<PAGE> 1
As filed with the Securities and Exchange Commission on November ___, 2000
Registration No. _____ - _________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
AMERICAN BIO MEDICA CORPORATION
(Name of Small Business Issuer in its charter)
<TABLE>
<S> <C> <C>
New York 5122 14-1702188
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation of organization) Classification Code Number) Identification No.)
</TABLE>
122 Smith Road
Kinderhook, New York 12106
800-227-1243
(Address and Telephone Number of Principal Executive Offices and
Principal Place of Business)
Stan Cipkowski
Chairman, President and
Chief Executive Officer
122 Smith Road
Kinderhook, New York 12106
800-227-1243
(Name, Address and Telephone Number of Agent for Service)
Copies to:
Michael J. Gamsky, Esq.
Hopkins & Sutter
Three First National Plaza
Chicago, Illinois 60602
(312)558-6750
Approximate date of commencement of proposed sale to the public: At such time or
times after the Registration Statement becomes effective as the selling
shareholder may determine.
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
<PAGE> 2
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
----------------------------- --------------------------- --------------- -------------------- -------------------
Proposed
maximum
Title of each class Amount offering
of securities to be to be price per Maximum aggregate Amount of
registered registered share offering price registration fee
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Shares 1,408,450 shares $1.125(1) $1,584,506(1) $418
------------------------------------------------------------------------------------------------------------------
Common Shares underlying
exercise of Warrants 953,283 shares $1.1689 $1,114,293 $294
------------------------------------------------------------------------------------------------------------------
Total registration fee $712
------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933, as amended, on the
basis of the average of the high and low sales prices for such common shares on
November 14, 2000 as reported on the Nasdaq SmallCap Market.
(2) Pursuant to Rule 416, the Registration Statement also registers an
indeterminate number of common shares as may be issued or become issuable upon
and exercise of the Warrants in accordance with their respective terms to
prevent dilution resulting from stock splits, stock dividends or similar
transactions.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
<PAGE> 3
SUBJECT TO COMPLETION, DATED NOVEMBER ____, 2000
AMERICAN BIO MEDICA CORPORATION
2,361,733 SHARES COMMON SHARES
In this prospectus, "ABMC", "we", "us" and "our" refer to American Bio Medica
Corporation.
2,361,733 common shares, par value $.01 per share are being offered by this
prospectus, of which up to 953,283 are common shares issuable upon the exercise
of common share purchase warrants. The shares will be sold from time to time by
the selling shareholder named in this prospectus. We will not receive any of the
proceeds from the sale of the shares.
Our common shares trade on the Nasdaq SmallCap Market under the symbol "ABMC".
On November 14, 2000, the average for the high and low price of our common
shares on the Nasdaq SmallCap Market was $1.125 per share.
THE SHARES OFFERED IN THIS PROSPECTUS INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 4 OF THIS PROSPECTUS FOR INFORMATION THAT YOU SHOULD
CONSIDER BEFORE PURCHASING THESE SECURITIES.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is ______ __, 2000
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. The Selling Shareholder is offering to sell common
shares, and seeking offers to buy common shares, only in those jurisdictions
where offers and sales are permitted. The information contained in this
prospectus is accurate only as of the date of this prospectus, regardless of the
time of delivery of this prospectus or any sale of our common shares.
<PAGE> 4
TABLE OF CONTENTS
Page
SUMMARY..............................................................3
RISK FACTORS.........................................................4
FORWARD-LOOKING STATEMENTS...........................................7
USE OF PROCEEDS......................................................7
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.............7
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION............8
BUSINESS............................................................14
MANAGEMENT..........................................................23
PRINCIPAL STOCKHOLDERS..............................................27
RELATED PARTY TRANSACTIONS..........................................28
DESCRIPTION OF SECURITIES...........................................29
SELLING SHAREHOLDER.................................................30
PLAN OF DISTRIBUTION................................................30
LEGAL MATTERS.......................................................31
EXPERTS.............................................................31
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES......................31
WHERE YOU CAN FIND ADDITIONAL INFORMATION...........................32
FINANCIAL STATEMENTS...............................................F-1
2
<PAGE> 5
SUMMARY
The information below is only a summary of more detailed information included in
other sections of this prospectus. The other information is important, so please
read this entire prospectus carefully.
American Bio Medica Corporation
We are primarily engaged in acquiring, developing, manufacturing and marketing
biomedical technologies and products. We own a technology, for which patents
have been granted, for screening drugs of abuse, using the adopted trademark the
"Rapid Drug Screen". Our common shares trade on the Nasdaq SmallCap Market under
the trading symbol "ABMC".
We produce several versions of a drugs of abuse screening test, called the
"Rapid Drug Screen" at our manufacturing facility in Columbia County, New York.
The Rapid Drug Screen is a one-step test that allows a small urine sample to be
tested for the presence or absence of up to nine drugs of abuse (cocaine, THC
(marijuana), opiates, amphetamine, PCP, benzodiazepines, methamphetamine,
barbiturates, and tricyclic antidepressants) simultaneously.
The competitively priced test is self-contained, thereby preventing exposure of
the test administrator to the urine sample. In our opinion, the Rapid Drug
Screen, which requires no mixing of reagents, pipetting, or manipulation of the
test, is easier to use than any other competitive product. In addition, hundreds
of controlled tests conducted by independent laboratories compared the Rapid
Drug Screen with results produced by EMIT II, a standard laboratory test, and
found a 100% correlation of both positive and negative test results. As a
result, we believe that the Rapid Drug Screen is as accurate as that laboratory
test.
Versions of the Rapid Drug Screen include two-two panel tests (cocaine and
THC/methamphetamine and THC), three-three panel tests (THC, cocaine and
opiates/THC, cocaine and amphetamine/THC, cocaine and methamphetamine), two-five
panel tests (cocaine, THC, opiates, PCP and amphetamine/cocaine, THC, opiates,
methamphetamine and amphetamine), an eight panel test (cocaine, THC, opiates,
PCP, amphetamine, benzodiazepines, methamphetamines and barbiturates), and a
nine panel test (includes all drugs of abuse from the eight panel in addition to
tricyclic antidepressants). Additional versions of the Rapid Drug Screen can be
produced by us, on special order, for any quantity (from two - nine) or
configuration of drugs. The Federal Drug Administration (the "FDA") has granted
510(k) clearances for the three, five, eight, and nine panel tests and these
tests can be sold in clinical as well as non-clinical markets. We have developed
ten tests trademarked "Rapid One", each of which detects one drug of abuse
(cocaine, THC, opiates, amphetamine, PCP, benzodiazepines, methamphetamines,
barbiturates, tricyclic antidepressants and methadone). We have received 510(k)
clearance on the cocaine, THC, opiates, amphetamine, barbiturates, and
benzodiazepine Rapid One tests.
In January 2000, we acquired the exclusive rights for distribution and marketing
of a patented onsite drug detection system in North and South America. We have
adopted the trademark the "Drug Detector" for this product. The Drug Detector
tests for the presence or absence of residue on surfaces from marijuana,
cocaine, heroin, or methamphetamines without the need for urine, hair, or saliva
samples.
We also own a patented low cost method for producing keratin proteins. We have
no intention of developing or marketing our keratin technology at this time.
Instead, we intend to concentrate on the production and marketing of our drug
screen tests and pursuing development and acquisition strategies related to
onsite diagnostic testing markets. We may develop or acquire additional
biomedical technologies or products in the future unrelated to substance abuse
testing.
3
<PAGE> 6
Since our inception to April 30, 2000, we have an accumulated deficit of
$11,643,000. We believe that our accumulated deficit is the result of the
on-going development, marketing, and distribution of our Rapid Drug Screen test.
During the year ended April 30, 2000, we sustained a net loss from operations of
$2,136,000 and used net cash of $846,000 in operating activities. We are in the
process of taking a number of steps to improve our financial prospects including
focusing our efforts on sales of existing products, implementing certain cost
reductions and production efficiencies and taking other measures to enhance
profit margins.
Our headquarters are located at 122 Smith Road, Kinderhook, New York 12106. Our
telephone number is 800-227-1243.
<TABLE>
<CAPTION>
The Offering
<S> <C>
Common shares outstanding as of November 15, 2000....... 18,045,548
Common shares offered by ABMC........................... No shares
Common shares offered by selling shareholder............ 2,361,733 which includes up to
953,283 common shares issuable
upon the exercise of warrants
Use of proceeds......................................... We will not receive any part of
the proceeds from the sales of
these shares of our common
stock. We will receive, however,
the sale price of any warrants
that are issued to the Selling
Shareholder if, and to the
extent, that the Selling
Shareholder elects to exercise
such warrants. All such
proceeds will be used by us for
general corporate purposes.
Nasdaq SmallCap Market Trading Symbol................... ABMC
</TABLE>
RISK FACTORS
THE 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 PROSPECTIVE PURCHASER, PRIOR TO MAKING AN INVESTMENT
DECISION, SHOULD CAREFULLY CONSIDER, ALONG WITH OTHER MATTERS REFERRED TO
HEREIN, THE FOLLOWING RISK FACTORS:
WE HAVE INCURRED OPERATING LOSSES AND MAY INCUR LOSSES IN THE FUTURE.
We incurred a net loss of $1,691,000 and $2,136,000 for our 1999 and 2000 fiscal
years, respectively. As of April 30, 2000, we had an accumulated deficit of
$11,643,000. There can be no assurance as to our future profitability.
4
<PAGE> 7
WE HAVE A LIMITED ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS AND OTHERS
COULD INFRINGE ON OR MISAPPROPRIATE OUR PROPRIETARY RIGHTS.
Our success depends in part on our ability to maintain and enforce our patents
and other proprietary rights. We rely on a combination of patents, trademarks,
trade secrets, know-how and confidentiality agreements to protect the
proprietary aspects of its technology. These measures afford only limited
protection and competitors may gain access to our intellectual property and
proprietary information. The patent positions of biomedical product companies
are generally uncertain and involve complex legal and technical issues.
Litigation has been, and may in the future be, necessary to enforce our
intellectual property rights, to protect our trade secrets and to determine the
validity and scope of our proprietary rights. Any litigation could be costly and
divert our attention from the growth of the business. We cannot assure investors
that our patents and other proprietary rights will not be successfully
challenged, or that others will not independently develop substantially
equivalent information and technology or otherwise gain access to our
proprietary technology. We may be sued by third parties which claim that our
products infringe on their intellectual property rights.
WE MAY NEED TO RAISE CAPITAL AND WE CANNOT BE CERTAIN THAT ADDITIONAL FINANCING
WILL BE AVAILABLE.
We expect that our cash on hand and cash from operations will be sufficient to
fund our proposed operations through April 30, 2001. 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 our drug test kits and other technologies
could make cash on hand insufficient to fund our proposed operations. The
Company is currently negotiating the sale of additional equity securities to a
private institutional investor to provide additional funds for working capital
and capital expenditures. There can be no assurance that this financing or any
financing will be completed or will be available on satisfactory terms. In
addition, financing may result in further dilution to our then existing
shareholders. We have no established borrowing arrangements or available lines
of credit.
THE MARKET PRICE OF OUR COMMON SHARES COULD DECLINE AND SHAREHOLDER'S PERCENTAGE
INTEREST MAY BE REDUCED AS A RESULT OF THE ISSUANCE OF COMMON SHARES PURSUANT TO
WARRANTS.
As part of our sale of 1,408,450 common shares for $2,000,000 ($1.41 per share)
in a private placement to Seaside Partners, LLC on April 28, 2000, we issued a
five-year warrant to Seaside to purchase up to 953,283 common shares on October
28, 2000. The specific number of common shares subject to the Seaside warrant
was determined pursuant to a formula based partially on the average of the
closing prices of the common shares on the Nasdaq SmallCap Market on the 10
consecutive trading days immediately preceding the date of the six-month
anniversary of the closing date of the Seaside private placement. The exercise
price per share for the common shares subject to the Seaside warrant is the
anniversary price or $1.1689 per share. As of November 15, 2000, we also had
warrants outstanding to purchase 7,355 common shares at a price of $4.81 per
share, 101,987 common shares at a price of $4.71 per share and 200,000 common
shares at a price of $2.00 per share.
The issuance and exercise of the Seaside warrant and the sale of such common
shares and/or the exercise of the outstanding warrants and the sale of such
common shares could have a significant negative impact on the market price of
the common shares and could materially impair our ability to raise capital
through the future sale of equity securities. All of the
5
<PAGE> 8
warrants are subject to or contain certain anti-dilution protections that may
result in the issuance of additional shares under certain circumstances.
OUR LIMITED OPERATING HISTORY MAKES EVALUATING OUR BUSINESS DIFFICULT.
Although we were formed in 1986, as far as the development, manufacture and sale
of drug testing kits are concerned, we have an extremely limited operational
history upon which investors may base an evaluation of our performance or any
assumption as to the likelihood that we will be profitable. Our 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 we operate. Since our entry into the biomedical
business, we have generated limited revenues. There can be no assurance that we
will be able to generate significant revenues or achieve profitable operations.
OUR BUSINESS MAY SUFFER IF NEW CUSTOMERS DO NOT ACCEPT OUR PRODUCTS.
Our drug test kits have been well received by customers, including corporations,
distributors and correctional institutions. As is typically the case with an
emerging company, demand and market acceptance for newly introduced products is
subject to a high level of uncertainty. Achieving continued market acceptance
for our 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 our kits. There can be
no assurance that our drug test kits will become generally accepted or that our
efforts will result in successful product commercialization or initial or
continued market acceptance for our other drug testing products. In addition,
continued market acceptance will depend on our ability to upgrade our
technology.
COMPETITION COULD REDUCE OUR MARKET SHARE AND HARM OUR BUSINESS.
We face competition from other manufacturers of drug test kits. Some of our
competitors are well known and have far greater financial resources than we do.
To the best of our knowledge, and in our opinion, no competitors have introduced
products which equal the ease of use combined with the accuracy of our Rapid
Drug Screen product line and Rapid One. 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 ours are not
currently under development. There can be no assurance that other companies will
not attempt to develop or market competing products directly competitive with
our Rapid Drug Screen product line and Rapid One. Despite protections which are
available to us under our patents, we expect other companies to attempt to
develop technologies or products which will compete with our products.
IF WE LOSE OUR KEY PERSONNEL, OR FAIL TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL, OUR BUSINESS AND GROWTH MAY SUFFER.
Our future success depends on the continued services of a relatively small
number of key technical and senior management personnel, including Stan
Cipkowski, our Chairman, President and Chief Executive Officer, Jay Bendis, our
Vice President- Sales and Marketing, and Douglas Casterlin, our Vice President
of Operations, none of whom presently has an employment contract with us. Our
future success also depends on our continuing ability to attract and retain
other highly qualified technical, sales and managerial personnel.
6
<PAGE> 9
Competition for these people is intense, and we have at times in the past
experienced difficulty in recruiting qualified personnel. The loss of any member
of our key technical, sales and senior management personnel or the inability to
attract and retain additional qualified personnel could have a material adverse
effect on our business.
WE HAVE ADOPTED ANTI-TAKEOVER PROVISIONS THAT COULD AFFECT THE MARKET PRICE OF
OUR COMMON SHARES OR OUR ABILITY TO SELL OUR BUSINESS.
Certain provisions of our amended and restated certificate of incorporation and
our by-laws could make it more difficult for a third party to acquire us, even
if doing so would be beneficial to our stockholders. In addition, certain
provisions of New York law and our stock incentive plans may also have the
effect of discouraging, delaying or preventing a sale.
OUR COMMON STOCK PURCHASE AGREEMENT WITH SEASIDE PARTNERS REQUIRED FILING BY
OCTOBER 28, 2000 TO AVOID PENALTIES.
The Common Stock Purchase Agreement that the Company entered into with Seaside
Partners in connection with the private placement of 1,408,450 common shares
for $2,000,000 provided that the Company was obligated to register these shares
by filing a registration statement with the SEC and to have the registration
statement declared effective by October 28, 2000. The Common Stock Purchase
Agreement further provided that the Company would be obligated to pay to
Seaside Partners liquidated damages in an amount equal to five percent per
month (or any part thereof), compounded monthly on $2,000,000 for the period
beginning on October 29, 2000 and ending on the date the registration statement
is declared effective by the SEC. As of November 15, 2000, the registration
statement has not been declared effective and the Company is obligated to pay
liquidated damages to Seaside Partners. The amount of the liquidated damages
will depend on the date this registration statement is declared effective. For
example, if this registration statement is not declared effective by December
31, 2000, the Company will be obligated to pay Seaside $215,186. The Company
will also be obligated to pay liquidated damages based on the same formula with
respect to the Warrants if this registration statement is not declared
effective by January 26, 2001. The Company is currently working closely with
Seaside to secure a waiver on this penalty for a period of 30 days to
facilitate the filing of this registration statement.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements regarding our plans,
expectations, estimates and beliefs. These statements involve risks and
uncertainties, and actual results could differ materially from those reflected
in the forward-looking statements. Forward-looking statements in the prospectus
are typically identified by words such as "believes," "anticipates," "expects,"
"intends," "will" and "may" and other similar expressions. In addition any
statements that refer to expectations, projections or other characterizations of
future events or circumstances are forward-looking statements. We will not
necessarily update the information in this prospectus if and when any
forward-looking statement later turns out to be inaccurate. Some of the
important risks and uncertainties that may affect our future results and
performance are described in "Risk Factors" above. Additional information about
factors that could affect our future results and events is included later in
this prospectus and in our periodic reports which are filed with the SEC.
USE OF PROCEEDS
We will not receive any part of the proceeds from the sales of these shares of
our common shares. If all the warrants issued to Seaside Partners are exercised,
the gross proceeds to us from the exercise of the warrants will be approximately
$1,114,293. We intend to use the proceeds for working capital and general
corporate purposes. We will pay for the cost of registering the common shares in
this offering.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The table below sets forth the range of high and low sale prices for the fiscal
years 1999 and 2000 and the first and second quarters of the fiscal year 2001 on
the Nasdaq SmallCap Market. As of November 15, 2000 there were approximately
4,000 holders of common shares.
Fiscal Year Ending April 30, 2001 High Low
--------------------------------- ---- ---
Second Quarter $1.50 $0.969
First Quarter $2.00 $1.125
Fiscal Year Ending April 30, 2000 High Low
--------------------------------- ---- ---
Fourth Quarter $4.25 $1.31
Third Quarter $2.50 $1.06
Second Quarter $2.25 $1.25
First Quarter $1.96 $1.25
7
<PAGE> 10
Fiscal Year Ending April 30, 1999 High Low
--------------------------------- ---- ---
Fourth Quarter $1.87 $1.75
Third Quarter $2.87 $2.75
Second Quarter $3.00 $2.62
First Quarter $3.53 $3.31
As of November 15, 2000 there were outstanding 18,045,548 Common shares. The
Company has not declared any dividends on the Common shares and does not expect
to do so in the foreseeable future.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED APRIL 30, 2000 (THE "2000 FISCAL
YEAR") COMPARED TO THE FISCAL YEAR ENDED APRIL 30, 1999 (THE "1999 FISCAL YEAR")
Net sales were $7,653,000 for the 2000 Fiscal Year as compared to $7,038,000 for
the 1999 Fiscal Year, representing an increase of $615,000 or 8.7%. During the
2000 Fiscal Year, the Company continued its extensive program to market and
distribute its primary product, the Rapid Drug Screen((TM)). The Company
believes that sales from drug test kits will continue to grow steadily.
Cost of goods sold for the 2000 Fiscal Year was $3,602,000 or 47.1% of net sales
as compared to $3,356,000 or 47.7% of net sales for the 1999 Fiscal Year. Based
on the extensive cost reduction program aimed specifically at its in-place
production process undertaken by the Company and the commencement of its
in-house manufacturing of drug test strips, the Company believes that it can
continue to decrease the cost of goods sold as a percentage of net sales.
Although net sales of drug test kits in the 2000 Fiscal Year increased 17.8%
compared to the 1999 Fiscal Year, the 2000 Fiscal Year percentage increase in
net sales was significantly less than the 226.4% increase in the 1999 Fiscal
Year compared to the 1998 Fiscal Year. Management believes that the Company's
net sales were significantly impacted by the production and sale of a
"knock-off" product by a former supplier. Certain of the Company's former
distributors also began selling the knock-off product in the 2000 Fiscal Year.
The Company has filed a lawsuit against the former supplier and certain of the
former distributors alleging patent infringement, trademark dilution and unfair
competition. As of July 31, 2000, the Company has settled the claims against two
former distributors and is in the final stages of settlement negotiations with a
third former distributor. Management believes that as the Company successfully
settles these lawsuits or the courts rule in favor of the Company following the
trial of these lawsuits, the Company's net sales will significantly increase.
While revenues increased 8.7% in the 2000 Fiscal Year, selling, general and
administrative costs increased $183,000 or 3.6% to $5,223,000 for the 2000
Fiscal Year compared to $5,040,000 for the 1999 Fiscal Year.
8
<PAGE> 11
The following table sets forth the percentage relationship of selling, general
and administrative costs to net sales for both years:
<TABLE>
<CAPTION>
2000 Percent 1999 Percent
Fiscal Year of Sales Fiscal Year of Sales
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Sales salaries and commissions $ 1,033,000 13.5% $1,047,000 14.9%
Sales travel 439,000 5.7 496,000 7.0
Consulting and other selling expenses 936,000 12.2 441,000 6.3
Marketing and promotion 265,000 3.5 883,000 12.5
Investor relations costs 225,000 3.0 138,000 2.0
Legal fees 951,000 12.4 489,000 6.9
Accounting fees 80,000 1.1 81,000 1.2
Office salaries 667,000 8.7 507,000 7.2
Payroll taxes and insurance 174,000 2.3 187,000 2.7
Telephone 139,000 1.8 100,000 1.4
Insurance 49,000 0.6 43,000 0.6
Bad debts 79,000 1.0 13,000 0.2
Other administrative costs 186,000 2.4 615,000 8.7
----------- ---- ---------- -----
Total selling, general and
administrative costs $ 5,223,000 68.2% $5,040,000 71.6%
=========== ==========
</TABLE>
Management believes that the amount of selling, general and administrative costs
will increase as the Company continues to create the necessary infrastructure to
meet the Company's worldwide drug test marketing and production goals. These
costs will also increase as the Company increases its marketing efforts relating
to over-the-counter sales of the Drug Detector and increases its direct selling
efforts in connection with all of the Company's products. As a result of
increasing sales, the Company expects selling, general and administrative costs
to continue to decline as a percentage of net sales.
As a result of relocating its marketing department to New York, marketing and
promotion costs (included in selling, general and administrative costs)
decreased $618,000 or 8.1% of net sales to $265,000 for the 2000 Fiscal Year
compared to $883,000 for the 1999 Fiscal Year.
Legal fees for the 2000 Fiscal Year were $951,000 or 12.4% of net sales, an
increase of $462,000 compared to legal fees of $489,000 or 6.9% of net sales for
the 1999 Fiscal Year. This increase in legal fees is primarily due to the
substantial legal fees incurred in connection with the lawsuits filed against a
former supplier and certain former distributors in connection with the
production and sale of a knock-off product. Management believes that the
Company's successful prosecution of these lawsuits will result in a significant
increase in the Company's sales revenue.
During the 2000 Fiscal Year, the Company issued 300,000 Common shares and
granted options to purchase 297,250 Common shares as compensation for consulting
and professional services and previously unamortized option related costs
resulting in a non-cash compensation charge of $367,000 or 4.8% of net sales.
The non-cash compensation charge incurred in the 1999 Fiscal Year was $91,000.
Research and development expenses for the 2000 Fiscal Year were $799,000
compared to $336,000 for the 1999 Fiscal Year. This increase represents a
continuation of the Company's efforts to develop improved methods to reduce the
cost of manufacturing its drug test kits and to develop and produce the drug
testing strip for TCA included in the Company's nine panel version of the Rapid
Drug Screen.
Net loss from operations increased to $(2,136,000) for the 2000 Fiscal Year
compared to $(1,691,000) for the 1999 Fiscal Year.
9
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES AS OF APRIL 30, 2000
The Company had working capital of $2,016,000 at April 30, 2000 as compared to
working capital of $2,387,000 at April 30, 1999. The Company has historically
satisfied its working capital requirements principally through proceeds from
private placements of equity securities with institutional investors. The
Company has never paid any dividends on its Common shares. The Company
anticipates that all future earnings, if any, will be retained for use in the
Company's business and it does not anticipate paying any cash dividends.
Net cash used in operating activities was $846,000 for the 2000 Fiscal Year
compared to net cash used in operating activities of $2,008,000 for the 1999
Fiscal Year. The net cash used in operating activities in the 2000 Fiscal Year
was primarily due to the net loss of $2,136,000 offset by a reduction of
inventory of $356,000, issuance of compensatory stock and stock options of
$367,000 and an increase in accounts payable and accrued expenses of $535,000.
The net cash used in operating activities in the 1999 Fiscal Year was primarily
due to the net loss of $1,691,000 and increases in accounts receivable and
inventory of $339,000 and $843,000 respectively, offset by an increase in
accounts payable and accrued expenses of $663,000.
Net cash provided by investing activities was $64,000 for the 2000 Fiscal Year
compared to net cash used in investing activities of $1,092,000 for the 1999
Fiscal Year. The net cash provided from investing activities for the 2000 Fiscal
Year was primarily due to sales and maturity of investments of $571,000 offset
by a purchase of investments of $73,000, a $280,000 loan to BioSys, Inc. and
purchases of plant, property and equipment of $145,000. The net cash used in
investing activities in the 1999 Fiscal Year was primarily due to a purchase of
investments of $1,812,000 offset by sales and maturities of investments of
$969,000.
Net cash provided by financing activities was $1,858,000 for the 2000 Fiscal
Year compared to net cash used in financing activities of $8,000 for the 1999
Fiscal Year. The net cash provided by financing activities in the 2000 Fiscal
Year was primarily due to the sale by the Company of 1,408,450 Common shares for
$2,000,000 in a private placement to Seaside Partners, LLC on April 28, 2000
offset by repayment of note payable to stockholder of $130,000.
At April 30, 2000 the Company had cash and cash equivalents of $1,207,000.
The Company's primary short-term needs are to increase its manufacturing and
production capabilities, decrease current inventory levels and continue to
support its research and development programs, finance its patent infringement
litigation and to increase its direct sales force. The Company currently plans
to expend approximately $100,000 for the expansion and development of its
manufacturing facilities in addition to its marketing and general administrative
programs.
The Company expects its capital requirements to increase over the next several
years as it expands its research and development efforts, sales and
administration infrastructure, manufacturing capabilities and facilities and, if
the required contingencies are resolved, purchases the Kinderhook, New York
facility. 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.
10
<PAGE> 13
RESULTS OF OPERATIONS FOR THE FISCAL QUARTER ENDED JULY 31, 2000 (THE "2001
FIRST QUARTER") COMPARED TO THE FISCAL QUARTER ENDED JULY 31, 1999 (THE "2000
FIRST QUARTER")
Net sales were $2,155,000 for the 2001 First Quarter as compared to $2,127,000
for the 2000 First Quarter, representing an increase of $28,000 or 1.3%. During
the 2001 First Quarter, the Company continued its extensive program to market
and distribute its primary product, the Rapid Drug Screen((TM)). The Company
believes that sales from drug test kits will continue to grow steadily.
Cost of goods sold for the 2001 First Quarter was $742,000 or 34.4% of net sales
as compared to $1,067,000 or 50.2% of net sales for the 2000 First Quarter. This
decrease resulted primarily from the Company's extensive cost reduction program
aimed specifically at its in-place production process and the Company's in-house
manufacturing of drug test strips.
Although net sales of drug test kits in the 2001 First Quarter increased 1.3%
compared to the 2000 First Quarter, the 2001 First Quarter percentage increase
in net sales was significantly less than the 74.3% increase in the 2000 First
Quarter compared to the 1999 First Quarter. Management believes that the
Company's net sales were significantly impacted by the production and sale of a
"knock-off" product by a former supplier. Certain of the Company's former
distributors also began selling the knock-off product in the 2000 Fiscal Year.
The Company has filed a lawsuit against the former supplier and certain of the
former distributors alleging patent infringement, trademark dilution and unfair
competition. As of September 8, 2000, the Company has settled the claims against
two former distributors and is in the final stages of settlement negotiations
with a third former distributor. See "Note C - Litigation" to the Company's
unaudited financial statements. Management believes that as the Company
successfully settles these lawsuits or the courts' rule in favor of the Company
following the trial of these lawsuits, the Company's net sales will
significantly increase.
While revenues increased 1.3% in the 2001 First Quarter, selling, general and
administrative costs increased $484,000 or 53.4% to $1,391,000 for the 2001
First Quarter compared to $907,000 for the 2000 First Quarter.
11
<PAGE> 14
The following table sets forth the percentage relationship of selling, general
and administrative costs to net sales for both fiscal quarters:
<TABLE>
<CAPTION>
2001 Percent 2000 Percent
First Quarter Of Sales First Quarter Of Sales
------------- -------- ------------- --------
<S> <C> <C> <C> <C>
Sales salaries and commissions $ 187,000 8.7% $250,000 11.8%
Sales travel 99,000 4.6% 99,000 4.7%
Consulting and other selling 122,000 5.7% 80,000 3.8%
Marketing and promotion 141,000 6.5% 54,000 2.5%
Investor relations costs 95,000 4.4% 40,000 1.9%
Legal fees 323,000 15.0% 104,000 4.9%
Accounting fees 81,000 3.8% 20,000 0.9%
Office salaries 176,000 8.2% 126,000 5.9%
Payroll taxes and insurance 48,000 2.2% 38,000 1.8%
Telephone 38,000 1.8% 28,000 1.3%
Insurance 13,000 0.6% 11,000 0.5%
Bad debts 9,000 0.4% 17,000 0.8%
Other administrative costs 59,000 2.7% 40,000 1.9%
---------- --------
Total selling, general and
administrative costs $1,391,000 64.6% $907,000 42.7%
========== ========
</TABLE>
Management believes that the amount of selling, general and administrative costs
will increase as the Company continues to create the necessary infrastructure to
meet the Company's worldwide drug test marketing and production goals. These
costs will also increase as the Company increases its marketing efforts relating
to over-the-counter sales of the Drug Detector and increases its direct selling
efforts in connection with all of the Company's products.
Legal fees for the 2001 First Quarter were $323,000 or 15.0% of net sales, an
increase of $219,000, compared to legal fees of $104,000 or 4.9% of net sales
for the 2000 First Quarter. This increase in legal fees is primarily due to the
substantial legal fees incurred in connection with the lawsuits filed against a
former supplier and certain former distributors in connection with the
production and sale of a knock-off product. Management believes that the
Company's successful prosecution of these lawsuits will result in a significant
increase in the Company's sales revenue.
As a result of expenses associated with an internal restructuring of its
marketing department, marketing and promotion costs increased $87,000 to
$141,000 or 6.5% of net sales for the 2001 First Quarter compared to $54,000 or
2.5% of net sales for the 2000 First Quarter.
Office salaries for the 2001 First Quarter were $176,000 or 8.2% of net sales,
an increase of $50,000, compared to office salaries of $126,000 or 5.9% of net
sales for the 2000 First Quarter. This increase was primarily due to an increase
in staff in purchasing and quality assurance.
Accounting fees for the 2001 First Quarter were $81,000 or 3.8% of net sales, an
increase of $61,000, compared to accounting fees of $20,000 or 0.9% of net
sales. This increase was primarily due to an increase in accounting fees
12
<PAGE> 15
incurred in completing the audit of the Company's financial statements for the
2000 Fiscal Year.
The increases in legal fees, marketing and promotion costs, office salaries and
accounting fees during the 2001 First Quarter were partially offset by decreases
in sales salaries and commissions. Sales salaries and commissions for the 2001
First Quarter were $187,000 or 8.7% of net sales, a decrease of $63,000,
compared to sales salaries and commissions of $250,000 or 11.8% of net sales for
the 2000 First Quarter. This decrease was primarily due to a reduction in staff.
Depreciation expense increased $5,000 to $29,000 or 1.3% of net sales for the
2001 First Quarter compared to depreciation of $24,000 or 1.1% of net sales for
the 2000 First Quarter.
The Company incurred a non-cash compensation charge of $182,000 or 8.4% of net
sales associated with the issuance of common shares and grants of options to
purchase common shares in the 2001 First Quarter as compensation for consulting
and professional services. No non-cash compensation charge was incurred in the
2000 First Quarter.
Research and development expenses for the 2001 First Quarter were $119,000
compared to $235,000 for the 2000 First Quarter. This decrease was primarily due
to the Company's successful implementation of certain quality standards in the
manufacturing of the Rapid Drug Screen((TM)) product during Fiscal 2000.
Net loss from operations increased to $308,000 for the 2001 First Quarter
compared to $106,000 for the 2000 First Quarter.
LIQUIDITY AND CAPITAL RESOURCES AS OF JULY 31, 2000
The Company had working capital of $1,716,000 at July 31, 2000 as compared to
working capital of $2,016,000 at April 30, 2000. The Company has historically
satisfied its working capital requirements principally through proceeds from
private placements of equity securities with institutional investors. The
Company has never paid any dividends on its Common shares. The Company
anticipates that all future earnings, if any, will be retained for use in the
Company's business and it does not anticipate paying any cash dividends.
Net cash used in operating activities was $216,000 for the 2001 First Quarter
compared to net cash used in operating activities of $226,000 for the 2000 First
Quarter. The net cash used in operating activities in the 2001 First Quarter was
primarily due to the net loss of $273,000 and an increase in accounts receivable
of $228,000 offset by issuance of compensatory stock and stock options of
$182,000 and an increase in accounts payable and accrued expenses of $158,000.
The net cash used in operating activities in the 2000 First Quarter was
primarily due to the net loss of $27,000 and an increase in accounts receivable
of $347,000 offset by a decrease in inventory of $107,000.
Net cash used in investing activities was $233,000 for the 2001 First Quarter
compared to net cash provided by investing activities of $238,000 for the 2000
First Quarter. The net cash used in investing activities for the 2001 First
Quarter was due to an additional $100,000 loan to BioSys, Inc. and an additional
$118,000 loan to a director/stockholder. The net cash provided by investing
activities in the 2000 First Quarter was primarily due to sales and maturities
of investments of $342,000 offset by purchases of investments of $73,000 and
property plant and equipment of $31,000.
Net cash used in financing activities was $128,000 for the 2001 First Quarter
compared to net cash used in financing activities of $104,000 for the 2000 First
Quarter. The net cash used in
13
<PAGE> 16
financing activities in the 2001 First Quarter and the 2000 First Quarter was
primarily due to the settlement of registration rights agreement.
At July 31, 2000, the Company had cash and cash equivalents of $630,000.
The Company's primary short-term needs are to increase its manufacturing and
production capabilities, decrease current inventory levels, continue to support
its research and development programs, finance its patent infringement
litigation and to increase its direct sales force. The Company currently plans
to expend approximately $100,000 for the expansion and development of its
manufacturing facilities in addition to its marketing and general administrative
programs.
The Company expects its capital requirements to increase over the next several
years as it expands its research and development efforts, sales and
administration infrastructure, manufacturing capabilities and facilities and, if
the required contingencies are resolved, purchases the Kinderhook, New York
facility. 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 Common Stock Purchase Agreement that the Company entered into with Seaside
Partners in connection with the private placement of 1,408,450 common shares for
$2,000,000 provided that the Company was obligated to register these shares by
filing a registration statement with the SEC and to have the registration
statement declared effective by October 28, 2000. The Common Stock Purchase
Agreement further provided that the Company would be obligated to pay to Seaside
Partners liquidated damages in an amount equal to five percent per month (or any
part thereof), compounded monthly on $2,000,000 for the period beginning on
October 29, 2000 and ending on the date the registration statement is declared
effective by the SEC. As of November 15, 2000, the registration statement has
not been declared effective and the Company is obligated to pay liquidated
damages to Seaside Partners. The amount of the liquidated damages will depend on
the date this registration statement is declared effective. For example, if this
registration statement is not declared effective by December 31, 2000, the
Company will be obligated to pay Seaside $215,186. The Company will also be
obligated to pay liquidated damages based on the same formula with respect to
the Warrants if this registration statement is not declared effective by January
26, 2001.
The Company believes that its available cash and cash from operations will be
sufficient to satisfy its funding needs through April 30, 2001. The Company is
negotiating the sale of additional equity securities to a private institutional
investor to provide additional funds for working capital and capital
expenditures. There can be no assurance that this financing will be available on
satisfactory terms.
BUSINESS
ABMC has developed and markets its trademarked "Rapid Drug Screen" a test for
one, two, three, five, eight, and nine drugs of abuse, which can be used in all
situations where an immediate test result is required. The product consists of a
credit-card size test card divided into two, three, five, eight, or nine
lengthwise strips, or sections. The card contains an identification and date
area. The person being tested urinates into a test cup, puts on the lid and
hands it to the 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 specimen. Thus, the test administrator is
not exposed to the urine sample nor does he or she
14
<PAGE> 17
have to mix reagents. Within five to eight minutes the results can be read on
the inserted card through the side of the cup. A single line in the test area of
the Rapid Drug Screen card indicates the sample is positive for the presence of
tested drug(s) of abuse. A double line in the test area of the Rapid Drug Screen
card indicates that the sample is negative for the presence of tested drug(s) of
abuse.
The Company has designed two-two panel tests, three-three panel tests, two-five
panel tests, an eight panel test, and a nine panel test and can produce, on
special order or if a market demands, tests which can screen for any quantity
(from two - nine) or configuration of drugs of abuse. The two-two panel tests,
designed for the correction and education markets, screens only for cocaine and
THC/methamphetamine and THC. The three-three panel tests, designed for various
non-clinical markets, screens for THC, cocaine, and opiates/THC, cocaine, and
amphetamine/THC, cocaine, and methamphetamine. The two-five panel tests,
designed for the workplace (industry) market, screens for the "SAMHSA 5" (
SAMHSA stands for the Substance Abuse and Mental Health Services
Administration); cocaine, THC, opiates, PCP, and amphetamine (the additional
version of this test consists of methamphetamine replacing PCP). The Drug Free
Workplace Act (the "Act"), designated drugs of abuse to be tested for in most
federally regulated drug-testing programs. The eight panel test, designed for
the clinical market; primarily to hospitals and physicians, includes the "SAMHSA
5 (listed above), benzodiazepines, methamphetamine, and barbiturates. The nine
panel test, also designed for the clinical market, includes all drugs of abuse
from an eight panel in addition to tricyclic antidepressants (TCA). These
additional tests are combined in a single card so that one sample can be tested
simultaneously for nine drugs of abuse.
In July 1998, the Company began marketing the "Rapid One", a line of 10 drug
tests, each of which screens for the presence or absence of a substance of abuse
(cocaine, marijuana(THC), opiates, PCP, amphetamine, benzodiazepines,
methamphetamine, barbiturates, tricyclic antidepressants (TCA), and methadone).
Rapid One utilizes the same technology as the Rapid Drug Screen. It includes a
single dip platform, an identification and date area, and does not require the
use of pipettes or reagents. Rapid One is designed for correctional facilities
and other markets where the person subject to substance abuse testing is known
to abuse a specific drug. It can also be used to enhance a two, three, five,
eight, nine panel, or any special order test, by means of allowing screening of
an additional drug.
One of the problems which may occur in on-site drug testing is that of fraud or
evasion practiced by the person being tested. The most prevalent method of
avoiding adverse test results is the substitution, by the person being tested,
of a hidden "clean" urine sample, which he or she brings to the test. As a
consequence, each of the Company's drug screens contains a temperature sensor,
which helps prevent the substitution of another urine sample. The premise is
that the substituted sample would be of a lower temperature than a sample
produced from the body on the spot. In addition, the Rapid Drug Screen contains
a control line, designed to assure the test administrator that the test is
working properly. Should the control line not appear, the administrator is
instructed to void the test and re-test the individual by obtaining another
urine sample. It is suggested, and sometimes mandated, that a positive result be
confirmed by method of GC/MS (Gas chromatography/Mass spectrometry).
The Company markets the "Drug Detector", an on-site drug detection system which
tests for the presence or absence of residue on surfaces from marijuana,
crack/cocaine, heroin, or methamphetamines. The Drug Detector consists of an
aerosol spray for either of the previously listed drugs, special collection
papers, and instructions. The Company is currently marketing the retail
(over-the-counter) version which contains enough collection papers to perform 10
tests. The Drug Detector for crack/cocaine and the Drug Detector for marijuana
are the two versions being offered for sale initially in the over-the-counter
market. The remaining two Drug Detector tests may be available for
over-the-counter sale at a later date. It is the Company's intention to offer an
"industrial" version of the product, which would contain collection papers
15
<PAGE> 18
to perform either 50 or 100 tests and a larger aerosol can. All four tests as
mentioned above would be available in this industrial Drug Detector. The test
can be performed with or without the knowledge of the person whom you believe
has come in contact with the surface. The Company feels this is of great benefit
in avoiding confrontation with a suspected drug abuser. You simply wipe the
surface with the special collection paper and spray the collection paper with
the aerosol can. Within seconds, a color change will occur if the presence of
the drug is detected. No color change will occur if the drug is not detected.
"FDA" Approval
Although FDA clearance is not required for non-clinical markets (i.e. industry,
corrections, etc.), it is required for clinical markets (i.e. hospitals,
physicians, etc.), which Management anticipates will become a major marketplace
for the Company's drug testing product(s). FDA 510(k) clearances have been
granted for Company's three panel (cocaine, THC, and opiates), two five panels
(cocaine, THC, opiates, amphetamines, PCP and cocaine, THC, opiates,
amphetamines, methamphetamines), eight panel (cocaine, THC, opiates,
amphetamines, methamphetamines, PCP, benzodiazepines, barbiturates), eight
panel-low volume (eight panel as above requiring only 2 ml specimens), and nine
panel (eight panel with tricyclic antidepressants (TCA) added). The Company has
applied to the FDA for clearance of its Rapid One tests which, although they use
the same methodology and chemistries as the Rapid Drug Screen, employ a
different delivery device. The Company has received clearance on the THC,
cocaine, opiates, amphetamines, barbiturates, and benzodiazepines Rapid One
tests. The Company's Drug Detector does not require FDA approval for sale.
Patents and Trademarks
The Company, to date, has been granted six patents relating to the Rapid Drug
Screen including a design patent on the multiple drug test card issued in
January 1999 and a utility patent on the drug abuse test kit issued in November
1999. The Company has registered "ABM" and its logo in the United States,
Canada, Chile, and Mexico and has registered "Rapid Drug Screen" in Mexico and
Canada. The Company has additional trademark applications pending in the United
States, Russia, Philippines, and in 15 European countries. The Company's
trademark counsel, has opined that there are no similar marks and, as a
consequence, the Company feels confident that such trademarks will be
registered. The Company has applied for various additional patents directly in
numerous countries, including the United States, Canada, Austria, Russia,
Switzerland, Hong Kong, Australia, Argentina, Brazil, China, Japan, Germany,
Mexico, Philippines, and Poland. Stan Cipkowski, Chairman of the Board of
Directors, President and CEO, 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. The Company's patent counsel has opined
that a search has revealed no competing patented products. However, there can be
no assurance that patents will be granted or that, if granted, they will
withstand challenge.
Research and Development
Research and Development ("R&D") efforts of the Company have been focused on
methods to reduce the costs of the drug testing delivery system. A program of
in-house strip manufacturing was embarked upon in Fiscal 1999. In Fiscal 2000,
the Company continued to make a significant investment in this program. The
Company currently manufactures nearly all of its required individual drug
testing strips. In Fiscal 2000, a considerable effort and expense was also
invested in development and production of the drug testing strip for tricyclic
antidepressants ("TCA"). The Company's nine panel version of the Rapid Drug
Screen includes this testing strip. This nine panel version is essential for the
Company to achieve success in the clinical market. The Company is of the belief
that it is one of very few companies who can offer this product in the clinical
market. Additionally, the Company's R&D efforts have been
16
<PAGE> 19
focused on enhancing strip performance thereby allowing the Company to offer, in
its opinion, the most reliable on-site drugs of abuse test on the market today.
Sales and Marketing
The Company advertises through trade journals and direct mail campaigns, and its
representatives attend trade shows. The Company sells primarily to distributors
in the industrial market, which then resell in the various marketplaces and the
Company sells directly in the over-the-counter market. The Company employs a
Vice-President of Sales and Marketing, Director of Sales for Mexico and Latin
America, National Sales Manager, OTC National Sales Manager, U.S. Marketing
Manager, six regional sales managers, and additional sales and marketing support
positions. In September of 1999, the Company closed a Sales and Marketing Office
in Boca Raton, Florida and consolidated the Company's operations at its current
facility in New York State.
The Company has divided its marketplace into the following categories:
Corporate/Industry
The Company has developed a nationwide network of distributors and
administrators of workplace drug testing programs to sell its Rapid Drug Screen
testing kit. The Company's National Sales Manager and its six regional sales
managers oversee this market. The Company believes that the market for
pre-employment and random/employee testing is immense and expanding. The
economic and human costs of drug and alcohol use are astounding. In fact, the
National Institute of Health reported that alcohol and drug abuse cost the
economy $246 billion in 1992, the most recent year for which economic data is
available. The number of businesses using drug testing to screen job applicants
and employees has increased significantly in the last several years. According
to the Drug Free Workplace Act, Congress found that 74% of adults who use
illegal drugs are employed; absenteeism is 66% higher among drug users than
those who do not use drugs; health benefit utilization is 300% higher among drug
users; 47% of workplace accidents are drug-related; disciplinary actions are 90%
higher among drug users; and employee turnover is significantly higher among
drug users. According to a national survey conducted by the Hazelden Foundation,
more than 60% of adults know people who have gone to work under the influence of
drugs or alcohol. Most employers recognize not only the financial benefits of
drug testing, but also realize a drug-free environment is a safer one.
Incentives encourage employers to adopt Drug Free Workplace Programs; they
include, in some states, workman's compensation and unemployment insurance
premium reductions; tax deductions; and other incentives. The Act requires
employers receiving federal contracts of $100,000 or more (the Federal
Acquisition Streamlining Act of 1994 (FASA) raised the threshold of contracts
covered by the Drug-Free Workplace Act of 1988 from $25,000 to those exceeding
$100,000) to enact a Drug Free Workplace Program.
The Company's Drug Detector is not yet available for sale in the
Corporate/Industry market. The Company does intend to introduce the "industrial"
Drug Detector in Fiscal 2001.
Government, Corrections, and Law Enforcement
This market includes federal, state, and county level agencies, including
correctional facilities, pretrial agencies, probation, drug courts and parole
departments at the federal and state levels, and juvenile correctional
facilities. As of June 1998, there were more than 1.8 million inmates
nationally: 1.2 million in state and federal prisons and 600,000 in local jails.
In 1985, our incarceration rate was 313 per 100,000 population. In 1998, it was
645 per 100,000, which is three to 10 times higher than rates of the other
modern democratic societies. The largest single factor contributing to this
imprisonment wave is an eight-fold rise in drug arrests. In the
17
<PAGE> 20
Survey of Inmates in State Correctional Facilities conducted for the Bureau of
Justice Statistics, it was found that rates of use among convicted inmates was
substantially higher than the household population. This survey collected
information on the use of drugs in the month prior to the offense for convicted
inmates. Under the Uniform Crime Reporting System, the FBI maintains estimates
of arrests for drug abuse violations. Arrests for drug abuse violations are at
their highest levels ever for adults and juveniles. The Rapid Drug Screen is
ideal for this use. The Company employs a Regional Sales Manager who has
extensive experience in this market. In addition, the Company exhibits at the
trade shows of the American Corrections Association and other related
organizations. The Company has shipped orders to several agencies included in
this market. The "industrial" Drug Detector would also be of use in this market
and the Company intends to introduce the product in Fiscal 2001.
Rehabilitation Centers
This market for the Rapid Drug Screen includes people in treatment for substance
abuse. This does not include rehabilitation centers that are affiliated with
hospitals. 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.
International Markets
The Company has entered into distribution agreements with companies in several
countries and is pursuing a course of multinational distribution of its products
through both clinical and non-clinical distribution companies. As of November
2000, the Company has 24 distributors in 31 various countries throughout the
world.
Clinics, Physicians, and Hospitals
The Company is actively pursuing the hospital and physician markets for its
entire Rapid Drug Screen product line. In December 1998, the Company entered
into a four-year, exclusive, worldwide distribution agreement with Abbott
Laboratories (NYSE:ABT) to market the Rapid Drug Screen product line to
hospitals, physicians, and occupational health clinics throughout the world. The
Company had initially entered into a distribution agreement with Murex
International Technologies Corp. ("Murex"). Abbott Laboratories acquired Murex
in April 1998 and the Company negotiated with Abbott Laboratories to expand and
extend the contract. In May 2000, the distribution agreement between the Company
and Abbott Laboratories was re-negotiated to a non-exclusive two year contract.
The Company currently utilizes the services of a nationwide network of
independent commissioned sales representatives to sell the nine panel Rapid Drug
Screen. The Company believes that this market could yield a significant
beneficial impact on its business. The Company does not feel the Drug Detector
would be of use in this market and does not intend to actively market the
product.
Consumer and Over-the-Counter ("OTC")
The Rapid Drug Screen product line is ideal for consumer use as it produces
immediate and accurate results, is unrivaled for its ease-of-use, and its design
is such that the person utilizing the product will not come in contact with the
specimen. In September 1998, the FDA approved the class of on-site diagnostic
kits for drugs of abuse. The Company submitted its application to the FDA for
over-the-counter approval in May 2000. Its target for launching its retail
product is the end of Fiscal 2001. However, there can be no assurance that such
approval will be obtained.
In June 2000, the Company debuted its over-the-counter version of the Drug
Detector at the National Association of Chain Drug Stores tradeshow. The Company
is establishing the market
18
<PAGE> 21
framework for sales and intends to leverage these costs when the Rapid Drug
Screen is available. It is the belief of the Company that the Drug Detector is
ideal for use by consumers such as persons who are concerned about the welfare
of their child/spouse and suspect drug abuse but who are hesitant to confront
their child/spouse without just cause. The Drug Detector will allow them to
obtain this just cause without confrontation, as the person being tested does
not need to be present at the time of the test. The Company feels sales in this
market could have a significant beneficial impact on its business.
Educational Market
The Company believes that this is a potentially large market as testing becomes
more prevalent in this area. It consists of the testing of student athletes, and
in some states, all students involved in extra-curricular activities. Private
schools can begin testing all of their students as an admission requirement. A
1995 Supreme Court decision in the case of Acton vs. Vernonia, in which the
Justices voted 6 to 3 to overturn a lower court decision and allow testing of
student athletes. Since that decision, the Seventh Circuit Court of Appeals made
a decision enabling a Rush County School District to test not only student
athletes but students involved in extra curricular activities as well. In this
case, the Supreme Court refused to hear the appeal therefore allowing the lower
court ruling to stand. These ground-breaking decisions have opened the door for
all schools, both public and private, to enact drug testing programs within
their schools.
The Company currently sells its Rapid Drug Screen to over 100 schools across the
United States. The Company feels the Rapid Drug Screen could be an integral part
of helping schools test due to its ease of use and immediate, accurate results.
The Drug Detector would also be useful in this market and the Company intends to
introduce the "industrial" version of the Drug Detector into this market when
available.
Additional Markets
The Company believes that the Department of Transportation ("DOT") could be a
future market for its Rapid Drug Screen. Presently, the DOT market is not
available to any on-site drug of abuse testing device. Law requires that anyone
with a commercial driving license be randomly tested for use of drugs of abuse.
Federal law requires that certified laboratories be used in these testing
situations. The Company feels that the potential for this market is enormous
when or if the law is changed. The Company actively pursues such change.
Competition
Competition to the Rapid Drug Screen comes from on-site tests developed by
companies including, but not limited to, Roche Diagnostics, Medtox Scientific,
Inc. and Biosite Diagnostics. In all cases that the Company is aware of,
competitive products use a collection or delivery method different than the
Rapid Drug Screen. Management believes the Rapid Drug Screen provides an easier
option to the user. There is no pipetting of the specimen, adding or mixing of
reagents, and no other manipulation of the device by the user. Other competitive
products for the Rapid Drug Screen are on-site tests with platforms utilizing
saliva instead of urine. It is the Company's opinion that such tests are limited
in their use as the time frames in which drugs can be detected are much less
than that of urine, which remains to be the industry standard.
Other available drug testing options, aside from on-site tests offering
immediate results, include traditional laboratory testing where a urine sample
is sent to a laboratory for analysis and hair testing where a hair sample is
sent to a laboratory for analysis. These forms of drug testing are more
expensive and take longer to produce results than the Rapid Drug Screen.
19
<PAGE> 22
Manufacturing
In September 1999, the Company moved into a 30,000 square foot facility in
Kinderhook, New York, which houses assembly and packaging of the Rapid Drug
Screen and Drug Detector in addition to administration. The Company continues to
contract out the printing and manufacture of specimen cup components of the
Rapid Drug Screen. The Drug Detector components are not manufactured by the
Company. Due to the unavailability of qualified technical personnel, the Company
leased a laboratory facility in Bridgeport, New Jersey in August 1999. This
facility houses research and development and bulk strip manufacturing.
The Company's Plan of Operations
The Company intends to continue to establish a network of distributors, which
service customers in the non-clinical markets (i.e. workplace/industry,
government/corrections/law enforcement, education, etc.) and to market its Rapid
Drug Screen product line in the clinical market (i.e. hospitals, physicians,
etc.) through Abbott Laboratories and a nationwide network of independent
commissioned sales representatives. The Company intends to market the Rapid Drug
Screen in the over-the-counter market (pending FDA approval), and to market its
Drug Detector in both the over-the-counter market and non-clinical markets. It
also intends to continue research and development on additional biomedical
products.
The Company has entered into national and international non-exclusive,
non-clinical market distribution agreements with a number of distributors. These
agreements permit the distributors to sell the non-competitive products of other
manufacturers and permits the Company to sell its test kits to other
distributors within and outside the territory of each distributor. The
agreements are cancelable by either the Company or the distributor upon 30 days
written notice.
The Company has retained a Director of Sales for Latin America and Mexico, a
National Sales Manager, six regional sales managers (in Florida, Pennsylvania,
Wisconsin, Oregon, Europe, and Puerto Rico). These representatives call on
non-clinical accounts, such as corporations, correctional facilities, directly
and support the Company's worldwide distribution network. The Company intends to
continue its direct mail campaign and its participation in national and regional
trade shows.
The Company's present manufacturing equipment is sufficient to produce 200,000
drug test kits per month, assuming one shift per day, five days per week. The
Company's facility in Kinderhook would allow it to increase its capacity for
production when/if additional personnel were hired and equipment was installed
assuming the same one shift per day, five days per week. The Company would
expect to add additional assembly/packaging personnel and/or equipment when/if
production needs of either or both the Rapid Drug Screen and Drug Detector
increases.
In Fiscal 2000, the Company completed its in-house strip manufacturing program
to reduce costs and improve earnings. However, there can be no guarantee that
the Company will be able to operate profitably.
Government Regulations
The development, testing, manufacture, and sale of the Company's Rapid Drug
Screen and possible additional biomedical products are subject to regulation by
the United States and foreign regulatory agencies. Pursuant to the Federal Food,
Drug, and Cosmetic Act, and the regulations promulgated thereunder, the FDA
regulates the pre-clinical 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,
20
<PAGE> 23
recall or seizure of products, total or partial suspension of production,
failure of the government to grant pre-market clearance or pre-market approval
for devices, withdrawal of marketing clearances or approvals and criminal
prosecution.
Description of Property
In September 1999, the Company relocated to a new 30,000 square foot facility in
Kinderhook, New York. This new facility houses administrative offices, assembly
and packaging, quality control/quality assurance, and sales and marketing. The
Company has entered into a Lease/Purchase Agreement with a non-affiliate. The
purchase of the building is contingent upon a permanent zoning change that the
Company is confident it will receive from the town. However, there can be no
guarantee that this permanent zoning change will occur. In such case, the
Company will lease the facility through December 2001. At that time, the lease
would be required to be renegotiated.
In August 1999, the Company began leasing a 3,900 square foot laboratory
facility in Bridgeport, New Jersey. This facility is leased for a period of
three years at which time the Company has the option to renew the lease.
Legal Proceedings
"Patent, Trademark, and Unfair Competition Litigation"
On January 26, 1999, the Company was granted a U.S. Patent for the design of the
Multiple Test Card, known as the Rapid Drug Screen. On April 7, 1999, the
Company filed suit in the federal court in Delaware against Phamatech, Inc. of
California. Phamatech, Inc. of California was a former supplier of the Company
and in that capacity acquired proprietary information on the Company's Rapid
Drug Screen that it used to "knock off" the Company's product. This case was
transferred from Delaware to California. In July 2000, the California Court
granted ABMC's motion to add Tuan Pham, President of Phamatech, as an individual
defendant in the suit. The Court also ordered that Wolfe & Associates (aka Wolfe
Data) and James Wolfe, Elite Health Services, LLC and John Polanco (former
distributors now selling the alleged infringing product) be joined as
defendants. Peninsula Drug Analysis Co., Inc. and James Ramsey (former
distributor selling a private label knock off believed by the Company to be
manufactured by Phamatech), and Dipro Diagnostics of North America (another
party selling the private label knock off (believed to be manufactured by
Phamatech) are already parties. The Company is alleging patent infringement,
violation of trademark rights, and unfair competition against all parties.
On April 8, 1999, one day after the Company filed its Delaware suit, Phamatech,
Inc. filed suit in the federal court in San Diego, California asking for a
declaration that the Company's patent is invalid. It also claimed breach of
contract damages for an alleged non-payment of invoices by the Company. The
Company's transferred Delaware case and Phamatech's California case have been
placed on the same trial docket in San Diego. By Order dated July 24, 2000, the
Court ordered the competing California based suits be consolidated in one case.
In a recent motion, Phamatech sought summary judgment on its declaratory
judgment on the Company's patent claims. The trial court denied the motion.
Since the ABMC trademark had not been registered, even though the petition for
trademark is on appeal within the United States Patent and Trademark Office
("PTO"), the trial court denied the Company's trademark claim. However, the
Court did not deal with the Company's trade dress claim. Phamatech has now moved
for partial summary judgment on ABMC's trade dress claim. On October 10, 2000,
Phamatech, Peninsula Drug Analysis Co., Ramsey, and Pham brought four claims for
relief against ABMC. ABMC has moved to dismiss these claims.
21
<PAGE> 24
In October 1999, the Company sued Larry Hartselle, Drug Detection Devices, and
Gulf Supply for patent infringement, trademark dilution, and unfair competition.
It is alleged that they are also selling the Phamatech knock off. Drug Detection
Devices is alleged to be selling yet another private label manufactured by
Phamatech. Larry Hartselle d/b/a Instant Drug Detection is a former distributor
who was selling the Phamatech knock-off. Gulf Supply is alleged to be selling
the private label knock off sold by Drug Detection Devices. The claims against
Hartselle and 3DL have been settled by the parties. The terms are confidential.
As a non-confidential part of the agreement, Hartselle, without admitting any
liability, has agreed to a consent order prohibiting him from selling the
knock-off product in all configurations and from infringing any other ABMC
property. At the parties' request, ABMC's clams against the remaining defendant
have been stayed pending resolution of the California case.
"Friedenberg-related Litigation"
In February 1994, Robert Friedenberg, as former owner of the two medical
technology companies, MDI and Gendex, acquired by the Company, in the name of
these corporations, filed for a declaratory judgment in Maryland that a Share
Exchange Agreement had been rescinded. In order to make a claim for damages, the
Company filed a third-party claim against Dr. Friedenberg for breach of the
Share Exchange Agreement and fraud. In November 1995, after a trial, the court
denied Dr. Friedenberg's request for a declaration of rescission and allowed the
Company's third-party claim to proceed to trial. In September 1996, Dr.
Friedenberg died.
The Company's third party claim was decided by a jury on May 5, 1997. The
verdict determined that Dr. Friedenberg breached the Share Exchange Agreement
when he failed to deliver drug screening know how technology to the Company. The
jury also found in favor of the Company on two of three fraud claims against Dr.
Friedenberg and awarded the Company approximately $321,000 in damages. Dr.
Friedenberg's estate, just prior to the jury trial, filed a supplemental claim
for the shares of the Company which he would have received under the Share
Exchange Agreement. The trial judge on July 17, 1998, ruled that the estate of
Dr. Friedenberg was entitled to 5,907,154 common shares of the Company. The
Company appealed that ruling and on September 15, 1999, the Court of Special
Appeals in Maryland ruled in favor of the Company and reversed a Maryland
circuit court's ruling that the estate of Dr. Robert Friedenberg was entitled to
5,907,154 common shares of the Company. The case was remanded to the circuit
court with directions to enter a judgment for the Company. The Friedenberg
estate petitioned the Court of Appeals, Maryland's highest court, to consider
the case. The Company opposed any further proceeding. On December 21, 1999, the
Court of Appeals denied the Friedenberg estate's petition to review the decision
of the Court of Special Appeals.
In June 1995, the Company filed a lawsuit against Jackson Morris, the lawyer who
was in charge of drafting and advising it on the Share Exchange Agreement. Mr.
Morris, who had been recommended to the Company by Dr. Robert Friedenberg and
whose fees were paid by the Company, is alleged to have breached his fiduciary
duty to the Company in several ways, including by later advising Dr.
Friedenberg, individually, on how to rescind the Share Exchange Agreement as
well as testifying for Dr. Friedenberg over the Company's objections and in
violation of this obligations to the Company. Mr. Morris is also charged with
negligence in drafting the Share Exchange Agreement. The Company's lawsuit
demands damages in the amount of $1,000,000. Mr. Morris has counterclaimed as a
party to the Share Exchange Agreement and seeks common shares. Whatever claim
Mr. Morris has comes from the Friedenberg claim. No trial date has been set. The
Company is vigorously contesting the Morris claim.
In June 1999, an individual, Richard Davidson, filed suit in New York claiming
that two placement memoranda dated respectively September 15, 1992 and February
5, 1993, obligated
22
<PAGE> 25
the Company to issue him 1,555,601 common shares of the Company. The claim is
that he is entitled to the common shares in consideration of brokering the
acquisitions subject to the Share Exchange Agreement with Dr. Robert
Friedenberg. In addition, the individual is claiming a finder's fee of five
percent of the funds raised by the September 1992 private placement. He alleges
that a sum of one million dollars was raised. Finally, he claims that he is
entitled to a consulting fee of $24,000. Management denies the claims and is
vigorously contesting the suit. ABMC filed a motion for summary judgment against
Davidson and Davidson cross-claimed for summary judgment against ABMC. The case
was scheduled for a jury trial in the fourth calendar quarter of 2000. The trial
date has been postponed and we are awaiting rescheduling pending the outcome of
the summary judgment motions.
MANAGEMENT
Directors, Executive Officers, and Senior Officers
The following sets forth the names of the Company's directors, executive
officers, and senior officers. Directors of the Company are elected annually by
the shareholders and the officers are appointed annually by the Board of
Directors.
<TABLE>
<CAPTION>
Name Age Position Since
---- --- -------- -----
<S> <C> <C>
Stan Cipkowski 52 Chairman of the Board of Directors, President and 1986
Chief Executive Officer
Edmund Jaskiewicz 77 Secretary 1992
Jay Bendis 53 Vice President-Sales and Marketing, Director 1995
Keith Palmer 39 Chief Financial Officer, Treasurer, and Vice 2000
President-Finance
Douglas Casterlin 53 Vice President-Operations 1997
Robert Aromando 44 Director 2000
Gerald Moore 62 Director 1999
Denis O'Donnell, M.D. 46 Director 2000
Henry J. Wells, Ph.D. 68 Vice President-Scientific Development 1995
Martin Gould 49 Vice President-Technology 1998
</TABLE>
Stan Cipkowski founded the predecessor of the Company in 1982 and has been an
executive 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 was 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 served as Chairman of
the Board of Directors from 1992 until 1999. He currently serves as Secretary of
the Company. From 1953 to 1963, Mr. Jaskiewicz was associated with Toulmin and
Toulmin, Attorneys-at-Law, 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
23
<PAGE> 26
from George Washington University Law School and his B.S. in Engineering from
the University of Connecticut in 1947.
Jay Bendis was an independent consultant to biomedical companies from 1990 until
1995, specializing in commercializing new concept products in both domestic and
international markets. From 1990 to 1992, he was a principal and 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.
Keith Palmer joined American Bio Medica Corporation in October 2000. He is a
Certified Public Accountant with over 15 years experience in accounting,
finance, strategic planning, and mergers and acquisitions. Palmer was Director
of Finance and Controller of Matthew Bender, Part Of Lexis Publishing, a legal
publisher, from 1998 until joining ABMC. At Matthew Bender he was responsible
for management of financial reporting and analysis, accounting and control,
strategic planning, and numerous Finance and Operational integration efforts.
From 1993 until 1998, he was the Director of Finance & Controller for Matthew
Bender & Company, Inc., a wholly owned subsidiary of the Times Mirror Corp.
During that time he spearheaded the acquisition and/or integration, and assumed
responsibility for financial reporting and analysis, of four businesses,
including Shepard's, a legal Citations publisher in Colorado Springs, Colorado,
Capsoft, an electronic legal forms software firm in Provo, Utah, Mosby Medical
Publishing in St. Louis, Missouri, and Michie, a legal publisher in
Charlottesville, Virginia. In addition to integrating financial and operational
functions, Palmer assisted on the integration and implementations of several
financial, manufacturing, and fulfillment systems, during this time. Prior to
joining Matthew Bender, he was a Vice President of Marine Midland Bank, a
commercial bank and from 1983 until 1987, he was an auditor and senior
consultant at the public accounting firm of Ernst & Whinney. Palmer received his
MBA in Finance from Sage Colleges in 1995 and his BBA in Accounting from Siena
College in 1983.
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 re-manufacturing business
serving the television broadcast industry. Mr. Casterlin was Workshop Director,
Putnam Industries, Inc., from 1976 to 1979 and Production Manager, from 1973 to
1976, of Occupatics, Inc. From 1966 to 1970, Mr. Casterlin served as an Air
Force Intelligence Officer and was honorably discharged as Sergeant. He studied
Engineering at Lehigh University from 1965 to 1966 and received his B.A. degree
in Psychology in 1973 from the State University of New York at New Paltz.
Robert Aromando is currently the Director of Global Marketing of Covance, Inc.,
a global clinical research organization. He has over 20 years experience in
sales and marketing. Mr. Aromando was Director of Global Marketing of Roche
Diagnostics from 1992 until 1999. In this capacity, he had the responsibility
for the business development and marketing for Roche Diagnostics' global on-site
drugs of abuse business. From 1988 until 1992 he was Product Manager for
American Home Products where he organized a new infectious disease business
unit. From 1984 to 1988, he was Director of Sales and Marketing at Diagnostic
Technology Inc. where he reorganized the hematology sales and marketing
department. From 1978 to
24
<PAGE> 27
1984, he was a Regional Sales Manager for Litton Bionetics, responsible for a
field sales district.
Gerald Moore currently serves as President and CEO of Med-Ox Diagnostics of
Canada and BioSys, Inc. Mr. Moore was President of UNIPATH (North America) from
1990 to 1998 when he reached parent-company Unilever's mandatory retirement age.
Brooke Bond, Inc took a majority equity position in MED-OX in 1978 and renamed
it Oxoid. In 1980, Mr. Moore opened Oxoid US in Columbus, Maryland and was
appointed President and Chief Executive Officer of both Oxoid CANADA and Oxoid
USA. Unilever acquired all of Oxoid International's holdings and subsidiaries in
1984 and changed its name to UNIPATH in 1990. Mr. Moore is a member of the Board
of Directors of the Canadian Assoc. of Clinical Microbiology and Infectious
Diseases (CACMID); a Director of the Canadian Clinical Standards Organization,
serves on the National Committee for Clinical Laboratory Standards (NCCLS), a
member of the NCCLS Committee for Antimicrobial Susceptibility testing and
Veterinary Diagnostics, is an advisor to the NCCLS Committee on Culture Media,
and is a liaison to the Board of Exhibitors of the Interscience Conference on
Antimicrobial Agents and Chemotherapy (ICAAC) of the American Society of
Microbiology. Mr. Moore received his degree in chemistry and mathematics from
Strathclyde University in Glascow, Scotland in 1961.
Denis O'Donnell, M.D. is currently a Managing Director of Seaside Partners,
L.P., the firm which purchased $2,000,000 of Common shares in a private
placement on April 28, 2000. Since 1986, Dr. O'Donnell has been a Clinical
Instructor of Health Science at Northeastern University. From 1984 to 1985 he
was a Resident in Surgery at Tufts New England Medical Center. From 1986 to 1991
he served a Director of the Clinical Research Center of Medical and Technical
Research Associates, Inc. From 1991 through 1995 he was Vice President of IGI,
Inc. From 1995 until 1997 he was President of Novavax, Inc., a company in which
he still holds the seat of Chairman of the Board. In addition to the Novavax,
Inc. board seat, Dr. O'Donnell is currently a director of ELXSI Corporation
(NASDAQ:ELXS), Columbia Laboratories, Inc. (AMEX:COB), Ampersand Medical
Corporation (NASDAQ:AMPM), and is also a member of the Associates of Clinical
Pharmacology Scientific Advisory Board. He has written and contributed to
numerous medical manuscripts, abstracts, and papers. Dr. O'Donnell graduated
from Harvard University (A.B./Biology) and from AUC Medical School (M.D.).
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.
Martin Gould is a biomedical scientist with more than 24 years of experience in
the diagnostic and chemical fields. He has an extensive background in research
and development, manufacturing, quality control/assurance, as well as business
development, sales and marketing. His experience is in the areas of clinical
chemistry, serology, immunology, hematology, dyes and stains, chromatography,
reagent chemical and food diagnostics, specifically rapid microbiological
testing. From 1973 to 1987, Mr. Gould worked for E. Merck, Inc. in various
positions of increasing responsibilities within the product management, research
and development, and quality assurance/control departments. In 1987, he founded
Ampcor Diagnostics, Inc. which he grew until 1994 when it was acquired by Neogen
Corp.
25
<PAGE> 28
(NASDAQ:NEOG). Mr. Gould continued to serve as Vice President and General
Manager of Neogen Corp. until 1997. Mr. Gould was an independent consultant
after leaving Neogen Corp. in 1997 until joining the Company in 1998. Mr. Gould
is an accomplished researcher with numerous publications in a variety of fields,
including rapid immunoassay tests to detect food pathogens such as e-coli,
salmonella, listeria, shigella, and campylobacter. He has a master's in
biomedical science and engineering and a bachelor's in animal science/chemistry.
Mr. Gould established a patent in composition for stabilization of diagnostics
reagents, three separate patents for immunoassay diagnostics kits, as well as a
patent concerning a growth media that resuscitates injured bacteria, such as
salmonella, that was recently issued.
Compensation of Directors
Directors who are not employees or officers of the Company ("Outside Directors")
are granted an option to purchase 10,000 Common shares at the time of election
and are granted an additional option to purchase 10,000 Common shares annually
on the date of the Company's Annual Meeting of Shareholders. Outside Directors
are also granted an option to purchase 2,000 Common shares for service on the
Audit Committee or the Compensation Committee annually on the date of the
Company's Annual Meeting of Shareholders. Outside Directors who serve on both
committees are granted an option to purchase 4,000 Common shares annually.
Outside Directors receive a fee of $1,000 for attending meetings of the Board,
and are reimbursed for out-of-pocket expenses incurred in attending such
meetings.
Executive Compensation
The following table reflects all forms of compensation for services to the
Company for the fiscal years ended April 30, 1998, 1999, and 2000 of the
executive officers of the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term Compensation
----------------------
Annual Compensation Awards
------------------- ------
Restricted Securities
Name and Principal Position Year Salary Bonus Stock Awards Underlying Options
--------------------------- ---- ------ ----- ------------ ------------------
<S> <C> <C> <C> <C> <C>
Stan Cipkowski 2000 $96,000 $77,010 $ 0 100,000
Chairman, President 1999 96,000 64,992 0 0
And Chief Executive Officer 1998 97,231 23,080 0 0
Jay Bendis 2000 $84,000 $77,010 0 100,000
Vice-President Sales 1999 84,000 64,992 0 0
And Marketing 1998 85,077 23,080 2,356,000 0
Douglas Casterlin 2000 $84,000 $67,010 0 100,000
Vice-President Operations 1999 84,000 54,992 0 0
1998 73,807 11,540 540,000 0
</TABLE>
26
<PAGE> 29
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
----------------- Value at Assume Annual
Percentage of Rates of Stock Price
Number of Total Options Appreciation for
Securities Granted to Exercise Option Term(1)
Underlying Employees in Price Expiration ----------------------
Name Options Granted Fiscal Year(2) ($/Share) Date(3) 5% 10%
---- --------------- -------------- --------- ------- -- ---
<S> <C> <C> <C> <C> <C> <C>
Stan Cipkowski 100,000 6.8% $2.50 11-22-09 $27,000 $212,000
Jay Bendis 100,000 6.8% $2.50 11-22-09 $27,000 $212,000
Douglas Casterlin 100,000 6.8% $2.50 11-22-09 $27,000 $212,000
</TABLE>
------------------------------
(1) Potential realizable value is based on an assumption that the price of the
common shares appreciates at the annual rate shown (compounded annually)
from the date of grant until the end of the option term. These numbers are
calculated based on the requirements of the Securities and Exchange
Commission and do not reflect the Company's estimate of future stock price
performance.
(2) The Company granted options representing 1,473,250 shares to employees in
fiscal 2000.
(3) The options become exercisable in 25% increments on November 22, 1999.
AGGREGATED OPTIONS EXERCISES IN LAST
FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised Options In-The-Money Options at
Shares at Fiscal Year-End Fiscal Year-End
Acquired on Value ----------------------------- -----------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Stan Cipkowski 0 $ 0 363,500 75,000 $ 0 $ 0
Jay Bendis 0 0 219,000 75,000 0 0
Douglas Casterlin 0 0 175,000 75,000 0 0
</TABLE>
PRINCIPAL STOCKHOLDERS
As of November 15, 2000, there were 18,045,548 common shares outstanding. The
following table sets forth, as of November 15, 2000, the beneficial ownership of
the Company's common shares by (i) each director, (ii) each of the executive
officers named in the Summary Compensation Table; (iii) all directors and
executive officers of the Company as a group; and (iv) each shareholder, known
to management of the Company, to beneficially own more than five percent of the
outstanding common shares.
27
<PAGE> 30
Number of
Beneficial Owner Common Shares Percent of Total
---------------- ------------- ----------------
Stan Cipkowski 2,713,000 (1) 14.7%
122 Smith Road
Kinderhook, New York 12106
Edmund Jaskiewicz 2,078,155 (2) 11.4%
1730 M Street, NW
Washington, DC 20036
Jay Bendis 779,999 (3) 4.3%
Douglas Casterlin 314,500 (4) 1.7%
Robert Aromando 0 *
Gerald Moore 20,000 (5) *
Denis O'Donnell, M.D. 0 (6) *
Seaside Partners, L.P. 2,361,733 (7) 12.4%
623 Ocean Avenue
Sea Girt, New Jersey
Directors and executive
officers as a group (8 persons) 5,905,654 (8) 31.0%
-------------------------------------
* Less than one percent (1%).
(1) Includes 388,500 common shares subject to stock options exercisable within
60 days of November 15, 2000.
(2) Includes 161,500 common shares subject to stock options exercisable within
60 days of November 15, 2000.
(3) Includes 244,000 common shares subject to stock options exercisable within
60 days of November 15, 2000.
(4) Includes 200,000 common shares subject to stock options exercisable within
60 days of November 15, 2000.
(5) Includes 20,000 common shares subject to stock options exercisable within
60 days of November 15, 2000.
(6) Dr. O'Donnell may be deemed to indirectly beneficially own 1,408,450 Common
shares because he is a member of Seaside Advisors, LLC which is the general
partner of Seaside Partners, L.P. Dr. O'Donnell specifically disclaims
beneficial ownership of these securities.
(7) Includes 953,283 common shares subject to warrants exercisable within 60
days of November 15, 2000.
(8) Includes an aggregate of 1,014,000 common shares subject to stock options
exercisable within 60 days of November 15, 2000. Does not include the
1,408,450 common shares beneficially owned by Seaside Partners, L.P. which
Dr. O'Donnell may be deemed to indirectly beneficially own.
RELATED PARTY TRANSACTIONS
At November 15, 2000, the Company had provided loans, and accrued interest,
aggregating $482,000 to Stan Cipkowski, the Company's Chairman of the Board,
President and Chief Executive Officer. These loans are evidenced by a note and
bear interest at the rate of 11.5% per annum. The note is payable on demand.
Interest on the loan is being accrued and reported separately from the loan
balance and at November 17, 2000 totaled $14,000. Mr. Cipkowski has agreed to
pledge 1,500,000 of the Company's common shares to the Company as collateral.
Mr. Cipkowski has agreed to a repayment of this loan through the periodic
redemption by the Company of certain of Mr. Cipkowski's common shares, from the
pledged shares, on the second day following the earnings release at each
quarter end.
The Company has collateralized a bank loan totaling $115,000 for Mr. Cipkowski
with a $112,000 certificate of deposit in the bank.
28
<PAGE> 31
As of November 15, 2000, the Company has provided a loan in the amount of
$380,000 to BioSys, Inc. ("BioSys"). BioSys is a development stage company
focusing on developing, manufacturing, marketing and selling proprietary new
products for the industrial microbiology testing market. Gerald Moore, a
director of the Company, is a stockholder and officer of BioSys. This loan is
convertible into shares of common stock of BioSys based on the percentage of the
funds provided by the Company through this loan during the two year period
ending July 14, 2001 compared to the total amount of funds provided to BioSys by
all other investors during this period. The Company's percentage ownership of
the outstanding shares of common stock of BioSys is limited to a maximum of 20%
based on a maximum of $400,000 that may be provided to BioSys by the Company.
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 30,000,000 shares of common stock,
$0.01 par value, and 5,000,000 shares of preferred stock, $0.01 par value. As of
November 15, 2000, there were 18,045,548 common shares outstanding, 1,262,625
common shares subject to the exercise of outstanding warrants and no shares of
preferred stock outstanding. As of the same date, there were 3,155,997 common
shares subject to the exercise of outstanding options.
Common Shares
The holders of the common shares are entitled to one vote per share with respect
to all matters required by law to be submitted to our shareholders for approval.
Our common shares do not have any cumulative voting, preemptive, subscription or
conversion rights. Election of directors and other general shareholder action
requires the affirmative vote of a majority of common shares represented at a
meeting in which a quorum is represented.
In the event of the liquidation, dissolution, or winding up of ABMC, the holders
of common shares are entitled to share ratably in all assets remaining after
payment of liabilities, subject to prior distribution rights of preferred stock,
if any, then outstanding. The common shares have no preemptive or conversion
rights or other subscription rights. All outstanding common shares are fully
paid and non-assessable.
Subject to the preferences that may be applicable to any outstanding preferred
stock, the holders of common shares are entitled to receive ratably such
dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available therefor. 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.
Preferred Stock
The Company has the authority to issue up to 5,000,000 preferred shares with
such designations, rights, and preferences as may be determined by the Board of
Directors. The Company is empowered, without further shareholder approval, to
issue preferred shares with dividend, liquidation, conversion, voting or other
rights, which could adversely affect the voting power or other rights of the
holders of common shares. No preferred shares were outstanding as of November
15, 2000.
29
<PAGE> 32
Warrants and Options
As of November 15, 2000, we had outstanding a total of 1,262,625 warrants to
purchase our common shares at exercise prices ranging from $1.1689 to $4.81 per
share, and 3,155,997 options to purchase our common shares at exercise prices
ranging from $1.21 to $3.50.
Anti-Takeover Effects of Provisions of the 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 right,
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
super-voting rights, conversion rights into common shares, liquidation or a
combination of rights and preferences, which could inhibit success of such
attempt.
SELLING SHAREHOLDER
We have agreed to register 2,361,733 of our common shares owned by Seaside
Partners, L.P., a Delaware limited partnership which we refer to in this
prospectus as either the "selling shareholder" or "Seaside." Of these 2,361,733
common shares, up to 953,283 are common shares issuable upon exercise of common
stock purchase warrants. These shares were acquired by the selling shareholder
pursuant to a Common Stock Purchase Agreement, dated April 28, 2000, between
Seaside and us. We are registering the common shares held by the selling
shareholder to permit public secondary trading of these shares, and the selling
shareholder may offer these shares for resale from time to time. Denis
O'Donnell, M.D., a director of the Company, is a Managing Director of Seaside.
Other than Dr. O'Donnell's service as a Company director, Seaside has not had
any material relationship with us, or any of our predecessors or affiliates,
within the last three years. The selling shareholder may sell all, some or none
of the shares that it holds so the actual number of shares that will be sold by
the selling shareholder upon or prior to termination of this offering may vary.
Additional information concerning the selling shareholder may be set forth from
time to time in supplements to this prospectus.
PLAN OF DISTRIBUTION
The selling shareholder may sell common shares from time to time in one or more
transactions at fixed prices, at market prices at the time of sale, at varying
prices determined at the time of sale or at negotiated prices. The selling
shareholder may offer its common shares in one or more of the following
transactions:
- on any national securities exchange or quotation service on which the
common shares may be listed or quoted at the time of sale, including
the Nasdaq Small Cap;
- in the over-the-counter market;
- through options;
- by pledge to secure debts and other obligations; or
- a combination of any of the above transactions.
If required, we will distribute a supplement to this prospectus to describe
material changes in the terms of the offering.
30
<PAGE> 33
The selling shareholder may enter into hedging transactions that do not have an
impact on the market price of the common shares with broker-dealers and the
broker-dealer may engage in short sales of the common shares in the course of
hedging the positions they assume with the selling shareholder, including,
without limitation, in connection with distributions of the common shares by
such broker-dealers. In addition, the selling shareholder may, from time to
time, sell short the common shares (provided the transactions do not have an
impact on the market price of the common shares) and in such instances this
prospectus may be delivered in connection with such short sales and the common
shares offered hereby may be used to cover such short sales. The selling
shareholder may also enter into option or other transactions with broker-dealers
that involve the delivery of the common shares to the broker-dealers (provided
the transactions do not have an impact on the market price of the common
shares), who may then resell or otherwise transfer such common shares. The
selling shareholder may also loan or pledge the common shares to a broker-dealer
and the broker dealer-may sell the common shares so loaned or upon a default may
sell or otherwise transfer the pledged common shares.
The common shares described in this prospectus may be sold from time to time
directly by the selling shareholder. Alternatively, the selling shareholder and
any underwriters, broker/dealers or agents that participate in the distribution
of the common shares may be deemed to be "underwriters" within the meaning of
the Securities Act of 1933. Any profits on the resale of common shares and any
compensation received by any underwriter, broker/dealer or agent may be deemed
to be underwriting discounts and commissions under the Securities Act of 1933.
With regard to the common shares, we have agreed to maintain the effectiveness
of this registration statement until five years after the effective date of this
registration statement.
We will bear all costs, expenses and fees in connection with the registration of
the shares. The selling shareholder will bear all commissions, and discounts, if
any, attributable to the sale of the shares. We and the selling shareholder have
agreed to indemnify each other against certain liabilities, including
liabilities under the Securities Act.
LEGAL MATTERS
The validity of the common shares offered by this prospectus has been passed
upon for us by Hopkins & Sutter, Three First National Plaza, Chicago, Illinois
60602.
EXPERTS
The financial statements of American Bio Medica Corp as of April 30, 2000 and
for the years ended April 30, 2000 and 1999 appearing in this registration
statement have been audited by Richard A. Eisner & Company, LLP, independent
auditors, as set forth in their report thereon, and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
Under the New York Business Corporation Law ("NYBCL"), a corporation may
indemnify any person made, or threatened to be made, a party to any action or
proceeding, except for shareholder derivative suits, by reason of the fact that
he or she was a director or officer of the corporation, provided such director
or officer acted in good faith for a purpose which he or she reasonably believed
to be in the best interests of the corporation and, in criminal proceedings, in
addition, had no reasonable cause to believe his or her conduct was unlawful. In
the case of shareholder derivative suits, the corporation may indemnify any
person by reason of the fact that he or she was a director or officer of the
corporation if he or she acted in good faith for a purpose which he or she
reasonably believed to be in the best interests of the corporation, except that
no indemnification may be made in respect of (i) a threatened action, or a
pending
31
<PAGE> 34
action which is settled or otherwise disposed of; or (ii) any claim, issue or
matter as to which such person has 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 that portion of
the settlement amount and expenses as the court deems proper.
The indemnification described above under the NYBCL is not exclusive of other
indemnification rights to which a director or officer may be entitled, whether
contained in the certificate of incorporation or by-laws, or when authorized by
(i) such certificate of incorporation or by-laws; (ii) a resolution of
shareholders; (iii) a resolution of directors; or (iv) 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 or her 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 or she
personally gained in fact a financial profit or other advantage to which he or
she was not legally entitled.
The Company is in the process of amending its bylaws. The new bylaws will
provide that the Company will indemnify our directors and officers to the full
extent permitted by law if that person is a party to a matter by reason of being
a director or officer. These provisions may discourage stockholders from
bringing suit against a director for breach of fiduciary duty and may reduce the
likelihood of derivative litigation brought by our stockholders on our behalf
against a director.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Act") may be permitted to directors, officers, and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer 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.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may request a copy of these filings, at no cost,
by writing or telephoning us at the following address: Investor Relations,
American Bio Medica Corporation, 122 Smith Road, Kinderhook, New York 12106,
telephone (800) 227-1243. You may read and copy these documents at the SEC's
Public Reference Room at 450 Fifth Street, NW, Washington, D.C. 20549 or at the
SEC's other public reference facilities in New York, NY or Chicago, Illinois.
Please call the SEC at 1-800-SEC-0330 for further information on the Public
Reference Room. The SEC also maintains an Internet site that contains reports,
proxy and information statements, and other information regarding issuers like
us that file electronically with the SEC. The address of the SEC's website is
http://www.sec.gov. Additional information about us may be found on our website
at http://www.americanbiomedica.com. Information contained on our website does
not constitute part of this prospectus.
32
<PAGE> 35
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONTENTS
--------
Page
----
<S> <C>
Independent Auditors' Report..............................................................F-2
Balance Sheet as of April 30, 2000........................................................F-3
Statements of Operations for the years ended April 30, 2000 and 1999......................F-4
Statements of Changes in Stockholders' Equity for the years ended April 30, 2000
and 1999..............................................................................F-5
Statements of Cash Flows for the years ended April 30, 2000 and 1999......................F-6
Notes to Financial Statements dated April 30, 2000.......................................F-10
Unaudited Balance Sheet as of July 31, 2000..............................................F-20
Unaudited Statements of Operations for the three months ended July 31, 2000 and 1999.....F-21
Unaudited Statements of Cash Flows for the three months ended July 31, 2000 and 1999.....F-22
Notes to Unaudited Financial Statements dated July 31, 2000..............................F-23
</TABLE>
F-1
<PAGE> 36
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
American Bio Medica Corporation
Kinderhook, New York
We have audited the accompanying balance sheet of American Bio Medica
Corporation as of April 30, 2000 and the related statements of operations,
changes in stockholders' equity and cash flows for each of the years in the
two-year period ended April 30, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all
material respects, the financial position of American Bio Medica Corporation as
of April 30, 2000 and the results of its operations and its cash flows for each
of the years in the two-year period ended April 30, 2000, in conformity with
generally accepted accounting principles.
New York, New York
June 9, 2000
With respect to the last paragraph of Note G,
July 20, 2000
With respect to the first and third paragraphs of Note K[4](d),
July 24, 2000
With respect to the last paragraph of Note E,
August 2, 2000
F-2
<PAGE> 37
AMERICAN BIO MEDICA CORPORATION
BALANCE SHEET
APRIL 30, 2000
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,207,000
Investments 74,000
Accounts receivable - net of allowance for doubtful accounts of $81,000 1,150,000
Inventory 1,332,000
Prepaid expenses and other current assets 46,000
----------------
Total current assets 3,809,000
Property, plant and equipment, net 388,000
Due from director/stockholder 335,000
Restricted cash 112,000
Other assets 114,000
Loan receivable - BioSys, Inc. 280,000
----------------
$ 5,038,000
================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,655,000
Note payable - stockholder 125,000
Current portion of capital lease obligations 13,000
----------------
Total current liabilities 1,793,000
Long-term portion of capital lease obligations 34,000
----------------
Total liabilities 1,827,000
----------------
Commitments and contingencies
Stockholders' equity:
Preferred stock; par value $.01 per share; 5,000,000 shares authorized, none issued
and outstanding
Common stock; par value $.01 per share; 30,000,000 shares authorized; 18,045,548 shares
issued and outstanding 180,000
Additional paid-in capital 15,210,000
Subscription receivable (5,000)
Unearned portion of compensatory options (454,000)
Unrealized loss on investments available for sale (77,000)
Accumulated deficit (11,643,000)
----------------
3,211,000
----------------
$ 5,038,000
================
</TABLE>
See notes to financial statements F-3
<PAGE> 38
AMERICAN BIO MEDICA CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Net sales $ 7,653,000 $ 7,038,000
Cost of goods sold 3,602,000 3,356,000
-------------- --------------
Gross profit 4,051,000 3,682,000
-------------- --------------
Operating expenses:
Selling, general and administrative (including equity related charges of
$367,000 in 2000 and $91,000 in 1999) 5,223,000 5,040,000
Depreciation and amortization 106,000 25,000
Research and development 799,000 336,000
-------------- --------------
6,128,000 5,401,000
Operating loss (2,077,000) (1,719,000)
-------------- --------------
Other income (loss):
Loss on sale of marketable securities (122,000) (68,000)
Interest income 84,000 103,000
Interest expense (21,000) (7,000)
-------------- --------------
(59,000) 28,000
-------------- --------------
NET LOSS (2,136,000) (1,691,000)
Adjustments:
Preferred stock beneficial conversion feature (57,000) (123,000)
Preferred stock dividends (including late penalty in 1999) (82,000) (391,000)
-------------- --------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (2,275,000) $ (2,205,000)
============== ==============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (.15) $ (.15)
============== ==============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC AND DILUTED 15,480,790 14,557,000
============== ==============
</TABLE>
See notes to financial statements F-4
<PAGE> 39
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED COMMON STOCK ADDITIONAL
STOCK ------------ PAID-IN SUBSCRIPTION
SHARES SHARES AMOUNT CAPITAL RECEIVABLE
--------- ------------- --------- -------------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE - APRIL 30, 1998 2,500 14,282,989 $ 143,000 $ 12,102,000 $ (9,000)
Proceeds from exercise of options 2,000 6,000
Preferred "D" shares converted to common shares (1,093) 588,032 6,000 (6,000)
Dividend paid to holders of Preferred "D" shares:
Preferred shares 129 128,000
Cash
Common shares 2,169 5,000
Settlement of registration rights agreement
Value assigned to compensatory stock options 91,000
Amortization of compensatory stock options
Net loss
Other comprehensive loss:
Unrealized loss on securities available for sale
Comprehensive loss
--------- ------------- --------- -------------- --------
BALANCE - APRIL 30, 1999 1,536 14,875,190 149,000 12,326,000 (9,000)
Preferred "D" shares converted to common shares (1,647) 1,445,759 14,000 (14,000)
Dividends paid to holders of Preferred "D" shares:
Preferred shares 111 112,000
Cash
Fair value of compensatory stock options 83,000
Common shares issued in a private
placement 1,408,450 14,000 1,986,000
Exercise of common stock options 17,649
Common stock and common stock options issued
to consultants, net of amortization 300,000 3,000 721,000
Cancellation of common stock (1,500) (4,000) 4,000
Amortization of compensatory stock options
Net loss
Other comprehensive loss:
Unrealized loss on securities available for sale
Comprehensive loss
--------- ------------- --------- -------------- --------
BALANCE - APRIL 30, 2000 0 18,045,548 $ 180,000 $ 15,210,000 $ (5,000)
========= ============= ========= ============== ========
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE UNEARNED COMPREHENSIVE ACCUMULATED
LOSS COMPENSATION LOSS DEFICIT TOTAL
------------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE - APRIL 30, 1998 $ (24,000) $ (7,342,000) $ 4,870,000
Proceeds from exercise of options 6,000
Preferred "D" shares converted to common shares 0
Dividend paid to holders of Preferred "D" shares:
Preferred shares (158,000) (30,000)
Cash (3,000) (3,000)
Common shares (5,000) 0
Settlement of registration rights agreement (225,000) (225,000)
Value assigned to compensatory stock options 91,000
Amortization of compensatory stock options 11,000 11,000
Net loss $(1,691,000) (1,691,000) (1,691,000)
Other comprehensive loss:
Unrealized loss on securities available for sale (56,000) $ (56,000) (56,000)
-----------
Comprehensive loss $(1,747,000)
=========== --------- --------- ------------- -------------
BALANCE - APRIL 30, 1999 (13,000) (56,000) (9,424,000) 2,973,000
Preferred "D" shares converted to common shares 0
Dividends paid to holders of Preferred "D" shares:
Preferred shares (82,000) 30,000
Cash (1,000) (1,000)
Fair value of compensatory stock options 83,000
Common shares issued in a private
placement 2,000,000
Exercise of common stock options 0
Common stock and common stock options issued
to consultants, net of amortization (452,000) 272,000
Cancellation of common stock 0
Amortization of compensatory stock options 11,000 11,000
Net loss $(2,136,000) (2,136,000) (2,136,000)
Other comprehensive loss:
Unrealized loss on securities available for sale (21,000) (21,000) (21,000)
-----------
Comprehensive loss $(2,157,000)
=========== --------- --------- ------------- -------------
BALANCE - APRIL 30, 2000 $(454,000) $ (77,000) $ (11,643,000) $ 3,211,000
========= ========= ============= =============
</TABLE>
See notes to financial statements F-5
<PAGE> 40
AMERICAN BIO MEDICA CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
--------------------------------
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $(2,136,000) $(1,691,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization and depreciation 106,000 78,000
Loss on disposal of property 7,000
Allowance for note receivable, net 105,000
Provision for bad debts 11,000 30,000
Issuance of compensatory stock and stock options 367,000 102,000
Accrued interest (23,000) (16,000)
Loss on sale of marketable securities 14,000 68,000
Changes in:
Accounts receivable (197,000) (339,000)
Inventory 356,000 (843,000)
Prepaid expenses and other current assets 51,000 (73,000)
Other assets (35,000) 6,000
Accounts payable and accrued expenses 535,000 663,000
----------- -----------
Net cash used in operating activities (846,000) (2,008,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (145,000) (220,000)
Purchase of investments (73,000) (1,812,000)
Sales and maturity of investments 571,000 969,000
Collections on note receivable 23,000
Loan to BioSys, Inc. (280,000)
Loans to director/stockholder (32,000) (29,000)
----------- -----------
Net cash provided by (used in) investing activities 64,000 (1,092,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of capital lease obligations (11,000) (11,000)
Proceeds from private placement 2,000,000
Proceeds from exercise of options 6,000
Cash dividends paid (1,000) (3,000)
Repayment of note payable to stockholder (130,000)
----------- -----------
Net cash provided by (used in) financing activities 1,858,000 (8,000)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,076,000 (3,108,000)
Cash and cash equivalents - beginning of year 131,000 3,239,000
----------- -----------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 1,207,000 $ 131,000
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 8,000 $ 8,000
Income taxes $ 6,000
NONCASH ACTIVITIES:
Common stock issued in connection with stock dividends to holders of
preferred stock $ 111,000 $ 133,000
Dividend accrued not yet paid $ 30,000
Acquisition of property under capital leases $ 69,000
Settlement of registration rights agreement $ 225,000
Sale of book business and related assets for a note receivable $ 205,000
Cancellation of common stock $ 4,000
Preferred stock converted to common stock $ 1,647,000 $ 1,093,000
</TABLE>
See notes to financial statements F-6
<PAGE> 41
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 2000
NOTE A - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
American Bio Medica Corporation (the "Company") was formed under the laws of the
state of New York on April 10, 1986 and is in the business of manufacturing,
developing and marketing biomedical technologies and products. The Company
currently owns two technologies for screening drugs of abuse, a workplace
screening test and a preliminary test for use by laboratories. The Company was
involved in marketing educational books and software to schools and municipal
libraries and audio-visual educational packages to corporations throughout the
United States, which constitute less than 10% of net sales. (See Note F).
During the year ended April 30, 2000 the Company sustained a net loss of
$2,136,000 and had net cash outflows from operating activities of $846,000. The
Company has taken a number of steps to improve its financial prospects including
entering into national and international distribution agreements with a number
of distributors, completed an in-house strip manufacturing program to reduce
costs and other measures to enhance profit margins. In addition, on April 28,
2000 the Company raised $2,000,000 pursuant to a common stock purchase agreement
(see Note J[2]).
[1] CASH EQUIVALENTS:
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
[2] INVENTORY:
Inventory is stated at the lower of cost or market; cost is determined by
the first-in-first-out method.
[3] INCOME TAXES:
The Company accounts for income taxes in accordance with Statements of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes". Deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities, and are measured using the enacted laws and tax rates that
will be in effect when the differences are expected to reverse. The
measurement of deferred tax assets is reduced, if necessary, by a
valuation allowance for any tax benefits which are not expected to be
realized. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in the period that such tax rate changes are
enacted.
[4] DEPRECIATION AND AMORTIZATION:
Property, equipment and capitalized lease assets are depreciated on the
straight-line method over their estimated useful lives. Leasehold
improvements are amortized by the straight-line method over the shorter
of their estimated useful lives or the term of the lease.
[5] REVENUE RECOGNITION:
The Company recognizes revenue when products are shipped or services are
rendered.
[6] RESEARCH AND DEVELOPMENT:
Research and development costs are charged to operations when incurred.
[7] LOSS PER COMMON SHARE:
Basic loss per share is calculated by dividing net loss by the weighted
average number of outstanding common shares during the period. No effect
has been given to potential issuances of common stock including
outstanding options and warrants in the diluted computation as their
effect would be antidilutive.
F-7
<PAGE> 42
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 2000
NOTE A - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[7] LOSS PER COMMON SHARE: (CONTINUED)
When preferred stock is convertible to common stock at a conversion rate
that is the lower of a rate fixed at issuance or a fixed discount from
the common stock market price at the time of conversion, the discounted
amount is an assured incremental yield. This "beneficial conversion
feature", to the preferred stockholders is accounted for as an embedded
dividend to preferred shareholders. As such, the loss per common share
was adjusted for this feature.
[8] USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
[9] IMPAIRMENT OF LONG-LIVED ASSETS:
The Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of " during
the year ended April 30, 1999. SFAS No. 121 establishes accounting
standards for the impairment of long-lived assets, certain identifiable
assets, and goodwill related to those assets. There was no effect of the
adoption of SFAS No. 121 on the financial statements.
[10] FINANCIAL INSTRUMENTS:
The carrying amounts of cash and cash equivalents, accounts receivable -
net, due from director/stockholder, loan receivable - BioSys, Inc.,
accounts payable and accrued expenses and note payable approximate their
fair value based on the nature of those items.
Estimated fair value of financial instruments are determined using
available market information. In evaluating the fair value information,
considerable judgment is required to interpret the market data used to
develop the estimates. The use of different market assumptions and/or
different valuation techniques may have a material effect on the
estimated fair value amounts. Accordingly, the estimates of fair value
presented herein may not be indicative of the amounts that could be
realized in a current market exchange.
[11] ACCOUNTING FOR STOCK-BASED COMPENSATION:
The Company accounts for its stock-based compensation plans under
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock
Issued to Employees" and related interpretations. In October 1995, the
Financial Accounting Standards Board issued Statement No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), which
establishes a fair value-based method of accounting for stock-based
compensation plans. The Company has adopted the disclosure-only
alternative under SFAS No. 123, which requires disclosure of the pro
forma effects on net loss and net loss per share as if stock-based
employee compensation was measured under SFAS No. 123, as well as certain
other information. The Company accounts for stock-based compensation to
nonemployees using the fair value method in accordance with SFAS No. 123
and Emerging Issues Task Force (EITF) 96-18. The Company has recognized
deferred stock compensation related to certain stock option grants (see
Note J).
F-8
<PAGE> 43
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 2000
NOTE A - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[12] CONCENTRATION OF CREDIT RISK:
The Company sells its drug testing products primarily to United States
distributors. Credit is extended based on an evaluation of the customer's
financial condition, and generally collateral is not required. The
Company establishes an allowance for doubtful accounts based on factors
surrounding the credit risk of specific customers and other information.
The Company maintains certain cash balances at a financial institution
that is federally insured and at times the Company's balance have
exceeded federally insured limits.
[13] REPORTING COMPREHENSIVE LOSS:
During fiscal 1999, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130"). The
provisions for SFAS No. 130 require the Company to report the change in
the Company's equity during the period from transactions and events other
than those resulting from investments by and distributions to the
shareholders.
[14] RECLASSIFICATIONS:
Certain items have been reclassified to conform with the current year
presentation.
NOTE B - INVESTMENTS AND RESTRICTED CASH
The Company's investments are classified as available-for-sale and are carried
at fair value with the unrealized gains and losses included in stockholders'
equity. Investments at April 30, 2000 consist of the following:
<TABLE>
<CAPTION>
FAIR UNREALIZED
COST VALUE LOSS
------------- ------------ ----------
<S> <C> <C> <C>
Certificates of deposit - maturity
less than one year $ 32,000 $ 32,000
Marketable equity securities - common stock 119,000 42,000 $(77,000)
------------- ------------ --------
$ 151,000 $ 74,000 $(77,000)
============= ============ ========
Certificate of deposit - restricted (Note K[5]) $ 112,000 $ 112,000
============= ============
</TABLE>
During the year ended April 30, 1999, the Company used equity instruments as
collateral for certain borrowings under a margin account, which were repaid.
NOTE C - INVENTORY
Inventory is comprised of the following:
Drug screening tests:
Raw materials $ 713,000
Work in process 397,000
Finished goods 222,000
-------------
Total $ 1,332,000
=============
F-9
<PAGE> 44
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 2000
NOTE D - PLANT AND EQUIPMENT
Plant and equipment, at cost, are as follows:
Office equipment, including $46,000 under capital leases $ 246,000
Manufacturing and warehouse equipment, including $23,000
under capital lease 365,000
----------
611,000
Less accumulated depreciation 223,000
----------
$ 388,000
==========
NOTE E - LOAN RECEIVABLE - BIOSYS, INC.
BioSys, Inc. is a development stage company focusing on developing,
manufacturing, marketing and selling proprietary new products for the industrial
microbiology testing market. BioSys, Inc. has developed patented methodologies,
a computerized instrument and disposable vials for accurate rapid
microbiological testing.
The Company advanced $280,000 to BioSys, Inc., (the President of BioSys is a
director of the Company). The loan is convertible into common stock of BioSys,
Inc. based on the percentage of funds provided by the Company compared to the
total amount of capital obtained by BioSys, Inc. within a two-year period
commencing July 14, 1999, limited to a maximum of 20% in exchange for an
aggregate contribution of $400,000. The agreement provides for the Company to
select two individuals to serve on the board of directors of BioSys, Inc.
During May 2000, the Company advanced an additional $100,000 pursuant to the
aforementioned terms.
In August 2000, BioSys, Inc. began to more fully exploit its technology and will
display its testing equipment at trade shows and otherwise commercialize its
products.
NOTE F - OTHER ASSETS
On September 1, 1999, the Company sold its book sales business including all
inventories and accounts receivable (see Note A) to an entity in exchange for a
$250,000 five year secured promissory note. During the year ended April 30,
2000, the Company repossessed certain assets, upon the default of the note and
collected $23,000 through April 30, 2000. In addition, the Company recorded an
allowance of $150,000 and is carrying the repossessed assets at its estimated
realizable value of $77,000.
NOTE G - DUE FROM DIRECTOR/STOCKHOLDER
At April 30, 2000, the Company has a note receivable from a director/stockholder
for $335,000. The note bears interest at 11.5% per annum and is payable on
demand.
During the years ended April 30, 2000 and 1999, the Company advanced $32,000 and
$29,000, respectively to the director/stockholder. Interest income in connection
with the note receivable for the years ended April 30, 2000 and 1999 was $23,000
and $16,000, respectively.
During May 2000, the Company advanced an additional $80,000 to this
director/stockholder pursuant to the same terms, as stated above.
The Company's Board of Directors is currently evaluating forms of repayments of
the director/stockholder's loan. The forms of repayment may include cash or
noncash assets in the form of Company common shares owned by the
director/stockholder. The director/stockholder has agreed to provide 1,500,000
common shares as collateral for the loan.
F-10
<PAGE> 45
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 2000
NOTE H - CAPITAL LEASE OBLIGATIONS
The Company leases certain equipment under a capital lease. As of April 30,
2000, minimum future lease payments on the capital leases are as follows:
YEAR ENDING
APRIL 30,
------------
2001 $ 19,000
2002 19,000
2003 19,000
2004 1,000
-----------
Total future minimum loan payments 58,000
Less amount representing interest (11,000)
-----------
Present value of minimum lease payments 47,000
Less current portion of capital lease payments (13,000)
-----------
Long-term portion of capital lease obligations $ 34,000
===========
NOTE I - INCOME TAXES
At April 30, 2000, the Company has approximately $8,500,000 of net operating
loss carryforwards expiring through 2019.
At April 30, 2000, the Company has a deferred tax asset of approximately
$3,500,000 representing the benefits of its net operating loss carryforward and
certain expenses not currently deductible. The Company's deferred tax asset has
been fully reserved by a valuation allowance since realization of its benefit is
uncertain. The difference between the statutory tax rate of 34% and the
Company's effective tax rate of 0% is substantially due to the increase in the
valuation allowance of $900,000 and $716,000 for the years ended April 30, 2000
and 1999, respectively. The Company's ability to utilize its net operating loss
carryforwards may be subject to an annual limitation in future periods pursuant
to Section 382 of the Internal Revenue Code of 1986, as amended.
NOTE J - STOCKHOLDERS' EQUITY
[1] PREFERRED STOCK:
In October 1996, the Company amended its certificate of incorporation
authorizing the issuance of 5,000,000 Preferred Shares. The board of
directors of the Company has the authority, without further action by the
holders of the outstanding common shares, to issue preferred shares from
time to time in one or more classes or series, to fix the number of
shares constituting any class or series and the stated value thereof, if
different from the par value, and to fix the terms of any such series or
class, including dividend rights, dividend rates, conversion or exchange
rights, voting rights, rights and terms of redemption (including sinking
fund provisions,) the redemption price and the liquidation preference of
such class or series.
F-11
<PAGE> 46
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 2000
NOTE J - STOCKHOLDERS' EQUITY (CONTINUED)
[1] PREFERRED STOCK: (CONTINUED)
During April 1998, the Company completed a private placement in which it
netted proceed of approximately $2,312,000 through the sale of 2,500
shares of 8% Series D Convertible Preferred Shares with a stated value of
$1,000 per share. Each Preferred Share is convertible at the lesser of
(i) 95% of the average of the closing bid prices of the common shares
over any three trading days selected by the holder of the Preferred
Shares in the 20 trading days immediately preceding the date of
conversion or (ii) $4.625 based on a formula as provided. Dividends are
payable in cash or additional Preferred Shares at the Company's option.
Pursuant to a Registration Rights Agreement dated April 24, 1998 (the
"Registration Rights Agreement"), the Company agreed to register the
resale of the Company's common stock issuable upon conversion of the
Company's Series D Preferred Stock and upon exercise of certain stock
purchase warrants. Pursuant to the Registration Rights Agreement, if a
registration statement covering the resale of such shares of Common Stock
was not declared effective by July 23, 1998 or once declared effective
sales could not be made thereunder for any reason (a "Registration
Statement Deficiency"), the Company agreed to pay a late registration
penalty. The Registration Statement filed by the Company was not declared
effective until March 17, 1999, resulting in a penalty. In the fourth
quarter of fiscal 1999, the Series D preferred stockholders (the
"holders") communicated to the Company that they were willing to accept
$250,000 in cash in settlement of the penalty. On May 28, 1999, the
Company entered into a definitive Agreement as of April 30, 1999 (the
"1999 Agreement") to settle all claims against the Company, including the
late registration penalty and certain other claims under the Securities
Purchase Agreement dated April 24, 1998. Pursuant to the 1999 Agreement,
the Company gave as consideration $225,000 on June 1, 1999 ($100,000 in
cash and a one-year promissory note in the principal amount of $125,000
accruing interest at the rate of 14% annually), which was subsequently
repaid.
The preferred dividend payable of $30,000 at April 30, 1999 was paid
through the issuance of 29 Series D Preferred Shares and $1,000 in cash.
On January 27, 2000, the Company entered into an agreement with the
holders of the Series D Preferred Shares to convert all of their
outstanding Series D Preferred Shares. Pursuant to this agreement certain
preferred shares were converted at a price of $1.078646 resulting in an
additional preferred dividend of approximately $57,000 for the difference
between the original conversion rate and the adjusted conversion price.
During the year ended April 30, 2000, the Company issued 1,445,759 common
shares to convert all of the outstanding Series D Preferred Shares and to
pay accrued dividends of approximately $111,000.
[2] COMMON STOCK PURCHASE AGREEMENT:
On April 28, 2000, the Company entered into an agreement with an investor
group ("Investor") to issue and sell 1,408,450 common shares at a per
share price of $1.42 (the "closing price") for a total of $2 million.
In conjunction with the agreement, the Company has agreed to issue a
five-year warrant to the investor to purchase up to 1,877,934 common
shares pursuant to a formula based on the Company's stock price on the
ten consecutive tradings prior to the six-month anniversary of the
closing date. If the six-month anniversary price per share is $2.13 or
more per share, the Company will not be required to issue any warrants.
If it is less than $2.13 per share, the Company will be required to issue
warrants exercisable at the anniversary price into a number of common
shares based on a formula.
F-12
<PAGE> 47
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 2000
NOTE J - STOCKHOLDERS' EQUITY (CONTINUED)
[3] STOCK OPTION PLANS:
The Company adopted the Fiscal 1997 Nonstatutory Stock Option Plan (the
"1997 Plan"), the Fiscal 1998 Nonstatutory Plan (the "1998 Plan") and the
Fiscal 2000 Nonstatutory Stock Option Plan (the "2000 Plan"). The 1997
Plan provides for the granting of options to purchase up to 2,000,000
shares of common stock, the 1998 Plan provides for the granting of
options to purchase 1,000,000 common shares and the 2000 Plan provides
for the granting of options to purchase up to 1,000,000 common shares.
These Plans are administered by the Option Committee of the Board of
Directors, which determines the terms of options exercised, including the
exercise price, the number of shares subject to the option and the terms
and conditions of exercise.
[4] OTHER STOCK OPTIONS:
During March 1996, the Company entered into an agreement with a public
relations and communications firm to serve as the Company's liaison and
spokesman to the financial and investment community. In connection
therewith, the Company also granted 500,000 options exercisable at $1.00
through March 15, 1999 and 500,000 options exercisable at $2.00 through
March 15, 1999. During March 1998, the Company purchased from the public
relations firm 75,000 options exercisable at $1.00 per common share and
75,000 options exercisable at $2.00 per common share for $225,000.
At April 30, 1999, the options had expired.
[5] STOCK OPTIONS:
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
----------------------------------------------------------
2000 1999
----------------------------- ---------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Options outstanding at beginning of year 1,976,000 $3.02 2,510,000 $2.55
Granted 1,858,000 2.45 468,000 2.81
Exercised (67,000) 2.96 (2,000) 3.00
Cancelled/expired (777,000) 3.00 (1,000,000) 3.02
------------- -------------
Options outstanding at end of year 2,990,000 2.63 1,976,000 3.02
============= =============
Options exercisable at end of year 2,558,000 2.67 1,558,000 2.98
============= =============
</TABLE>
F-13
<PAGE> 48
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 2000
NOTE J - STOCKHOLDERS' EQUITY (CONTINUED)
[5] STOCK OPTIONS: (CONTINUED)
In March 2000, 17,649 common shares were issued upon the cashless
exercise of options to purchase 67,000 shares of the Company's common
shares.
The following table presents information relating to stock options
outstanding at April 30, 2000.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE REMAINING EXERCISE
RANGE OF EXERCISE PRICE SHARES PRICE LIFE IN YEARS SHARES PRICE
----------------------- ------------- --------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
$2.00 - $3.00 2,805,000 $2.57 6.44 2,373,000 $2.61
============= ============
$3.50 185,000 3.50 2.37 185,000 3.50
============= ============
</TABLE>
As of April 30, 2000, 4,416 options are available for future grant under
the 1997 Plan, 8,250 options are available for future grant under the
1998 Plan and 275,000 options are available for future grant under the
2000 Plan.
Through May 27, 1999, the Company granted 137,750 options. On July 1,
1999 the Company extended the term of approximately 852,000 options from
3 to 5 years.
[6] WARRANTS:
In connection with the Private Placement of the 8% Series D Convertible
Preferred Shares, the Company granted 107,355 common share purchase
warrants entitling the holder to purchase one common share at a price of
$4.81 per share until April 24, 2001. 100,000 of the purchase warrants
were issued to preferred stockholders and 7,355 of the purchase warrants
were issued to the selling agent as additional compensation. The weighted
average fair value of warrants granted during the year ended April 30,
1998 was $1.67 on the date of grant using the Black-Scholes pricing model
using the following assumptions: dividend yield 0%; volatility of 59%,
risk free rate of 5.61% and expected life of three years.
F-14
<PAGE> 49
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 2000
NOTE J - STOCKHOLDERS' EQUITY (CONTINUED)
[7] STOCK-BASED COMPENSATION:
The Company applies APB No. 25 in accounting for its employee stock
option plans and, accordingly, recognizes employee compensation expense
for the difference between the fair value of the underlying common shares
and the exercise price of the option at the date of grant. The effect of
applying SFAS No. 123 on pro forma net loss as stated above is not
necessarily representative of the effects on reported net loss for future
years due to, among other things (1) the vesting period of the stock
options and (2) the fair value of additional stock options in future
years. The weighted average fair value of options granted during 1999 and
2000 was approximately $1.21 and $1.06, respectively. The following pro
forma information gives effect to fair value of the options on the date
of grant using the Black-Scholes option-pricing model with the following
assumptions: dividend yield of 0%, volatility of 79% and 85% for 1999 and
2000, respectively, risk free interest rates of ranging from 4.67% -
5.62% and 5.81% - 6.60% for 1999 and 2000, respectively and expected life
of 3 years.
YEAR ENDED APRIL 30,
-----------------------------
2000 1999
------------ -------------
Net loss:
As reported $ (2,136,000) $ (1,691,000)
Pro forma (3,684,000) (1,967,000)
Basic and diluted loss per share:
As reported $ (.15) $ (.15)
Pro forma $ (.24) $ (.17)
During the year ended April 30, 1999, the Company granted 9,000 options
to employees at exercise prices less than fair value of the underlying
common shares at dates of grant. In addition, during the year ended April
30, 1999, the Company granted 33,500 options to consultants. In
connection with these grants the Company recorded a one-time noncash
charge of $51,000.
During year ended April 30, 1999, the Company implemented a stock option
program pursuant to which distributors were granted stock options under
the 1997 Plan based on annual sales for the year ended April 30, 1999. On
June 10, 1999, the Company granted 56,000 options at an exercise price of
$3.00 per common share exercisable through June 10, 2002 pursuant to the
program. In connection therewith, the Company recorded a charge of
$40,000 for the year ended April 30, 1999.
During December 1999, the Company entered into a one year consulting
agreement with an individual knowledgeable in the medical diagnostic
testing area. In connection therewith, the Company issued 300,000 common
shares and granted options to purchase 200,000 common shares at $2 per
share, vesting as of December 15, 2000. The Company has recorded an
estimated charge of $272,000 for the fair value of the common shares and
options issued. The actual cost of the options will be determined on
December 15, 2000.
During the year ended April 30, 2000, the Company has granted various
options to distributors and consultants to purchase 97,250 common shares.
The options can be exercised through January 2005 at exercise prices
ranging from $2.50 to $3.00 per share. In connection therewith, the
Company recorded a charge of $84,000 for the year ended April 30, 2000.
F-15
<PAGE> 50
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 2000
NOTE K - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
[1] OPERATING LEASES:
The Company leases office and warehouse facilities under operating leases
expiring through August 2003. At April 30, 2000, the future minimum
rental payments under the operating lease are as follows:
2001 $ 101,000
2002 41,000
2003 9,000
-----------
$ 151,000
===========
Rent expense was $139,000 and $75,000 for the years ended April 30, 2000
and 1999, respectively.
[2] PURCHASE AGREEMENT:
On May 19, 1999, the Company entered into an agreement to acquire one of
the leased facilities for $1,300,000 subject to zoning approval,
environment assessment and structural inspection. The Company anticipates
the purchase to be financed through a mortgage loan. At April 30, 2000,
the Company has made a deposit of $20,000 towards this purchase.
[3] EMPLOYMENT AGREEMENTS:
On November 4, 1998, the Company entered into an employment agreement
with its President providing for an annual salary of $96,000 which
expired April 30, 2000.
On November 4, 1996, the Company entered into a employment agreement with
its Vice-President of Marketing and Sales for an annual salary of $84,000
which expired April 30, 2000.
In addition, the above agreements provide for bonuses based on an
aggregate of 2% of net sales.
During 1997, the Company entered into a three year employment agreement
with its Vice-President/General Manager. The employment agreement
provides for a base annual salary of $84,000 per annum and a bonus of 1%
of net sales after gross revenue of $1,000,000 per fiscal year. This
employment agreement expired May 25, 2000.
The Company is currently negotiating agreements with all of these
individuals.
During the years ended April 30, 2000 and 1999, the Company recorded
approximately $156,000 and $199,000, respectively in bonuses based on net
sales in accordance with employment agreements.
[4] LITIGATION:
(a) Freidenberg Case
In February 1994, Robert Friedenberg, as former owner of the two
medical technology companies, MDI and Gendex, acquired by the
Company, in the name of these corporations, filed for a declaratory
judgment in Maryland that a Share Exchange Agreement had been
rescinded. In order to make a claim for damages, the Company filed a
third-party claim against Dr. Friedenberg for breach of the Share
Exchange Agreement and fraud. In November 1995, after a trial, the
court denied Dr. Friedenberg's request for a declaration of
rescission and allowed the Company's third-party claim to proceed to
trial. In September 1996, Dr. Friedenberg died.
F-16
<PAGE> 51
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 2000
NOTE K - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED)
[4] LITIGATION: (CONTINUED)
(a) Freidenberg Case (continued)
The Company's third party claim was decided by a jury on May 5,
1997. The verdict determined that Dr. Friedenberg breached the Share
Exchange Agreement when he failed to deliver drug screening know how
technology to the Company. The jury also found in favor of the
Company on two of three fraud claims against Dr. Friedenberg and
awarded the Company approximately $321,000 in damages. Dr.
Friedenberg's estate, just prior to the jury trial, filed a
supplemental claim for the shares of the Company which he would have
received under the Share Exchange Agreement. The trial judge on July
17, 1998, ruled that the estate of Dr. Friedenberg is entitled to
5,907,154 common shares of the Company. The Company appealed that
ruling and on April 1, 1999, a hearing was held in the Court of
Special Appeals in Maryland.
On September 15, 1999, the Court of Special Appeals in Maryland
ruled in favor of the Company and reversed the circuit court's
ruling that the estate of Dr. Friedenberg was entitled to 5,907,154
common shares of the Company. On December 21, 1999, the Court of
Appeals denied the Friedenberg estate's petition to review the
decision of the Court of Special Appeals. As a result of the
aforementioned matters, no accrual was required.
(b) Jackson Morris Case
In June 1995, the Company filed a lawsuit against Jackson Morris,
the lawyer who was in charge of drafting and advising it on the
Share Exchange Agreement (see Freidenberg Case). Mr. Morris, who had
been recommended to the Company by Dr. Friedenberg, is alleged by
the Company to have breached his fiduciary duty to the Company by
later advising Dr. Friedenberg, individually, on how to rescind the
Share Exchange Agreement. Mr. Morris is also charged with negligence
in drafting the Share Exchange Agreement. The Company's lawsuit
demands damages in the amount of $1,000,000. Mr. Morris has
counterclaimed as a party to the Share Exchange Agreement and seeks
common shares. No trial date has been set. The Company is vigorously
contesting the Morris claim.
(c) Private Placement Claim
In June 1999, an individual filed suit in New York claiming that two
private placement memoranda dated respectively September 15, 1992
and February 5, 1993, obligated the Company to issue him 1,555,601
common shares of the Company. The claim is that he is entitled to
the common shares in consideration of brokering the acquisitions
subject to the Share Exchange Agreement with Dr. Friedenberg. In
addition, the individual is claiming a finder's fee of five percent
of the funds raised by a September 1992 private placement. He
alleges that a sum of one million dollars was raised. Finally, he
claims that he is entitled to a consulting fee of $24,000.
Management denies the claims and is vigorously contesting the suit.
It is scheduled for a jury trial in the 4th calendar quarter of
2000.
(d) Phamatech Case
On January 26, 1999, the Company was granted a U.S. Patent for the
design of the Multiple Test Card, known as the Rapid Drug Screen. On
April 7, 1999, the Company filed suit in the federal court in
Delaware against Phamatech, Inc. of California. Phamatech, Inc. of
California was a former supplier of the Company and in that capacity
acquired proprietary information on its Rapid Drug Screen that it
allegedly used to "knock off" the Company's product. This case was
transferred from Delaware to California. On July 24, 2000, the
California court granted American Bio Medica Corporation's motion to
F-17
<PAGE> 52
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 2000
NOTE K - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED)
[4] LITIGATION: (CONTINUED)
(d) Phamatech Case (continued)
add Tuan Pham, President of Phametech, as an individual defendant in
the suit. The court also ordered that Wolfe & Associates (aka Wolfe
Data) and James Wolfe, Elite Health Services, LLC and John Polanco
(former distributors now selling the alleged infringing products be
joined as defendants). Peninsula Drug Analysis Co., Inc. and James
Ramsey (former distributor selling an alleged private label knock
off believed by the Company to be manufactured by Phamatech), and
Dipro Diagnostics of North America (another party selling an alleged
private label knock off believed to be manufactured by Phamatech)
are already parties to the Phamatech suit. The Company is alleging
patent infringement, violation of trademark rights and unfair
competition against all parties.
On April 8, 1999, Phamatech Inc. filed suit in the federal court in
San Diego, California asking for a declaration that the Company's
patent is invalid. It also claimed breach of contract damages for an
alleged nonpayment of invoices by the Company. The Company's
transferred Delaware case and Phamatech's California case have been
placed on the same trial docket in San Diego. By Order dated July
24, 2000, the Court ordered the competing California based suits be
consolidated in one case. In a recent motion, Phamatech sought
summary judgment. The trial court denied the motion as to
Phamatech's declaratory judgment on the Company's patent claims.
Since the Company's trademark had not been registered, even though
the petition for trademark is on appeal within the United States
Patent and Trademark Office ("PTO"), the trial court denied the
Company's trademark claim. However, the Court did not deal with the
Company's trade dress claim. Phamatech has now moved for partial
summary judgment on the Company's trade dress claim even though the
Company's application for trademark protection of its trade dress is
still pending before the examiner at the PTO.
In October 1999, the Company sued Larry Hartselle, Drug Detection
Devices, and Gulf Supply for patent infringement, trademark
dilution, and unfair competition. It is alleged that they are also
selling the Phamatech knock off. Drug Detection Devices is alleged
to be selling yet another private label manufactured by Phamatech.
Larry Hartselle d/b/a Instant Drug Detection is a former distributor
now selling the alleged Phamatech knock-off. Gulf Supply is alleged
to be selling the private label knock off sold by Drug Detection
Devices. The claims against Hartselle and Drug Detection Devices
have been settled by the parties. An injunction will be issued
against Larry Hartselle prohibiting further infringement. The
remaining defendant, Gulf Supply, is in settlement negotiations with
the Company.
[5] RESTRICTED CASH:
The Company collateralized a bank loan totalling $105,000 for the
chairman of the board of directors/stockholder with a certificate of
deposit in the bank amounting to $112,000.
[6] MAJOR CUSTOMER:
During the year ended April 30, 2000, there were no major customers
representing 10% of sales. During the year ended April 30, 1999, one
customer accounted for approximately 17% of net sales.
[7] 401(K) PLAN:
Effective January 1, 1999, the Company adopted a defined contribution
401(k) plan available to eligible employees. Employee contributions are
voluntary and are determined on an individual basis, limited to the
maximum amount allowable under federal tax regulations. The Company at
its discretion may make certain contributions to the plan. No such
contributions have been made through April 30, 2000.
F-18
<PAGE> 53
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 2000
NOTE L - GEOGRAPHIC INFORMATION
Information concerning sales by principal geographic is as follows:
YEAR ENDED APRIL 30,
-------------------------------
2000 1999
-------------- --------------
United States $ 7,073,000 $ 6,477,000
North America (not domestic) 276,000 22,000
Europe 155,000 70,000
Asia/Pacific Run 11,000 34,000
South America 138,000 435,000
-------------- --------------
$ 7,653,000 $ 7,038,000
============== ==============
F-19
<PAGE> 54
AMERICAN BIO MEDICA CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
July 31, April 30,
2000 2000
(Unaudited)
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 630,000 $ 1,207,000
Investments 84,000 74,000
Accounts receivable, net 1,369,000 1,150,000
Inventory 1,372,000 1,332,000
Prepaid expenses 87,000 46,000
------------ ------------
Total current assets 3,542,000 3,809,000
Property, plant and equipment, net 377,000 388,000
Due from director/stockholder 465,000 335,000
Restricted cash 116,000 112,000
Other assets 110,000 114,000
Loan receivable - BioSys, Inc. 380,000 280,000
------------ ------------
$ 4,990,000 $ 5,038,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,813,000 $ 1,655,000
Note payable - stockholder 125,000
Current portion of capital lease obligations 13,000 13,000
------------ ------------
Total current liabilities 1,826,000 1,793,000
Long term portion of capital lease obligations 31,000 34,000
------------ ------------
Total liabilities 1,857,000 1,827,000
------------ ------------
Stockholders' equity:
Preferred stock; par value $.01 per share; 5,000,000 shares
Authorized; none issued and outstanding
Common stock; par value $.01 per share; 30,000,000 shares
Authorized; 18,045,548 shares issued and
Outstanding at July 31, 2000 and April 30, 2000 180,000 180,000
Additional paid-in capital 15,210,000 15,210,000
Subscription receivable (5,000) (5,000)
Unearned portion of compensation (272,000) (454,000)
Unrealized loss on investments available for sale (64,000) (77,000)
Accumulated deficit (11,916,000) (11,643,000)
------------ ------------
3,133,000 3,211,000
------------ ------------
$ 4,990,000 $ 5,038,000
============ ============
</TABLE>
See accompanying notes to financial statements
F-20
<PAGE> 55
AMERICAN BIO MEDICA CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
JULY 31,
------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Net sales $ 2,155,000 $ 2,127,000
Cost of goods sold 742,000 1,067,000
------------ ------------
Gross profit 1,413,000 1,060,000
------------ ------------
Operating expenses:
Selling, general and administrative 1,391,000 907,000
Non-cash compensation 182,000
Depreciation 29,000 24,000
Research and development 119,000 235,000
------------ ------------
1,721,000 1,166,000
------------ ------------
Operating loss (308,000) (106,000)
------------ ------------
Other income (expense):
Gain on sale of marketable securities 58,000
Interest income 37,000 27,000
Interest expense (2,000) (6,000)
------------ ------------
35,000 79,000
------------ ------------
Net loss $ (273,000) $ (27,000)
Adjustments:
Preferred stock beneficial conversion feature (123,000)
Preferred stock dividends (32,000)
------------ ------------
Net loss attributable to common shareholders $ (273,000) $ (182,000)
============ ============
Basic and diluted net loss
per common share $ (0.02) $ (0.01)
Weighted average shares outstanding -
basic and diluted 18,045,548 14,875,190
============ ============
AMERICAN BIO MEDICA CORPORATION
STATEMENT OF COMPREHENSIVE LOSS
Net loss $ (273,000) $ (27,000)
Other comprehensive loss:
Unrealized gain (loss) on investments 13,000 (44,000)
------------ ------------
Comprehensive loss $ (260,000) $ (71,000)
============ ============
</TABLE>
See accompanying notes to financial statements
F-21
<PAGE> 56
AMERICAN BIO MEDICA CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
JULY 31,
----------------------------
2000 1999
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (273,000) $ (27,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 29,000 24,000
Provision for bad debts 9,000 17,000
Issuance of compensatory stock and stock options 182,000
Accrued interest (12,000) (4,000)
Gain on sale of marketable securities (39,000)
Changes in:
Accounts receivable (228,000) (347,000)
Inventory (40,000) 107,000
Prepaid expenses and other current assets (41,000) 7,000
Other assets 4,000 (5,000)
Restricted cash (4,000)
Accounts payable and accrued expenses 158,000 41,000
----------- -----------
Net cash used in operating activities (216,000) (226,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (18,000) (31,000)
Purchase of investments (73,000)
Sales and maturity of investments 3,000 342,000
Loan to Biosys, Inc. (100,000)
Loan to director/stockholder (118,000)
----------- -----------
Net cash provided by (used in) investing activities (233,000) 238,000
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Settlement of registration rights agreement (125,000) (100,000)
Capital lease payments (3,000) (4,000)
----------- -----------
Net cash used in financing activities (128,000) (104,000)
----------- -----------
Net decrease in cash and cash equivalents (577,000) (92,000)
Cash and cash equivalents - beginning of period 1,207,000 131,000
----------- -----------
Cash and cash equivalents - end of period $ 630,000 $ 39,000
=========== ===========
Supplemental disclosures of cash flow information
Cash paid during year for:
Interest $ 2,000 $ 6,000
NON-CASH ACTIVITIES:
Common stock dividends paid to holders of preferred stock $ 31,000
Dividend accrued not yet paid $ 32,000
</TABLE>
See accompanying notes to financial statements
F-22
<PAGE> 57
Notes to Financial Statements
July 31, 2000
Note A - Basis of Reporting
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-QSB. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, such
statements include all adjustments (consisting only of normal recurring items)
which are considered necessary for a fair presentation of the financial position
of American Bio Medica Corporation (the "Company" or "ABMC") at July 31, 2000,
and the results of its operations, and cash flows for the three-month period
then ended. The results of operations for the three-month period ended July 31,
2000 are not necessarily indicative of the operating results for the full year.
It is suggested that these financial statements be read in conjunction with the
financial statements and related disclosures for the year ended April 30, 2000
included in the Company's Form 10-KSB.
During the year ended April 30, 2000, the Company sustained a net loss of
$2,136,000 and had net cash outflows from operating activities of $846,000.
During the 2001 First Quarter, the Company sustained a net loss of $273,000
principally due to an increase in selling, general and administrative expenses
and had net cash outflows from operating activities of $216,000. The Company has
taken a number of steps to improve its financial prospects including entering
into national and international distribution agreements with a number of
distributors, completed an in-house strip manufacturing program to reduce costs
and other measures to enhance profit margins. In addition, on April 28, 2000 the
Company raised $2,000,000 pursuant to a common stock purchase agreement.
Note B - Loss Per Common Share
Basic loss per share is calculated by dividing net loss by the weighted average
number of outstanding common shares during the period. No effect has been given
to potential issuances of common stock including outstanding options and
warrants in the diluted computation, as their effect would be antidilutive.
When preferred stock is convertible to common stock at a conversion rate that is
the lower of a rate fixed at issuance or a fixed discount from the common stock
market price at the time of conversion, the discounted amount is an assured
incremental yield. This "beneficial conversion feature", to the preferred
stockholders is accounted for as an embedded dividend to preferred shareholders.
As such, the loss per common share was adjusted for this feature.
Note C - Litigation
"Patent, Trademark, and Unfair Competition Litigation"
On January 26, 1999, the Company was granted a U.S. Patent for the design of the
Multiple Test Card, known as the Rapid Drug Screen. On April 7, 1999, the
Company filed suit in the federal court in Delaware against Phamatech, Inc. of
California. Phamatech, Inc. of California was a former supplier of the Company
and in that capacity acquired proprietary information on the Company's Rapid
Drug Screen that it used to "knock off" the Company's product. This case was
transferred from Delaware to California. In July 2000, the California Court
granted ABMC's motion to add Tuan Pham, President of Phamatech, as an individual
defendant in the suit. The Court also ordered that Wolfe & Associates (aka Wolfe
Data) and James Wolfe, Elite Health Services, LLC and John Polanco (former
distributors now selling the alleged infringing product) be joined as
defendants. Peninsula Drug Analysis Co., Inc. and James Ramsey (former
distributor selling a private label knock off believed by the Company to be
manufactured by Phamatech), and Dipro Diagnostics of North America (another
party selling the private label knock off (believed to be manufactured by
Phamatech) are already parties. The Company is alleging patent infringement,
violation of trademark rights, and unfair competition against all parties.
F-23
<PAGE> 58
On April 8, 1999, one day after the Company filed its Delaware suit, Phamatech,
Inc. filed suit in the federal court in San Diego, California asking for a
declaration that the Company's patent is invalid. It also claimed breach of
contract damages for an alleged non-payment of invoices by the Company. The
Company's transferred Delaware case and Phamatech's California case have been
placed on the same trial docket in San Diego. By Order dated July 24, 2000, the
Court ordered the competing California based suits be consolidated in one case.
In a recent motion, Phamatech sought summary judgment on its declaratory
judgment on the Company's patent claims. The trial court denied the motion.
Since the ABMC trademark had not been registered, even though the petition for
trademark is on appeal within the United States Patent and Trademark Office
("PTO"), the trial court denied the Company's trademark claim. However, the
Court did not deal with the Company's trade dress claim. Phamatech has now moved
for partial summary judgment on ABMC's trade dress claim even though ABMC's
application for trademark protection of its trade dress is still pending before
the examiner at the PTO.
In October 1999, the Company sued Larry Hartselle, Drug Detection Devices, and
Gulf Supply for patent infringement, trademark dilution, and unfair competition.
It is alleged that they are also selling the Phamatech knock off. Drug Detection
Devices is alleged to be selling yet another private label manufactured by
Phamatech. Larry Hartselle d/b/a Instant Drug Detection is a former distributor
who was selling the Phamatech knock-off. Gulf Supply is alleged to be selling
the private label knock off sold by Drug Detection Devices. The claims against
Hartselle and 3DL have been settled by the parties. The terms are confidential.
As a non-confidential part of the agreement, Hartselle, without admitting any
liability, has agreed to a consent order prohibiting him from selling the
knock-off product in all configurations and from infringing any other ABMC
property. The remaining defendant is engaged in settlement negotiations with the
Company.
"Friedenberg-related Litigation"
In February 1994, Robert Friedenberg, as former owner of the two medical
technology companies, MDI and Gendex, acquired by the Company, in the name of
these corporations, filed for a declaratory judgment in Maryland that a Share
Exchange Agreement had been rescinded. In order to make a claim for damages, the
Company filed a third-party claim against Dr. Friedenberg for breach of the
Share Exchange Agreement and fraud. In November 1995, after a trial, the court
denied Dr. Friedenberg's request for a declaration of rescission and allowed the
Company's third-party claim to proceed to trial. In September 1996, Dr.
Friedenberg died.
The Company's third party claim was decided by a jury on May 5, 1997. The
verdict determined that Dr. Friedenberg breached the Share Exchange Agreement
when he failed to deliver drug screening know how technology to the Company. The
jury also found in favor of the Company on two of three fraud claims against Dr.
Friedenberg and awarded the Company approximately $321,000 in damages. Dr.
Friedenberg's estate, just prior to the jury trial, filed a supplemental claim
for the shares of the Company which he would have received under the Share
Exchange Agreement. The trial judge on July 17, 1998, ruled that the estate of
Dr. Friedenberg was entitled to 5,907,154 common shares of the Company. The
Company appealed that ruling and on September 15, 1999, the Court of Special
Appeals in Maryland ruled in favor of the Company and reversed a Maryland
circuit court's ruling that the estate of Dr. Robert Friedenberg was entitled to
5,907,154 common shares of the Company. The case was remanded to the circuit
court with directions to enter a judgment for the Company. The Friedenberg
estate petitioned the Court of Appeals, Maryland's highest court, to consider
the case. The Company opposed any further proceeding. On December 21, 1999, the
Court of Appeals denied the Friedenberg estate's petition to review the decision
of the Court of Special Appeals.
In June 1995, the Company filed a lawsuit against Jackson Morris, the lawyer who
was in charge of drafting and advising it on the Share Exchange Agreement. Mr.
Morris, who had been recommended to the Company by Dr. Robert Friedenberg and
whose fees were paid by the Company, is alleged to have breached his fiduciary
duty to the Company in several ways, including by later advising Dr.
Friedenberg, individually, on how to rescind the Share Exchange Agreement as
well as testifying for Dr. Friedenberg over the Company's objections and in
violation of this obligations to the Company. Mr. Morris is also
F-24
<PAGE> 59
charged with negligence in drafting the Share Exchange Agreement. The Company's
lawsuit demands damages in the amount of $1,000,000. Mr. Morris has
counterclaimed as a party to the Share Exchange Agreement and seeks common
shares. Whatever claim Mr. Morris has comes from the Friedenberg claim. No trial
date has been set. The Company is vigorously contesting the Morris claim.
In June 1999, an individual, Richard Davidson, filed suit in New York claiming
that two placement memoranda dated respectively September 15, 1992 and February
5, 1993, obligated the Company to issue him 1,555,601 common shares of the
Company. The claim is that he is entitled to the common shares in consideration
of brokering the acquisitions subject to the Share Exchange Agreement with Dr.
Robert Friedenberg. In addition, the individual is claiming a finder's fee of
five percent of the funds raised by the September 1992 private placement. He
alleges that a sum of one million dollars was raised. Finally, he claims that he
is entitled to a consulting fee of $24,000. Management denies the claims and is
vigorously contesting the suit. It is scheduled for a jury trial in the fourth
calendar quarter of 2000.
Note D - Reclassifications
Certain items have been restated to conform with the current presentation.
F-25
<PAGE> 60
AMERICAN BIO MEDICA CORPORATION
Part II
Information Not Required in Prospectus
Item 24. Indemnification of Directors and Officers
Under the New York Business Corporation Law ("NYBCL"), a corporation may
indemnify any person made, or threatened to be made, a party to any action or
proceeding, except for shareholder derivative suits, by reason of the fact that
he or she was a director or officer of the corporation, provided such director
or officer acted in good faith for a purpose which he or she reasonably believed
to be in the best interests of the corporation and, in criminal proceedings, in
addition, had no reasonable cause to believe his or her conduct was unlawful. In
the case of shareholder derivative suits, the corporation may indemnify any
person by reason of the fact that he or she was a director or officer of the
corporation if he or she acted in good faith for a purpose which he or she
reasonably believed to be in the best interests of the corporation, except that
no indemnification may be made in respect of (i) a threatened action, or a
pending action which is settled or otherwise disposed of; or (ii) any claim,
issue or matter as to which such person has 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 that portion of
the settlement amount and expenses as the court deems proper.
The indemnification described above under the NYBCL is not exclusive of other
indemnification rights to which a director or officer may be entitled, whether
contained in the certificate of incorporation or by-laws, or when authorized by
(i) such certificate of incorporation or by-laws; (ii) a resolution of
shareholders; (iii) a resolution of directors; or (iv) 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 or her 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 or she
personally gained in fact a financial profit or other advantage to which he or
she was not legally entitled.
The Company is in the process of amending its bylaws. The new bylaws will
provide that the company will indemnify our directors and officers to the full
extent permitted by law if that person is a party to a matter by reason of being
a director or officer. These provisions may discourage stockholders from
bringing suit against a director for breach of fiduciary duty and may reduce the
likelihood of derivative litigation brought by our stockholders on our behalf
against a director.
Item 25. Other Expenses Of Issuance And Distribution
The expenses payable by us in connection with the issuance and distribution of
the securities are estimated as follows:
SEC Registration Fee $ 712
Legal Fees and Expenses 25,000
Accounting 10,000
Transfer Agent Fees 1,000
--------
Total: $ 36,712
Item 26. Recent Sales of Unregistered Securities.
II-1
<PAGE> 61
During the past three years, the following transactions were effected by us in
reliance upon exemptions from registration under the Securities Act of 1933 as
amended.
Unless stated otherwise, we believe that:
- Each of the persons who received these unregistered securities had
knowledge and experience in financial and business matters which
allowed them to evaluate the merits and risk of the receipt of these
securities, and that they were knowledgeable about our operations and
financial condition.
- No underwriter participated in, nor did we pay any commissions or fees
to any underwriter in connection with the transactions.
- These transactions did not involve any public offerings.
- Each certificate issued for these unregistered securities contained a
legend stating that the securities have not been registered under the
Securities Act and setting forth the restrictions on the
transferability and the sale of the securities.
The Company believes that these issuances and sales were exempt from
registration pursuant to Section 4(2) of the Securities Act.
Sale of Convertible Preferred Stock
During September 1997, the Company completed a private placement to a private
institutional investor in which it netted proceeds of approximately $950,000
through the sale of 60 shares of 8% Series B Convertible Preferred Shares and
45.5 shares of Series C Convertible Preferred Shares with a stated value of
$10,000 per share. Each Preferred Share was convertible into common shares
pursuant to the following formula: $10,000 divided by lesser of $3.50 for 7% of
the average of the daily closing bid prices for the twenty consecutive trading
days ending on the trading day prior to the day on which the Preferred Shares
are converted to common shares. Dividends were payable in cash or shares of
common stock at the election of the Company on the date the Preferred Shares are
converted to common shares. The Series B Preferred Shares and the Series C
Preferred Shares were converted into an aggregate of 226,037 and 160,359 common
shares respectively.
During April 1998, the Company issued 2,500 Series D Preferred Shares in a
private placement to a private institutional investor for which it received
proceeds of $2.5 million. The Company issued an additional 231 Preferred Shares
as dividend payments from April 28, 1998 through February 2, 2000. In six
conversions from July 1998 through February 2000, the institutional investor
converted all Series D Preferred Shares (2,731) into 2,306,020 common shares.
Issuance of Additional Common Shares
On December 15, 1999, the Company issued 300,000 common shares to a general
medical consultant as consideration for the consulting services to be provided
pursuant to a consulting agreement.
On April 20, 2000, the Company issued 1,408,450 common shares for $2,000,000
($1.41 per share) in a private placement to a private institutional investor.
II-2
<PAGE> 62
Issuance of Warrants
On April 24, 1998, the Company issued 7,355 warrants at $4.81 per share to
Shoreline Pacific in connection with the placement of the Series D Preferred
financing. The warrants expire on April 24, 2001.
On April 24, 1998, the Company issued 100,000 warrants at $4.81 per share in a
private placement to a private institutional investor in connection with the
Series D Preferred financing. The warrants expire on April 24, 2001. On January
27, 2000, an additional 1,987 warrants were issued to the investor pursuant to
the anti-dilution provisions of the Warrant Agreement and the exercise price of
all 101,987 warrants was adjusted to $4.71 per share.
On October 28, 2000, the Company issued warrants to purchase 953,283 common
shares at an exercise price of $1.1689 per share to the private institutional
investor as required by the terms of the April 2000 sale of common shares to
that investor.
The only other issuances were related to stock options, cancellation and
expiring of options, and issuances of stock related to stock option exercises.
Item 27. Exhibits
See Exhibit List on page E-1.
Item 28. Undertakings
The undersigned registrant hereby undertakes that it will:
Undertaking (a)
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the Securities
Act of 1933:
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information set forth
in the registration statement; and arising after the effective date of
the 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 the registration
statement. Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may
be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) (`230.424(b) of this chapter) if, in the
aggregate, the changes in volume and price represent no more than a
20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement.
(iii) Include any additional or changed material information on the plan of
distribution
II-3
<PAGE> 63
(2) For determining any liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
Undertaking (e)
Insofar as indemnification for liabilities arising under the Securities Act of
1993 (the "Act") may be permitted to directors, officers and controlling persons
of the small business issuer pursuant to the foregoing provisions, or otherwise,
the small business issuer 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 claim for indemnification against such liabilities (other than
the payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer 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 small business issuer 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 Securities Act and will be governed by
the final adjudication of such issue.
II-4
<PAGE> 64
SIGNATURES
In accordance with 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 authorized this registration
statement to be signed on its behalf by the undersigned, in the City of
Kinderhook and State of New York on November __, 2000.
AMERICAN BIO MEDICA CORPORATION
(Registrant)
By: /s/ Stan Cipkowski
--------------------------
Stan Cipkowski,
Chairman of the Board of Directors,
President and Chief Executive Officer
POWER OF ATTORNEY
Each of the undersigned officers and directors of American Bio Medica
Corporation whose signature appears below hereby appoints Stan Cipkowski and
Keith Palmer, and each of them, as true and lawful attorney-in-fact for the
undersigned with full power of substitution, to execute in his name and on his
behalf in each capacity stated below, any and all amendments (including
post-effective amendments) to this registration statement as the
attorney-in-fact shall deem appropriate, and to cause to be filed any such
amendment (including exhibits thereto and other documents in connection
therewith) to this registration statement with the Securities and Exchange
Commission, as fully and to all intents and purposes as such person might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact, or any of them, may lawfully do or cause to be done by virtue
herewith.
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities indicated
on November 17, 2000:
Signature Title
--------- -----
/s/ Stan Cipkowski
----------------------------
Stan Cipkowski Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Edmund Jaskiewicz
----------------------------
Edmund Jaskiewicz Director
/s/ Jay Bendis
----------------------------
Jay Bendis Director and Vice President Sales and Marketing
/s/ Gerald Moore
----------------------------
Gerald Moore Director
S-1
<PAGE> 65
/s/ Robert Aromando
----------------------------
Robert Aromando Director
/s/ Denis O'Donnell, M.D.
----------------------------
Denis O'Donnell, M.D. Director
/s/Keith Palmer
----------------------------
Keith Palmer Chief Financial Officer
(Principal Financial Officer)
S-2
<PAGE> 66
AMERICAN BIO MEDICA CORPORATION
INDEX TO EXHIBITS
Number Description of Exhibits
3.5 Bylaws*
3.6 Fifth Amendment to Certificate of Incorporation (filed as exhibit 3.6 to
the Company's Form SB-2 filed on November 21, 1996 and incorporated
herein by reference)
4.6 Fiscal 1997 Nonstatutory Stock Option Plan (filed as part of the Company's
Proxy Statement for its Fiscal 1997 Annual Meeting and incorporated herein
by reference)
4.14 Fiscal 1998 Nonstatutory Stock Option Plan (filed as part of the Company's
Proxy Statement for its Fiscal 1998 Annual Meeting and incorporated herein
by reference)
4.15 Fiscal 2000 Nonstatutory Stock Option Plan (filed as part of the Company's
Proxy Statement for its Fiscal 2000 Annual Meeting and incorporated herein
by reference)
4.16 Common Stock Purchase Agreement dated as of April 28, 2000 by and between
the Company and Seaside Partners, L.P.**
5.1 Opinion and Consent of Hopkins & Sutter re: legality
10.6 Contract of Sale dated May 19, 1999/Kinderhook, New York facility**
10.7 Agreement of Lease dated May 13, 1999/Kinderhook, New York facility**
10.8 Lease dated August 1, 1999/New Jersey facility**
10.9 Voting Agreement dated as of April 28, 2000 by and between the Company,
certain Key Holders of the Company's securities, and Seaside Partners,
L.P.
10.10 Letter Agreement regarding terms of employment by and between the Company
and Keith Palmer dated September 6, 2000
23.1 Consent of Richard A. Eisner & Company, LLP
23.2 Consent of Hopkins & Sutter (contained in Exhibit 5.1)
24.1 Power of Attorney (included on page S-1)
--------------------------
* Filed as the exhibit number listed to the Company's Form 10-SB filed on
November 21, 1996 and incorporated herein by reference.
** Filed as the exhibit number listed to the Company's Form 10-KSB for the
fiscal year ended April 30, 2000 and incorporated herein by reference.
E-1
