, 1997 and the unaudited balance sheet dated October 31, 1997 and the related
statements of operations, retained earnings and cash flows for the years ended
April 30, 1996 and 1997 and the related unaudited statements of operations,
retained earnings and cash flows for the six months and three months ended
October 31, 1996 and 1997.
b. Earnings per Share
Primary earnings per share are based on the weighted average number of
common and dilutive common equivalent shares outstanding at April 30, 1996 and
1997 and the six months and three months ended October 31, 1996 and 1997. The
weighted average shares for computing primary earnings per share were
12,528,266, 12,728,180 12,450,860 and 13,718,265 respectively.
c. Revenue Recognition
Revenue is recognized when merchandise is shipped.
d. Organization Expense
The cost of organizing the Company was charged to operations on a straight
line basis over a five year period.
F-8
<PAGE>
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED APRIL 30, 1997
AND THE SIX MONTHS ENDED OCTOBER 31, 1997 (UNAUDITED)
e. Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments
with a maturity of three months or less. Excess cash balances are primarily
invested in U.S. treasury bills with lesser amounts invested in high quality
commercial paper and time deposits.
f. Research and Development Expenses
Research and development costs are charged to operations when incurred.
g. Patents and License Agreements
Certain costs incurred to acquire exclusive licenses of patentable
technology are capitalized and amortized over a five year period or the term of
the license, whichever is shorter. The portion of these amounts determined to be
attributable to patents is amortized over their remaining lives and the
remainder is amortized over the estimated period of benefit but not more than 40
years.
h. Concentration of Credit Risk
The Company sells its products primarily to United States distributors
(which resell to end-users in the United States and abroad) and to end-users in
the United States. Credit is extended based on an evaluation of the customer's
financial condition, and generally collateral is not required. Credit losses
have been minimal and within Management's expectations.
The Company invests its excess cash in debt instruments of financial
institutions and corporations with strong credit ratings. The Company has
established guidelines relative to diversification and maturities that maintain
safety and liquidity. These guidelines are periodically reviewed and modified to
take advantage of trends in yields and interest rates. The Company has not
experienced any realized losses on its marketable securities.
i. Stock Options
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its stock options. Under APB 25, because the
exercise price of the Company's employee stock options is not less than the fair
value of the underlying stock on the date of grant, no compensation was recorded
j. Unaudited Financial Information
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments (consisting only of normal recurring items)
necessary to present fairly the financial position of the Company as of October
31, 1996 and 1997. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission (the "Commission"). The
results of operations for the periods presented are not necessarily indicative
of the results to be expected for the full year.
F-9
<PAGE>
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED APRIL 30, 1997
AND THE SIX MONTHS ENDED OCTOBER 31, 1997 (UNAUDITED)
Note 3 - Marketable Securities, Available for Sale
The Company has adopted Financial Accounting Standards Board ("FASB")
Statement No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", which requires that investments in equity securities that have
readily determinable fair values and investments in debt securities be
classified in three categories: held-to-maturity, trading and
available-for-sale. Based on the nature of the assets held by the Company and
Management's investment strategy, the Company's investments have been classified
as available-for-sale. Management determines the appropriate classification of
debt securities at the time of purchase and reevaluates such designation as of
each balance sheet date.
Securities classified as available-for-sale are carried at estimated fair
value, as determined by quoted market prices, with unrealized gains and losses,
net of tax, reported in a separate component of stockholders' equity. At October
31, 1997, the Company had no investments that were classified as trading or
held-to-maturity as defined by the Statement.
Note 4 - Balance Sheet Information
a. Inventory
Inventory has been recorded at the lower of cost or market under the
first-in-first-out method. Inventory components were as follows:
April 31, 1997 October 31, 1997
-------------- ----------------
Books held for resale $ 43,527 $ 30,934
Workplace drug screening tests:
Raw materials 292,456 375,654
Work in process 183,500 210,052
Finished Goods 149,239 364,671
------- -------
Total workplace drug screening tests: 625,195 $ 950,377
------- -------
Total inventory $ 668,722 $ 981,311
========= =========
b. Property, equipment and leasehold improvements consist of the following:
April 30, 1997 October 31, 1997
-------------- ----------------
Office equipment $ 45,702 $ 52,578
Manufacturing and warehouse equipment 87,666 118,478
---------- ----------
Total 133,368 171,056
Less accumulated depreciation (22,534) ( 35,851)
---------- ----------
Total $ 110,834 $ 135,205
========== ==========
F-10
<PAGE>
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED APRIL 30, 1997
AND THE SIX MONTHS ENDED OCTOBER 31, 1997 (UNAUDITED)
c. Cash, Cash Equivalents and Marketable Securities, Available for Sale
The following is a summary of cash, cash equivalents and available-for-sale
securities by balance sheet classification at April 30, 1997:
Estimated
Gross Gross Fair
Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ ------
Cash $ 99,039 $-0- $-0- $ 99,039
Certificates of deposit
90 days and less 1,663,467 -0- -0- 1,663,467
----------- ---- ---- -----------
Total cash and cash
equivalents $ 1,762,506 $-0- $-0- $ 1,762,506
=========== ==== ==== ===========
Marketable Securities
Due in one year or
less-Certificates of
Deposit $1,053,000 $-0- $-0- $ 1,053,000
========== ==== ==== ===========
The following is a summary of cash, cash equivalents and available-for-sale
securities by balance sheet classification at October 31, 1997:
Estimated
Gross Gross Fair
Unrealized Unrealized Market
Cost Gains Losses Value
--------- ----------- ----------- -----------
Cash $ 99,640 $-0- $-0- $ 99,640
Certificates of deposit
90 days and less 1,262,598 -0- -0- 1,262,598
----------- ------------ ----------- -----------
Total cash and cash
equivalents $ 1,362,238 $-0- $-0- $ 1,362,238
=========== ============= =========== ===========
Marketable Securities
Due in one year or
less Certificates of
Deposit $ 1,076,860 $-0- $-0- $ 1,076,860
=========== ============= =========== ===========
F-11
<PAGE>
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED APRIL 30, 1997
AND THE SIX MONTHS ENDED OCTOBER 31, 1997 (UNAUDITED)
Note 5 - Related Party Transaction
a. Nonstatutory Option Plans
In June, 1996, the Company adopted its Fiscal 1996 Nonstatutory Stock
Option Plan (the "1996 Plan"). Options to purchase 2,000,000 Common Shares are
included in the 1996 Plan.
In June, 1996, 1,500,000 were issued.
In April, 1997, the Company issued an aggregate of 272,000 options.
On August 29, 1997, the Company issued 185,000 options.
In June, 1997, the Company adopted the Fiscal 1998 Nonstatutory Stock
Option Plan (the "1998 Plan"). Options to purchase 1,000,000 Common Shares are
included in the 1998 Plan. In June, 1997, 150,000 options were issued under the
1998 Plan.
All Nonstatutory Options which the Company has issued are exercisable for a
period of three years at $3.00 per share.
b. Employment Agreement with Jay Bendis
On November 3, 1995, the Company entered into a three year employment
agreement with Jay Bendis, Vice-President-Marketing and Sales. Under this
agreement, Mr. Bendis received an annual salary of $24,000 per year until April
30, 1996 and $48,000 per year until the Company generated an aggregate of
$500,000 gross revenues from the sale of biomedical products. Mr. Bendis' salary
is presently $60,000 per year. In addition to his salary, Mr. Bendis will
receive a bonus equal to 2% of the gross revenues of the Company in excess of
$1,000,000 per fiscal year until such annual revenues reach $3,000,000, 1.5% of
gross revenues between $3,000,000 and $5,000,000 per year and 1% thereafter.
In consideration of past services valued at $125,000 or $.25 per share, Mr.
Bendis also received the right to receive 500,000 common shares. Certificates
representing 400,000 Common Shares were held by the Company for vesting as
follows:
100,000 shares upon the Company achieving $1,000,00 in gross revenues from
sales of biomedical products (these shares have vested);
100,000 shares upon the Company achieving $2,000,00 in gross revenues from
sales of biomedical products;
100,000 shares upon the Company achieving $3,000,00 in gross revenues from
sales of biomedical products;
100,000 shares upon the Company achieving $4,000,00 in gross revenues from
sales of biomedical products.
F-12
<PAGE>
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED APRIL 30, 1997
AND THE SIX MONTHS ENDED OCTOBER 31, 1997 (UNAUDITED)
Certificates representing shares which have not vested on or before April
30, 1998 (or the end of the next succeeding fiscal year in the event the Company
changes its fiscal year) will be returned to the Company's stock transfer agent
for cancellation. No bonuses will be paid nor will shares vest subsequent to any
election by Mr. Bendis to terminate agreement or his discharge for cause from
employment by the Company. Mr. Bendis also is entitled to receive health
insurance, participate in stock option or similar plans or other benefits
offered generally to Management employees and reimbursement of out-of-pocket
expenses.
c. Employment Agreement with Edmund Jaskiewicz
On November 3, 1995, the Company entered into a three year employment
agreement with Edmund Jaskiewicz, Executive Vice-President. Under this
agreement, Mr. Jaskiewicz received an annual salary of $24,000 per year until
April 30, 1996 $48,000 per year until the Company generated an aggregate of
$500,000 gross revenues from the sale of biomedical products. Mr. Jaskiewicz'
salary is presently $60,000 per year. In addition, to his salary, Mr. Jaskiewicz
will receive a bonus equal to 2% of the gross revenues of the Company in excess
of $1,000,000 per fiscal year until such annual revenues reach $3,000,000, 1.5%
of gross revenues between $3,000,000 and $5,000,000 per year and 1% thereafter.
No bonuses will be paid or shares vest subsequent to any election by Edmund
Jaskiewicz to terminate this agreement or his discharge for cause from
employment by the Company. Mr. Jaskiewicz also is entitled to receive health
insurance, participate in stock option or similar plans or other benefits
offered generally to management employees and reimbursement of out-of-pocket
expenses.
d. Employment Agreement with Stan Cipkowski
On November 3, 1995, the Company entered into a three year employment
agreement with Stan Cipkowski, President. Under this agreement, Mr. Cipkowski
received an annual salary of $36,000 per year until April 30, 1996, $60,000 per
year until the Company generated an aggregate of $500,000 gross revenues from
the sale of biomedical products. Mr. Cipkowski's salary is presently $72,000 per
year. In addition, to his salary, Mr. Cipkowski will receive a bonus equal to 2%
of the gross revenues of the Company in excess of $1,000,000 per fiscal year
until such annual revenues reach $3,000,000, 1.5% of gross revenues between
$3,000,000 and $5,000,000 per year and 1% thereafter. No bonuses will be paid or
shares vest subsequent to any election by Mr. Cipkowski to terminate agreement
or his discharge for cause from employment by the Company. Mr. Cipkowski also is
entitled to receive health insurance, participate in stock option or similar
plans or other benefits offered generally to Management employees and
reimbursement of out-of-pocket expenses.
e. Employment Agreement with Douglas Casterlin
On May 15, 1997, the Company entered into a three year employment agreement
with Douglas Casterlin, Vice President and General manager. Under this
agreement, Mr. Casterlin receives an annual salary of $84,000 per year, and a
bonus equal to 1.0% of net sales of the Company and is entitled to receive
health insurance, participate in stock option programs or similar benefit
programs generally offered to management or employees. Pursuant to his
employment agreement, in June, 1997, Mr. Casterlin received 150,000 nonstatutory
options exercisable at $3.00 for a period of three years.
F-13
<PAGE>
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED APRIL 30, 1997
AND THE SIX MONTHS ENDED OCTOBER 31, 1997 (UNAUDITED)
Note 6 - 12% Convertible Subordinated Debentures
As of July 31, 1996, the principal amount, aggregating $2,131,000, of
convertible debentures had been converted into 2,841,333 Common Shares, at $.75
per share.
Note 7 - Preferred Shares
a. Private Placement of Convertible A Preferred Shares
The Company, in October, 1996, amended its certificate of incorporation
authorizing the issuance of 5,000,000 Preferred Shares $.01 par value each. The
board of directors of the Company has the authority, without further action by
the holders of the outstanding Common Shares, to issue Preferred Shares from
time to time in one or more classes or series, to fix the number of shares
constituting any class or series and the stated value thereof, if different from
the par value, and to fix the terms of any such series or class, including
dividend rights, dividend rates, conversion or exchange rights, voting rights,
rights and terms of redemption (including sinking fund provisions), the
redemption price and the liquidation preference of such class or series.
The Company sold 150 "A" Preferred Shares ("A
Preferred Shares") for $10,000 per share for an aggregate consideration of
$1,500,000 less $90,000 in commissions and $5,000 in offering expenses for a net
consideration of $1,405,000. Each A Preferred Share was 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 A Preferred
Shares were converted to Common Shares. All accrued but unpaid dividends were
payable in cash. The Company registered the Common Shares underlying the A
Preferred Shares with the Commission.
As of April 30, 1997, 60 "A" Preferred Shares had been converted into
229,039 Common Shares.
In May, 1997, the remaining 70 "A" Preferred Shares had been converted into
301,120 Common Shares.
b. Outstanding Warrants
The Company has issued 24,712 Common Share purchase warrants. The Warrants
are exercisable at $3.00 per share until January 21, 1999.
F-14
<PAGE>
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED APRIL 30, 1997
AND THE SIX MONTHS ENDED OCTOBER 31, 1997 (UNAUDITED)
c. Private Placement of Series B Convertible Preferred Shares
In September, 1997, the Company sold 60 8% Series B Convertible Preferred
Shares, ('"B" Preferred Shares') at $10,000 each for an aggregate consideration
of $600,000 less an 8% commission of $48,000 for net proceeds of $552,000. Each
"B" Preferred Share (plus accumulated but unpaid dividends) is convertible into
common shares calculated by dividing $10,000 by the lesser of $3.50 or 75% of
the average closing price of the Common Shares for the 20 trading days preceding
conversion. Neither the Preferred Shares nor the Common Shares into which they
may be converted may be sold or transferred in public markets without an
effective registration under the Securities Act of 1933.
During the period the"B" Preferred Shares are outstanding, no dividend
shall be paid or set apart for payment on the Common Shares or any other class
of shares ranking junior to the "B" Preferred Shares in either payment of
dividends or liquidation unless full dividends on all outstanding B Preferred
Shares have been paid in full for all past dividend periods and the dividends
for the current period have been paid or declared and sufficient funds set
apart.
The Company has agreed to register the Common Shares underlying the B
Preferred Shares.
d. Private Placement of Series C Convertible Preferred Shares
During the month of September, 1997, the Company sold 45.5 Shares of Series
C Convertible Preferred Shares ('"C" Preferred Shares') for an aggregate
consideration of $455,000 less a 10% commission of $45,500 for net proceeds of
$409,500. Each "C" Preferred Share (plus accumulated dividends) is convertible
into Common Shares calculated by dividing $10,000 by the lesser of $3.50 or 75%
of the average closing price of the Common Shares for the 20 trading days
preceding conversion. Neither the "C" Preferred Shares nor the Common Shares
into which they may be converted may be sold or transferred in public markets
without an effective registration under the Securities Act of 1933.
The Company has agreed to register the Common Shares underlying the C
Preferred Shares.
Note 8 - Income Taxes
The Company provides for the tax effects of transactions reported in the
financial statements. The provision if any, consists of taxes currently due plus
deferred taxes related primarily to differences between the basis of assets and
liabilities for financial and income tax reporting. The deferred tax assets and
liabilities, if any, represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled. As of April 30, 1997 and October 31, 1997,
the Company had no material current tax liability, deferred tax assets, or
liabilities to impact on the Company's financial position because the deferred
tax asset related to the Company's net operating loss carry forward and was
fully offset by a valuation allowance.
At October 31, 1997, the Company had net operating loss carry forwards for
income tax purposes of $2,870,007. This carry forward is available to offset
future taxable income, if any, and expires in the year 2010. The Company's
utilization of this carry forward against future taxable income may become
subject to an annual limitation in the event that there is a cumulative change
in ownership of the Company of more than 50%.
F-15
<PAGE>
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED APRIL 30, 1997
AND THE SIX MONTHS ENDED OCTOBER 31, 1997 (UNAUDITED)
The components of the net deferred tax asset as of April 30, 1997 were as
follows:
Deferred tax asset:
Net operating loss carry forward $ 975,802
Valuation allowance $ (975,802)
-------
Net deferred tax asset $ -0-
The Company recognized no income tax benefit from the loss generated in the
year ended April 30, 1997 and for the six months ended October 31, 1997. SFAS
No. 109 requires that a valuation allowance be provided if it is more likely
than not that some portion or all of a deferred tax asset will not be realized.
The Company's ability to realize benefit of its deferred tax asset will depend
on the generation of future taxable income. Because the Company has yet to
recognize significant revenue from the sale of its products, the Company
believes that a full valuation allowance should be provided.
Note 9 - Commitments and Contingencies
a. Lawsuits
In February, 1994, Robert Friedenberg, former stockholder of two medical
technology companies, MDI and Gendex, acquired by the Company, filed suit in the
name of the two subsidiaries to have the Share Exchange Agreement under which
the companies were acquired rescinded on the grounds of breach of contract. The
Company filed a third party claim in July, 1994, against Dr. Friedenberg,
seeking enforcement of the Share Exchange Agreement. In November, 1995, after a
bifurcated trial, the court dismissed Dr. Friedenberg's lawsuit brought in the
name of MDI and Gendex) and allowed the Company's third party claim to proceed
to trial. In September, 1996, Dr. Friedenberg died.
Trial on the third party claim was decided by a jury on May 5, 1997. The
verdict determined that Dr. Friedenberg (represented by his estate) breached
various contracts by failing to deliver certain technology to the Company. The
jury also found in favor of the Company on two of the three fraud claims against
Dr. Friedenberg and awarded the Company approximately $350,000 in damages. The
trial judge, who is bound by the jury verdict against Friedenberg, will decide
Dr. Friedenberg's Estate's pending claim to shares of Company common stock which
the Company had refused to issue them to Dr. Friedenberg.
F-16
<PAGE>
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED APRIL 30, 1997
AND THE SIX MONTHS ENDED OCTOBER 31, 1997 (UNAUDITED)
In June, 1995, the Company filed a lawsuit against Jackson Morris, Esq. for
the breach of attorney-client relationship and of his fiduciary duty to the
Company for subsequently providing legal services to Dr. Friedenberg in his
dispute with the Company. The Company's lawsuit demands damages in the amount of
$1,000,000. Mr. Morris has counterclaimed for Common Shares. The court has set a
trial date of September 14, 1998.
b. Public Relations Agreement
In February, 1996, the Company entered into an agreement with OTC
Communications ("OTC") for financial public relations and communications
services to the Company and to serve when requested as the Company's liaison and
spokesman to the financial and investment community. In March, 1996, the Company
granted, under Regulation D to the Securities Act of 1933, to OTC the right to
receive 100,000 Common Shares at a value of $.65 per share for a total
consideration of $65,000 in lieu of an initial payment, monthly retainers and/or
expense reimbursement, including communications and mailing for a period of one
year. 550,000 Common Shares were granted for years 2 and 3 for a consideration
of $.325 per share representing one-half the market price of the Common Shares
at March 14, 1996, the date of the contract. This valuation reflects the receipt
of unregistered Common Shares and the market risk of the holding period until
they may be sold publicly. Of the 550,000 shares, 50,000 shares were allocated
to expense reimbursement and 500,000 shares allocated to public relations
consulting. Certificates representing the 100,000 Common Shares were issued in
July, 1996. The Company has also issued to OTC 500,000 "A" Options which are
exercisable at $1.00 through March 14, 1999 and 500,000 "B" Options, which are
exercisable at $2.00 through March 14, 1999. Until a registration statement
relating to the Common Shares underlying the options is effective, certificates
representing the shares into which the options are exercised will bear a legend
restricting transfer in the absence of an effective registration with the
Commission or an exemption therefrom.
c. Nonstatutory Option Plans
The Company has adopted the Fiscal 1996 Nonstatutory Stock Option Plan (the
"1996 Plan") and the Fiscal 1998 Nonstatutory Stock Option Plan (the "1998
Plan"). 2,000,000 Common Shares were reserved under the 1996 Plan and 1,000,000
options under the 1998 Plan. Both plans are administered by the Option Committee
of the Board of Directors.
Stock options under the Plan may be granted to employees, officers,
directors, consultants of the Company or any other parties who have made a
significant contribution to the business and success of the Company. The
exercise price under the Plan may be more, equal to or less than the then
current market price of the Common Shares as deemed to be appropriate. All
Nonstatutory Options are exercisable for a period of three years at $3.00 per
share.
As of October 31, 1997, the Company had issued 1,957,000 options under the
1996 Plan and 150,000 options under the 1998 Plan. All options were exercisable
at $3.00 per share for a period of three years.
F-17
<PAGE>
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED APRIL 30, 1997
AND THE SIX MONTHS ENDED OCTOBER 31, 1997 (UNAUDITED)
As of October 31, 1997, 697,445 nonstatutory stock options had been
exercised under the 1996 Plan for an aggregate consideration of $2,092,186.
Following is a further breakdown of the options outstanding under the
1996 and 1998 Plans as of October 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
WEIGHTED AVERAGE
REMAINING
EXERCISE PRICE OF
RANGE OF EXERCISE OPTIONS CONTRACTUAL LIFE WEIGHTED AVERAGE
OPTIONS OPTIONS
PRICE OUTSTANDING IN YEARS EXERCISE PRICE
EXERCISABLE EXERCISABLE
----- ----------- -------- --------------
----------- -----------------
<S> <C> <C> <C>
<C> <C>
$3.00 802,555 1.50 $3.00
802,555 $3.00
3.00 457,000 2.50 3.00
457,000 3.00
3.00 150,000 2.75 3.00
150,000 3.00
------- ---- ----
------- -----
1,409,555 2.00 $3.00
1,409,555 $3.00
</TABLE>
Adjusted pro forma information regarding net income is required by SFAS
123, and has been determined as if the Company had accounted for its employee
stock options under the fair value method of that Statement. The fair value for
these options was estimated at the date of grant using the Black-Scholes method
for option pricing with the following weighted-average assumptions for both 1996
and 1997: risk-free interest rates of 6%; volatility of 50%; dividend yields of
0%; and an expected life of the option of six years.
For purposes of adjusted pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. The
Company's adjusted pro forma information follows:
Years Ended Six Months Ended
April 30, October 31,
1996 1997 1996 1997
----------- ----------- ----------- -----------
Adjusted pro forma
net income $ (996,458) $ (590,321) $ (275,218) $ (2,297)
Adjusted pro forma
net income per share $ (0.08) $ (0.05) $ (.02) $ (.00)
F-18
<PAGE>
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED APRIL 30, 1997
AND THE SIX MONTHS ENDED OCTOBER 31, 1997 (UNAUDITED)
The pro forma effects on net income for 1996 and 1997 is not likely to be
representative of the effects on reported net income or loss in future years. In
management's opinion, existing stock option valuation models do not provide a
reliable single measure of the fair value of employee stock options that have
vesting provisions and are not transferable. In addition, option valuation
models require the input of highly subjective assumptions, including expected
stock price volatility. Changes in such subjective input assumptions can
materially affect the fair value estimate of employee stock options.
e. Leased Office Space
The Company leases 4,000 square feet of office and warehouse space in two
locations from unrelated parties on a month to month basis at an aggregate rent
of $1,000 per month.
Note 10 - Secured Loan
In April, 1996, a potential obligation aggregating $126,500 to a finance
company became barred by New York State's six-year statute of limitations. The
Company wrote off the obligation during the second quarter of fiscal 1997.
Note 11 - Business and Credit Concentrations
The amount reported in the financial statements for cash represents fair
market value. Because the difference between cost and the lower of cost or
market is immaterial, no adjustment has been recognized and investments are
recorded at cost.
The Company sells its products primarily to distributors located in the
United States. Credit is extended based on an evaluation of the customer's
financial condition and, generally, collateral is not required. Credit losses
have been minimal and within Management's expectations. At October 31, 1997, two
customers accounted for 42.2% of accounts receivable.
F-19
<PAGE>
The Company invests its excess cash in debt instruments of financial
institutions and corporations with strong credit ratings. The Company has
established guidelines relative to diversification and maturities that maintain
safety and liquidity. These guidelines are periodically reviewed and modified to
take advantage of trends in yields and interest rates. The Company has not
realized any losses on its marketable securities.
Note 12 - Development Stage Company
The Company was considered to be a development stage company with little
operating history subsequent to the commencement of development of bio-medical
technologies which are, at present, its core business. The Company is in
commercial production of its drug test kits and has what management maintains
are adequate resources to adequately fund its continuing operations. The Company
is no longer considered to be a development stage Company.
Note 13 - Subsequent Events
The Company has been accepted for a listing on the Nasdaq SmallCap market.
F-20
<PAGE>
AMERICAN BIO MEDICA CORPORATION
Part II
Information Not Required in Prospectus
Item 24. Indemnification of Directors and Officers
The New York Business Corporation Law provides for the indemnification of
the Company's officers, directors and corporate employees and agents under
certain circumstances as follows:
721 NONEXCLUSIVITY OF STATUTORY PROVISIONS FOR INDEMNIFICATION OF DIRECTORS
AND OFFICERS.
The indemnification and advancement of expenses granted pursuant to, or
provided by, this article shall not be deemed exclusive of any other rights to
which a director or officer seeking indemnification or advancement of expenses
may be entitled, whether contained in the certificate of incorporation or the
by-laws or, when authorized by such certificate of incorporation or by-laws, (i)
a resolution of shareholders, (ii) a resolution of directors, or (iii) an
agreement providing for such indemnification, provided that no indemnification
may be made to or on behalf of any director or officer if a judgment or other
final adjudication adverse to the director or officer establishes that his acts
were committed in bad faith or were the result of active and deliberate
dishonesty and were material to the cause of action so adjudicated, or that he
personally gained in fact a financial profit or other advantage to which he was
not legally entitled. Nothing contained in this article shall affect any rights
to indemnification to which corporate personnel other than directors and
officers may be entitled by contract or otherwise under law.
722 AUTHORIZATION FOR INDEMNIFICATION OF DIRECTORS AND OFFICERS.
(a) A corporation may indemnify any person, made, or threatened to be made, a
party to an action or proceeding other than one by or in the right of the
corporation to procure a judgment in its favor, whether civil or criminal,
including an action by or in the right of any other corporation of any type
or kind, domestic or foreign, or any partnership joint venture, trust,
employee benefit plan or other enterprise, which any director or officer of
the corporation served in any capacity at the request of the corporation,
by reason of the fact that he, his testator or intestate, was a director or
officer of the corporation, or served such other corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise in any
capacity, against judgments, fines, amounts paid in settlement and
reasonable expenses, including attorneys' fees actually and necessarily
incurred as a result of such action or proceeding, or any appeal therein,
if such director or officer acted, in good faith, for a purpose which he
reasonably believed to be in, or, in the case of service for any other
corporation or any partnership, joint venture, trust, employee benefit plan
or other enterprise, not opposed to, the best interests of the corporation
and, in criminal actions or proceedings, in addition, had no reasonable
cause to believe that his conduct was unlawful.
(b) The termination of any such civil or criminal action or proceeding by
judgment, settlement, conviction or upon a plea of nolo contendere, or its
equivalent, shall not in itself create a presumption that any such director
or officer did not act, in good faith, for a purpose which he reasonably
believed to be in, or, in the case of service for any other corporation or
any partnership, joint venture, trust, employee benefit plan or other
enterprise, not opposed to, the best interests of the corporation or that
he had reasonable cause to believe that his conduct was unlawful.
iv
<PAGE>
(c) A corporation may indemnify any person made, or threatened to be made, a
party to an action by or in the right of the corporation to procure a
judgment in its favor by mason of the fact that he, his testator or
intestate, is or was a director or officer of the corporation, or is or was
seeing at the request of the corporation as a director or officer of any
other corporation of any type or kind, domestic or foreign, of any
partnership, joint venture, trust, employee benefit plan or other
enterprise, against amounts paid in settlement and reasonable expenses,
including attorneys' fees, actually and necessarily incurred by him in
connection with the defense or settlement of such action, or in connection
with an appeal therein if such director or officer acted, in good faith,
for a purpose which he reasonably believed to be in, or, in the case of
service for any other corporation or any partnership, joint venture, trust,
employee benefit plan or other enterprise, not opposed to, the best
interests of the corporation, except that no indemnification under this
paragraph shall be made in respect of (1) a threatened action, or a pending
action which is settled or otherwise disposed of, or (2) any claim issue or
matter as to which such person shall have been adjudged to be liable to the
corporation. unless and only to the extent that the court on which the
action was brought, or, if no action was brought, any court of competent
jurisdiction, determines upon application that, in view of all the
circumstances of the case, the person is fairly and reasonably entitled to
indemnity for such portion of the settlement amount and expenses as the
court deems proper.
(d) For the purpose of this section, a corporation shall be deemed to have
requested a person to serve an employee benefit plan where the performance
by such person of his duties to the corporation also imposes duties on, or
otherwise involves services by, such person to the plan or participants or
beneficiaries of the plan; excise taxes assessed on a person with respect
to an employee benefit plan pursuant to applicable law shall be considered
fines; and action taken or omitted by a person with respect to an employee
benefit plan in the performance of such person's duties for a purpose
reasonably believed by such person to be in the interest of the
participants and beneficiaries of the plan shall be deemed to be for a
purpose which is not opposed to the best interests of the corporation.
723 PAYMENT OF INDEMNIFICATION OTHER THAN BY COURT AWARD.
(a) A person who has been successful, on the merits or otherwise, in the
defense of a civil or criminal action or proceeding of the character
described in section 722 shall be entitled to indemnification as authorized
in such section.
(b) Except as provided in paragraph (a), any indemnification under section 722
or otherwise permitted by section 721, unless ordered by a court under
section 724 (Indemnification of directors and officers by a court), shall
be made by the corporation, only if authorized in the specific case:
(1) By the board acting by a quorum consisting of directors who are not
parties to such action or proceeding upon a finding that the director
or officer has met the standard of conduct set forth in section 722 or
established pursuant to section 721, as the case may be, or,
v
<PAGE>
(2) If a quorum under subparagraph (1) is not obtainable or, even if
obtainable, a quorum of disinterested directors so directs;
(A) By the board upon the opinion in writing of independent legal
counsel that indemnification is proper in the circumstances
because the applicable standard of conduct set forth in such
sections has been met by such director or officer, or
(B) By the shareholders upon a finding that the director or officer
has met the applicable standard of conduct set forth in such
sections.
(c) Expenses incurred in defending a civil or criminal action or proceeding may
be paid by the corporation in advance of the final disposition of such
action or proceeding upon receipt of an undertaking by or on behalf of such
director or officer to repay such amount as, and to the extent, required by
paragraph (a) of section 725.
724 INDEMNIFICATION OF DIRECTORS AND OFFICERS BY A COURT.
(a) Notwithstanding the failure of a corporation to provide indemnification,
and despite any contrary resolution of the board or of the shareholders in
the specific case under section 723 (Payment of indemnification other than
by court award), indemnification shall be awarded by a court to the extent
authorized under section 722 (Authorization for indemnification of
directors and officers) and paragraph (a) of section 723. Application
therefore may be made, in every case, either
(1) In the civil action or proceeding in which the expenses were incurred
or the amounts were paid, or
(2) to the supreme court in a separate proceeding, in which case the
application shall set forth the disposition of any previous
application made to any court for the same or similar relief and also
reasonable cause for the failure to make application for such relief
in the action or proceeding in which the expenses were incurred or
other amounts were paid
(b) the application shall be made in such manner and form as may be
required by the applicable rules of court or, in the absence thereof, by
direction of a court to which it is made. Such application shall be upon notice
to the corporation. The court may also direct that notice by given at the
expense of the corporation to the shareholder and such other person as it may
designate in such manner as it may require.
(c) Where indemnification is sought by judicial action, the court may allow
a person such reasonable expenses, including attorneys' fees, during the
pendency of the litigation as are necessary in connection with his defense
therein, if the court shall find that the defendant has by his pleadings or
during the course of the litigation raised genuine issues of fact or law.
725 OTHER PROVISIONS AFFECTING INDEMNIFICATION OF DIRECTORS AND OFFICERS.
(a) All expenses incurred in defending a civil or criminal action or proceeding
which are advanced by the corporation under paragraph (c) of section 723
(Payment of indemnification other than by court award) or allowed by a
court under paragraph (c) of section 724 (Indemnification of directors and
officers by a court) shall be repaid in case the person receiving such
advancement or allowance is ultimately found, under the procedure set forth
in this article, not to be entitled to indemnification or, where
indemnification is granted, to the extent the expenses so advanced by the
corporation or allowed by the court exceed the indemnification to which he
is entitled.
vi
<PAGE>
(b) No indemnification, advancement or allowance shall be made under this
article in any circumstance where it appears:
(1) That the indemnification would be inconsistent with the law of the
jurisdiction of incorporation of a foreign corporation which prohibits
or otherwise limits such indemnification
(2) That the indemnification would be inconsistent with a provision of the
certificate of incorporation, a by-law, a resolution of the board or
of the shareholders, an agreement or other proper corporate action, in
effect at the time of the accrual of the alleged cause of action
asserted in the threatened or pending action or proceeding in which
the expenses were incurred or other amounts were paid, which prohibits
or otherwise limits indemnification; or
(3) If there has been a settlement approved by the court, that the
indemnification would be inconsistent with any condition with respect
to indemnification expressly imposed by the court in approving the
settlement.
(c) If any expenses or other amounts are paid by way of indemnification,
otherwise than by court order or action by the shareholders, the
corporation shall, not later than the next annual meeting of shareholders
unless such meeting is held within three months from the date of such
payment, and in any event, within fifteen months from the date of such
payment, mail to its shareholders of record at the time entitled to vote
for the election of directors a statement specifying the persons paid, the
amounts paid, and the nature and status at the time of such payment of the
litigation or threatened litigation.
(d) If any action with respect to indemnification of directors and officers is
taken by way of amendment of the by-laws, resolution of directors, or by
agreement, then the corporation shall, not later than the next annual
meeting of shareholders, unless such meeting is held within three months
from the date of such action, and, in any event, within fifteen months from
the date of such action, mail to its shareholders of record at the time
entitled to vote for the election of directors a statement specifying the
action taken.
(e) Any notification required to be made pursuant to the foregoing paragraph
(c) or (d) of this section by any domestic mutual insurer shall be
satisfied by compliance with the corresponding provisions of section one
thousand two hundred sixteen of the insurance law.
726 INSURANCE FOR INDEMNIFICATION OF DIRECTORS AND OFFICERS.
a) Subject to paragraph (b), a corporation shall have power to purchase and
maintain insurance:
(1) To indemnify the corporation for any obligation which it incurs as a
result of the indemnification of directors and officers under the
provisions of this article, and
(2) To indemnify directors and officers in instances in which they may be
indemnified by the corporation under the provisions of this article,
and
vii
<PAGE>
(3) To indemnify directors and officers in instances in which they may not
otherwise be indemnified by the corporation under the provisions of
this article provided the contract of insurance covering such
directors and officers provides, in a manner acceptable to the
superintendent of insurance, for a retention amount and for
coinsurance.
(b) No insurance under paragraph (a) may provide for any payment, other than
cost of defense, to or on behalf of any director or officer:
(1) if a judgment or other final adjudication adverse to the insured
director or officer establishes that his acts of active and deliberate
dishonesty were material to the cause of action so adjudicated, or
that he personally gained in fact a financial profit or other
advantage to which he was not legally entitled, or
(2) in relation to any risk the insurance of which is prohibited under the
insurance law of this state.
(c) Insurance under any or all subparagraphs of paragraph (a) may be included
in a single contract or supplement thereto. Retrospective rated contracts
are prohibited.
(d) The corporation shall, within the time and to the persons provided in
paragraph (c) of section 725 (Other provisions affecting indemnification of
directors or officers), mail a statement in respect of any insurance it has
purchased or renewed under this section, specifying the insurance carrier,
date of the contract, cost of the insurance, corporate positions insured,
and a statement explaining all sums, not previously reported in a statement
to shareholders, paid under any indemnification insurance contract.
(e) This section is the public policy of this state to spread the risk of
corporate management, notwithstanding any other general or special law of
this state or of any other jurisdiction including the federal government.
Item 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses payable by the Registrant in connection with the issuance and
distribution of the securities are estimated as follows:
Amount
-----
SEC Registration Fee $400
Printing and Mailing $1,000
Legal Fees and Expenses $10,000
Accounting Fees $5,000
Transfer Agent Fees $1,000
Miscellaneous $2,600
-------
Total $20,000
viii
<PAGE>
Item 26. RECENT SALES OF UNREGISTERED SECURITIES
The following unregistered securities have been issued by the Registrant:
The title and amount of securities issued and the aggregate offering price
or other consideration are as follows:
In February, 1996, the Registrant sold, through a private placement, 25,000
units (the "Units") pursuant to Rule 504 ("Rule 504") to the Securities Act of
1933, as amended, (the "Securities Act") consisting of an aggregate of 25,000
Common Shares, 500,000 "A" Warrants and 50,000 "B" Warrants for an aggregate
consideration of $25,000.
As of April 30, 1996, the Registrant issued 489,181 restricted Common
Shares in consideration for past services to five individuals in the amount of
$60,975 or an average consideration of $.125 per share.
As of April 30, 1996, the Registrant issued to OTC Communications 100,000
Common Shares under Rule 504 as consideration for financial consulting services
rendered per contract at a value of $.65 per share.
As of April 30, 1996, the Registrant issued to Riverside Consulting Group,
Inc. 25,000 common shares under Rule 504 in consideration for financial
consulting services of $12,500 at $.50 per share.
As of April 30, 1996, the Registrant issued an aggregate of 100,000 Common
Shares to two persons under Rule 504 valued at $.50 per share in consideration
for financial consulting services.
As of April 30, 1996, the Registrant authorized the issuance to OTC
Communications 550,000 restricted Common Shares, 500,000 shares as consideration
for financial consulting services rendered per contract and 50,000 as expense
reimbursement at a value of $178,750 or $.325 per share
From 1993 through 1996, the Company sold an aggregate of $1,417,000 of 12%
convertible Debentures, under Rule 504, the principal amount of each Debenture
convertible at the option of the holder into Common Shares at $.75 per share.
All the Debentures have been converted at $.75 per share into 1,888,333 Common
Shares. There are no outstanding Debentures.
All the "A" Warrants issued as part of the Units have been exercised at
$.50 each into Common Shares and all the "B" Warrants issued as part of the
Units have been exercised at $1.00 each into Common Shares pursuant to Rule 504.
In September, 1996, the Registrant issued 150 "A" Preferred Shares to
Midland Walwyn Capital, Inc. for a total purchase price of $1,500,000. Each
Preferred Share was convertible into Common Shares at the option of the holder
pursuant to the following formula: $10,000 (the purchase price of each Preferred
Share) divided by the lesser of $6.07 or 75% of the Market Price. ("Market
Price" was defined as the average closing price of the Common Shares for the
five days prior to the date of conversion of the "A" Preferred Shares.)
In September, 1996, the Registrant issued 24,712 Warrants to a
non-management consultant. Each warrant was exercisable into one Common Share
originally at $6.07 and subsequently adjusted to $3.00 for a period of two years
commencing the effective date of a registration statement relating to the
underlying Common Shares. An effective registration statement covers the Common
Shares underlying these warrants.
In March, 1996, the Registrant issued to OTC Communications 500,000 "A"
Options exercisable until March 14, 1999 at $1.00 per share and 500,000 "B"
Options exercisable until March 14, 1999 at $2.00 per share. These options and
the shares underlying them are restricted.
ix
<PAGE>
In June, 1996, the Company adopted its 1996 Nonstatutory Stock Option Plan
under which a maximum of 2,000,000 Nonstatutory Options may be issued. 1,500,000
Nonstatutory Options were issued on June 28, 1996 as follows: Stan Cipkowski,
President, 550,000 options; Edmund Jaskiewicz, Executive Vice-President, 250,000
options; Jay Bendis, Vice-President-Marketing, 300,000 options; Henry Wells,
Vice-President-Product Development, 150,000 options; and four non-management
employees and consultants, 225,000 options each. Each Nonstatutory Option
entitles the holder to purchase one Common Share for $3.00 for a period of three
years. In November, 1996, 131,000 options were issued to two consultants, each
option exercisable at $3.00 until November 12, 1999.
On April 30, 1997, the Company issued 20,000 options to Jay Bendis,
Executive-Vice-President and 252,000 options to 15 non-Management employees and
consultants. Each Nonstatutory Option entitles the holder to purchase one Common
Share for $3.00 for a period of three years.
As of October 31, 1997, the Company had issued 150,000 Nonstatutory Options
to Douglas Casterlin, Vice-President. Each Nonstatutory Option entitles the
holder to purchase one Common Share for $3.00 for a period of three years.
As of October 31, 1997, 697,445 nonstatutory stock options had been
exercised for an aggregate consideration of $2,092,186.
On August 29, 1997, the Company issued 185,000 options as follows: 10,000
to Jasper Clay, Jr., a Director, 10,000 to John F. Murray, a Director, and
165,000 options to 5 non-management employees.
In September, 1997, the Registrant issued 60 "B" and 44.5 "C" Preferred
Shares to a total of 12 investors for a total purchase price of $1,055,000 Each
Preferred Share is convertible into Common Shares at the option of the holder
pursuant to the following formula: $10,000 (the purchase price of each Preferred
Share) divided by the lesser of $3.50 or 75% of the Market Price. ("Market
Price" is defined as the average closing price of the Common Shares for the 20
days prior to the date of purchase or conversion, as the case may be, of the "B"
and "C" Preferred Shares.)
The Common Shares underlying the Nonstatutory Options have been registered
under the Securities Act.
Exemption from registration of the issue of said securities is claimed
under Section 4(2) of the Securities Act. Neither the Issuer nor any person
acting on its behalf offered or sold the securities by means of any form of
general solicitation or general advertising. Prior to the making any offer, the
Registrant had reasonable grounds to believe and believed that each subscriber
was capable of evaluating the merits and risks of the prospective investment or
was able to bear the economic risk of the investment. Prior to making any sale,
the issuer had reasonable grounds to believe and believed that each subscriber
was capable of evaluating the merits and risks of the prospective investment or
was able to bear the economic risk of the investment.
Each purchaser represented in writing that he acquired the securities for
his own account. Except for the securities sold under Rule 504, the certificates
of which bear no restrictive legend, a legend was placed on each certificate
stating that the securities have not been registered under the Securities Act;
and setting forth the restrictions on their transferability and sale. Each
purchaser signed a written agreement that the securities will not be sold
without registration under the Securities Act of exemption therefrom.
x
<PAGE>
Item 27. EXHIBITS
Exhibits
Exhibit List
3.1 Certificate of Incorporation*
3.2 First Amendment to Certificate of Incorporation*
3.3 Second Amendment to Certificate of Incorporation*
3.4 Third Amendment to Certificate of Incorporation*
3.5 Bylaws*
3.6 Fourth Amendment to Certificate of Incorporation*
4.1 Specimen Common Share Certificate*
4.2 Specimen "B" Warrant Certificate**
4.3 Terms of Series "A" Preferred Shares**
4.4 Private Securities Subscription Agreement to Series "A" Preferred
Shares**
4.5 Registration Rights Agreement relating to Common Shares underlying
Series "A" Preferred Shares**
4.6 Form of Subscription Agreement relating to Series "B" Convertible
Preferred Shares
4.7 Form of Designation Agreement Relating to Terms of Series "C"
Convertible Preferred Shares
4.8 Registration Rights Agreement relating to Common Shares underlying
Series "C" Preferred Shares
5.3 Opinion of Pensley & Fugler**
5.4 Opinion of Joel Pensley, Esq.
10.1 Contract with OTC Communications*
10.2 Employment Contract between the Registrant and Stan Cipkowski*
10.3 Employment Contract between the Registrant and Edmund Jaskiewicz*
10.4 Employment Contract between the Registrant and Jay Bendis*
10.5 Employment Contract between the Registrant and Douglas Casterlin
23.4 Consent of Thomas P. Monahan, CPA**
23.5 Consent of Pensley & Fugler**
23.6 Consent of Joel Pensley, Esq.
23.7 Consent of Thomas P. Monahan, CPA to First Amendment**
23.8 Consent of Thomas P. Monahan, CPA to Post Effective Amendment**
23.9 Consent of Thomas P. Monahan, CPA
*Previously submitted as exhibits to Form 10-SB
** Previously submitted as exhibits to Form SB-2
Financial Statement Schedules: None
- --------------------------
xi
<PAGE>
Item 28. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned hereby undertakes:
(a) to file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) to include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after the
effective date of this Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this Registration Statement; and
(iii)to include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement
or any material change to such information in this Registration
Statement;
(b) that, for the purposes of determining any liability under said Act, each
such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof;
(c) to remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
the offering;
Subject to the terms and conditions of Section 15(d) of the Securities and
Exchange Act of 1934, the undersigned hereby undertakes to file with the
Securities and Exchange Commission such supplementary and periodic information,
documents, and reports as may be prescribed by any rule or regulation of the
Commission heretofore or hereafter duly adopted pursuant to its authority.
xii
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Town of Ancramdale and State of New York on the 24th day of
December, 1997.
AMERICAN BIO MEDICA CORPORATION
(Registrant)
By: /s/Stan Cipkowski
------------------
Stan Cipkowski,
President and Principal
Executive Officer
By: /s/John F. Murray
--------------------
John F. Murray,
Treasurer and Principal
Financial Officer
Date: December 24, 1997
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated:
/s/Stan Cipkowski
- --------------------- Director December 24, 1997
Stan Cipkowski
/s/Edmund Jaskiewicz
- ---------------------
Edmund Jaskiewicz Director December 24, 1997
/s/Jay Bendis
- ---------------------
Jay Bendis Director December 24, 1997
- ---------------------
John F. Murray Director
- ---------------------
Jasper R. Clay, Jr. Director
/s/Karen Russo
- --------------------- December 24, 1997
Karen Russo Director
xiii
Exhibit 5.4
Opinion of Joel Pensley
<PAGE>
Joel Pensley
Attorney at Law
276 Fifth Avenue Suite 715
New York, New York 10001
212-725-7110
Fax: 212-725-7527
December 24, 1997
American Bio Medica Corporation
102 Simons Road
Ancramdale, New York 12503
Re: Registration Statement on Form SB-2
Gentlemen:
I refer to the registration statement on Form SB-2 (the "Registration
Statement") of American Bio Medica Corporation, a New York corporation (the
"Company"), to be delivered for electronic filing to the Securities and Exchange
Commission by mail, relating to 301,429 common shares, $.01 par value each
("Common Shares") underlying Series "B" and "C" convertible preferred shares
(the "Preferred Shares") (subject to adjustment). I have reviewed such documents
and records as I have deemed necessary to enable us to express an informed
opinion on the matters covered thereby and we are of the opinion that:
(i) The Company has been duly incorporated and is a validly existing
corporation in good standing under the laws of the State of New York.
(ii) The Common Shares to be issued upon conversion of the Preferred Shares have
been duly authorized and, when issued, will be validly issued, fully paid
and nonassessable;
Very truly yours,
/s/Joel Pensley
---------------
Joel Pensley
<PAGE>
Exhibit 10.5
Employment Contract Between American Bio Medica Corporation
and Douglas Casterlin
<PAGE>
EMPLOYMENT AGREEMENT
This agreement (the "Agreement") made and entered into this 17th day of
April, 1997 by and between American Bio Medica, a New York Corporation with its
office located at 102 Simons Road, Ancramdale, New York 12503 ("Employer") and
Douglas Casterlin individual residing at 65 Ballory Road, Ghent, NY 12075
("Employee") (Employer and Employee are sometimes collectively referred to as
the "Parties")
WHEREAS, Employer is engaged in the business of research and development,
design, manufacture and marketing of drug testing kits and other biomedical
products; and
WHEREAS, Employee is experienced in production and operations of biomedical
products including drug testing kits.
WHEREAS, both Employer and Employee are desirous of entering into an
employment agreement whereby Employee would devote his time and Employer would
compensate him as an employee.
NOW THEREFORE, in consideration of the premises and of the mutual covenants
herein contained, the Parties agree as follows:
1. Employment and Duties: Employer hereby employs Employee as Vice President
and General Manager.
2. Performance: Employee will devote substantially his full working time and
efforts as an employee of Employer. "Full working time," in this context,
shall mean at least an average of 40 hours per week.
3. Term: The Employment Term shall commence on May 26, 1977 and, unless
extended by mutual agreement of the parties hereto, or sooner terminated or
canceled pursuant to Section 14 hereof, shall terminate and expire on May
25, 2000.
4. Compensation: Employee shall be paid a base annual salary of $84,000 per
annum. Employer may from time to time enter into supplemental agreements or
memoranda in writing with Employee for the award and payment to him of
additional compensation or bonuses upon such terms and conditions as
Employer shall deem to be in its business interest. In addition, effective
with the date of this contract:
Employee shall be paid, on a quarterly basis, a bonus equal to 1% net
sales after gross revenues of $1,000,000 per fiscal year.
Employee shall receive 150,000 options at $3.00 per share vesting
immediately.
<PAGE>
No bonuses will be earned subsequent to the Employee's election to
terminate the Agreement or Employer's discharge of Employee for cause.
In the event of Termination due to death of Employee or inability due
to illness of Employee to render services under the Agreement to
Employer, no bonuses shall be paid; but shares shall vest pursuant to
the formula set forth in this section.
In the event that American Bio Medica Corporation is merged or
acquired by another company, all unvested shares and/or options become
immediately vested.
If the employee is terminated without cause, all unvested shares
and/or options become immediately vested and the balance of annual
salary due for the term of the contract is paid as severance.
5. Employee Benefits: Employee shall be entitled to be covered by any employee
health insurance policy, dental plan, pension plan, stock option or similar
plans or other employee benefit(s) offered generally to management
employees of Employer. Employee shall not be obligated to contribute any
money to be covered under said plain except in the event the Company enacts
a contributory pension plan for other employees. Employee shall be entitled
to three weeks paid vacation at times to be mutually agreed upon between
Employer and Employee.
6. Expenses: In addition to the compensation provided Employee under the
Agreement, Employer shall reimburse Employee for any and all authorized
expenses which he shall incur directly relating to his functions as an
employee. Reimbursable expenses shall include, but are not limited to,
travel (except to and from the office) and entertainment and purchase of
supplies. Reimbursement of expenses shall not be deemed as compensation to
Employee.
7. Recommendations for Operations: Employee shall provide Employer all
information regarding Employer's business of which Employee has knowledge.
Employee shall make all suggestions and recommendations that will be of
mutual benefit to Employer and Employee.
8. Confidentiality: Employee recognizes that Employer has and will have
information relating to inventions, equipment and machinery, products,
prices, apparatus, costs, discounts, future plans, business affairs,
process information, trade secrets, technical information, customer lists,
product design, copyrights, patents and other vital information
)collectively, the "Information") which are valuable, special and unique
assets of Employer. Employee agrees that Employee will not at any time or
in any manner, either directly of indirectly, divulge, disclose, or
communicate any
<PAGE>
Information to any third party without the prior written consent of
Employer. Employee will protect the Information and treat it as strictly
confidential. A violation of Employee of this paragraph shall be a material
violation of the Agreement and will justify immediate Termination and legal
and/or equitable relief.
9. Unauthorized Disclosure of Information: If it appears that employee has
disclosed (or has threatened to disclose) Information in violation of the
Agreement, Employer shall be entitled to an injunction to restrain Employee
from disclosing, in whole or in part, such Information, or from providing
any services to any party to whom such Information has been disclosed or
may be disclosed. Employer shall not be prohibited by this provision from
pursuing other remedies, including a claim for losses and damages.
10. Confidentiality After Termination of Employment: The confidentiality
provisions of the Agreement shall remain in full force and effect for a two
year period after Termination. During such two year period, neither Party
shall make or permit the making of any public announcement or public
statement of any kind that Employee was formerly employed by or connected
with Employer except as may be required by the Securities Act of 1933, the
Securities Exchange Act of 1934 or any relevant state securities laws.
11. Development of New Products/Technologies: All products or technologies
developed during the term of the Agreement shall become the property of
Employer. Employee shall transfer to Employer all ideas, prototypes,
drawings, descriptions, patents, copyrights, trademarks or other
intellectual property to Employer. Employer has the right to accept or
reject any such assets; in the event of rejection, all ownership rights
will revert to Employee.
12. Non-Compete: Recognizing that the various items of Information are special
and unique assets of the company. Employee covenants that for a period of
two years following voluntary Termination, Employee may not directly or
indirectly engage in a business competitive with Employer in any of the
eastern seaboard States in which the Employer is presently producing or
distributing its products and also in eastern seaboard States in which
Employee knows or has reason to believe Employer intends to extend its
production or distribution activities. Employee will not be compensated by
the Company during this period. Employee may not, directly or indirectly,
contact, (including, but not limited to employees of Employer), solicit,
hire, sell to, purchase from, obtain financing from or recommend the
contacting, selling to, purchasing from or financing from any person,
institution, entity or company with which Employer has dealt during the one
year period preceding the date of the Agreement. The term "directly or
indirectly engaging in any competitive business" includes, but is not
limited to, (I) engaging in a business as owner, partner, or agent, (II)
becoming an employee of any third party engaged in such business, (III)
becoming interested directly or indirectly in any such business, or (IV)
soliciting any customer of Employer for the benefit or a third party
engaged in such business.
<PAGE>
13. Employee's Inability to Contract for Employer: Employee shall not have the
right to make any contracts or commitments for or on behalf of Employer out
of the area of normal business operations without first obtaining the
express written consent of board of directors of Employer or a relevant
committee of the board of directors for the specific contract or commitment
or class of contract or commitment.
14. Termination: The Agreement shall terminate upon the happening of any of the
following events:
(a) Death of Employee;
(b) Discontinuance of the business of Employer for a period of sixty (60)
days;
(c) Resignation of Employee;
(d) Unwillingness or inability caused by illness or otherwise to fulfill
the duties and obligations of his employment for a continuous period
of 60 days or an aggregate of 90 days in any yearly period;
(e) Reasonable cause, including but not limited to, the breach of
agreement, covenant, representation or warranty of Employee set forth
herein, or gross misconduct which brings him or Employer into
disrepute or is detrimental to Employers business.
(f) Intention and notice to terminate pursuant to paragraph 3.
15. Assignment: The rights and obligations of the Employer under this agreement
shall inure to the benefit of and shall be binding upon the successors and
assigns of the Employer.
16. Severability: If any term of the Agreement shall, to any extent, be
determined through arbitration or by court of competent jurisdiction to be
invalid or unenforceable, the remainder of the Agreement shall not be
effected thereby and each other term of the Agreement shall be valid and
enforceable to the fullest extent permitted by law.
17. Arbitration: Any controversy arising from or related to the Agreement shall
be determined by arbitration in New York City in accordance with the rules
of the America Arbitration Association any such determination or award may
be enforced by any court having jurisdiction thereof.
18. Complete Agreement: The Agreement constitutes the entire agreement between
the Parties regarding the subject matter herein and supersedes any other
previous and/or collateral agreements or resolutions of the board of
directors pertaining thereto. Agreement may not be modified or amended
other than by a written instrument duly executed by or on behalf of the
parties hereto.
20. Governing Law: The Agreement shall be interpreted and construed under the
internal laws of the State of New York. 21. Indemnification: The personal
liability of the directors and officers of the Corporation is eliminated to
the fullest extent permitted by the provisions of paragraph (b) of Section
402 of the Business Corporation Law, as the same may be amended and
supplemented. Section 402(b) of the Business Corporation Law of New York is
printed in full in the Company's Form 10-SB-2-A on file with the Securities
and Exchange Commission in Item 5, pages 23 through 28.
<PAGE>
IN WITNESS WHEREOF, the Parties have executed the Agreement as of the date
first written above.
AMERICAN BIO MEDICA CORPORATION
By: /s/ Stan Cipkowski
Stan Cipkowski
its President
/s/Douglas Casterlin
Douglas Casterlin
<PAGE>
Exhibit 23.6
Consent of Joel Pensley
<PAGE>
CONSENT
I hereby consent to the use of my name in the prospectus filed as a part of
the registration statement of American Bio Medica Corporation on Form SB-2 under
the caption "LEGAL MATTERS."
December 24, 1997
/s/Joel Pensley
---------------
Joel Pensley
Exhibit 23.9
Consent of Thomas P. Monahan, CPA
<PAGE>
CONSENT
I, Thomas P. Monahan, CPA, hereby consent to the use of my report relating
to the audited financial statements for the years ended April 30, 1996 and 1997
in a registration statement on Form SB-2 of American Bio Medica Corporation. to
be filed with the Securities and Exchange Commission.
Dated: December 24, 1997
/s/Thomas P. Monahan
--------------------
Thomas P. Monahan
Exhibit 4.6
Form of Subscription Agreement Relating to
the Series B Convertible Preferred Shares
<PAGE>
SUBSCRIPTION AGREEMENT
AMERICAN BIO MEDICA CORPORATION
THE SECURITIES WHICH ARE THE SUBJECT TO THIS SUBSCRIPTION AGREEMENT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER THE SECURITIES
LAWS OF ANY STATE AND WILL BE OFFERED AND SOLD IN RELIANCE ON EXEMPTIONS FROM
THE REGISTRATION REQUIREMENTS OF THESE LAWS BY VIRTUE OF AMERICAN BIO MEDICA
CORPORATION'S INTENDED COMPLIANCE WITH SECTIONS 3(b), 4(2) AND 4(6) OF THE
SECURITIES ACT OF 1933, THE PROVISIONS OF REGULATION D UNDER SUCH ACT AND
SIMILAR EXEMPTIONS UNDER STATE LAW. THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY ANY REGULATORY AUTHORITY. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The undersigned purchaser (hereafter, the "Purchaser") hereby offers to
purchase certain 8% Series B Convertible Preferred Stock, par value $.01 per
share (referred to herein as a "Share" or collectively as "Shares"), of American
Bio Medica Corporation (the "Company"), a publicly held corporation formed under
the laws of the State of New York. This offer to purchase may, for any reason
whatsoever, be revoked by the Purchaser or rejected by the Company prior to
acceptance of this offer by the Company.
Section 1.1 Purchase and Sale of Shares. Upon the following terms and
conditions, the Company shall issue and sell to the Purchaser, and the Purchaser
shall purchase from the Company, the number of Shares indicated herein, which
Shares shall have the rights, designations and preferences set forth in Schedule
I hereto, incorporated herein by reference.
Section 1.2 Purchase Price. The purchase price for the Shares (the
"Purchase Price") shall be $10,000 per Share.
Section 1.3 The Closing.
(a) The closing of the purchase and sale of the Shares (the "Closing"),
shall take place at the offices of Joel Pensley, Esq. (Counsel for the
Company), 276 Fifth Avenue - Suite 715, New York, New York 10001, at
10:00 a.m., local New York, New York time, on the later of the
following: (i) the date on which the last to be fulfilled or waived of
the conditions set forth in Section 4.1 and 4.2 hereof and applicable
to the Closing shall be fulfilled or waived in accordance herewith, or
(ii) such other time and place and/or on such other date as the
Purchaser and the Company may agree. The date on which the Closing
occurs is referred to herein as the "Closing Date."
(b) On the Closing Date, the Company shall deliver to the Purchaser
certificates representing the Shares registered in the name of the
Purchaser or deposit such Shares into accounts designated by the
Purchaser, and the Purchaser shall deliver to the Company the Purchase
Price for all the Shares by cashier's check or wire transfer in
immediately available funds to such account as shall be designated in
writing by the Company. In addition, each party shall deliver all
documents, instruments and writings required to be delivered by such
party pursuant to this Agreement at or prior to the Closing.
1
<PAGE>
Section 1.4 Covenant to Register.
(a) For purposes of this Section, the following definitions shall apply:
(i) The terms "register," "registered," and "registration" refer to a
registration under the Securities Act of 1933, as amended (the
"Act"), effected by preparing and filing a registration statement
or similar document in compliance with the Act, and the
declaration or ordering of effectiveness of such registration
statement, document or amendment thereto.
(ii) The term "Registrable Securities" means the shares of the
Company's Common Shares, par value $.01 per shares (the "Common
Stock") issuable upon conversion of shares of the Shares, or upon
conversion of any other stock, if any, issued in payment of
dividends on the Shares, or otherwise issuable pursuant to this
Agreement or the provisions of Schedule I hereto, and any
securities of the Company or securities of any successor
corporation issued as, or issuable upon the conversion or
exercise of any warrant, right or other security that is issued
as a dividend or other distribution with respect to, or in
exchange for, or in replacement of, the Shares.
(iii)The term "holder of Registrable Securities" means the Purchaser
and any permitted assignee of registration rights pursuant to
Section 1.4(h).
(b)
(i) The Company shall, as soon as practicable after the Closing Date,
file a registration statement on Form S-1, SB-2 or S-3 covering
all the Registrable Securities, and shall use its best efforts to
cause such registration statement to become effective on or
before one hundred twenty (120) days after the Closing Date (the
"Initial Registration"). In the event such registration is not so
declared effective or does not include all Registrable
Securities, a holder of Registrable Securities shall have the
right to require by notice in writing that the Company register
all or any part of the Registrable Securities held by such holder
(a "Demand Registration") and the Company shall thereupon effect
such registration in accordance herewith (which may include
adding such shares to an existing shelf registration). The
parties agree that if the holder of Registrable Securities
demands registration of less than all of the Registrable
Securities, the Company, at its option, may nevertheless file a
registration statement covering all of the Registrable
Securities. If such registration statement is declared effective
with respect to all Registrable Securities and the Company is in
compliance with its obligations under Subsection (d) of this
Section 1.4, the demand registration rights granted pursuant to
this Subsection (b)(i) shall cease. If such registration
statement is not declared effective with respect to all
Registrable Securities or if the Company is not in compliance
with such obligations, the demand registration rights described
herein shall remain in effect.
2
<PAGE>
(ii) The Company shall not be obligated to effect a Demand
Registration under Subsection (b)(i) above: (A) if all of the
Registrable Securities held by the holder of Registrable
Securities which are demanded to be covered by the Demand
Registration are, at the time of such demand, included in an
effective registration statement and the Company is in compliance
with its obligations under Subsection (d) of this Section 1.4;
(B) if all of the Registrable Securities may be sold under Rule
144(k) of the Act and the Company's transfer agent has accepted
an instruction from the Company to such effect; or (C) at any
time after two (2) years from the Closing Date.
(iii)Subject to Subsection (iv)(B) hereof, the Company may suspend the
effectiveness of any such registration effected pursuant to this
Subsection (b) in the event and for such period of time as, such
a suspension is required by the rules and regulations of the
Securities and Exchange Commission ("SEC"). The Company will use
its best efforts to cause such suspension to terminate at the
earliest possible date.
(iv) (A) If the effectiveness of the Registration Statement is
suspended or a current prospectus meeting the requirements of
Section 10 of the Act is not available for delivery by the
Purchaser (either referred to herein as a "suspension"), the
Company shall pay Purchaser as liquidated damages an amount equal
to two percent (2%) of the total Purchase Price of Shares and any
Registrable Securities then held by Purchaser for the first
thirty (30) day period after the date of the suspension, plus
amount equal to two percent (2%) of the total Purchase Price of
Shares and any Registrable Securities then held by Purchaser for
each subsequent thirty (30) day period thereafter. Such amounts
shall be pro-rated daily and paid to the Purchaser by cashier's
check or wire transfer in immediately available funds to such
account as shall be designated in writing by the Purchaser.
(B) Any amount payable pursuant to the foregoing provisions of
this subsection (iv) shall be delivered on or before the fifth
(5th) day following the end of the calendar month in which such
payment obligation arose. The "Purchase Price" of Registrable
Securities shall be (1) if derived from conversion or
substitution of Shares, the Purchase Price of the Shares, and (2)
if received in satisfaction of a Company obligation, the dollar
amount of such obligation.
(C) This subsection is in addition to the provisions of Section
7.2(a) hereof.
(c) If the Company proposes to register (including for this purpose a
registration effected by the Company for shareholders other than the
Purchaser) any of its stock or other securities under the Act in
connection with a public offering of such securities (other than a
registration on Form S-4, Form S-8 or other limited purpose form) and
all Registrable Securities have not theretofore been included in a
registration statement under Subsection (b) of this Section 1.4 which
remains effective, the Company shall, at such time, promptly give all
holders of Registrable Securities written notice of such registration.
Upon the written request of any holder of Registrable Securities given
within twenty (20) days after receipt of such notice by the holder of
Registrable Securities, the Company shall use its best efforts to
cause to be registered under the Act all Registrable Securities that
such holder of Registrable Securities requests to be registered.
However, the Company shall have no obligation under this Subsection
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(c) if (i) the Registrable Securities may be sold without registration
under Rule 144(k) and the Company's transfer agent has accepted an
instruction from the Company to such effect, (ii) the Registration
Statement is filed more than two (2) years after the Closing Date, or
(iii) to the extent that, with respect to any underwritten offering
initiated by the Company later than one calendar year following the
Closing, the managing underwriter of such offering reasonably notifies
such holder(s) in writing of its determination that the Registrable
Securities or a portion thereof shall be excluded therefrom.
(d) Whenever required under this Section 1.4 to effect the registration of
any Registrable Securities including, without limitation, the Initial
Registration, the Company shall, as expeditiously as reasonably
possible:
(i) Prepare and file with the SEC a registration statement or
amendment thereto with respect to such Registrable Securities and
use its best efforts to cause such registration to become
effective as provided in Section 1.4(b)(i), provide notice to
each holder of Registrable Securities by telefacsimile on the day
a registration statement filed hereunder becomes effective
advising that the registration statement has become effective,
and keep such registration statement effective for so long as any
holder of Registrable Securities desires to dispose of the
securities covered by such registration statement; provided,
however, that in no event shall the Company be required to keep
the Registration Statement effective for a period greater than
two (2) years from the Closing Date;
(ii) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply
with the provisions of the Act with respect to the disposition of
all securities covered by such registration statement and notify
the holders of the filing and effectiveness of such Registration
Statement and any amendments or supplements;
(iii)Furnish to each holder of Registrable Securities such numbers of
copies of a current prospectus, including a preliminary
prospectus, conforming with the requirements of the Act, copies
of the registration statement any amendment or supplement to any
thereof and any documents incorporated by reference therein and
such other documents, all free of charge, as such holder of
Registrable Securities may reasonably require in order to
facilitate the disposition of Registrable Securities owned by
such holder of Registrable Securities;
(iv) Use its best efforts to register and qualify the securities
covered by such registration statement under such other
securities or "Blue Sky" laws of such jurisdictions as shall be
reasonably requested by the holder of Registrable Securities;
(v) Notify each holder of Registrable Securities immediately of the
happening of any event as a result of which the prospectus
included in such registration statement, as then in effect,
includes an untrue statement of material fact or omits to state a
material fact required to be stated therein or necessary to make
the statements therein not misleading in light of the
circumstances then existing, and use its best efforts to promptly
update and/or correct such prospectus;
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(vi) Furnish, at the Company's expense upon the request of any holder
of Registrable Securities in connection with a registration
statement filed pursuant to this agreement or any underwritten
public offering, (A) an opinion of counsel of the Company, dated
the effective date of the registration statement, in form and
substance reasonably satisfactory to the holder and its counsel
and covering, without limitation, such matters as the due
authorization and issuance of the securities being registered and
certain matters pertaining to disclosure under and compliance
with securities laws by the Company in connection with the
registration thereof and/or (B) a "comfort" letter or letters of
the Company's independent public accountants provided at the
Company's expense in form and substance reasonably satisfactory
to the holder and its counsel;
(vii)Use its best efforts to list and maintain the listing of the
Registrable Securities covered by such registration statement
with any national market or securities exchange on which such
securities are then listed;
(viii) Make available for inspection by any holder of Registrable
Securities, upon request by such holder, all SEC Documents (as
defined below) filed subsequent to the Closing and require the
Company's officers, directors and employees to supply all
information reasonably requested by any holder of Registrable
Securities in connection with such registration statement; and
(ix) Furnish to each holder of Registrable Securities prompt notice of
the commencement of any stop-order proceedings under the Act,
together with copies of all documents in connection therewith,
and use its best efforts to obtain withdrawal of any such stop
order as soon as possible.
(e) Upon request of the Company, each holder of Registrable Securities
will furnish to the Company in connection with any registration under
this Section such information regarding itself, the Registrable
Securities and other securities of the Company held by it, and the
intended method of disposition of such securities as shall be
reasonably required to effect the registration of the Registrable
Securities held by such holder of Registrable Securities. The intended
method of disposition (Plan of Distribution) of such securities as so
provided by each such holder shall be included without alteration in
the Registration Statement covering the Registrable Securities and
shall not be changed without the prior written consent of such holder.
(f) (i) The Company shall indemnify, defend and hold harmless each holder
of Registrable Securities which are included in a registration
statement pursuant to the provisions of Subsections (b) or (c) hereof
and each of its officers, directors, employees, agents, partners or
controlling persons (within the meaning of the Act) (each, an
"indemnified party") from and against, and shall reimburse such
indemnified party with respect to, any and all claims, suits, demands,
causes of action, losses, damages, liabilities, costs or expenses
("Liabilities") to which such indemnified party may become subject
under the Act or otherwise, arising from or relating to (A) any untrue
statement or alleged untrue statement of any material fact contained
in such registration statement, any prospectus contained therein or
any amendment or supplement thereto, or (B) the omission or alleged
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading; provided,
however, that the Company shall not be liable in any such case to the
extent that any such Liability arises out of or is based upon an
untrue statement or omission so made in strict conformity with
information furnished by such indemnified party in writing
specifically for use in a registration statement.
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(ii) In the event of any registration under the Act of
Registrable Securities pursuant to Subsections (b) or (c)
hereof, each holder of such Registrable Securities hereby
severally agrees to indemnity, defend and hold harmless the
Company, and its officers, directors, employees, agents,
partners, or controlling persons (within the meaning of the
Act) (each, an "indemnified party") from and against, and
shall reimburse such indemnified party with respect to, any
and all Liabilities to which such indemnified party may become
subject under the Act or otherwise, arising from or relating
to (A) any untrue statement or alleged untrue statement of any
material fact contained in such registration statement, any
prospectus contained therein or any amendment or supplement
thereto, or (B) the omission or alleged omission to state
therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading;
provided, that such holders will be liable in any such case to
the extent and only to the extent, that any such Liability
arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission made in such
registration statement, prospectus or amendment or supplement
thereto in reliance upon and in conformity with written
information furnished by such holder specifically for use in
the preparation thereof.
(iii) Promptly after receipt by any indemnified party of
notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made
against another party (the "indemnifying party") hereunder,
notify such party in writing thereof, but the omission so to
notify such party shall not relieve such party from any
Liability which it may have to the indemnified party other
than under this Section and shall only relieve it from any
Liability which it may have to the indemnified party under
this Section if and to the extent an indemnifying party is
materially prejudiced by such omission. In case any such
action shall be brought against any indemnified party and such
indemnified party shall notify an indemnifying party of the
commencement thereof, the indemnifying party shall be entitled
to participate in and, to the extent it shall wish, to assume
and undertake the defense thereof with counsel reasonably
satisfactory to such indemnified party, and, after notice from
the indemnifying party to the indemnified party of its
election so to assume and undertake the defense thereof, the
indemnifying party shall not be liable to the indemnified
party under this Section for any legal expenses subsequently
incurred by the indemnified party in connection with the
defense thereof other than reasonable costs of investigation
and of liaison with counsel so selected; provided, however,
that if the defendants in any such action include both parties
and the indemnified party shall have reasonably concluded that
there may be reasonable defenses available to them which are
different from or additional to those available to the
indemnifying party or if the interests of the indemnified
party reasonably may be deemed to conflict with the interests
of the indemnifying party, the indemnified party shall have
the right to select a separate counsel and to assume such
legal defenses and otherwise to participate in the defense of
such action, with the reasonable expenses and fees of one such
separate counsel and other reasonable expenses related to such
participation to be reimbursed by the indemnifying party as
incurred.
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(g) (i) With respect to the inclusion of Registrable Securities in a
registration statement pursuant to Subsections (b) or (c), all fees,
costs and expenses of and incidental to such registration, inclusion
and public offering shall be borne by the Company; provided, however,
that any security holders participating in such registration shall
bear their pro-rata share of the underwriting discounts and
commissions, if any, incurred by them in connection with such
registration.
(ii) The fees, costs and expenses of registration to be borne
by the Company as provided in this Subsection (g) shall
include, without limitation, all registration, filing and NASD
fees, printing expenses, fees and disbursements of counsel and
accountants for the Company, all expenses associated with any
opinion or "comfort" letters, and all legal fees and
disbursements and other expenses of complying with state
securities or Blue Sky laws of any jurisdiction or
jurisdictions in which securities to be offered are to be
registered and qualified. Subject to appropriate agreements as
to confidentiality, the Company shall make available to the
holders of Registrable Securities and their counsel its
documents and personnel for due diligence purposes. Except as
otherwise provided herein, fees and disbursements of counsel
and accountants for the selling security holders shall be
borne by the respective selling security holders.
(h) The rights to cause the Company to register all or any portion of
Registrable Securities pursuant to this Section l.4 may be assigned by
Purchaser to a transferee or assignee. Within a reasonable time after
such transfer, the Purchaser shall notify the Company of the name and
address of such transferee or assignee, and the securities with
respect to which such registration rights are being assigned. Such
assignment shall be effective only if, immediately following such
transfer, the further disposition of such securities by the transferee
or assignee is restricted under the Act. Any transferee asserting
registration rights hereunder shall be bound by the applicable
provisions of this Agreement.
(i) The Company shall not agree to allow the holders of any securities of
the Company to include any of their securities in any registration
statement filed by the Company pursuant to Subsection (b) unless such
inclusion will not reduce the amount of the Registrable Securities
included therein.
Section 1.5 Company Standoff. Except in a business combination, or under
existing employee stock incentive or purchase plans, the Company shall not for
its own account effect any public sale or distribution of any securities similar
to the Registrable Securities or any securities exercisable for or convertible
or changeable into the Registrable Securities during the thirty (30) days prior
to, and during the sixty (60) days immediately following, the effective date of
any registration statement filed pursuant to Section 1.4(b) hereof; provided,
however, that the Company may effect such public sale or distribution during the
thirty (30) days immediately following the effective date of such registration
statement if such sale or distribution of securities is at a price equal to or
greater than 130% of the last trade price of the Company's Common Stock on the
Closing Date.
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Section 2.1 Representations and Warranties of the Purchaser. The Purchaser
makes the following representations and warranties to the Company:
(a) Accredited Investor. The Purchaser is an "accredited investor", as
such term is defined in Rule 501(a) of Regulation D, promulgated under
the Act.
(b) Speculative Investment. The Purchaser is aware that an investment in
the Shares is highly speculative and subject to substantial risks. The
Purchaser is capable of bearing the high degree of economic risk and
the burden of this venture, including, but not limited to, the
possibility of complete loss of the Purchaser's investment in the
Shares and underlying Common Stock which make liquidation of this
investment impossible for the indefinite future.
(c) Disposition. The Purchaser understands that neither the Shares nor the
underlying Common Stock have been registered under the Act. The Shares
are being acquired by reason of a specific exemption under the Act as
well as under certain state statutes for transactions by an issuer not
involving any public offering and that any disposition of the Shares
may, under certain circumstances, be inconsistent with this exemption
and may make the Purchaser an "underwriter" within the meaning of the
Act. The Purchaser acknowledges that the Shares purchased must be held
and may not be sold, transferred, or otherwise disposed of for value
unless they are subsequently registered under the Act, sold pursuant
to Rule 144 of the Act, or an exemption from registration under the
Act is available.
(d) Privately Offered. The offer to acquire the Shares was directly
communicated to the Purchaser in such manner that the Purchaser was
able to ask questions of and receive answers concerning the terms and
conditions of this transaction. At no time was the Purchaser presented
with or solicited by or through any leaflet, public promotional
meeting, television advertisement, or any other form of general
advertising.
(e) Purchase for Investment. The Shares are being acquired solely for the
Purchaser's own account, for investment, and are not being purchased
with view to the resale, distribution, subdivision or
fractionalization thereof without a valid registration with applicable
governmental authorities.
Section 2.2 Representations and Warranties of the Company. The Company
hereby makes the following representations and warranties to the Purchaser:
(a) Organization and Qualification. The Company is a corporation duly
incorporated and existing in good standing under the laws of the State
of New York and has the requisite corporate power to own its
properties and to carry on its business as now being conducted. The
Company does not have any subsidiaries. The Company is duly qualified
as a foreign corporation to do business and is in good standing in
every jurisdiction in which the nature of the business conducted or
property owned by it makes such qualification necessary other than
those in which the failure so to qualify would not have a Material
Adverse Effect. "Material Adverse Effect", for purposes of this
Subscription Agreement (as it may be amended from time to time, the
"Agreement"), means any adverse effect on the business, operations,
properties, prospects, or financial condition of the entity with
respect to which such term is used and which is material to such
entity and other entities controlled by such entity taken as a whole.
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<PAGE>
(b) Authorization; Enforcement. (i) The Company has the requisite
corporate power and authority to enter into and perform this Agreement
and to issue the Shares and Registrable Securities in accordance with
the terms hereof, (ii) the execution and delivery of this Agreement by
the Company and the consummation by it of the transactions
contemplated hereby have been duly authorized by all necessary
corporate action, and no further consent or authorization of the
Company or its Board of Directors or stockholders is required, (iii)
this Agreement has been duly executed and delivered by the Company,
(iv) this Agreement constitutes a valid and binding obligation of the
Company enforceable against the Company in accordance with its terms
(except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation or
similar laws relating to, or affecting generally the enforcement of,
creditors' rights and remedies or by other equitable principles of
general application) and (v) prior to the Closing Date, any necessary
Certificate of Amendment to the Company's the Company's Certificate of
Incorporation as in effect on the date hereof (the "Charter")
authorizing Company to issue all of the Shares and Registerable
Securities, in accordance with Schedule I, will have been filed with
the New York Department of State and will be in full force and effect,
enforceable against the Company in accordance with the terms of such
amended Charter.
(c) Authorized Capital; Rights or Commitments to Stock. The authorized
capital stock of the Company consists of 30,000,000 shares of Common
Stock, and 5,000,000 shares of Preferred Stock; there are 13,680,627
shares of Common Stock issued and outstanding and there are no shares
of such Preferred Stock issued and outstanding; and, upon issuance of
the Shares in accordance with the terms hereof, there will be
13,680,627 shares of Common Stock and 105 shares of 8% Series B
Preferred Stock issued and outstanding.
All of the outstanding shares of the Company's Common Stock have been
validly issued and are fully paid and nonassessable. Except as set
forth in Exhibit A, attached hereto and incorporated herein by
reference, or as described in the SEC Documents, no shares of Common
Stock are entitled to preemptive rights or registration rights and
there are no outstanding options, warrants, scrip, rights to subscribe
to, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into, any shares of capital stock of
the Company, or contracts, commitments, understandings, or
arrangements by which the Company is or may become bound to issue
additional shares of capital stock of the Company or options,
warrants, scrip, rights to subscribe to, or commitments to purchase or
acquire, any shares, or securities or rights convertible into shares,
of capital stock of the Company. The Company has furnished or made
available to the Purchaser true and correct copies of the Company's
Charter, and the Company's By-Laws, as in effect on the date hereof
(the "By-Laws").
(d) Issuance of Shares. The issuance of the Shares has been duly
authorized and, when paid for and issued in accordance with the terms
hereof, the shall be validly issued, fully paid and non-assessable and
entitled to the rights and preferences set forth in Schedule I hereto.
The Common Stock issuable upon conversion of the Shares will be duly
authorized and reserved for issuance and, upon conversion, will be
validly issued, fully paid and non-assessable and the holders shall be
entitled to all rights and preferences accorded to a holder of Common
Stock.
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(e) No Conflicts. The execution, delivery and performance of this
Agreement by the Company and the consummation by the Company of the
transactions contemplated hereby do not and will not (i) result in a
violation of the Company's Charter or By-Laws or (ii) conflict with,
or constitute a default (or an event which with notice or lapse of
time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, any
agreement, indenture or instrument to which the Company is a party, or
result in a violation of any federal, state, local or foreign law,
rule, regulation, order, judgment or decree (including Federal and
state securities laws and regulations) applicable to the Company or by
which any property or assets of the Company or any of its subsidiaries
is bound or affected (except for such conflicts, defaults,
terminations, amendments, accelerations, cancellations and violations
as would not, individually or in the aggregate, have a Material
Adverse Effect); provided that, for purposes of such representation as
to Federal, state, local or foreign law, rule or regulation, no
representation is made herein with respect to any of the same
applicable solely to the Purchaser and not to the Company. The
business of the Company is not being conducted in violation of any
law, ordinance or regulations of any governmental entity, except for
violations which either singly or in the aggregate do not and will not
have a Material Adverse Effect. The Company is not required under
Federal, state or local law, rule or regulation in the United States
to obtain any consent, authorization or order of, or make any filing
(other than any filing of a vote establishing a class or series of
stock with the New York Department of State) or registration with, any
court or governmental agency in order for it to execute, deliver or
perform any of its obligations under this Agreement or issue and sell
the Shares in accordance with the terms hereof (other than any SEC,
NASD or state securities filings which may be required to be made by
the Company subsequent to the Closing, and any registration statement
which may be filed pursuant hereto); provided that, for purposes of
the representation made in this sentence, the Company is assuming and
relying upon the accuracy of the relevant representations and
agreements of the Purchaser herein.
(f) SEC Documents, Financial Statements. The Common Stock of the Company
is registered pursuant to Section 12(g) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act") and, except as set forth in
Exhibit A, the Company has filed on a timely basis all reports,
schedules, forms, statements and other documents required to be filed
by it with the SEC pursuant to the reporting requirements of the
Exchange Act, including material filed pursuant to Section 13(a) or
15(d), in addition to one or more registration statements and
amendments thereto heretofore filed by the Company with the SEC under
the Act (all of the foregoing including filings incorporated by
reference therein being referred to herein as the "SEC Documents").
The Company directly or through its agent has delivered to the
Purchaser true and complete copies of the SEC Documents. The Company
has not provided to the Purchaser any information which, according to
applicable law, rule or regulation, should have been disclosed
publicly by the Company but which has not been so disclosed, other
than with respect to the transactions contemplated by this Agreement.
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Except as set forth in Exhibit A, as of their respective dates the SEC
Documents complied in all material respects with the requirements of
the Act or the Exchange Act as the case may be and the rules and
regulations of the SEC promulgated thereunder and other federal, state
and local laws, rules and regulations applicable to such SEC
Documents, and none of the SEC Documents contained any untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they
were made, not misleading. Except as set forth in Exhibit A, the
financial statements of the Company included in the SEC Documents
comply as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC or
other applicable rules and regulations with respect thereto. Such
financial statements have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis during
the periods involved (except (i) as may be otherwise indicated in such
financial statements or the notes thereto or (ii) in the case of
unaudited interim statements, to the extent they may not include
footnotes or may be condensed or summary statements) and fairly
present in all material respects the financial position of the Company
as of the dates thereof and the results of operations and cash flows
for the periods then ended (subject, in the case of unaudited
statements, to normal year-end audit adjustments).
(g) No Material Adverse change. Since the date through which the most
recent quarterly report of the Company on Form 10-Q has been prepared
and filed with the SEC, a copy of which is included in the SEC
Documents, no Material Adverse Effect has occurred or exists with
respect to the Company.
(h) No Undisclosed Liabilities. The Company has no material liabilities or
obligations not disclosed in the SEC Documents, other than those
incurred in the ordinary course of the Company's business since the
date of the most recently filed SEC Documents which, individually or
in the aggregate, do not or would not have a Material Adverse Effect
on the Company.
(i) No Undisclosed Events or Circumstances. No event or circumstance has
occurred or exists with respect to the Company or any of its
subsidiaries or their respective businesses, properties, prospects,
operations or financial condition which, under applicable law, rule or
regulation, requires public disclosure or announcement by the Company
but which has not been so publicly announced or disclosed.
(j) No General Solicitation. Neither the Company nor any of its affiliates
or, to the best of the Company's knowledge, any person acting on its
or their behalf, has engaged in any form of general solicitation or
general advertising (within the meaning of Regulation D under the Act)
in connection with the offer or sale of the Shares.
(k) No Integrated Offering. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf has, directly
or indirectly, made any offers or sales of any security or solicited
any offers to buy any security, under circumstances that would require
registration of the Shares under the Act.
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Section 3.1 Securities Compliance. The Company shall notify the SEC and the
NASD, in accordance with their respective requirements, if any, of the
transactions contemplated by this Agreement, and shall take all other necessary
action and proceedings as may be required and permitted by applicable law, rule
and regulation, for the legal and valid issuance of the Shares, and the Common
Stock issuable upon conversion thereof, to the Purchaser.
Section 3.2 Registration and Listing. Until at least two (2) years after
all Shares have been converted into Registrable Securities, the Company will
cause its Common Stock to continue to be registered under Sections 12(b) or
12(g) of the Exchange Act, will comply in all respects with its reporting and
filing obligations under such Exchange Act, will comply with all requirements
related to any registration statement filed pursuant to this Agreement and will
not take any action or file any document (whether or not permitted by the Act or
the Exchange Act or the rules thereunder) to terminate or suspend such
registration or to terminate or suspend its reporting and filing obligations
under said Acts, except as permitted herein. Until at least two (2) years after
all Shares have been converted into Common Stock, the Company will take all
action within its power to continue the listing or trading of its Common Stock
on the Principal Market (as defined in Section 7.10 hereof) and will comply in
all respects with the Company's reporting, filing and other obligations under
the bylaws or rules of the Principal Market authority. The covenants set forth
in this Section 3.2 shall not be deemed to prohibit a merger, sale of all assets
or other corporate reorganization if the entity surviving or succeeding to the
Company is bound by this Agreement with respect to its securities issued in
exchange for or in replacement of the Shares or Common Stock or the
consideration received for or in replacement of the Shares or Common Stock is
cash.
Section 3.3 Right of First Refusal and Most-Favored-Nation Clause. If at
any time before the end of the thirty (30) day period following the effective
date of a registration statement filed pursuant to Section 1.4 hereof the
Company proposes to issue Common Stock or securities convertible into or
exercisable for Common Stock or other convertible securities, pursuant to an
offering exempt from registration under the Act, the Company shall provide to
Purchaser reasonable advance notice of all the terms of such proposed issuance.
The Purchaser shall have the right to purchase or refuse to purchase all or any
part of such securities proposed to be issued in such offering, and shall have
at least seventy two (72) hours after receipt of such notice to review the terms
of the proposed issuance.
If the Company issues Common Stock or securities convertible into or
exercisable for Common Stock or other convertible securities at a time when any
of the Shares remain outstanding at an effective price per share of Common Stock
which is lower than the conversion price of the Shares at that time, then the
Company shall issue to each holder upon conversion an additional number of
shares of Common Stock necessary to reduce the effective conversion price to
such lower issue price. This Section shall not be applicable to issuances of
Common Stock, or options granted at market price, pursuant to any
shareholder-approved option plan covering not more than 10% of the Company's
outstanding stock.
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Section 4.1 Conditions Precedent to the Obligation of the Company to Sell
the Shares. The obligation hereunder of the Company to issue and/or sell the
Shares to the Purchaser is subject to the satisfaction, at or before the
Closing, of each of the conditions set forth below. These conditions may be
waived by the Company at any time in its sole discretion.
(a) Accuracy of the Purchaser's Representations and Warranties. The
representations and warranties of the Purchaser shall be true and
correct in all material respects as of the date when made and as of
the Closing Date as though made at that time (except for
representations and warranties that speak as of a particular date).
(b) Performance by the Purchaser. The Purchaser shall have performed all
agreements and satisfied all conditions required to be performed or
satisfied by the Purchaser at or prior to the Closing.
(c) No Injunction. No statute, rule, regulation, executive order, decree,
ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent
jurisdiction which prohibits the consummation of any of the
transactions contemplated by this Agreement.
(d) Legal action. No legal action, suit or proceeding shall be pending or
threatened which seeks to restrain or prohibit the transactions
contemplated by this Agreement.
Section 4.2 Conditions Precedent to the Obligation of the Purchaser to
Purchase the Shares. The obligation hereunder of the Purchaser to acquire and
pay for the Shares is subject to the satisfaction, at or before the Closing, of
each of the conditions set forth below. These conditions may be waived by the
Purchaser at any time in its sole discretion.
(a) Accuracy of the Company's Representations and Warranties. The
representations and warranties of the Company shall be true and
correct in all material respects as of the date when made and as of
the Closing Date as though made at that time (except for
representations and warranties that speak as of a particular date).
(b) Performance by the Company. The Company shall have performed all
agreements and satisfied all conditions required to be performed or
satisfied by the Company at or prior to the Closing.
(c) Suspension. From the date hereof to the Closing Date, trading in the
Company's Common Stock shall not have been suspended by the SEC or the
Principal Market (except for any suspension of trading of limited
duration agreed to between the Company and the Principal Market solely
to permit dissemination of material information regarding the
Company), and trading in securities generally as reported by the
Principal Market shall not have been suspended, or limited or minimum
prices shall not have been established on securities whose trades are
reported by the Principal Market.
(d) No Injunction. No statute, rule, regulation, executive order, decree,
ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent
jurisdiction which prohibits the consummation of any of the
transactions contemplated by this Agreement.
(e) Opinion of Counsel, Etc. The Purchaser shall have received before or
at the Closing an opinion of counsel to the Company (covering, without
limitation, such of the matters set forth in Section 2.2(a) through
(e)), as are in form and substance reasonably satisfactory to the
Purchaser and its counsel, and such other certificates and documents
as the Purchaser or its counsel shall reasonably require incident to
the Closing.
13
<PAGE>
Section 5.1 Legend on Stock. Each certificate representing the Shares and,
if necessary, Common Stock issued upon conversion thereof, shall be stamped or
otherwise imprinted with a legend substantially in the following form:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND
ANY APPLICABLE STATE SECURITIES LAW OR AN APPLICABLE EXEMPTION FROM SUCH
REGISTRATION REQUIREMENTS.
The Company agrees to reissue certificates representing the Shares or, if
applicable, the Common Stock issued upon conversion thereof without the legend
set forth above at such time as (a) the holder thereof is permitted to dispose
of such Shares (or securities issued upon conversion thereof) pursuant to Rule
144(k) under the Act, (b) the securities are sold to a purchaser or purchasers
who (in the opinion of counsel to such holders, in form and substance reasonably
satisfactory to the Company and its counsel) are able to dispose of such
securities publicly without registration under the Act, or (c) such securities
are registered under the Act.
Section 6.1 Termination by Mutual Consent. This Agreement may be terminated
at any time prior to the Closing by the mutual written consent of the Company
and the Purchaser.
Section 6.2 Other Termination. This Agreement may be terminated by action
of the Board of Directors or other governing body of the Purchaser or the
Company at any time if the Closing shall not have been consummated by the fifth
(5th) business day following the date of this Agreement, provided that the party
seeking to terminate the Agreement is not in breach of the Agreement.
Section 6.3 Automatic Termination. This Agreement shall automatically
terminate without any further action of either party hereto if the Closing shall
not have occurred by the seventh (7th) business day following the date of this
Agreement, provided, however, that any such termination shall not terminate the
liability of any party which is then in breach of the Agreement.
Section 7.1 Fees and Expenses. Except as otherwise set forth in Section 1.4
hereof, each party shall pay the fees and expenses of its advisers, counsel,
accountants and other experts, if any, and all other expenses incurred by such
party incident to the negotiation, preparation, execution, delivery and
performance of this Agreement. The Company shall pay all stamp and other taxes
and duties levied in connection with the issuance of the Shares and Common Stock
pursuant hereto.
Section 7.2 Specific Enforcement, Consent to Jurisdiction.
(a) The Company and the Purchaser acknowledge and agree that irreparable
damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms
or were otherwise breached. It is accordingly agreed that the parties
shall be entitled to an injunction or injunctions to prevent or cure
breaches of the provisions of this Agreement and to enforce
specifically the terms and provisions hereof, this being in addition
to any other remedy to which either of them may be entitled by law or
equity.
14
<PAGE>
(b) The Company and the Purchaser each (i) hereby irrevocably submits to
the jurisdiction of the United States District Court and other courts
of the United States sitting in Texas for the purposes of any suit,
action or proceeding arising out of or relating to this Agreement and
(ii) hereby waives, and agrees not to assert in any such suit, action
or proceeding, any claim that it is not personally subject to the
jurisdiction of such court, that the suit, action or proceeding is
brought in an inconvenient forum or that the venue of the suit, action
or proceeding is improper. The Company and the Purchaser each consents
to process being served in any such suit, action or proceeding by
mailing a copy thereof to such party at the address in effect for
notices to it under this Agreement and agrees that such service shall
constitute good and sufficient service of process and notice thereof.
Nothing in this paragraph shall affect or limit any right to serve
process in any other manner permitted by law.
Section 7.3 Entire Agreement: Amendment. This Agreement contains the entire
understanding of the parties with respect to the matters covered hereby and,
except as specifically set forth herein, neither the Company nor the Purchaser
makes any representation, warranty, covenant or undertaking with respect to such
matters. No provision of this Agreement may be waived or amended other than by a
written instrument signed by the party against whom enforcement of any such
amendment or waiver is sought.
Section 7.4 Notices. Any notice or other communication required or
permitted to be given hereunder shall be in writing and shall be effective (a)
upon hand delivery or delivery by telex (with correct answer back received),
telecopy or facsimile at the address or number designated below (if delivered on
a business day during normal business hours where such notice is to be
received), or the first business day following such delivery (if delivered other
than on a business day during normal business hours where such notice is to be
received) or (b) on the second (2nd) business day following the date of mailing
by express courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for
such communications shall be:
to the Company: Stan Cipkowski, President
America Bio Medica Corporation
102 Simons Road
Ancramdale, New York 12503
to the Purchaser: At the address set forth at the foot of this Agreement
or as specified in writing by Purchaser.
Any party hereto may from time to time change its address for notices by
giving at least ten (10) days' written notice of such changed address to the
other party hereto.
Section 7.5 Waivers. No waiver by either party of any default with respect
to any provision, condition or requirement of this Agreement shall be deemed to
be a continuing waiver in the future or a waiver of any other provision,
condition or requirement hereof, nor shall any delay or omission of either party
to exercise any right hereunder in any manner impair the exercise of any such
right accruing to it thereafter.
15
<PAGE>
Section 7.6 Headings. The headings herein are for convenience only, do not
constitute a part of this Agreement and shall not be deemed to limit or affect
any of the provisions hereof.
Section 7.7 Governing Law. This Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the present state
of incorporation of the Company without regard to such state's principles of
conflict of laws.
Section 7.8 Survival. The representations and warranties of the Company and
the Purchaser contained in herein and the agreements and covenants set forth in
Sections 1.1 through 1.5, 3.1 through 3.4 and 7.1 through 7.15 shall survive the
Closing.
Section 7.9 Publicity. The Company agrees that it will not disclose, and
will not include in any public announcement, the name of the Purchaser without
its consent, unless and until such disclosure is required by law or applicable
regulation, and then only to the extent of such requirement.
Section 7.10 Principal Market. The term "Principal Market" refers to the
NASD Bulletin Board, NASDAQ Small Cap Market, or other principal market or
national securities exchange, on which the Common Stock of the Company is
principally traded.
Section 7.11 Acceptance. Execution and delivery of this Agreement shall
constitute an offer to purchase the Shares, which offer, unless previously
revoked by the Purchaser, may be accepted or rejected by the Company, in its
sole discretion for any cause or for no cause and without liability to the
Purchaser. The Company shall indicate acceptance of this Agreement by signing as
indicated on the signature page hereof.
Section 7.12 Binding Agreement. Upon acceptance of this Agreement by the
Company, the Purchaser agrees that he may not cancel, terminate or revoke any
agreement of the Purchaser made hereunder, and that this Agreement shall survive
the death or disability of the Purchaser and shall be binding upon heirs,
successors, assigns, executors, administrators, guardians, conservators or
personal representatives of the Purchaser.
Section 7.13 Incorporation by Reference. All information set forth on the
signature page is incorporated as integral terms of this Agreement.
Section 7.14 Counterparts. This Agreement may be signed in multiple
counterparts, which counterparts shall constitute one and the same original
instrument.
THIS SPACE HAS BEEN LEFT BLANK INTENTIONALLY.
THE SIGNATURE PAGE FOLLOWS.
16
<PAGE>
IN WITNESS WHEREOF, the Purchaser has executed this Agreement on the date
set forth below.
For the purchase price of $10,000 per Share, the Purchaser tenders herewith
the full purchase price of:
The exact name(s) (Including correct, legible spelling) and the information
under which title to the Shares will be taken is as follows (Please print or
type):
Address of Purchaser:
Social Security or IRS Employer Identification Number(s):
Signature of Purchaser:
Name of Purchaser:
By: Dated:
Name:
Title:
Accepted by:
AMERICA BIO MEDICA CORPORATION, a New York corporation
By:
Print Name:
Title:
17
<PAGE>
SCHEDULE I
AMERICAN BIO MEDICA CORPORATION
RESOLUTION ESTABLISHING RIGHTS AND PREFERENCES
FOR 8% SERIES B CONVERTIBLE PREFERRED STOCK
RESOLVED, that there shall be a series of shares of the Corporation
designated "8% Series B Convertible Preferred Stock"; that the number of
shares of such series shall be 1,000, that the Corporation issue such
shares, and that the rights and preferences of such series (the "8%
Preferred") and the limitations or restrictions thereon, shall be as set
forth herein.
The following terms and conditions shall be adopted and incorporated by
reference into the foregoing resolutions as if fully set forth therein:
1. Dividends.
(a) The holders of the 8% Preferred shall be entitled to receive out of
any assets legally available therefor cumulative dividends at the rate
of $800 per share per annum, payable quarterly in arrears on March 31,
June 30, September 30 and December 31 of each year, in preference and
priority to any payment of any dividend on the Common Stock or any
other class or series of stock of the Corporation. Such dividends
shall accrue on any given share from the day of original issuance of
such share and shall accrue from day to day whether or not earned or
declared. If at any time dividends on the outstanding 8% Preferred at
the rate set forth above shall not have been paid or declared and set
apart for payment with respect to all preceding periods, the amount of
the deficiency shall be fully paid or declared and set apart for
payment, but without interest, before any distribution, whether by way
of dividend or otherwise, shall be declared or paid upon or set apart
for the shares of any other class or series of stock of the
Corporation.
(b) All dividends on the 8% Preferred shall be paid in cash. If the
Corporation shall have received the prior written consent of all
holders of the 8% Preferred at least ten (10) days before the record
date for a dividend, which consent may be arbitrarily withheld, the
dividend may be payable in shares of 8% Preferred valued at $10,000
per share; provided the Common Stock issuable upon conversion of such
8% Preferred has been registered for resale under the Securities Act
of 1933, as amended (the "Act"), and the registration statement
including a current prospectus with respect thereto remains in effect
at the date of delivery of such shares.
<PAGE>
2. Liquidation Preference; Redemption.
(a) In the event of any liquidation, dissolution or winding up of the
Corporation, either voluntary or involuntary, the holders of the 8%
Preferred shall be entitled to receive, prior and in preference to any
distribution of any assets of the Corporation to the holders of any
other class or series of shares the amount of $10,000 per share plus
any accrued but unpaid dividends (the "Liquidation Preference").
(b) A consolidation or merger of the Corporation with or into any other
corporation or corporations, or a sale of all or substantially all of
the assets of the Corporation, shall, at the option of the holders of
the 8% Preferred, be deemed a liquidation, dissolution or winding up
within the meaning of this Section 2 if the shares of stock of the
Corporation outstanding immediately prior to such transaction
represent immediately after such transaction less than a majority of
the voting power of the surviving corporation (or of the acquirer of
the Corporation's assets in the case of a sale of assets). Such option
may be exercised by the vote or written consent of holders of a
majority of the 8% Preferred at any time within thirty (30) days after
written notice (which shall be given promptly) of the essential terms
of such transaction shall have been given to the holders of the 8%
Preferred in the manner provided by law for the giving of notice of
meetings of shareholders.
(c) The Corporation may, at its option, cause all outstanding shares of
the 8% Preferred to be redeemed after the date on which a registration
statement under the Act ("Registration Statement") has been declared
effective (the "effective date"), provided the Corporation has given
notice of its intention to redeem to the holders of the 8% Preferred
at least five (5) days prior to the redemption date. On the redemption
date, the Corporation shall pay such holders by cashier's check or
wire transfer in immediately available funds the amount of $14,000 per
share if the redemption date is on or before the ninetieth (90th) day
after the effective date, plus any accrued but unpaid dividends.
Promptly thereafter, the holders shall surrender the certificate or
certificates representing the 8% Preferred, duly endorsed, at the
office of the Corporation or of any transfer agent for such shares, or
at such other place designated by the Corporation.
3. 8% Preferred - Forced Conversion.
(a) The Corporation may, at its option, cause all outstanding shares of
the 8% Preferred to be converted into Common Stock at any time
beginning one (1) year after the date of issuance, on at least twenty
(20) days' advance notice, at a conversion price determined as set
forth in Section 4 hereof (the "Conversion Price") as of the date
specified in such notice (the "Conversion Date") and otherwise on the
terms set forth in Section 4 hereof; provided, that the Corporation
may not exercise such right of conversion unless (i) the Closing Price
(last trade price) of the Common Stock as reported by the Principal
Market (as defined in Section 3(d)(iv) hereof) for the twenty (20)
consecutive trading days prior to the date the Conversion Notice is
mailed has not on any day been less than one hundred forty percent
(140%) of the last trade price of the Company's Common Stock on the
day of Closing (subject to adjustment for stock dividends, stock
splits and reverse stock splits), and (ii) the shares issuable upon
conversion of the 8% Preferred are registered for resale by an
effective Registration Statement which became effective not more than
one hundred twenty (120) days after the date of issuance of the 8%
Preferred, and a current prospectus meeting the requirements of
Section 10 of the Act is available for delivery at the Conversion
Date.
<PAGE>
(b) At least twenty (20) days prior to the Conversion Date, written notice
(the "Conversion Notice") shall be mailed, first class postage
prepaid, by the Corporation to each holder of record of the 8%
Preferred, at the address last shown on the records of the Corporation
for such holder, notifying such holder of the conversion which is to
be effected, specifying the Conversion Date and calling upon each such
holder to surrender to the Corporation, in the manner and at the place
designated, a certificate or certificates representing the number of
shares of 8% Preferred held by such holder. Subject to the provisions
of the following subsection (c), on or after the Conversion Date, each
holder of 8% Preferred shall surrender to the Corporation the
certificate or certificates representing the shares of 8% Preferred
owned by such holder as of the Conversion Date, in the manner and at
the place designated in the Conversion Notice, and thereupon the
shares issuable upon such conversion shall be delivered as provided in
Section 4(b) hereof.
(c) If, on the Conversion Date, the registration condition specified in
clause (ii) of subsection (a) shall not be satisfied, then no shares
shall be converted and the Conversion Notice shall be deemed to be
withdrawn. In such event, any certificates for 8% Preferred which have
been surrendered for conversion shall be returned to the persons
surrendering the same; provided, however, that if a holder has
received shares of Common Stock upon conversion of 8% Preferred after
the Conversion Notice was given but before the Conversion Date, such
holder may elect either to retain such Common Stock or rescind such
conversion by tendering such shares of Common Stock to the
Corporation.
(d) On the second anniversary of the issuance of the 8% Preferred, all
then outstanding shares of 8% Preferred shall be automatically
converted into Common Stock at the Conversion Price and otherwise
pursuant to the applicable provisions set forth in Section 4 hereof.
4. 8% Preferred - Optional Conversion. The holders of the 8% Preferred shall
have optional conversion rights as follows:
(a) Right to Convert. Subject to the succeeding sentence, Shares of 8%
Preferred shall be convertible, at the option of the holder thereof,
into such number of fully paid and nonassessable shares of Common
Stock as is determined by dividing (A) the Liquidation Preference of
the 8% Preferred determined pursuant to Section 2 hereof on the date
the notice of conversion is given, by (B) the Conversion Price
determined as hereinafter provided in effect on the applicable
conversion date. No holder of Shares, except for ProFutures Special
Equities Fund, L.P. and Deere Park Capital Management, Inc. (nominee),
shall be entitled to convert Shares, and enter into any short sale or
long sale transaction with respect to the Company's Common Stock,
directly or indirectly, at any time before the period ending sixty
(60) days after the effective date of any registration statement filed
pursuant to Section 1.4(b) hereof (the "Open Selling Date"). The
Corporation shall prohibit any other party purchasing restricted
convertible securities of the Corporation at any time during the
period beginning thirty (30) days prior to the Closing Date and ending
on the Open Selling Date from converting any of such securities during
such period.
<PAGE>
(b) Mechanics of Conversion. To convert shares of 8% Preferred into shares
of Common Stock, the holder shall give written notice to the
Corporation (which notice may be given by telefacsimile transmission)
that such holder elects to convert the shares and shall state therein
date of the conversion, the number of shares to be converted and the
name or names in which such holder wishes the certificate or
certificates for shares of Common Stock to be issued. Promptly
thereafter, the holder shall surrender the certificate or certificates
representing the shares of 8% Preferred to be converted, duly
endorsed, at the office of the Corporation or of any transfer agent
for such shares, or at such other place designated by the Corporation;
provided, that the holder shall not be required to deliver all
certificates representing such shares if the holder is waiting to
receive all or part of the certificates from the Corporation. The
Corporation shall, immediately upon receipt of such notice, issue and
deliver to or upon the order of such holder, against delivery of the
certificates representing the shares which have been converted, a
certificate or certificates for the number of shares of Common Stock
to which such holder shall be entitled and such certificate or
certificates shall not bear any restrictive legend; provided (A) the
Common Stock evidenced thereby are sold pursuant to an effective
registration statement under the Act, (B) the holder provides the
Corporation with an opinion of counsel reasonably acceptable to the
Corporation to the effect that a public sale of such shares may be
made without registration under the Act, or (C) such holder provides
the Corporation with reasonable assurance that such shares can be sold
free of any limitations imposed by Rule 144, promulgated under the
Act. The Corporation shall cause such issuance to be effected as soon
as possible days and shall cause the transmission of the certificates
by messenger or overnight delivery service to reach the address
designated by such holder within three (3) business days after the
receipt of such notice. Absent any circumstances substantially beyond
the control of the Corporation, the Corporation shall immediately pay
such holder in cash or by wire transfer in immediately available funds
$500 per day as liquidated damages for each day such shares have not
been delivered to the holder after the end of such three (3) business
day period. The notice of conversion may be given by a holder via
telefacsimile at any time during the day up to 5:00 p.m. New York, New
York time and such conversion shall be deemed to have been made on the
date that such notice is transmitted to the Corporation. The person or
persons entitled to receive the shares of Common Stock issuable upon
such conversion shall be treated for all purposes as the record holder
or holders of such shares of Common Stock at the close of business on
such date.
(c) Conversion Required. The Corporation acknowledges and understands that
a delay in the issuance of the Common Stock pursuant to the provisions
hereof below could result in economic loss to the holders of the 8%
Preferred. As compensation to any holder when the Corporation has
failed with respect to such holder to comply with the Corporation's
obligations under Subsection (a) above, and not as a penalty, the
Corporation shall pay, in addition to any amounts due under subsection
4(b) above, to such holder liquidated damages an amount equal to two
percent (2%) of the total Purchase Price of 8% Preferred and any
Common Stock then held by the holder for the first thirty (30) day
period after the date on which the Common Stock should have been
issued by the Corporation (i.e., the end of the three (3) business day
period described in Subsection (b)), plus amount equal to two percent
(2%) of the total Purchase Price of 8% Preferred and any Common Stock
then held by the holder for each subsequent thirty (30) day period
thereafter. Such amounts shall be pro-rated daily and paid to the
holder by cashier's check or wire transfer in immediately available
funds to such account as shall be designated in writing by the holder.
<PAGE>
(d) Determination of Conversion Price.
(i) Subject to adjustment hereunder, the "Conversion Price" for
purposes of hereof shall be equal to seventy five percent (75%)
(the "Conversion Percentage") of the average closing bid price of
the Common Stock as reported by the Principal Market during the
five (5) consecutive trading days preceding the conversion date
(but not including such date); provided, however, that in no
event may the Conversion Price be more than three dollars and
fifty cents ($3.50) per share (the "Maximum Conversion Price").
If the registration statement covering all Common Stock
registrable upon conversion of the 8% Preferred is not effective
by the one hundred twentieth (120th) day after the date of
issuance of the 8% Preferred, the Conversion Percentage shall be
decreased by two percent (2%) (pro-rated daily) beginning on the
one hundred twenty first (121st) day, and shall be decreased by
an additional two percent (2%) (pro-rated daily) for each thirty
(30) day period thereafter until such registration statement
becomes effective. (For example, if the registration statement
becomes effective on the 151st day after the date of issuance,
the Conversion Percentage will be 71% [75% minus a total of 4%].)
(ii) The "closing bid price" of the Common Stock on a trading day
shall be the closing bid price of the Common Stock on the
Principal Market. The term "trading day" means a day on which
trading is reported on the Principal Market on which prices of
the Common Stock are reported.
(iii)If, during the period of consecutive trading days provided for
above, the Corporation shall declare or pay any dividend on the
Common Stock payable in Common Stock or in rights to acquire
Common Stock, or shall effect a stock split or reverse stock
split, or a combination, consolidation or reclassification of the
Common Stock, the Conversion Price and Maximum Conversion Price
shall be proportionately decreased or increased, as appropriate,
to give effect to such event.
(iv) The term "Principal Market" refers to the NASD Bulletin Board,
NASDAQ Small Cap Market, or other principal market or national
securities exchange, on which the Common Stock of the Company is
principally traded.
(e) Distributions. If the Corporation shall at any time or from time to
time make or issue, or fix a record date for the determination of
holders of Common Stock entitled to receive, a dividend or other
distribution payable in securities of the Corporation or any of its
subsidiaries other than additional shares of Common Stock, then in
each such event provision shall be made so that the holders of 8%
Preferred shall receive, upon the conversion thereof, the securities
of the Corporation which they would have received had they been the
owners on the date of such event of the number of shares of Common
Stock issuable to them upon conversion.
<PAGE>
(f) Certificates as to Adjustments. Upon the occurrence of any adjustment
or readjustment of the Conversion Price and the Maximum Conversion
Price pursuant to this Section 4, the Corporation shall at its expense
promptly compute such adjustment or readjustment in accordance with
the terms hereof and cause the independent public accountants
regularly employed to audit the financial statements of the
Corporation to verify such computation and prepare and furnish to each
holder of 8% Preferred a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation shall, upon the
written request at any time of any holder of 8% Preferred, furnish or
cause to be furnished to such holder a like certificate prepared by
the Corporation setting forth (i) such adjustments and readjustments,
and (ii) the number of other securities and the amount, if any, of
other property which at the time would be received upon the conversion
of 8% Preferred with respect to each share of Common Stock received
upon such conversion.
(g) Notice of Record Date. In the event of any taking by the Corporation
of a record of the holders of any class of securities for the purpose
of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any
security or right convertible into or entitling the holder thereof to
receive additional shares of Common Stock, or any right to subscribe
for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, the
Corporation shall mail to each holder of 8% Preferred at least ten
(10) days prior to the date specified therein, a notice specifying the
date on which any such record is to be taken for the purpose of such
dividend, distribution, security or right and the amount and character
of such dividend, distribution, security or right.
(h) Issue Taxes. The Corporation shall pay any and all issue and other
taxes, excluding any income, franchise or similar taxes, that may be
payable in respect of any issue or delivery of shares of Common Stock
on conversion of shares of 8% Preferred pursuant hereto; provided,
however, that the Corporation shall not be obligated to pay any
transfer taxes resulting from any transfer requested by any holder in
connection with any such conversion.
(i) Reservation of Stock Issuable Upon Conversion. The Corporation shall
at all times reserve and keep available out of its authorized but
unissued shares of Common Stock, solely for the purpose of effecting
the conversion of the shares of the 8% Preferred, such number of its
shares of Common Stock as shall from time to time be sufficient to
effect the conversion of all outstanding shares of the 8% Preferred,
and if at any time the number of authorized but unissued shares of
Common Stock shall not be sufficient to effect the conversion of all
then outstanding shares of the 8% Preferred, the Corporation will take
such corporate action as may be necessary to increase its authorized
but unissued shares of Common Stock to such number of shares as shall
be sufficient for such purpose, including, without limitation,
engaging in best efforts to obtain any requisite shareholder approval.
(j) Fractional Shares. No fractional shares shall be issued upon the
conversion of any share or shares of 8% Preferred. All shares of
Common Stock (including fractions thereof) issuable upon conversion of
more than one share of 8% Preferred by a holder thereof shall be
aggregated for purposes of determining whether the conversion would
result in the issuance of any fractional share. If, after the
aforementioned aggregation, the conversion would result in the
issuance of a fraction of a share of Common Stock, the Corporation
shall, in lieu of issuing any fractional share, pay the holder
otherwise entitled to such fraction a sum in cash equal to the fair
market value of such fraction on the date of conversion (as determined
in good faith by the Board of Directors of the Corporation).
<PAGE>
(k) Notices. Any notice required by the provisions of this Section to be
given to the holders of shares of 8% Preferred shall be deemed given
if deposited in the United States mail, postage prepaid, and addressed
to each holder of record at its address appearing on the books of the
Corporation.
(l) Reorganization or Merger. In case of any reorganization or any
reclassification of the capital stock of the Corporation or any
consolidation or merger of the Corporation with or into any other
corporation or corporations or a sale of all or substantially all of
the assets of the Corporation to any other person, and the holders of
8% Preferred do not elect to treat such transaction as a liquidation,
dissolution or winding up as provided in Section 2 hereof, then, as
part of such reorganization, consolidation, merger or sale, provision
shall be made so that each share of 8% Preferred shall thereafter be
convertible into the number of shares of stock or other securities or
property (including cash) to which a holder of the number of shares of
Common Stock deliverable upon conversion of such share of 8% Preferred
would have been entitled upon the record date of (or date of, if no
record date is fixed) such event and, in any case, appropriate
adjustment (as determined by the Board of Directors) shall be made in
the application of the provisions herein set forth with respect to the
rights and interests thereafter of the holders of the 8% Preferred, to
the end that the provisions set forth herein shall thereafter be
applicable, as nearly as equivalent as is practicable, in relation to
any shares of stock or the securities or property (including cash)
thereafter deliverable upon the conversion of the shares of 8%
Preferred.
5. Re-issuance of Certificates. In the event of a conversion (or, if
applicable, redemption) of 8% Preferred in which less than all of the
shares of 8% Preferred of a particular certificate are converted or
redeemed, as the case may be, the Corporation shall promptly (but no later
than five (5) business days after a conversion date) cause to be issued and
delivered to the holder of such certificate, a certificate representing the
remaining shares of 8% Preferred which have not been so converted or
redeemed.
6. Other Provisions. For all purposes of this Resolution, the term "date of
issuance" and the terms "Closing" or "Closing Date" shall mean the day on
which shares of the 8% Preferred are first issued by the Corporation. Any
provision herein which conflicts with or violates any applicable usury law
shall be deemed modified to the extent necessary to avoid such conflict or
violation.
7. Restrictions and Limitations. The Corporation shall not undertake the
following actions without the consent of the holders of a majority of the
8% Preferred: (i) modify its Certificate of Incorporation or Bylaws so as
to amend or change any of the rights, preferences, or privileges of the 8%
Preferred, (ii) authorize or issue any other preferred equity security
senior to or on a parity with the 8% Preferred, as to dividends,
liquidation preferences, conversion rights, redemption rights or other
rights, preferences or privileges for a period of thirty (30) days after
Closing, as applicable or (iii) purchase or otherwise acquire for value any
Common Stock or other equity security of the Corporation either junior or
senior to or on a parity with the 8% Preferred while there exists any
arrearage in the payment of cumulative dividends hereunder other than
redemptions of stock from terminating employees pursuant to contractual
rights in favor of the Corporation.
<PAGE>
8. Voting Rights. Except as provided herein or as provided for by law, the 8%
Preferred shall have no voting rights.
9. Attorneys' Fees. Any holder of 8% Preferred shall be entitled to recover
from the Corporation the reasonable attorneys' fees and expenses incurred
by such holder in connection with enforcement by such holder of any
obligation of the Corporation hereunder.
10. No Adverse Actions. The Corporation shall not in any manner, whether by
amendment of the Articles of Incorporation (including, without limitation,
any vote establishing a class or series of stock), merger, reorganization,
re-capitalization, consolidation, sales of assets, sale of stock, tender
offer, dissolution or otherwise, take any action, or permit any action to
be taken, solely or primarily for the purpose of increasing the value of
any class of stock of the Corporation if the effect of such action is to
reduce the value or security of the 8% Preferred.
<PAGE>
Exhibit 4.7
Form of Designation of Terms and Conditions Relating to
the Series C Convertible Preferred Shares
<PAGE>
TERMS OF 8% CONVERTIBLE PREFERRED SHARES, SERIES C
AMERICAN BIO MEDICA CORPORATION (the "Corporation")
1. Designation and Amount. There is hereby established a series of
Preferred Shares to be designated as the "8% Convertible Preferred Shares,
Series C" (the "Series C Convertible Preferred Shares") and the number of shares
which shall constitute such series shall be one hundred (100) shares, with a
stated value (the "Stated Value") of U.S. $10,000 per share.
2. Dividends.
(a) General. The Holders of Series C Convertible Preferred Shares shall be
entitled to receive preferential dividends in an amount equal to a rate of
return of 8% of the Stated Value per annum from the date of issuance (with
appropriate proration for any partial dividend period). Such cumulative
dividends shall be payable in cash.
(b) Dividends Cumulative. Dividends on the Series C Convertible Preferred
Shares shall accrue and be cumulative from the date of issuance, whether or
not earned and whether or not in any dividend period there shall be surplus
or net profits of the Corporation legally available for the payment of such
dividends.
(c) Equality of Shares. No dividend shall be declared or set apart for any of
the Series C Convertible Preferred Shares for any period unless at the same
time a like proportionate dividend for the same period shall be declared or
set apart for all the Series C Convertible Preferred Shares then
outstanding and entitled to receive such dividend.
(d) Restrictions with Respect to Junior Shares. So long as any Series C
Convertible Preferred Shares shall remain outstanding, no dividend shall be
declared or paid or set apart for payment on the Common Shares or any other
class of shares ranking junior to the Series C Convertible Preferred Shares
in either payment of dividends or liquidation (all such junior classes of
shares including, without limitation, the Common Shares, hereinafter
referred to collectively as the "Junior Shares") unless full dividends
(including interest on any accumulations of dividends) on all outstanding
Series C Convertible Preferred Shares shall have been paid in full for all
past dividend periods and the dividends on all outstanding Series C
Convertible Preferred Shares for the then current dividend period shall
have been paid or declared and sufficient funds set apart for payment
thereof.
3. Liquidation Preference.
(a) General. The Series C Convertible Preferred Shares shall be preferred over
the Common Shares and any other class or series of Junior Shares. In the
event of any liquidation or dissolution or winding up of the Corporation,
the Holders of Series C Convertible Preferred Shares shall be entitled to
receive, after payment or provision for payment of the debts and other
liabilities of the Corporation, out of the assets of the Corporation
available for distribution to its shareholders, all accumulated and unpaid
dividends before any distribution of the assets shall be made to the
Holders of the Common Shares or any other class or series of Junior Shares.
After payment of accumulated dividends on the Series C Convertible
Preferred Shares shall have been made in full as provided in the preceding
sentence, but not prior thereto, the Preferred Shares, the Common Shares
and any other series or class of Junior Shares shall, subject to the
respective terms and provisions, if any, applying thereto, be entitled to
receive any and all assets remaining to be paid or distributed, with the
Series C Convertible Preferred Shares sharing therein in an amount per
share of Series C Convertible Preferred Shares equal to the amount to be
distributed on each share of Common Shares multiplied by a fraction the
numerator of which is the Stated Value of such share of Series C
Convertible Preferred Shares and the denominator of which is the then
current Conversion Price (as defined below).
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<PAGE>
(b) Distributions Pro Rata. If upon any liquidation or dissolution or winding
up of the Corporation the amounts payable on or with respect to the Series
C Convertible Preferred Shares together with the amounts payable on or with
respect to all classes or series of shares ranking on a parity with the
Series C Convertible Preferred Shares as to distribution of assets are not
paid in full, the Holders of Series C Convertible Preferred Shares together
with all classes or series of shares ranking on a parity with the Series C
Convertible Preferred Shares as to distribution of assets shall share pro
rata in any distribution of assets in respect of the shares held by them
upon such distribution in proportion to the amounts that would have been
distributable to each such class or series if all amounts payable on or
with respect to the Series C Convertible Preferred Shares and any other
class or series of shares that so ranks on a parity with the Series C
Convertible Preferred Shares had been paid in full.
(c) Merger or Consolidation. Neither the merger or consolidation of the
Corporation with another corporation nor the sale or lease of all or
substantially all of the assets of the Corporation shall be deemed to be a
liquidation or dissolution or winding up of the Corporation.
(d) Notice Required. Written notice of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Corporation,
stating the payment date and the place where the distributable amount shall
be payable and stating the anticipated amount of any such distributable
amount, shall be given by mail, postage prepaid, not less than thirty (30)
days prior to the payment date stated therein, to the Holders of record of
Series C Convertible Preferred Shares at their respective addresses as the
same shall then appear on the books of the Corporation.
4. Conversion.
(a) General. Series C Convertible Preferred Shares may be converted at the
option of the Holder thereof, or otherwise as provided below, into fully
paid and nonassessable Common Shares of the Corporation at a price (the
"Conversion Price") equal to the lesser of: (i) $3.50, or (ii) twenty-five
percent (25%) off the Market Price per share of Common Shares on the date
of conversion. For purposes of this subparagraph (a) the Market Price per
share of Common Shares on any date shall be deemed to be the average of the
daily closing bid prices for the twenty (20) consecutive trading days
ending on the trading day prior to the day in question. "Closing price" on
any day when used with respect to the Common Shares means the reported
closing bid price therefor as reported by Reuters, or if not so reported
the average of the closing bid and asked prices as furnished by any member
of the National Association of Securities Dealers, Inc. selected from time
to time by the Holder for that purpose.
(b) Adjustments. The Conversion Price and the kind and amounts of securities
and property for which Series C Convertible Preferred Shares may be
converted shall be subject to adjustment from time to time as follows:
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<PAGE>
(i) If, at any time after the issuance of Series C Convertible Preferred
Shares, the Corporation shall (A) declare or pay a dividend, or make a
distribution, to all Holders of its Common Shares in Common Shares,
(B) subdivide its outstanding Common Shares into a greater number of
Common Shares, (C) combine its outstanding Common Shares into a
smaller number of Common Shares, or (D) issue by reclassification of
its Common Shares (other than a subdivision or combination thereof or
a change in par value) any securities, the Conversion Price in effect
immediately prior to such action shall be adjusted so that any Holder
of Series C Convertible Preferred Shares thereafter surrendered for
conversion shall be entitled to receive the kind and number of Common
Shares of the Corporation and/or other securities which he would have
owned or been entitled to receive immediately following such action
had such Series C Convertible Preferred Shares been converted
immediately prior thereto. Any adjustment made pursuant to this
Paragraph (b)(i) shall become effective immediately after the record
date in the case of a dividend or distribution and shall become
effective immediately after the effective date in the case of a
subdivision, combination or reclassification.
(ii) If, at any time after the date of issuance of Series C Convertible
Preferred Shares, the Corporation shall distribute to all or
substantially all Holders of its Common Shares either (A) evidences of
indebtedness or assets (excluding cash dividends or distributions) or
(B) any other securities of the Corporation or any rights, warrants or
options to subscribe for, purchase or otherwise acquire securities of
the Corporation in a transaction not covered by Paragraph (b)(i) above
(any of which are referred to herein as "Other Securities"), then and
in any such case the Corporation shall either distribute such Other
Securities to the Holders of Series C Convertible Preferred Shares or
reserve for the benefit of the Holders of Series C Convertible
Preferred Shares such amount of such Other Securities as the Holders
of all Series C Convertible Preferred Shares then outstanding would
have owned or been entitled to receive immediately following such
action had the Series C Convertible Preferred Shares been converted
into Common Shares immediately prior thereto. In addition, the
Corporation shall either distribute to, or reserve for the benefit of,
the Holders of Series C Convertible Preferred Shares any principal,
interest, dividends or other property payable with respect to such
Other Securities as and when such interest, dividends or other
property is distributed to the Holders of Common Shares. If such a
reserve is made, as and when each such share of Series C Convertible
Preferred Shares is converted, the Holder of such share shall be
entitled to receive from the Corporation his share of such Other
Securities together with the principal, interest, dividends or other
property payable with respect thereto.
(iii)All calculations under this Section 4 shall be made to the nearest
one-tenth of a cent or to the nearest one thousandth of a share, as
the case may be. No adjustment shall be required unless such
adjustment would result in an increase or decrease of at least one
percent (1%) of the Conversion Price; provided, however, that any
adjustments which by reason of this subparagraph (iii) are not
required to be made shall be carried forward and taken into account in
any subsequent adjustment.
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<PAGE>
(iv) Whenever the Conversion Price is adjusted or Other Securities are
reserved as herein provided, the Corporation shall mail or cause to be
mailed a copy of a statement, verified by its independent certified
public accountants, setting forth the required adjustments or the
nature and amount of Other Securities, as the case may be, to each
person who is a registered Holder of Series C Convertible Preferred
Shares at such person's last address as the same appears on the books
of the Corporation. Each adjustment shall remain in effect until a
subsequent adjustment is required hereunder. Failure to give or
receive such notice or any defect therein shall not affect the
legality or validity of any action taken. Following any adjustment to
the Conversion Price, the Holders of Series C Convertible Preferred
Shares shall be entitled, by themselves or through attorneys or
accountants retained by them, to inspect the books and records of the
Corporation in order to verify such adjustment. Such inspection shall
be at the expense of the Holders of Series C Convertible Preferred
Shares requesting such inspection unless such inspection reveals an
error in the adjustment equal to 5% or more of the lower applicable
Conversion Price, in which case the Corporation shall promptly
reimburse the Holders for all expenses incurred in connection
therewith.
(v) If at any time, as a result of an adjustment made pursuant to
Paragraph (ii) above, the Holders of Series C Convertible Preferred
Shares shall become entitled to receive upon conversion any Other
Securities, thereafter the number of such Other Securities receivable
upon conversion of Series C Convertible Preferred Shares and the price
of the Other Securities shall be subject to adjustment from time to
time and in a manner and on terms as nearly equivalent as practicable
to the provisions with respect to Series C Convertible Preferred
Shares contained in Paragraphs (i) and (ii), above.
(c) Merger or Consolidation. In case of a merger or consolidation of the
Corporation with or into another corporation, or the sale or transfer of
all, or substantially all, of the property or assets of the Corporation,
the Holders of Series C Convertible Preferred Shares shall thereafter have
the right to convert each of such shares into the kind and amount of shares
or other securities and property (including cash) receivable (the
"Consideration") upon such merger, consolidation or sale by a Holder of the
number of Common Shares (whether whole or fractional) into which such
Series C Convertible Preferred Shares might have been converted immediately
prior to such merger, consolidation or sale (all of which Consideration
shall be reserved and become payable upon conversion in the same manner as
for Other Securities pursuant to Paragraph (b)(ii) above and shall be
adjusted as provided in Paragraph (b) above), and shall have no other
conversion rights under these provisions and, in addition, the Corporation
shall reserve, on a current basis as and when distributed, for payment upon
conversion, in the same manner as required for Other Securities pursuant to
Paragraph (b)(ii) above, any interest, dividends, other shares, securities
or property distributable with respect to the Consideration, the same as if
such Series C Convertible Preferred Shares had been converted immediately
prior to such merger, consolidation, or sale of assets; and effective
provision shall be made in the charter of the resulting or surviving
corporation or otherwise, so that the provisions set forth herein for the
adjustment of the conversion terms of the Series C Convertible Preferred
Shares shall thereafter be applicable, as nearly as reasonably may be, to
any of the Consideration deliverable upon conversion of Series C
Convertible Preferred Shares remaining outstanding or other convertible
Preferred Shares received in place thereof. Any such resulting or surviving
corporation shall expressly assume the obligation to deliver the
Consideration, upon the exercise of the conversion right, (and, to that
end, shall reserve sufficient Consideration to issue, distribute and/or pay
the Holders of Series C Convertible Preferred Shares as if all such shares
were converted) as Holders of Series C Convertible Preferred Shares
remaining outstanding, or other convertible Preferred Shares received by
such Holders in place thereof, shall be entitled to receive pursuant to the
provisions hereof, and to make provision for protection of conversion
rights as above provided.
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<PAGE>
(d) Notices. If, at any time while Series C Convertible Preferred Shares are
outstanding, the Corporation shall (i) declare a dividend (or any other
distribution) on its Common Shares, other than in cash, or (ii) reclassify
its Common Shares (other than through a subdivision or combination thereof
or a change in par value) or become a party to any consolidation or merger
or sale or transfer of all or substantially all of the assets of the
Corporation, for which approval of the holders of its shares is required,
then the Corporation shall cause to be mailed to registered Holders of
Series C Convertible Preferred Shares, at their last addresses as they
shall appear on the books of the Corporation, at least thirty (30) days
prior to the applicable record date hereinafter specified, a notice stating
(x) the date on which a record is to be taken for the purpose of such
dividend or distribution, or, if a record is not to be taken, the date as
of which Holders of Common Shares of record to be entitled to such dividend
or distribution are to be determined, or (y) the date on which any such
reclassification, consolidation, merger, sale or transfer is expected to
become effective, and the date as of which it is expected that Holders of
record of Common Shares shall be entitled to exchange their Common Shares
for securities or other property, if any, deliverable upon such
reclassification, consolidation, merger, sale or transfer. Failure to give
or receive the notice required by this Paragraph (d) or any defect therein
shall not affect the legality or validity of any such dividend,
distribution, reclassification, consolidation, merger, sale, transfer or
other action.
(e) Exercise of Conversion Rights. The Holder of any Series C Convertible
Preferred Shares may exercise his/her/its option to convert such shares
into Common Shares only by surrendering for such purpose to the Corporation
the certificates representing the shares to be converted, accompanied or
preceded by written notice (which may be transmitted by telecopier) that
such holder elects to convert such shares in accordance with the provisions
of this Section 5. Said notice shall also state the name or names (with
addresses) in which the certificate or certificates for Common Shares which
shall be issuable on such conversion shall be issued. Each certificate or
certificates surrendered for conversion shall, unless the shares issuable
on conversion are to be issued in the same name as that in which such
certificate or certificates are registered, be accompanied by instruments
of transfer, in form reasonably satisfactory to the Corporation, duly
executed by the Holder or his duly authorized attorney. Each conversion
shall be deemed to have been effected on the date on which such notice
shall have been received by the Corporation as aforesaid (the "Conversion
Date"), provided that the certificates to which such notice relates are
received by the Corporation no later than the third business day following
the date of receipt of such notice, and the person or persons in whose name
or names any certificate or certificates for Common Shares shall be
issuable upon such conversion shall be deemed to have become on said date
the Holder or Holders of record of the shares represented thereby
notwithstanding that the transfer books of the Corporation may then be
closed or that certificates representing such Common Shares shall not then
be actually delivered to such person. As promptly as practicable on or
after the Conversion Date, but within three (3) days thereafter, the
Corporation shall issue and deliver to the person or persons entitled to
receive the same a certificate or certificates representing the number of
Common Shares issuable upon such conversion and shall pay or cause the
payment of such Other Securities or Consideration or other property as may
be payable upon conversion pursuant to Paragraphs (b) (iii) or (c) of this
Section (4).
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<PAGE>
(f) Fractional Shares. No fractional Common Shares shall be issued in
connection with the conversion of Series C Convertible Preferred Shares
into Common Shares. Instead of any fractional Common Share which would
otherwise be issuable on conversion, the Corporation shall pay a cash
adjustment with respect to such fractional Common Share computed on the
basis of the then current fair market value of the Common Shares, as
determined in good faith by the Corporation's Board of Directors.
(g) Tax on Conversion. The issuance of share certificates on conversions of
Series C Convertible Preferred Shares shall be made without charge to
converting shareholders for any tax in respect of the issuance thereof
except any tax on the income or gain derived by the converting shareholders
as a result of the issuance thereof. The Corporation shall not, however, be
required to pay any tax which may be payable in respect of any registration
of transfer involved in the issue and delivery of shares in any name other
than that of the Holder of the Series C Convertible Preferred Shares
converted, and the Corporation shall not be required to so issue or deliver
any share certificate unless and until the person or persons requesting the
registration of transfer shall have paid to the Corporation the amount of
such tax or shall have established to the satisfaction of the Corporation
that such tax has been paid.
(h) Securities Reserved. The Corporation shall at all times reserve and keep
available out of its authorized Common Shares (and any Other Securities or
Consideration or property) the full number of Common Shares (and any Other
Securities or Consideration or property) deliverable upon the conversion of
all outstanding Series C Convertible Preferred Shares. The Corporation
shall not enter into any agreement or take any action which would impair or
restrict its legal authority to issue such Common Shares, Other Securities
or Consideration or property upon conversion or to defeat in any way the
right of the Holders of Series C Convertible Preferred Shares to receive
such consideration upon conversion. In addition, whenever the Corporation
is required to reserve any interest, dividends or other property payable
upon conversion of Series C Convertible Preferred Shares, the Corporation
shall, as to cash, deposit such amounts in one or more separate accounts
for the sole benefit of the Holders of Series C Convertible Preferred
Shares upon conversion and, as to other property, physically segregate or
otherwise set such property aside in such a manner as to protect the rights
of the Holders of Series C Convertible Preferred Shares to the receipt of
such property upon conversion.
(i) Effect of Conversion. All Series C Convertible Preferred Shares which shall
have been converted into Common Shares shall assume the status of
authorized but unissued Preferred Shares undesignated as to series.
5. Voting Rights.
No Holder of Series C Convertible Preferred Shares shall be entitled to
vote on any matter submitted to the shareholders of the Corporation for their
vote, waiver, release or other action, except as may be otherwise expressly
required by law.
6. Amendment.
Notwithstanding the provisions of Section 5 above, so long as any share of
Series C Convertible Preferred Shares is outstanding, the Articles of
Incorporation of the Corporation shall not be amended in any manner which would
materially alter or change the powers, preferences or special rights of the
Series C Convertible Preferred Shares so as to affect them adversely without the
affirmative vote of the Holders of a majority of the outstanding Series C
Convertible Preferred Shares, voting separately as a class.
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<PAGE>
Exhibit 4.8
Registration Rights Agreement Relating to Common Shares Underlying
Series "C" Preferred Shares
<PAGE>
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of September , 1997 (this
"Agreement"), is made by and among American Bio Medica Corporation, a New York
corporation (the "Corporation"), and the person named on the signature page
hereto (the "Investor").
W I T N E S S E T H :
WHEREAS, the Corporation is offering a maximum of 100 Series C Convertible
Preferred Shares, $.01 par value each, ("Preferred Shares") at $10,000 each
pursuant to a Private Security Subscription Agreement (the "Offering"); and
WHEREAS, in connection with the Private Securities Subscription Agreement,
dated as of September , 1997, between the Investor and the Corporation (the
"Subscription Agreement"), the Corporation has agreed, upon the terms and
subject to the conditions of the Subscription Agreement, to issue and sell to
the Investor Series C Convertible Preferred Shares (the "Preferred Shares"),
convertible into common shares, $.0l par value (the "Common Shares"); and
WHEREAS, to induce the Investor to execute and deliver the Subscription
Agreement, the Corporation has agreed to provide certain registration rights
under the Securities Act of 1933, as amended, and the rules and regulations
thereunder, or any similar successor statute (collectively, the "Securities
Act"), and applicable state securities laws with respect to the Shares;
NOW, THEREFORE, in consideration of the premises set forth above and the
mutual covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Corporation and
the Investor hereby agree as follows:
1. Definitions.
(a) As used in this Agreement, the following terms shall have the following
meanings:
(i) "Investor" means the Investor and any transferee or assignee who
agrees to become bound by the provisions of this Agreement in
accordance with Section 9 hereof.
(ii) "register," "registered," and "registration" refer to a registration
effected by preparing and filing a Registration Statement or
Statements in compliance with the Securities Act on such appropriate
registration form promulgated by the United States Securities and
Exchange Commission ("SEC") as shall be selected by the Corporation,
and, when requested by the Investor pursuant to Section 2(b) hereof,
shall (A) be reasonably acceptable to the holders of a majority of the
Registrable Securities to which such registration relates, and (B)
shall permit the disposition of Registrable Securities in accordance
with the intended method or methods specified in the Investor's
request for such registration, and the declaration or ordering of
effectiveness of such Registration Statement by the SEC.
(iii)"Registrable Securities" means those shares issuable, upon conversion
of the Preferred Shares issued and sold to the Investor including any
shares issued or issuable as dividends in respect thereof.
(iv) "Registration Statement" means a registration statement under the
Securities Act registering securities of the Corporation.
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<PAGE>
(b) As used in this Agreement, the term Investor includes (i) each Investor
(as defined above) and (ii) each person who is a permitted transferee
or assignee of the Registrable Securities pursuant to Section 9 of this
Agreement.
(c) Capitalized terms used herein and not otherwise defined herein shall
have the respective meanings set forth in the Subscription Agreement.
2. Registration.
(a) Piggy-Back Registrations. If at any time the Corporation shall determine to
prepare and file with the SEC a Registration Statement relating to an
offering for its own account or the account of others under the Securities
Act any of its equity securities, other than on Form S-4 or Form S-8 or
their then equivalents relating to equity securities to be issued solely in
connection with any acquisition of any entity or business or equity
securities issuable in connection with stock option or other employee
benefit plans, the Corporation shall send to each Investor who is entitled
to registration rights under this Section 2(a) written notice of such
determination and, if within twenty (20) days after receipt of such notice,
such Investor shall so request in writing, the Corporation shall include in
such Registration Statement all or any part of the Registrable Securities
such Investor requests to be registered, except that if, in connection with
any underwritten public offering for the account of the Corporation the
managing underwriter(s) thereof shall impose a limitation on the number of
Common Shares which may be included in the Registration Statement because,
in such underwriter(s)' judgment, such limitation is necessary to effect an
orderly public distribution, then the Corporation shall be obligated to
include in such Registration Statement only such limited portion, if any,
of the Registrable Securities with respect to which such Investor has
requested inclusion hereunder. Any exclusion of Registrable Securities
shall be made pro rata among the Investors seeking to include Registrable
Securities, in proportion to the number of Registrable Securities sought to
be included by such Investors; provided, however, that the Corporation
shall not exclude any Registrable Securities unless the Corporation has
first excluded all outstanding securities the holders of which are not
entitled by right to inclusion of securities in such Registration
Statement; and provided further, however, that, after giving effect to the
immediately preceding proviso, any exclusion of Registrable Securities
shall be made pro rata with holders of other securities having the right to
include such securities in the Registration Statement to the extent such
pro rata allotment is permitted under the Corporation's currently existing
agreements with such holders of the Corporation's securities. No right to
registration of Registrable Securities under this Section 2(a) shall be
construed to limit any registration required under Section 2(b) hereof. The
obligations of the Corporation under this Section 2(a) may be waived by
Investors holding a majority in interest of the Registrable Securities and
shall expire at the earlier of (i) the Corporation having afforded the
opportunity for the Investors to exercise registration rights under this
Section 2(a) for two registrations; provided, however, that any Investor
who shall have had any Registrable Securities excluded from any
Registration Statement in accordance with this Section 2(a) shall be
entitled to include in an additional Registration Statement filed by the
Corporation the Registrable Securities so excluded or (ii) when all of the
Registrable Securities held by any Investor may be sold by such Investor
under Rule 144 under the Securities Act ("Rule 144") within any three-month
period.
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(b) Demand Registration. As soon as practicable after the closing of the
Offering, the Corporation shall prepare and file a Registration Statement
covering such Registrable Securities with the SEC.
(c) If any offering pursuant to a Registration Statement pursuant to Section
2(b) hereof involves (at the Corporation's election) an underwritten
offering, the Investors who hold a majority in interest of the Registrable
Securities subject to such underwritten offering shall have the right to
select one legal counsel and an investment banker or bankers and manager or
managers to administer the offering, which investment banker or bankers or
manager or managers shall be reasonably satisfactory to the Corporation.
The Investors who hold the Registrable Securities to be included in such
underwriting shall pay all underwriting discounts and commissions and other
fees and expenses of such investment banker or bankers and manager or
managers so selected in accordance with this Section 2(c) (other than fees
and expenses relating to registration of Registrable Securities under
federal or state securities laws which are payable by the Corporation
pursuant to Section 5 hereof) with respect to their Registrable Securities
and the fees and expenses of such legal counsel selected by the Investors.
(d) Payments by the Corporation. It shall be the Corporation's obligation that
the Registration Statement be declared effective on or before December 31,
1997. If this date is not met, and Investor shall have performed its
obligations as set forth in this Agreement with respect to such
registration, then the Corporation will make payments to each holder of
Registrable Securities (each, a "Holder") in such amounts and at such times
as shall be determined pursuant to this Section 2(d). The amount to be paid
by the Corporation to the Holders shall be determined as of each
Computation Date, and such amount shall be equal to two percent (2%) of the
aggregate subscription price paid by the Investor for the Shares pursuant
to the Subscription Agreement for each month (the "Periodic Amount");
provided, however, that if any Computation Date is less than 30 days
subsequent to another Computation Date, then the Periodic Amount payable on
the later Computation Date shall be prorated. The Periodic Amount shall be
divided among all the Holders in the same proportion as each Holder's
Registrable Securities bears to the total of the outstanding Registrable
Securities. The Periodic Amount shall be paid by the Corporation within
five (5) business days after each Computation Date and shall be payable in
cash.
"Computation Date" means December 31, 1997 and each 30 days thereafter.
with respect to the Subscription Agreement under Section 2(b) and, if the
Registration Statement required to be filed by the Corporation pursuant to
Section 2(b) has not theretofore been declared effective by the SEC, each
date which is 30 days after a Computation Date and, if the Registration
Statement required to be filed by the Corporation pursuant to Section 2(b)
is not declared effective by the SEC within 90 days, or 120 days in the
event of an S-1 or an underwritten offering, after the exercise of demand
registration rights under Section 2(b), the date on which such Registration
Statement is declared effective.
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3. Obligations of the Corporation. In connection with the registration of
the Registrable Securities, the Corporation shall:
(a) prepare file with the SEC as soon as practicable a Registration Statement
or Statements with respect to all Registrable Securities to be included
therein, and thereafter use its best efforts to cause the Registration
Statement to become effective on or before December 31, 1997. The
Corporation shall keep the Registration Statement effective at all times
until such date as is two years after the date such Registration Statement
is first ordered effective by the SEC. In any case, the Registration
Statement (including any amendments or supplements thereto and prospectuses
contained therein) filed by the Corporation shall not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein, or necessary to make the statements therein, in light of
the circumstances in which they were made, not misleading; provided,
however, that, subject to the conditions set forth in Section 4(a) below,
each Investor may notify the Corporation in writing that it wishes to
exclude all or a portion of its Registrable Securities from such
Registration Statement.
(b) prepare and file with the SEC such amendments (including post-effective
amendments) and supplements to the Registration Statement and the
prospectus used in connection with the Registration Statement as may be
necessary to keep the Registration Statement effective at all times until
such date as is two years after the date such Registration Statement is
first ordered effective by the SEC, and, during such period, comply with
the provisions of the Securities Act with respect to the disposition of all
Registrable Securities of the Corporation covered by the Registration
Statement until such time as all of such Registrable Securities have been
disposed of in accordance with the intended methods of disposition by the
seller or sellers thereof as set forth in the Registration Statement;
(c) furnish to each Investor whose Registrable Securities are included in the
Registration Statement, such number of copies of a prospectus, including a
preliminary prospectus, and all amendments and supplements thereto and such
other documents as such Investor may reasonably request in order to
facilitate the disposition of the Registrable Securities owned by such
Investor;
(d) use reasonable efforts to (i) register and qualify the Registrable
Securities covered by the Registration Statement under such other
securities or blue sky laws of such jurisdictions as the Investors who hold
a majority in interest of the Registrable Securities being offered
reasonably request, (ii) prepare and file in those jurisdictions such
amendments (including post-effective amendments) and supplements, (iii)
take such other actions as may be necessary to maintain such registrations
and qualifications in effect at all times until such date as is the earlier
of three years after the date such Registration Statement is first ordered
effective by the SEC or is three years after the Investor acquired the
Shares and (iv) take all other actions reasonably necessary or advisable to
qualify the Registrable Securities for sale in such jurisdictions;
provided, however, that the Corporation shall not be required in connection
therewith or as a condition thereto to (I) qualify to do business in any
jurisdiction where it would not otherwise be required to qualify but for
this Section 3(d), (II) subject itself to general taxation in any such
jurisdiction, (III) file a general consent to service of process in any
such jurisdiction, (IV) provide any undertakings that cause more than
nominal expense or burden to the Corporation or (V) make any change in its
charter or by-laws, which in each case the Board of Directors of the
Corporation determines to be contrary to the best interests of the
Corporation and its shareholders;
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(e) in the event Investors who hold a majority in interest of the Registrable
Securities being offered in the offering select underwriters for the
offering, enter into and perform its obligations under an underwriting
agreement, in usual and customary form, including, without limitation,
customary indemnification and contribution obligations, with the managing
underwriter of such offering;
(f) as promptly as practicable after becoming aware of such event, notify each
Investor who holds Registrable Securities being sold pursuant to such
registration of the happening of any event of which the Corporation has
knowledge, as a result of which the prospectus included in the Registration
Statement, as then in effect, includes an untrue statement of a material
fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading, and use its best efforts
promptly to prepare a supplement or amendment to the Registration Statement
to correct such untrue statement or omission, and deliver a number of
copies of such supplement or amendment to each Investor as such Investor
may reasonably request;
(g) as promptly as practicable after becoming aware of such event, notify each
Investor who holds Registrable Securities being sold pursuant to such
registration (or, in the event of an underwritten offering, the managing
underwriters) of the issuance by the SEC of any stop order or other
suspension of effectiveness of the Registration Statement at the earliest
possible time;
(h) permit a single firm of counsel designated as selling shareholders' counsel
by the Investors who hold a majority in interest of the Registrable
Securities being sold pursuant to such registration to review the
Registration Statement and all amendments and supplements thereto a
reasonable period of time prior to their filing with the SEC, and shall not
file any document in a form to which such counsel reasonably objects;
(i) make generally available to its shareholders as soon as practicable, all
periodic filings pursuant to the Securities Exchange Act of 1934; but not
later than ninety (90) days after the close of the period covered thereby,
an earnings statement (in form complying with the provisions of Rule 158
under the Securities Act) covering a twelve-month period beginning not
later than the first day of the Corporation's fiscal quarter next following
the date of the Registration Statement;
(j) at the request of the Investors who hold a majority in interest of the
Registrable Securities being sold pursuant to such registration, furnish on
the date that Registrable Securities are delivered to an underwriter for
sale in connection with the Registration Statement (i) a letter, dated such
date, from the Corporation's independent certified public accountants in
form and substance as is customarily given by independent certified public
accountants to underwriters in an underwritten public offering, addressed
to the underwriters; and (ii) an opinion, dated such date, from counsel
representing the Corporation for purposes of such Registration Statement,
in form and substance as is customarily given in an underwritten public
offering, addressed to the underwriters and Investors;
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(k) make available for inspection by any Investor whose Registrable Securities
are being sold pursuant to such registration, any underwriter participating
in any disposition pursuant to the Registration Statement, and any
attorney, accountant or other agent retained by any such Investor or
underwriter (collectively, the "Inspectors"), all pertinent financial and
other records, pertinent corporate documents and properties of the
Corporation (collectively, the "Records"), as shall be reasonably necessary
to enable each Inspector to exercise its due diligence responsibility, and
cause the Corporation's officers, directors and employees to supply all
information which any Inspector may reasonably request for purposes of such
due diligence; provided, however, that each Investor and each Inspector
shall hold in confidence and shall not make any disclosure (except to an
Investor) of any Record or other information which the Corporation
determines in good faith to be confidential, and of which determination the
Investors or Inspectors, respectively, are so notified, unless (i) the
disclosure of such Records is necessary to avoid or correct a misstatement
or omission in any Registration Statement, (ii) the release of such Records
is ordered pursuant to a subpoena or other order from a court or government
body of competent jurisdiction or (iii) the information in such Records has
been made generally available to the public other than by disclosure in
violation of this or any other agreement. The Corporation shall not be
required to disclose any confidential information in such Records to any
Inspector until and unless such Inspector shall have entered into
confidentiality agreements (in form and substance satisfactory to the
Corporation) with the Corporation with respect thereto, substantially in
the form of this Section 3(k). Each Investor agrees that it shall, upon
learning that disclosure of such Records is sought in or by a court or
governmental body of competent jurisdiction or through other means, give
prompt notice to the Corporation and allow the Corporation, at its expense,
to undertake appropriate action to prevent disclosure of, or to obtain a
protective order for, the Records deemed confidential. The Corporation
shall hold in confidence and shall not make any disclosure of information
concerning an Investor provided to the Corporation pursuant to Section 4(e)
hereof unless (i) disclosure of such information is necessary to comply
with federal or state securities laws, (ii) the disclosure of such
information is necessary to avoid or correct a misstatement or omission in
any Registration Statement, (iii) the release of such information is
ordered pursuant to a subpoena or other order from a court or governmental
body of competent jurisdiction or (iv) such information has been made
generally available to the public other than by disclosure in violation of
this or any other agreement. The Corporation agrees that it shall, upon
learning that disclosure of such information concerning an Investor is
sought in or by a court or governmental body of competent jurisdiction or
through other means, give prompt notice to such Investor, at its expense,
to undertake appropriate action to prevent disclosure of, or to obtain a
protective order for, such information;
(l) use its best efforts either to secure designation of all the Registrable
Securities covered by the Registration Statement as a National Association
of Securities Dealers Automated Quotations System ("NASDAQ") "Small Cap"
or, if, despite the Corporation's best efforts to satisfy the preceding
clause, the Corporation is unsuccessful in satisfying the preceding clause
to secure such a listing for such Registrable Securities and, without
limiting the generality of the foregoing, to arrange for at least three
market makers to register with the National Association of Securities
Dealers, Inc. ("NASD") as such with respect to such Registrable Securities;
(m) provide a transfer agent and registrar, which may be a single entity, for
the Registrable Securities not later than the effective date of the
Registration Statement;
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(n) cooperate with the Investors who hold Registrable Securities being sold and
the managing underwriter or underwriters, if any, to facilitate the timely
preparation and delivery of certificates (not bearing any restrictive
legends) representing Registrable Securities to be sold pursuant to the
denominations or amounts as the case may be, and registered in such names
as the managing underwriter or underwriters, if any, or the Investors may
reasonably request; and, within five business days after a Registration
Statement which includes Registrable Securities is ordered effective by the
SEC, the Corporation shall deliver, and shall cause legal counsel selected
by the Corporation to deliver, to the transfer agent for the Registrable
Securities (with copies to the Investors whose Registrable Securities are
included in such Registration Statement) instructions to the transfer agent
to issue new share certificates without a legend and an opinion of such
counsel that the shares have been registered; and
(o) take all other reasonable actions necessary to expedite and facilitate
disposition by the Investor of the Registrable Securities pursuant to the
Registration Statement.
4. Obligations of the Investors. In connection with the registration of the
Registrable Securities, the Investors shall have the following obligations:
(a) It shall be a condition precedent to the obligations of the Corporation to
take any action pursuant to this Agreement with respect to each Investor
that such Investor shall furnish to the Corporation such information
regarding itself, the Registrable Securities held by it and the intended
method of disposition of the Registrable Securities held by it as shall be
reasonably required to effect the registration of the Registrable
Securities and shall execute such documents in connection with such
registration as the Corporation may reasonably request. At least five (5)
days prior to the first anticipated filing date of the Registration
Statement, the Corporation shall notify each Investor of the information
the Corporation requires from each such Investor (the "Requested
Information") if such Investor elects to have any of such Investor's
Registrable Securities included in the Registration Statement. If within
three (3) business days prior to the filing date the Corporation has not
received the Requested Information from an Investor (a "Non-Responsive
Investor"), then the Corporation may file the Registration Statement
without including the Registrable Securities of such Non-Responsive
Investor;
(b) Each Investor by such Investor's acceptance of the Registrable Securities
agrees to cooperate with the Corporation as reasonably requested by the
Corporation in connection with the preparation and filing of the
Registration Statement hereunder, unless, in connection with the
preparation and filing of the Registration Statement, such Investor has
notified the Corporation in writing of such Investor's election to exclude
all of such Investor's Registrable Securities from the Registration
Statement;
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(c) In the event Investors holding a majority in interest of the Registrable
Securities being registered determine to engage the services of an
underwriter, each Investor agrees to enter into and perform such Investor's
obligations under an underwriting agreement, in usual and customary form,
including, without limitation, customary indemnification and contribution
obligations, with the managing underwriter of such offering and to take
such other actions as are reasonably required in order to expedite or
facilitate the disposition of the Registrable Securities, unless such
Investor has notified the Corporation in writing of such Investor's
election to exclude all of such Investor's Registrable Securities from the
Registration Statement;
(d) Each Investor agrees that, upon receipt of any notice from the Corporation
of the happening of any event of the kind described in Section 3(f) or
3(g), such Investor will immediately discontinue disposition of the
Registrable Securities pursuant to the Registration Statement covering such
Registrable Securities until such Investor's receipt of the copies of the
supplemented or amended prospectus contemplated by Section 3(f) or 3(g)
and, if so directed by the Corporation, such Investor shall deliver to the
Corporation (at the expense of the Corporation) or destroy (and deliver to
the Corporation a certification of destruction) all copies in such
Investor's possession, of the prospectus covering such Registrable
Securities current at the time of receipt of such notice; and
(e) No Investor may participate in any underwritten registration hereunder
unless such Investor (i) agrees to sell such Investor's Registrable
Securities on the basis provided in any underwriting arrangements approved
by the Investors entitled hereunder to approve such arrangements, (ii)
completes and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents reasonably required under the
terms of such underwriting arrangements and (iii) agrees to pay its pro
rata share of all underwriting discounts and commissions and other fees and
expenses of investment bankers and any manager or managers of such
underwriting and legal expenses of the underwriter applicable with respect
to its Registrable Securities, in each case to the extent not payable by
the Corporation pursuant to the terms of this Agreement.
5. Expenses of Registration. All expenses (other than underwriting
discounts and commissions and other fees and expenses of investment bankers and
other than brokerage commissions) incurred in connection with registrations,
filings or qualifications pursuant to Section 3, including, without limitation,
all registration, listing and qualifications fees, printers and accounting fees
and the fees and disbursements of counsel for the Corporation, shall be borne by
the Corporation; provided, however, that the Investors shall bear the fees and
out-of-pocket expenses of the one legal counsel selected by the Investors
pursuant to Section 3(h) hereof.
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6. Indemnification. In the event any Registrable Securities are included in
a Registration Statement under this Agreement:
(a) To the extent permitted by law, the Corporation will indemnify and hold
harmless each Investor who holds such Registrable Securities, the
directors, if any, of such Investor, the officers, if any, of such
Investor, each person, if any, who controls any Investor within the meaning
of the Securities Act or the Exchange Act, any underwriter (as defined in
the Securities Act) for the Investors, the directors, if any, of such
underwriter and the officers, if any, of such underwriter, and each person,
if any, who controls any such underwriter within the meaning of the
Securities Act or the Exchange Act (each, an "Indemnified Person"), against
any losses, claims, damages, expenses or liabilities (joint or several)
(collectively "Claims") to which any of them become subject under the
Securities Act, the Exchange Act or otherwise, insofar as such Claims (or
actions or proceedings, whether commenced or threatened, in respect
thereof) arise out of or are based upon any of the following statements,
omissions or violations in the Registration Statement, or any
post-effective amendment thereof, or any prospectus included therein: (i)
any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement or any post-effective amendment
thereof or the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading, (ii) any untrue statement or alleged untrue
statement of a material fact contained in any preliminary prospectus if
used prior to the effective date of such Registration Statement, or
contained in the final prospectus (as amended or supplemented, if the
Corporation files any amendment thereof or supplement thereto with the SEC)
or the omission or alleged omission to state therein any material fact
necessary to make the statements made therein, in light of the
circumstances under which the statements therein were made, not misleading
or (iii) any violation or alleged violation by the Corporation of the
Securities Act, the Exchange Act or any state securities law or any rule or
regulation (the matters in the foregoing clauses (i) through (iv) being,
collectively, "Violations"). Subject to the restrictions set forth in
Section 6(d) with respect to the number of legal counsel, the Corporation
shall reimburse the Investors and each such underwriter or controlling
person, promptly as such expenses are incurred and are due and payable, for
any legal fees or other reasonable expenses incurred by them in connection
with investigating or defending any such Claim. Notwithstanding anything to
the contrary contained herein, the indemnification agreement contained in
this Section 6(a) (I) shall not apply to a Claim arising out of or based
upon a Violation which occurs in reliance upon and in conformity with
information furnished in writing to the Corporation by any Indemnified
Person or underwriter for such Indemnified Person expressly for use in
connection with the preparation of the Registration Statement or any such
amendment thereof or supplement thereto, if such prospectus was timely made
available by the Corporation pursuant to Section 3(c) hereof; (II) with
respect to any preliminary prospectus shall not inure to the benefit of any
such person from whom the person asserting any such Claim purchased the
Registrable Securities that are the subject thereof (or to the benefit of
any person controlling such person) if the untrue statement or omission of
material fact contained in the preliminary prospectus was corrected in the
prospectus, as then amended or supplemented, if such prospectus was timely
made available by the Corporation pursuant to Section 3(c) hereof, and
(III) shall not apply to amounts paid in settlement of any Claim if such
settlement is effected without the prior written consent of the
Corporation, which consent shall not be unreasonably withheld. Such
indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of the Indemnified Persons and shall
survive the transfer of the Registrable Securities by the Investors
pursuant to Section 9.
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(b) In connection with any Registration Statement in which an Investor is
participating, each such Investor agrees to indemnify and hold harmless, to
the same extent and in the same manner set forth in Section 6(a), the
Corporation, each of its directors, each of its officers who signs the
Registration Statement, each person, if any, who controls the Corporation
within the meaning of the Securities Act or the Exchange Act, any
underwriter and any other shareholder selling securities pursuant to the
Registration Statement or any of its directors or officers or any person
who controls such shareholder or underwriter within the meaning of the
Securities Act or the Exchange Act (collectively and together with an
Indemnified Person, an "Indemnified Party"), against any Claim to which any
of them may become subject, under the Securities Act, the Exchange Act or
otherwise, insofar as such Claim arises out of or is based upon any
Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written
information furnished to the Corporation by such Investor expressly for use
in connection with such Registration Statement; and such Investor will
promptly reimburse any legal or other expenses reasonably incurred by them
in connection with investigating or defending any such Claim; provided,
however, that the indemnity agreement contained in this Section 6(b) shall
not apply to amounts paid in settlement of any Claim if such settlement is
effected without the prior written consent of such Investor, which consent
shall not be unreasonably withheld; provided further, however, that the
Investor shall be liable under this Section 6(b) for only that amount of a
Claim as does not exceed the net proceeds to such Investor as a result of
the sale of Registrable Securities pursuant to such Registration Statement.
Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of such Indemnified Party and hall
survive the transfer of the Registrable Securities by the Investors
pursuant to Section 9. Notwithstanding anything to the contrary contained
herein, the indemnification agreement contained in this Section 6(b) with
respect to any preliminary prospectus shall not inure to the benefit of any
Indemnified Party if the untrue statement or omission of material fact
contained in the preliminary prospectus was corrected on a timely basis in
the prospectus, as then amended or supplemented.
(c) The Corporation shall be entitled to receive indemnities from underwriters,
selling brokers, dealer managers and similar securities industry
professionals participating in any distribution, to the same extent as
provided above, with respect to information such persons so furnished in
writing by such persons expressly for inclusion in the Registration
Statement.
(d) Promptly after receipt by an Indemnified Person or Indemnified Party under
this Section 6 of notice of the commencement of any action (including any
governmental action), such Indemnified Person or Indemnified Party shall,
if a Claim in respect thereof is to be made against any indemnifying party
under this Section 6, deliver to the indemnifying party a written notice of
the commencement thereof and his indemnifying party shall have the right to
participate in, and, to the extent the indemnifying party so desires,
jointly with any other indemnifying party similarly noticed, to assume
control of the defense thereof with counsel mutually satisfactory to the
indemnifying parties; provided, however, that an Indemnified Person or
Indemnified Party shall have the right to retain its own counsel, with the
fees and expenses to be paid by the indemnifying party, if, in the
reasonable opinion of counsel retained by the indemnifying party, the
representation by such counsel of the Indemnified Person or Indemnified
Party and the indemnifying party would be inappropriate due to actual or
potential differing interests between such Indemnified Person or
Indemnified Party and other party represented by such counsel in such
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proceeding. The Corporation shall pay for only one separate legal counsel
for the Investors; such legal counsel shall be selected by the Investors
holding a majority in interest of the Registrable Securities. The failure
to deliver written notice to the indemnifying party within a reasonable
time of the commencement of any such action shall not relieve such
indemnifying party of any liability to the Indemnified Person or
Indemnified Party under this Section 6, except to the extent that the
indemnifying party is prejudiced in its ability to defend such action. The
indemnification required by this Section 6 shall be made by periodic
payments of the amount thereof during the course of the investigation or
defense, as such expense, loss, damage or liability is incurred and is due
and payable.
7. Contribution. To the extent any indemnification provided for herein is
prohibited or limited by law, the indemnifying party agrees to make the maximum
contribution with respect to any amounts for which it would otherwise be liable
under Section 6 to the fullest extent permitted by law; provided, however, that
(a) no contribution shall be made under circumstances where the maker would not
have been liable for indemnification under the fault standards set forth in
Section 6, (b) no seller of Registrable Securities guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any seller of Registrable Securities who
was not guilty of such fraudulent misrepresentation, and (c) contribution by any
seller of Registrable Securities shall be limited in amount to the net amount of
proceeds received by such seller from the sale of such Registrable Securities.
8. Reports under Exchange Act. With a view to making available to the
Investors the benefits of Rule 144 or any other similar rule or regulation of
the SEC that may at any time permit the Investors to sell securities of the
Corporation to the public without registration, until such time as the Investors
have sold all the Registrable Securities pursuant to a Registration Statement or
Rule 144, the Corporation agrees to:
(a) make and keep public information available, as those terms are understood
and defined in Rule 144;
(b) file with the SEC in a timely manner all reports and other documents
required of the Corporation under the Securities Act and the Exchange Act;
and
(c) furnish to each Investor so long as such Investor owns Registrable
Securities, promptly upon request, (i) a written statement by the
Corporation that it has complied with the reporting requirements of Rule
144, the Securities Act and the Exchange Act, (ii) a copy of the most
recent annual or quarterly report of the Corporation and such other reports
and documents so filed by the Corporation and (iii) such other information
as may be reasonably requested to permit the Investors to sell such
securities pursuant to Rule 144 without registration.
9. Assignment of the Registration Rights. The rights to have the
Corporation register Registrable Securities pursuant to this Agreement shall be
automatically assigned by the Investors to transferees or assignees of all or
any portion of such securities only if: (a) the Corporation is, within a
reasonable time after such transfer or assignment, furnished with written notice
of (i) the name and address of such transferee or assignee and (ii) the
securities with respect to which such registration rights are being transferred
or assigned, (b) immediately following such transfer or assignment the further
disposition of such securities by the transferee or assignee is restricted under
the Securities Act and applicable state securities laws, and (c) at or before
the time the Corporation received the written notice contemplated by clause (a)
of this sentence the transferee or assignee agrees in writing with the
Corporation to be bound by all of the provisions contained herein.
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10. Amendment of Registration Rights. Any provision of this Agreement may
be amended and the observance thereof may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of the Corporation and Investors who hold a majority in interest
of the Registrable Securities. Any amendment or waiver effected in accordance
with this Section 10 shall be binding upon each Investor and the Corporation.
11. Miscellaneous.
(a) A person or entity is deemed to be a holder of Registrable Securities
whenever such person or entity owns of record such Registrable Securities.
If the Corporation receives conflicting instructions, notices or elections
from two or more persons or entities with respect to the same Registrable
Securities, the Corporation shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.
(b) Notices required or permitted to be given hereunder shall be in writing and
shall be deemed to be sufficiently given when personally delivered or when
sent by registered mail, return receipt requested, addressed (i) if to the
Corporation, at American Bio Medica Corporation, 102 Simons Road,
Ancramdale, New York 12503, Attention: Stan Cipkowski, (ii) if to the
Investor, at the address set forth under its name in the Subscription
Agreement and (iii) if to any other Investor, at such address as such
Investor shall have provided in writing to the Corporation, or at such
other address as each such party furnishes by notice given in accordance
with this Section 11(b), and shall be effective, when personally delivered,
upon receipt, and when so sent by certified mail, four business days after
deposit with the United States Postal Service.
(c) Failure of any party to exercise any right or remedy under this Agreement
or otherwise, or delay by a party in exercising such right or remedy, shall
not operate as a waiver thereof.
(d) This Agreement shall be enforced, governed by and construed in accordance
with the laws of the State of New York applicable to the agreements made
and to be performed entirely within such state. In the event that any
provision of this Agreement is invalid or unenforceable under any
applicable statute or rule of law, then such provision shall be deemed
inoperative to the extent that it may conflict therewith and shall be
deemed modified to conform with such statute or rule of law. Any provision
hereof which may prove invalid or unenforceable under any law shall not
affect the validity or enforceability of any other provision hereof.
(e) This Agreement constitutes the entire agreement among the parties hereto
with respect to the subject matter hereof. There are no restrictions,
promises, warranties or undertakings, other than those set forth or
referred to herein. This Agreement supersedes all prior agreements and
understandings among the parties hereto with respect to the subject matter
hereof.
(f) Subject to the requirements of Section 9 hereof, this Agreement shall inure
to the benefit of and be binding upon the successors and assigns of each of
the parties hereto.
(g) All pronouns and any variations thereof refer to the masculine, feminine or
neuter, singular or plural, as the context may require.
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(h) The headings in the Agreement are for convenience of reference only and
shall not limit or otherwise affect the meaning hereof.
(i) This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original but all of which shall constitute one and the
same agreement. This Agreement, once executed by a party, may be delivered
to the other party hereto by telephone line facsimile transmission of a
copy of this Agreement bearing the signature of the party so delivering
this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed by their respective officers thereunto duly authorized as of day and
year first above written.
AMERICAN BIO MEDICA CORPORATION
By:
Stan Cipkowski,
President
------------------------
If an entity by:
--------------------
Title: -----------------
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