<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended April 30, 2000
Commission File Number: 0-28666
AMERICAN BIO MEDICA CORPORATION
(Name of Small Business Issuer in its charter)
New York 14-1702188
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
122 Smith Road 12106
Kinderhook, New York (Zip Code)
(Address of principal executive offices)
Issuer's telephone number (800) 227-1243
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Shares, $.01 par value per share
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
[X] Yes [ ] No
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $7,653,000.
The aggregate market value of 11,559,444 voting Common Shares held by
non-affiliates of the issuer was approximately $18,067,411 based on the last
reported sale price of the issuer's Common Shares, $.01 par value, as reported
on the Nasdaq SmallCap Market on July 12, 2000.
The Proxy Statement for the Annual Meeting of Shareholders for the 2001
Fiscal Year has been incorporated herein by reference to the extent indicated
herein in Part III of this Form 10-KSB.
As of July 12, 2000, the issuer had outstanding 18,045,548 Common Shares,
$.01 par value.
Traditional Small Business Disclosure Format: [ ] [X] No
<PAGE> 2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Summary
American Bio Medica Corporation (the "Company") is primarily engaged in
acquiring, developing, manufacturing and marketing biomedical technologies and
products. The Company owns a technology, for which patents have been granted,
for screening drugs of abuse, using the adopted trademark the "Rapid Drug
Screen". The Company's common shares ("Common Shares") trade on the Nasdaq
SmallCap Market under the trading symbol "ABMC".
The Company produces several versions of a drugs of abuse screening
test, called the "Rapid Drug Screen" at its 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 the opinion of the
Company's management ("Management"), 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, Management
believes that the Rapid Drug Screen is as accurate as that laboratory test.
Versions of the Rapid Drug Screen include two-two panel tests,
three-three panel tests, two-five panel tests, an eight panel test, and a nine
panel test. Additional versions of the Rapid Drug Screen can be produced by the
Company, on special order, for any quantity (from two - nine) or configuration
of drugs. The three, five, eight, and nine panel tests have received 510(k)
clearance from the Federal Drug Administration (the "FDA") and can thus be sold
in clinical as well as non-clinical markets. The Company has developed 10 tests
trademarked "Rapid One", each of which detects one drug of abuse (cocaine, THC,
opiates, amphetamine, PCP, benzodiazepines, methamphetamines, barbiturates,
tricicyclic antidepressants, and methadone). The Company has received 510(k)
clearance on the cocaine, THC, opiates, amphetamine, barbiturates, and
benzodiazepine Rapid One tests.
In January 2000, the Company acquired the exclusive rights for
distribution and marketing of a patented onsite drug detection system in North
and South America. The Company has 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.
<PAGE> 3
The Company owns a patented low cost method for producing keratin
proteins. The Company has no intention of developing or marketing its keratin
technology at this time, but intends to concentrate on the production and
marketing of its drug screen tests and pursuing development and acquisition
strategies related to onsite diagnostic testing markets. The Company may develop
or acquire additional biomedical technologies or products in the future
unrelated to substance abuse testing.
Since its inception to April 30, 2000, the Company has an accumulated
deficit of $11,643,000 (see Financial Statements - Balance Sheet). Management
believes that the Company's accumulated deficit is the result of the on-going
development, marketing, and distribution of its Rapid Drug Screen test. During
the year ended April 30, 2000, the Company sustained a net loss from operations
of $2,136,000 and used net cash of $846,000 in operating activities. The Company
is in the process of taking a number of steps to improve its financial prospects
including focusing its efforts on sales of existing products, implementing
certain cost reductions and production efficiencies and taking other measures to
enhance profit margins.
Design
The Company 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 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,
2
<PAGE> 4
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, and 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 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.
3
<PAGE> 5
"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. (See "Risk Factors - Patents and Trademarks").
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
4
<PAGE> 6
this product in the clinical market. Additionally, the Company's R&D efforts
have been 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 also 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. (See "Description of Business - Design").
5
<PAGE> 7
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 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. (See
"Description of Business - Design").
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
July, 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,
6
<PAGE> 8
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. (See "Risk Factors - Possible
Changes in Regulatory Framework")
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 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
7
<PAGE> 9
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. (See
"Risk Factors - Competition in the Drug Testing Market; Technological
Obsolescence").
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. (See Item
2. Description of Property)
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,
8
<PAGE> 10
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. (See "Business - Manufacturing" and Item 2. Description
of Property)
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. (See "Risk Factors -
Limited Operations History")
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, 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.
9
<PAGE> 11
Risk Factors
Limited Operating History
Although the Company was formed in 1986, as far as the development,
manufacture, and sale of drug testing kits are concerned, it has limited
operational history upon which investors may base an evaluation of its
performance of any assumption as to the likelihood that the Company will be
profitable. (See " Business -- Summary and Company's Plan of Operations"). The
Company's prospects must be considered in the light of the risks, expenses,
delays, problems, and difficulties frequently encountered in the establishment
of a business, the development and commercialization of products based on
innovative technology and the competitive environment in which the Company
operates. Since the Company's entry into the biomedical business, the Company
has generated increased revenues. There can be no assurance that the Company
will be able to generate continued increased revenues or achieve profitable
operations. (See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Financial Statements.)
Technological Factors; Uncertainty of Product Development; Unproven Technology
Although the Company's development efforts relating to the
technological aspects of the Rapid Drug Screen are completed, the Company is
continually seeking to refine and improve its design and performance. The
Company's efforts remain subject to all of the risks inherent in product
development, including unanticipated technical, regulatory, or other problems
which could result in material delays in product development or
commercialization or significantly increase costs. The Company may be required
to commit considerable additional efforts, time, and resources to develop
production versions of additional products. The Company's success will depend
upon such products meeting targeted product costs and performance, and may also
depend upon their timely introduction into the marketplace. There can be no
assurance that development of the Company's proposed products will be
successfully completed on as timely basis, if at all, that they will meet
projected price and performance objectives, satisfactorily perform all of the
functions for which they are being designed, or prove to be sufficiently
reliable in widespread commercial application. Moreover, there can be no
assurance that unanticipated problems will not arise with respect to
technologies incorporated into its test kits or that product defects will not
become apparent after commercial introduction of its additional test kits. In
the event that the Company is required to remedy defects in any of its products
after commercial introduction, the costs to the Company could be significant,
which could have a material adverse effect on the Company revenues or earnings.
Uncertainty of Continued Market Acceptance
The Company's Rapid Drug Screen product line and Rapid One have been
well received by customers, including, but not limited to, industry,
distributors and correctional institutions. Achieving continued market
acceptance for its drug tests will require substantial marketing efforts and
expenditure of significant funds to inform potential distributors and customers
of the distinctive characteristics, benefits, and advantages of its test kits.
There can be no assurance that its Rapid Drug Screen
10
<PAGE> 12
product line and Rapid One will continue to be accepted or that the Company's
efforts will result in successful product commercialization or continued market
acceptance. The Company's Drug Detector has just recently been introduced into
the over-the-counter market and its industrial version has yet to be launched.
The Company has no history upon which to base market or customer acceptance of
the product. Introduction of the Drug Detector will also require substantial
marketing efforts and expenditure of funds. There can be no guarantee of such
market acceptance in response to the Company's efforts. (See "Business - Sales
and Marketing and Company's Plan of Operations")
Competition in the Drug Testing Market; Technological Obsolescence
The Company faces competition from other manufacturers of drug test
kits. Some of its competitors are well known and have far greater financial
resources than that of the Company. To the best of Management's knowledge, and
in its opinion, no competitors have introduced products which equal the ease of
use combined with the accuracy of the Company's Rapid Drug Screen product line
and Rapid One. (See "Business - Competition"). The markets for drug test kits
and related products are highly competitive. There can be no assurance that
other companies will not attempt to develop or market competing products
directly competitive with the Company's Rapid Drug Screen product line or Rapid
One. Despite protections, which are available to the Company under its patents,
the Company expects other companies to attempt to develop technologies or
products which will compete with the Company's products. (See " Business -
Competition and Patents and Trademarks")
Possible Inability to Find and Attract Qualified Personnel
The Company currently has sufficient management expertise and depth to
develop its business. However, it will need additional skilled, technical and
production personnel in the near future. There is no guarantee that the Company
can retain its present staff or that capable personnel with relevant skills will
be available. (See Item 9. and "Business - Manufacturing")
Dependence on Management
The Company is dependent on the expertise and experience of Stan
Cipkowski, President and CEO, Jay Bendis, Vice President Sales and Marketing,
and Douglas Casterlin, Vice President Operations for its operations. The loss of
Messrs. Cipkowski, Bendis, and/or Casterlin, will seriously inhibit the
Company's operations. The Company does not maintain key man insurance for any of
its management employees. (See Item 9).
Possible Adverse Changes in Regulatory Framework
Approval from the FDA is not required for the sale of the Rapid Drug
Screen in the non-clinical market, but it is required for the clinical and
over-the-counter markets. The Company has received 510(k) clearances from the
FDA for its three, five, eight, and nine panels of the Rapid Drug Screen and six
of its ten Rapid One tests. The Company has submitted its application to the FDA
for over-the-counter approval of the Rapid Drug Screen. However, regulatory
standards may change in the future
11
<PAGE> 13
and there is no assurance that if and when the Company applies for additional
approvals from the FDA they will be granted. FDA approval is not required for
the Drug Detector. (See "Business - FDA Approval and Government Regulations")
Patents and Trademarks
The Company to date has been granted six patents relating to its Rapid
Drug Screen. The Company has applied for additional patents on its Rapid Drug
Screen and for certain trademarks in the United States, South and Central
America, European Common Market, and Japan. Certain trademarks have been
registered and others are pending (See "Business - Patent and Trademarks").
Although its patent/trademark counsel has opined that there are no competing
designs or marks, there is no assurance that the additional patents will be
granted or that additional trademarks will be registered. (See "Business -
Patent and Trademarks" and "Risks -Competition in the Drug Testing Market")
Protection of Intellectual Property Rights
The Company's success depends in part on its ability to maintain and
enforce its patents and other proprietary rights. The Company relies 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 the Company's
intellectual property and proprietary information. The patent positions of
biomedical product companies are generally uncertain and involve complex legal
and technical issues. Litigation may be necessary to enforce the Company's
intellectual property rights, to protect its trade secrets and to determine the
validity and scope of its proprietary rights. Any litigation could be costly and
divert the Company's attention from the growth of the business. (See "Item 3.
Legal Proceedings"). The Company cannot assure investors that its 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 the Company's proprietary technology. The
Company may be sued by third parties which claim that the Company's products
infringe on their intellectual property rights.
Dilution as a Result of Potential Issuance and Exercise of New Warrants
and Exercise of Outstanding Warrants
As part of the sale by the Company of 1,408,450 Common Shares for
$2,000,000 ($1.41 per share) in a private placement to Seaside Partners, LLC
("Seaside") on April 28, 2000, the Company agreed under certain circumstances to
issue a five-year warrant to Seaside (the "Seaside Warrant") to purchase up to
1,877,934 Common Shares. The specific number of Common Shares, if any, to be
subject to the Seaside Warrant will be determined pursuant to a formula based
partially on the average of the closing prices of the Common Shares on the
Nasdaq SmallCap Market as reported by the Nasdaq Stock Market on the 10
consecutive trading days immediately preceding the date of the six-month
anniversary of the closing date (the "Anniversary Date") of the Seaside private
placement (the "Anniversary Price"). If the Anniversary Price is $2.13 or more
per share, the Company will not be obligated to issue the Seaside Warrant. If
the Anniversary Price is less than
12
<PAGE> 14
$2.13 per share, the specific number of Common Shares to be subject to the
Seaside Warrant will be determined pursuant to the formula based partially on
the Anniversary Price. The exercise price per share for the Common Shares
subject to the Seaside Warrant will be the Anniversary Price. For example, if
the Anniversary Price is $1.25 per share, 872,535 Common Shares would be subject
to the Seaside Warrant with an exercise price of $1.25 per share.
As of July 12, 2000, the Company also had warrants outstanding to
purchase 107,355 Common Shares at a price of $4.81 per share (the "Outstanding
Warrants").
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 the Company's ability to raise
capital through the future sale of equity securities.
Resale of Restricted Securities
7,426,455 Common Shares presently issued and outstanding as of the date
hereof are "restricted securities" as that term is defined under the Securities
Act of 1933, as amended, (the "Securities Act") and in the future may be sold in
compliance with Rule 144 of the Securities Act, or pursuant to a Registration
Statement filed under the Securities Act. Rule 144 provides, in essence, that a
person holding restricted securities for a period of one year or more may sell
those securities in unsolicited brokerage transactions or in transactions with a
market maker, in an amount equal to one percent of the Company's outstanding
Common Shares every three months. Sales of unrestricted shares by affiliates of
the Company are also subject to the same limitation upon the number of shares
that may be sold in any three month period. Such information is deemed available
if the issuer satisfies the reporting requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934 (the "Securities Exchange Act") or of Rule
15c2-11 thereunder. Rule 144(k) also permits the termination of certain
restrictions on sales of restricted securities by persons who are not affiliates
of the Company at the time of the sale and have not been affiliates in the
preceding three months. Such persons must satisfy a two-year holding period.
There is no limitation on such sales and there is no requirement regarding
adequate current public information. Investors should be aware that sales under
Rule 144 or 144(k), or pursuant to a registration statement filed under the Act,
may have a depressive act on the market price of the Company's securities in any
market which may develop for such shares.
Preferred Shares
The Company has the authority to issue up to 5,000,000 Preferred Shares
with such designations, rights, and preferences as may be determined by the
Board of Directors. The Company is empowered, without further shareholder
approval, to issue Preferred Shares with dividend, liquidation, conversion,
voting or other rights which could adversely affect the voting power or other
rights of the holders of Common Shares. No Preferred Shares were outstanding as
of July 12, 2000.
13
<PAGE> 15
Need for Additional Financing
The Company expects that its cash on hand will be sufficient to fund
the Company's proposed operations for at least 12 months. This estimate is based
on certain assumptions and there can be no assurance that unanticipated
un-budgeted costs will not be incurred. Future events, including the problems,
delays, expenses, and difficulties which may be encountered in establishing and
maintaining a substantial market for the Company's Rapid Drug Screen product
line and Rapid One could make cash on hand insufficient to fund the Company's
proposed operations. There can be no assurance that the Company will be able to
obtain any necessary additional financing on terms acceptable to it, if at all.
In addition, financing may result in further dilution to the Company's then
existing shareholders. The Company has no established borrowing arrangements or
available lines of credit. (See "Management's Discussion and Analysis of
Financial Condition and Results of Operations")
No Dividends
The payment of dividends rests within the discretion of the Company's
Board of Directors. No dividends have been paid on the Common Shares and the
Company does not anticipate the payment of cash dividends in the foreseeable
future. If the operations of the Company become profitable, it is anticipated
that, for the foreseeable future, any income received therefrom would be devoted
to the Company's future operations and that cash dividends would not be paid to
the Company's shareholders.
Ability to Retain and Attract Market Makers
The Common Shares trade on the Nasdaq SmallCap Market under the symbol
"ABMC". In the event that the market makers cease to function as such, public
trading in the Company's Common Shares will be adversely affected or may cease
entirely. Presently, market makers for the Company's Common Shares include
Knight Securities L.P., Herzog, Heine & Geduld, Inc., M.H. Meyerson & Co., Hill,
Thompson. Magid, & Co., J.W. Genesis Clearing Corp., Sharpe Capital Inc., Brean
Murray Foster Securities Inc., Wein Securities Corp., Schwab Capital Markets,
and Wien Securities Group.
Anti-Takeover Provision in Certificate of Incorporation
The Company's certificate of incorporation authorizes the issuance of
5,000,000 Preferred Shares. The Board of Directors has the authority, without
further action by the Common Shareholders, to issue Preferred Shares from time
to time in one or more classes or series, to fix the number of shares
constituting any class or series and the stated value thereof, if different from
the par value, and to fix the terms of any such series or class, including
dividend 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.
14
<PAGE> 16
No Assurance of Continued Public Market for Common Shares
Although the Common Shares trade on the Nasdaq SmallCap Market, there
is no assurance that an active trading market will be sustained.
ITEM 2. DESCRIPTION OF PROPERTY
In September 1999, the Company re-located 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 (See "Business - 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 re-negotiated.
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 re-new the
lease. (See " Manufacturing")
ITEM 3. 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
15
<PAGE> 17
patent claims. The trial court denied the motion declaring that the designs "are
visually similar....", and "[t]he accused device [is] visually similar to the
design patent." The opinion states: "Simply, visually comparing the design
patent and the accused devices, they appear substantially similar." Opinion of
June 7, 2000 @ p.12. 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. By the time of release of this report, an injunction
is anticipated to have been entered against Hartselle prohibiting further
infringement by him. 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.
16
<PAGE> 18
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 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. 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 on the Nasdaq SmallCap Market. As of July 12,
2000 there were approximately 4,000 holders of Common Shares.
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
17
<PAGE> 19
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 July 12, 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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. In order to comply with the terms of the
safe harbor, the Company notes that except for the description of historical
facts contained herein, this Form 10-KSB contains certain forward-looking
statements that involve risks and uncertainties as detailed herein and from time
to time in the Company's filings with the Securities and Exchange Commission and
elsewhere. Such statements are based on Management's current expectations and
are subject to a number of factors and uncertainties which could cause actual
results to differ materially from those described in the forward-looking
statements. These factors include, among others: (a) the Company's fluctuations
in sales and operating results, risks associated with international operations
and regulatory, competitive and contractual risks and product development; (b)
the ability to achieve strategic initiatives, including but not limited to the
ability to achieve sales growth across the business segments through a
combination of enhanced sales force, new products, and customer service; and (c)
acquisitions.
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.
18
<PAGE> 20
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. See "Item 3. Legal Proceedings". 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.
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 $5,223,000 68.2% $5,040,000 71.6%
costs
</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
19
<PAGE> 21
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 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.
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.
20
<PAGE> 22
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 1,408,405 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.
The Company believes that its available cash and cash from operations
will be sufficient to satisfy its funding needs through April 30, 2001.
Thereafter, if cash generated from operations is insufficient to satisfy the
Company's working capital and capital expenditure requirements, the Company may
be required to sell additional equity or debt securities or obtain additional
credit facilities. There can be no assurance that such financing, if required,
will be available on satisfactory terms, if at all.
ITEM 7. FINANCIAL STATEMENTS.
The Company's Financial Statements are set forth beginning on page F-1.
21
<PAGE> 23
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
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. Karen Russo resigned from the Board of Directors in April
2000 due to schedule conflicts and John Murray, the Company's CFO, resigned from
the Board of Directors in May 2000 in an effort to increase the number of
independent directors. Robert Aromando and Denis O'Donnell, M.D. were appointed
by the Board to fill those vacancies.
<TABLE>
<CAPTION>
Name Age Position Since
---- --- -------- -----
<S> <C> <C> <C>
Stan Cipkowski 52 Chairman of the Board of Directors, President 1986
and Chief Executive Officer
Edmund Jaskiewicz 77 Secretary 1992
Jay Bendis 53 Vice President-Sales and Marketing, Director 1995
John F. Murray 56 Chief Financial Officer 1997
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
22
<PAGE> 24
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 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.
John F. Murray served as Chief Financial Officer of Federal Supply,
Inc., Pompano Beach, Florida from April, 1994 to 1998. From 1988 to 1994, Mr.
Murray served as Controller for Bio Therapeutics, Inc., Woodbridge, New Jersey.
He also was Controller of Shortline, a group of transportation companies, from
1982 to 1988 and, from 1974 to 1982, of Kleber Tire & Rubber Corp. Mr. Murray
was Director of Accounting for Western Union Telegraph Company from 1972 to 1974
and Senior Accountant for S.D. Leidesdorf & Co (now Ernst & Young) from 1969 to
1972. Mr. Murray received his B.B.A. in Accounting from the Baruch School of the
City University of New York in 1968 and became a Certified Public Accountant in
the State of New York in 1974.
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
23
<PAGE> 25
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. 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 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, 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
24
<PAGE> 26
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. (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.
ITEM 10. EXECUTIVE COMPENSATION
See Proxy Statement for the Annual Meeting of Shareholders for Fiscal
Year 2001.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of July 12, 2000, the number and
percentage of shares of the common stock of the Company owned of record and
beneficially by each executive officer and director of the Company and by any
other person owning more than 5% of the outstanding Common Shares and by all
executive officers and directors as a group.
25
<PAGE> 27
<TABLE>
<CAPTION>
Number of
Beneficial Owner Common Shares Percent of Total
---------------- ------------- ----------------
<S> <C> <C>
Stan Cipkowski 2,693,000 (1) 14.6%
122 Smith Road
Kinderhook, New York 12106
Edmund Jaskiewicz 2,148,155 (2) 11.8%
1730 M Street, NW
Washington, DC 20036
Jay Bendis 774,999 (3) 4.2%
John F. Murray 221,666 (4) 1.2%
Douglas Casterlin 289,500 (5) 1.6%
Robert Aromando 0 *
Gerald Moore 20,000 (6) *
Denis O'Donnell, M.D. 0 (7) *
Seaside Partners, L.P. 1,408,450 7.8%
623 Ocean Avenue
Sea Girt, NJ 08750
Directors and executive officers as a group (8
persons) 6,147,320 (8) 32.0%
</TABLE>
-------------------------------------
* Less than one percent (1%).
(1) Includes 363,500 Common Shares subject to stock options exercisable within
60 days of July 12, 2000.
(2) Includes 161,500 Common Shares subject to stock options exercisable within
60 days of July 12, 2000.
(3) Includes 219,000 Common Shares subject to stock options exercisable within
60 days of July 12, 2000.
(4) Includes 221,666 Common Shares subject to stock options exercisable within
60 days of July 12, 2000.
(5) Includes 175,000 Common Shares subject to stock options exercisable within
60 days of July 12, 2000.
(6) Includes 20,000 Common Shares subject to stock options exercisable within
60 days of July 12, 2000.
(7) 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.
(8) Includes an aggregate of 1,160,666 Common Shares subject to stock options
exercisable within 60 days of July 12, 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.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Proxy Statement for the Annual Meeting of Shareholders for Fiscal
Year 2001.
26
<PAGE> 28
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index on page E-1, incorporated herein by
reference.
(b) Reports on Form 8-K
There were no reports on Form 8-K during the fourth quarter of
Fiscal Year 2000.
27
<PAGE> 29
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
AMERICAN BIO MEDICA CORPORATION
By /s/ Stan Cipkowski
----------------------------------
Stan Cipkowski, Chairman of the
Board of Directors, President and
Chief Executive Officer
Date: August 9, 2000
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities
indicated on August 9, 2000:
/s/ Stan Cipkowski Chairman of the Board of Directors,
------------------------------- President and Chief Executive Officer
Stan Cipkowski
/s/ Edmund Jaskiewicz Director
-------------------------------
Edmund Jaskiewicz
/s/ Jay Bendis Director
-------------------------------
Jay Bendis
/s/ Gerald Moore Director
-------------------------------
Gerald Moore
/s/ Robert Aromando Director
-------------------------------
Robert Aromando
/s/ Denis O'Donnell, M.D. Director
-------------------------------
Denis O'Donnell, M.D.
/s/ John F. Murray Chief Financial Officer
------------------------------- (Principal Financial Officer)
John F. Murray
S-1
<PAGE> 30
AMERICAN BIO MEDICA CORPORATION
FINANCIAL STATEMENTS
APRIL 30, 2000
<PAGE> 31
AMERICAN BIO MEDICA CORPORATION
<TABLE>
<CAPTION>
CONTENTS
PAGE
----
<S> <C>
FINANCIAL STATEMENTS
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 F-7
</TABLE>
F-1
<PAGE> 32
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.
Richard A. Eisner & Company, LLP
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> 33
AMERICAN BIO MEDICA CORPORATION
BALANCE SHEET
APRIL 30, 2000
<TABLE>
<CAPTION>
<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> 34
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> 35
AMERICAN BIO MEDICA CORPORATION
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
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> 36
AMERICAN BIO MEDICA CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
---------------------------------
2000 1999
---------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
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> 37
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> 38
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> 39
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> 40
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 DIRECTORY/STOCKHOLDER
At April 30, 2000, the Company has a note receivable from an
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> 41
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> 42
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> 43
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> 44
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> 45
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> 46
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) Friedenberg 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> 47
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 2000
NOTE K - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED)
[4] LITIGATION: (CONTINUED)
(a) Friedenberg 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 Friedenberg 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> 48
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 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 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 issue 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> 49
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> 50
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) (a)
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) (a)
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) (a)
4.16 Common Stock Purchase Agreement dated as of April 28, 2000 by and
between the Company and Seaside Partners, L.P.
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
23.1 Consent of Independent Auditors
27 Financial Data Schedule
--------------------
Indicates an employee benefit plan, management contract or compensatory plan or
arrangement in which a named executive officer participates.
* Filed as the exhibit number listed to the Company's Form 10-SB filed on
November 21, 1996 and incorporated herein by reference.
E-1
