-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UkEo+QqUyTsFh760NRmYtaiuBYI/LzR9rkfQrWqntCyhphGm1d2mH8dhHOKPLl2n S0LuwRhCFoICDvB3P1PDng== 0000896747-98-000001.txt : 19980114 0000896747-98-000001.hdr.sgml : 19980114 ACCESSION NUMBER: 0000896747-98-000001 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19980113 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN BIO MEDICA CORP CENTRAL INDEX KEY: 0000896747 STANDARD INDUSTRIAL CLASSIFICATION: MEASURING & CONTROLLING DEVICES, NEC [3829] STATE OF INCORPORATION: NY FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: SB-2 SEC ACT: SEC FILE NUMBER: 333-44205 FILM NUMBER: 98506138 BUSINESS ADDRESS: STREET 1: 102 SIMMONS RD CITY: ANCRAMDALE STATE: NY ZIP: 12503 BUSINESS PHONE: 5183294485 MAIL ADDRESS: STREET 1: 102 SIMONS ROAD CITY: ANCRAMDALE STATE: NY ZIP: 12503 SB-2 1 REGISTRATION STATEMENT As filed with the Securities and Exchange Commission on January , 1998 Registration No. 333-16535 ---------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D. C. FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 AMERICAN BIO MEDICA CORPORATION ---------------------------------------------- (Name of small business issuer in its charter) New York 5122 22-3378935 - ------------------------------- ---------------------------- ------------------- (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) (Identification No.) 102 Simons Road, Ancramdale, New York 12503 800-227-1243 ------------------------------------------------------------- (Address and telephone number of principal executive offices) 102 Simons Road, Ancramdale, New York 12503 800-227-1243 - -------------------------------------------------------------------------------- (Address of principal place of business or intended principal place of business) Stan Cipkowski, 102 Simons Road, Ancramdale, New York 12503 800-227-1243 ----------------------------------------------------------------------- (Name, address and telephone number of agent for service) Approximate date of commencement of proposed sale to the public: As soon as practical after this Registration Statement becomes effective. CALCULATION OF REGISTRATION FEE Proposed Maximum Title of each class Amount maximum aggregate Amount of of securities to be offering price offering registration to be registered registered per item price (1) fee - -------------------------------------------------------------------------------- Common Shares (2) Underlying conversion 171,429(3) $3.50 $600,000(3) $ 181.82 of "B" Preferred Shares Shares Common Shares (2) Underlying conversion 130,000 $3.50 $455,000 $ 137.88 of "C" Preferred Shares Shares -------- Total registration fee $ 319.70 (1) Estimated for purposes of calculating the registration fee pursuant to Rule 457. (2) Any additional Common Shares issuable pursuant to stock splits, stock dividends, conversion ratio or similar transactions will be deemed registered by this registration statement. (3) Number of Common Shares underlying conversion of "B" Preferred Shares is rounded up to nearest whole share. Maximum aggregate offering price represents the actual gross proceeds received from the sale of the "B" Preferred Shares. The registrant ("Registrant") hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. ii AMERICAN BIO MEDICA CORPORATION CROSS REFERENCE SHEET Indicating the location in the Prospectus included in this Registration Statement of the Information called for by the Items of Part I of Form SB-2 Item Heading Caption in Prospectus - ------- ------------------------------- --------------------- Item 1 Front of Registration Statement and Outside Front Cover of Prospectus Front Cover Page Item 2 Inside Front and Outside Back Cover Pages of Prospectus Inside Front Cover, Inside Back Cover Additional Information Item 3 Summary Information and Risk Factors Prospectus Summary, The Company, Risk Factors Item 4 Use of Proceeds Prospectus Summary, Use of Proceeds Item 5 Determination of Offering Price Front Cover Page, Risk Factors, Item 6 Dilution Dilution Item 7 Selling Security-Holders Selling Securityholders Item 8 Plan of Distribution Front Cover Page, Underwriting Item 9 Legal Proceedings Litigation Item 10 Directors, Executive Officers, Promoters and Control Persons Management Item 11 Security Ownership of Certain Beneficial Owners and Principal Shareholders Management Item 12 Description of Securities Front Cover Page, Prospectus Summary, Description of Securities Item 13 Interest of Named Experts and Counsel Legal Matters, Experts Item 14 Disclosure of Commission Position on Indemnification For Securities Act Liabilities Description of Securities-- Commission Position on Indemnification for Securities Act Liabilities Item 15 Organization Within Last Five Years Certain Transactions Item 16 Description of Business Business Item 17 Management's Discussion and Analysis of Plan of Operation Management's Discussion and Analysis of Results of Operations Item 18 Description of Property Business Item 19 Certain Relationships and Related Transactions Certain Transactions Item 20 Market for Common Equity and Related Stockholder Matters Market for Common Equity and Related Shareholder Matters Item 21 Executive Compensation Management Item 22 Financial Statements Financial Statements Item 23 Changes in and Disagreement With Accountants on Accounting and Financial Disclosure Experts iii PROSPECTUS AMERICAN BIO MEDICA CORPORATION American Bio Medica Corporation (the "Company") is registering the following securities: up to 171,429 common shares, $.01 par value each ("Common Shares"), subject to conversion ratio, into which 60 series "B" convertible preferred shares, $.01 par value each, ('"B" Preferred Shares'), and 130,000 Common Shares into which 45.5 series "C" convertible preferred shares, $.01 par value each ('"C" Preferred Shares'), subject to conversion ratio, may be converted. (The "B" and "C" Preferred Shares are hereinafter collectively referred to as the "Preferred Shares."). Each Preferred Share is convertible pursuant to the following formula: $10,000 (the purchase price of a Preferred Share) divided by the lesser of $3.50 or 75% of the Market Price. ("Market Price" is defined throughout this prospectus (the "Prospectus") as the average closing price of the Common Shares for the 20 days prior to the date of conversion of the Preferred Shares.) The formula for the conversion of the Preferred Shares has been determined by the Company and the holders thereof and bears no relation to the Company's assets, book value, or any other customary investment criteria, including the Company's prior operating history. (See ""Risk Factors--Determination of Offering Price," "Certain Transactions" and "Description of Securities.") The Common Shares have been accepted for trading on the National Association of Securities Dealers, Inc. Automatic Quotation Market ("Nasdaq SmallCap"). Nonetheless, there can be no assurance that a public market in the Common Shares will be sustained during the period of exercise of conversion of the Preferred Shares. (See "Risk Factors--No Assurance of Continued Public Market for Common Shares.") THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION TO INVESTORS. (SEE "RISK FACTORS" AND "DILUTION.") -------------------------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") OR BY ANY STATE OR JURISDICTION, NOR HAS THE COMMISSION OR ANY STATE OR JURISDICTION PASSED UPON THE ACCURACY OR ADEQUACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- Underwriting Price to Discounts and Proceeds to Public (1) Commissions(1) Company(2) - -------------------------------------------------------------------------------- Per Share Underlying Con- version of "B" Preferred Shares $3.50 (3) $0.28 $3.22 - -------------------------------------------------------------------------------- Per Share Underlying Con- version of "C" Preferred Shares $3.50 (3) $0.35 $3.15 - -------------------------------------------------------------------------------- Total Shares Underlying Conversion of "B" Preferred Shares $600,000 $48,000 $ 552,000 - -------------------------------------------------------------------------------- Total Shares Underlying Conversion of "C" Preferred Shares $455,000 $45,500 $ 409,500 - -------------------------------------------------------------------------------- Total $1,055,000 $93,500 $ 961,500 - -------------------------------------------------------------------------------- (1) Before deducting estimated expenses of the this offering (the "Offering"), including, but not limited to, legal and accounting fees, fees to regulatory authorities and printing and distribution expenses, which are payable by the Company estimated at $20,000. ("Use of Proceeds.") (2) Commissions to selling agents were paid upon the sale of the Preferred Shares. All proceeds from the sale of the Preferred Shares have been received by the Company. This registration statement (the "Registration Statement") relates to the conversion of the Preferred Shares into Common Shares. (3) Assumes conversion price of $3.50. The actual conversion price may be less than $3.50. (See "Description of Securities - Preferred Shares.") AMERICAN BIO MEDICA CORPORATION 102 Simons Road Ancramdale, New York 12503 800-227-1243 AVAILABLE INFORMATION The Prospectus, which constitutes a part of a registration statement (the "Registration Statement") filed by the Company with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Securities Act"), omits certain information contained in the Registration Statement, and reference is hereby made to the Registration Statement and to the exhibits relating thereto for further information with respect to the Company and the Preferred Shares offered hereby. Statements contained herein concerning provisions of any documents are not necessarily complete, and each statement is qualified in its entirety by reference to the copy of such document filed with the Commission. The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Securities Exchange Act"), and in accordance therewith files reports, proxy statements, and other information with the Commission. Such reports, proxy statements, and other information filed by the Company can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549-1004; and at the following Regional Offices of the Commission: Northeast Regional Office, 7 World Trade Center, New York, New York 10007; and Chicago Regional Office, Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549-1004 at prescribed rates. The Commission also maintains a World Wide Web site on the Internet at http://www.sec.gov. that contains copies of reports, proxy and information statements and other information regarding registrants, including the Company, which electronically file reports with the Commission. PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to the detailed information, financial statements and related notes appearing elsewhere in the Prospectus including information under the caption "Risk Factors." Each investor is urged to read the Prospectus in its entirety. The Company ------------ The Company is currently in the business of developing, manufacturing and marketing biomedical technologies and products. The Company, from inception to date, has accumulated losses of $2,870,007. The Company currently owns two technologies for screening drugs of abuse, a workplace screening test and a preliminary test for use by laboratories. The Company is marketing its workplace screening test and has produced and delivered in excess of 300,000 units of this test. It has installed equipment with an independent contractor suitable for the mass production of the workplace screening test and has purchased or produced inventories of reagents and other constituent parts of its test kits. It commenced producing its marijuana/cocaine test kit and its five drug (marijuana, cocaine, opiates, PCP and amphetamines) test kit using this machinery in November, 1996. It has secured several significant orders for its workplace screening tests and many smaller orders. On April 14, 1997, the Company received Federal Drug Administration ("FDA") approval of its preliminary laboratory drug test kit and has commenced marketing test kits to laboratories and other medical facilities. In November, 1997, the Company completed development of drug screening tests for benzodiazepines, barbiturates, and tricyclic anti- depressants. 2 The Company also owns a patented low cost method for producing Keratin proteins. The uses for such proteins include hardening of finger nails and carrying topical lotions and medicines through the skin. In addition, the Company is developing a saliva test for alcohol consumption. Although the Company has been supplying Keratin proteins on a limited basis for testing by potential customers, the further development or marketing of its Keratin technology and its saliva test for alcohol consumption cannot be predicted. The Company's present intention is to concentrate on production and marketing of its workplace and laboratory drug tests. The Company may develop or acquire additional drug testing or biomedical technologies or products in the future and/or may acquire a technology-based company or an interest in a technology-based company. However, as of the date of the Prospectus, it has not yet identified any technologies which it desires to develop or acquire or companies or interests in companies it desires to acquire. From its inception in 1986 until 1991, the Company, a New York corporation, was involved in marketing educational books and software to schools and municipal libraries and audiovisual educational packages to corporations throughout the United States. In 1991, the Company reduced its concentration in this market because of heightened competition, increasing costs of doing business and slow collections from municipalities and commenced seeking new technologies in emerging medical markets. However, the Company has continued one small segment of its original business, that of selling audiovisual packages to libraries. The Company's headquarters are located at 102 Simons Road, Ancramdale, New York 12503. Its telephone number at that address is 800-227-1243 and its fax number is 518-329-4156. Its e-mail address is abmc@taconic.net. Securities ---------- Common Shares ------------- The Company is authorized to issue 30,000,000 common shares, $.01 par value per share. As of October 31, 1997, 13,793,541 Common Shares have been issued. (See "Description of Securities - Common Shares.") Preferred Shares ----------------- The Company is authorized to issue 5,000,000 preferred shares, $.01 par value per share, with such designations, rights and preferences as may be determined by the Board of Directors. In September, 1996, the Company sold 150 "A" Preferred Shares, all of which were converted into an aggregate of 633,073 Common Shares. The Company has sold 60 "B" Preferred Shares and 45.5 "C" Preferred Shares. Each Preferred Share may be converted into Common Shares pursuant to the following formula: $10,000 divided by the lesser of $3.50 or 75% of the Market Price of the Common Shares at the date of conversion. As of the date of the Prospectus, no "B" or "C" Preferred Shares have been converted into Common Shares. (See Front Cover Page, "Description of Securities--Preferred Shares" and Financial Statements--Footnotes.) 3 Options ------- The Company has issued 500,000 "A" Options which are exercisable at $1.00 through March 14, 1999 and 500,000 "B" Options, which are exercisable at $2.00 through March 14, 1999. Until a registration statement relating to the Common Shares underlying the Options is effective, certificates representing the shares for which the Options are exercised will bear a legend restricting transfer in the absence of an effective registration with the Commission or an exemption therefrom. No "A" or "B" Options have been exercised. (See "Description of Securities--Options.") The Company has adopted the Fiscal 1996 Nonstatutory Stock Option Plan (the "Fiscal 1996 Plan") and the Fiscal 1998 Nonstatutory Stock Option Plan (the "Fiscal 1998 Plan"). 2,000,000 Common Shares have been reserved under the Fiscal 1996 Plan and 1,000,000 Common Shares under the 1998 Plan. The Plan is administered by the Board of Directors which has established an options committee of the Board of Directors consisting of Stan Cipkowski, President, Edmund Jaskiewicz, Executive Vice-President and Secretary, and Jay Bendis, Vice-President, for that purpose. The Company has issued 1,957,000 options pursuant to the Fiscal 1996 Plan. All options were exercisable for a period of three years at $3.00 per share. As of the date of the Prospectus, 732,645 options have been exercised for an aggregate exercise price of $2,197,935. No options have been issued pursuant to the Fiscal 1998 Plan. (See "Certain Transactions.") Warrants -------- The Company has issued 24,712 common share purchase warrants (the "Warrants"). The Warrants are exercisable at $3.00 per share for a period of two years from the date of an effective registration statement relating to the underlying Common Shares. A registration statement was filed with the Commission and has become effective. However, as of the date of the Prospectus, no Warrants have been exercised. (See "Description of Securities--Warrants.") Securities Registered --------------------- The Common Shares into which the "B" and "C" Preferred Shares may be converted are being registered herein. The minimum number of shares will be 301,249; the maximum number of shares will depend on the Market Price of the Common Shares. (See Front Cover Page, "Risk Factors," and "Description of Securities"). Dilution -------- If all the Preferred Shares are converted into Common Shares at $3.50 per share, there will be 14,145,208 Common Shares outstanding. Persons who convert their Preferred Shares will own 301,429 Shares or 2.1% of the issued Common Shares. The number of Common Shares into which the Preferred Shares are convertible will vary depending on the Market Price of the Common Shares (See "Description of Securities--Preferred Shares," "Dilution" and "Capitalization.") Certain Risk Factors -------------------- Conversion of the Preferred Shares into Common Shares and the purchase of the Common Shares involves substantial risks due to the highly speculative nature of the Company's business. Holders of Preferred Shares ("Selling Securityholders") as well as investors in the Common Shares should review the entire Prospectus, particularly the "Risk Factors." Determination of Conversion Price --------------------------------- The formula for the conversion of the Preferred Shares has been determined by the Company and the holders thereof and bears no relation to the Company's assets, book value, or any other customary investment criteria, including the Company's prior operating history. (See "Determination of Offering Price.") 4 SUMMARY FINANCIAL INFORMATION For the year ended April 30, 1997 and the six months ended October 31, 1997 -------------------------------------------------------------------- April 30, 1997 October 31, 1997 Unaudited -------------- ---------------- Statement of Operations Data: Sales $ 610,876 $ 1,273,724 Cost of sales 259,862 501,338 Gross Profit 351,014 772,386 Operating expenses 1,039,015 839,301 Operating loss (688,001) (66,915) Other income (expense) - net 182,680 103,900 Net profit (loss) (505,321) 36,985 Net loss per common share primary $ (.04) $ .00 Shares used in computing net profit (loss) per share 13,379,507 13,793,541 Net profit (loss) per common share fully diluted $ (.04) $ .00 Shares used in computing fully diluted 13,731,174 14,145,208 Cash dividends per share -0- -0- As adjusted (1) As of October 31, 1997 As of October 31, 1997 ---------------------- ---------------------- Balance Sheet Data: Current assets $ 4,740,281 $ 4,740,281 Current liabilities 168,691 168,691 Working capital 4,571,590 4,571,590 Total assets 4,911,871 4,911,871 Long term debt, less current portion -0- -0- Accumulated deficit (2,870,007) (2,870,007) Stockholders' equity 4,743,180 $4,743,180 - ------------------------------ 1. Assumes conversion of Preferred Shares. The number of Common Shares into which the Preferred Shares may be converted has been taken for purposes of this table as 301,429 Common Shares ($3.50 per share). The formula for conversion per Preferred Share is $10,000 (the purchase price of a Preferred Share) divided by the lesser of $3.50 or 75% of the Market Price on the date(s) of conversion. The actual number of Common Shares into which the Preferred Shares are converted may be greater than this number. 6 RISK FACTORS Except for the description of historical facts contained herein, the Prospectus contains certain forward looking statements that involve risks and uncertainties as detailed herein and from time to time in the Company's filings with the Commission and elsewhere. Forward looking statements herein are made pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Such statements are based on Management's current expectations and are subject to a number of factors and uncertainties which could cause actual results to differ materially from those described in the forward-looking statements. These factors include, among others, the Company's fluctuations in sales and operating results, risks associated with international operations and regulatory, competitive and contractual risks and product development. CONVERSION OF THE PREFERRED SHARES INTO COMMON SHARES AND PURCHASE OF COMMON SHARES IS HIGHLY SPECULATIVE, INVOLVES A HIGH DEGREE OF RISK AND SHOULD BE MADE ONLY BY INVESTORS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. A HOLDER OF PREFERRED SHARES OR A PROSPECTIVE PURCHASER, PRIOR TO MAKING A CONVERSION OR AN INVESTMENT DECISION, SHOULD CAREFULLY CONSIDER, ALONG WITH OTHER MATTERS REFERRED TO HEREIN, THE FOLLOWING RISK FACTORS: 1. Limited Operating History. Although the Company was formed in 1986, as far as the development, manufacture and sale of drug testing kits are concerned, it has extremely limited operational history upon which investors may base an evaluation of its performance or any assumption as to the likelihood that the Company will be profitable. (See "Business.") The Company's prospects must be considered in light of the risks, expenses, delays, problems and difficulties frequently encountered in the establishment of a new business, the development and commercialization of new products based on innovative technology and the competitive environment in which the Company operates. Since the Company's entry into the biomedical business, the Company has generated limited revenues. There can be no assurance that the Company will be able to generate significant revenues or achieve profitable operations. (See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Financial Statements.) 2. Technological Factors; Uncertainty of Product Development; Unproven Technology. Although the Company's development efforts relating to the technological aspects of the workplace drug testing kit are completed, the Company is continually seeking to refine and improve its design and performance and to develop additional versions. In addition, the Company plans to perfect its laboratory drug test kit, its saliva alcohol level test kit and its Keratin production technology. The Company's efforts remain subject to all of the risks inherent in new product development, including unanticipated technical, regulatory or other problems which could result in material delays in product development or commercialization or significantly increased costs. The Company may be required to commit considerable additional efforts, time and resources to develop of production versions of its additional products. The Company's success will depend upon such products meeting targeted product costs and performance, and may also depend upon their timely introduction into the marketplace. There can be no assurance that development of the Company's proposed products will be successfully completed on a timely basis, if at all, that they will meet projected price or performance objectives, satisfactorily perform all of the functions for which they are being designed, or prove to be sufficiently reliable in widespread commercial application. Moreover, there can be no assurance that unanticipated problems will not arise with respect to technologies incorporated into its test kits or that product defects will not become apparent after commercial introduction of its additional tests. In the event that the Company is required to remedy defects in any of its products after commercial introduction, the costs to the Company could be significant, which could have a material adverse effect on the Company revenues or earnings. (See "Business.") 7 3. Uncertainty of Continued Market Acceptance. The Company's workplace drug test kit has been well received by potential customers, including corporations, distributors and correctional institutions. However, although the Company has received and is confident of receiving additional large initial orders from customers in those categories, its success is contingent on the receipt of reorders from these customers and orders from new customers. (See "Business.") To date, the Company has generated limited revenues from sales of its workplace drug test kits. As is typically the case with an emerging company, demand and market acceptance for newly introduced products is subject to a high level of uncertainty. Achieving continued market acceptance for its workplace drug tests will require substantial marketing efforts and expenditure of significant funds to inform potential distributors and customers of the distinctive characteristics, benefits and advantages of its kits. There can be no assurance that its drug test kits will become generally accepted or that the Company's efforts will result in successful product commercialization or initial or continued market acceptance for its drug testing products. (See "Business--Marketing and Sales.") 4. Competition in the Drug Testing Market; Technological Obsolescence. The Company faces competition for every existing and proposed product from drug manufacturers and other manufacturers of drug test kits. Some of its competitors are well known and have far greater financial resources than the Company. To the best of Management's knowledge, and in its opinion, no competitors have introduced products which equal the ease of use combined with the accuracy of the Company's drug test kits. (See "Business--Competition.") The markets for drug test kits and related products are highly competitive. There can be no assurance that other technologies or products which are functionally similar to those of the Company are not currently under development. In addition, there can be no assurance that other companies with the expertise or resources that would encourage them to attempt to develop or market competing products will not develop new products directly competitive with the Company's drug test kits. Despite the protections which would be available to the Company in the event its pendind application for a esign patent is granted, the Company expects other companies to attempt to develop technologies or products which will compete with the Company's products. See "Business--Competition.") 5. Dilution as a Result of Conversion of Preferred Shares. The number of Common Shares into which the outstanding Preferred Shares, in the aggregate, will be convertible will be $1,055,500 divided by the lesser of $3.50 or 75% of the Market Price. The number of Common Shares into which the Preferred Shares will be convertible assumes that the average Market Price on the date(s) of conversion will be at least $4.67. Since the market price on the date of the Prospectus exceeds $4.67, it is assumed that the number of Common Shares into which the Preferred Shares will be convertible is 301,429. However, there is a distinct possibility that the Market Price will be less than $4.67 and, thus, the number of shares to be issued upon conversion of the Preferred Shares will exceed 301,429 representing a conversion price less than the purchase price per share of many shareholders (See Front Cover Page and "Dilution.") 6. Possible Inability to Find and Attract Qualified Personnel. The Company currently has sufficient management expertise and depth to develop its business. It has recently added marketing and manufacturing management and has added to its scientific advisory board. However, it will need additional skilled and dedicated marketing personnel as well as technical and production personnel in the future. There is no guarantee that the Company can retain its present staff or that capable personnel with relevant skills will be available. (See "Management.") 8 7. Dependence on Management. The Company is dependent on the expertise and experience of Stan Cipkowski, President, Jay Bendis, Vice-President-Marketing, and Douglas Casterlin, Vice-President and General Manager, for its operations. The loss of Messrs. Cipkowski, Bendis and Casterlin, or any of them, will seriously inhibit the Company's operations. (See "Management.") 8. Possible Adverse Changes in Regulatory Framework. Approval from the FDA is not required for the sale of a workplace drug test kits, but is required for the clinical drug test kit. The Company has applied for approval for and has received "510(k)" approval from the FDA for its drug test kit. However, regulatory standards may change in the future and there is no assurance that if and when the Company applies for additional approvals from the FDA they will be granted. (See "Business-FDA Approval/Patent Applications.") 9. Sales of Common Shares at Below the Conversion Price/Dilution. Principal shareholders and certain investors acquired their Common Shares at prices substantially below the conversion price of the Preferred Shares. Thus, when all the Preferred Shares are converted into Common Shares, there will be an immediate substantial dilution to holders of Preferred Shares in the book value of each Common Share, and the principal shareholders and certain investors will realize an immediate increase thereon. (See "Dilution.") 10. Restricted Resale of the Securities. 6,436,702 Common Shares presently issued and outstanding as of the date hereof are "restricted securities" as that term is defined under the Securities Act of 1933, as amended, (the "Securities Act") and in the future may be sold in compliance with Rule 144 of the Securities Act, or pursuant to a Registration Statement filed under the Securities Act. Rule 144 provides, in essence, that a person holding restricted securities for a period of one year may sell those securities in unsolicited brokerage transactions or in transactions with a market maker, in an amount equal to one percent of the Company's outstanding Common Shares every three months. Sales of unrestricted shares by affiliates of the Company are also subject to the same limitation upon the number of shares that may be sold in any three month period. If all the Preferred Shares are converted into Common Shares, the holders of the restricted shares may each sell 58,623 shares during any three month period. Additionally, Rule 144 requires that an issuer of securities made available adequate current public information with respect to the issuer. Such information is deemed available if the issuer satisfies the reporting requirements of sections 13 or 15(d) of the Securities and Exchange Act of 1934 (the "Securities Exchange Act") or of Rule 15c2-11 thereunder. Rule 144(k) also permits the termination of certain restrictions on sales of restricted securities by persons who were not affiliates of the Company at the time of the sale and have not been affiliates in the preceding three (3) months. Such persons must satisfy a two (2) year holding period. There is no limitation on such sales and there is no requirement regarding adequate current public information. Investors should be aware that sales under Rule 144 or 144(k), or pursuant to a Registration Statement filed under the Act, may have a depressive effect on the market price of the Company's securities in any market which may develop for such shares. (See "Description of Securities.") 9 11. Preferred Shares; Convertibility into Common Shares; Dilution. The Company has the authority to issue up to 5,000,000 Shares of Preferred Stock with such designations, rights and preferences as may be determined by the Board of Directors. The Company is empowered, without further shareholder approval, to issue Preferred Shares with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of the Common Shares. The Company, as of the date of the Prospectus, has issued and outstanding 105.5 Preferred Shares which are convertible into a minimum of 301,429 Common Shares. (See "Risk Factors--Dilution as a Result of Conversion of Preferred Shares," "Certain Transactions" and "Description of Securities--Preferred Shares.") 12. Need for Additional Financing. The Company expects that its cash on hand will be sufficient to fund the Company's proposed operations for at least 36 months from the date of the Prospectus. This estimate is based on certain assumptions and there can be no assurance that unanticipated unbudgeted costs will not be incurred. Future events, including the problems, delays, expenses and difficulties which may be encountered in establishing and maintaining a substantial market for the Company's drug test kits and other technologies could make cash on hand insufficient to fund the Company's proposed operations. There can be no assurance that the Company will be able to obtain any necessary additional financing on terms acceptable to it, if at all. In addition, financing may result in further dilution to the Company's then existing stockholders. The Company has no established borrowing arrangements or available lines of credit. (See "Management's Discussion and Analysis of Financial condition and Results of Operations.") 13. No Dividends. The payment of dividends rests within the discretion of the Company's Board of Directors. No dividends have been paid on the Common Shares and the Company does not anticipate the payment of cash dividends in the foreseeable future. If the operations of the Company become profitable, it is anticipated that, for the foreseeable future, any income received therefrom would be devoted to the Company's future operations and that cash dividends would not be paid to the Company's shareholders. (See "Business--Dividend Policy.") 14. Control by Management. After conversion of the Preferred Shares, assuming the Preferred Shares are converted into 301,429 Common Shares (see "Dilution"), Management of the Company will own approximately 45.2% of the outstanding Common Shares and will be in a position to control the election of the Board of Directors. The certificate of incorporation of the Company does not provide for cumulative voting and, as a result, purchasers of the Company's securities will not be able to elect any directors or exert any control over the general policies of the Company. (See "Description of Company's Securities--Description of Common Stock.") 15. Ability to Retain and Attract Market Makers. The Common Shares have recently begun trading on the Nasdaq SmallCap Market. In the event that the market makers cease to function as such, public trading in the Company's Shares will be adversely affected or may cease entirely. Presently, market makers for the Company's Common Shares include GVR Co., Fahnestock & Co., Inc., Hill Thompson Magid & Co., J.B. Oxford & Co. Kalb Voorhis & Co., Nash Weiss & Co., Inc., Paragon Capital Corp., Troster Singer Corp., Comprehensive Capital Corp., Herzog, Heine, Geduld, Inc., Mayer & Schweitzer, Inc., Knight Securities, Ltd., Naib Trading Corp., National Financial Securities Corp., Sharpe Capital, Inc. and Wien Securities Corp., Sherwood Securities Corp., H. J. Meyers & Co., Inc., M. H. Meyerson & Co., Inc., National Financial Service Corp. 10 16. Anti-Takeover Provisions in Certificate of Incorporation. The Company's certificate of incorporation authorizes the issuance of 5,000,000 Preferred Shares. The Board of Directors has the authority, without further action by the Common Shareholders, to issue Preferred Shares from time to time in one or more classes or series, to fix the number of shares constituting any class or series and the stated value thereof, if different from the par value, and to fix the terms of any such series or class, including dividend rights, dividend rates, conversion or exchange rights, voting rights, rights and terms of redemption (including sinking fund provisions), the redemption price and the liquidation preference of such class or series. Thus, the Board of Directors, in order to avoid a hostile takeover, could issue Preferred Shares with supervoting rights, conversion rights into Common Shares, liquidation preference or a combination of rights and preferences which could inhibit success of such attempt. (See "Description of Securities--Preferred Shares.") 17. Determination of Conversion Price. The formula for the conversion of the Preferred Shares into Common Shares has been determined by the Company and the holders thereof and bears no relation to the Company's assets, book value, or any other customary investment criteria, including the Company's prior operating history. (See Front Cover Page.) 18. No Assurance of Continued Public Market for Common Shares Although the Common Shares have been accepted for trading on the Nasdaq SmallCap market, there is no assurance that an active trading market will be sustained. (See "Front Cover Page and "Description of Securities--Common Shares." 19. Patents and Trademarks The Company has applied for design patents on its drug test kits and for a trademark on "The Rapid Drug Screen" in the United States, European Common Market and Japan. There is no assurance that the patents will be granted or the trademark registered. (See "Business--Patents and Trademarks.") DIVIDEND POLICY Since its inception, the Company has not paid any dividends on its Common Shares. The Company intends to retain future earnings, if any, that may be generated from the Company's operations to help finance the operations and expansion of the Company and accordingly does not plan to pay dividends to Shareholders. Any decision as to the future payment of dividends will depend on the results of operations and financial position of the Company and such other factors as the Company's Board of Directors, in its discretion, deems relevant. (See "Risk Factors--No Dividends.") DILUTION The following table sets forth the differences among the existing shareholders of the Company, including holders of Preferred Shares, the total consideration paid and the average price per Common Share paid. Number Average of Common Percent Dollar Percent Price Shares of Total Amount of Total Per Share ---------- -------- ---------- -------- --------- Common Shares 13,793,541, 97.5% $6,558,187 66.3% $0.48 105.5 Convertible Preferred Shares* 301,429 2.5% $1,055,000 33.7% $3.50 ---------- ------ ---------- ----- ----- Total Common Shares* 14,094,970 100.0% $7,613,187 100.0% $0.54 - ---------------------- * The number of Common Shares into which the Preferred Shares may be converted has been taken, for purposes of this table, as 301,429 Common Shares, assuming an average conversion price of $3.50 per share. The formula for conversion is $1,055,000 (the aggregate purchase price of the Preferred Shares) divided by the lesser of $3.50 or 75% of the Market Price on the date(s) of conversion. The actual number of Common Shares into which the Preferred Shares are converted may be greater than this number. 11 CAPITALIZATION The table below sets forth the capitalization of the Company as at October 31, 1997 on an historical basis and as adjusted to give effect of the exercise of the Warrants and conversion of the Preferred Shares. As Adjusted for Exercise of Conversion of Historical Basis Preferred Shares* ---------------- ----------------- Long Term Liabilities $ 0 $ 0 Stockholders' Equity Common Shares, $.01 par value per share, authorized 30,000,000 shares, issued and outstanding 13,793,541 shares at October 31, 1997; 14,094,978 Common Shares will be issued and outstanding after conversion of the Preferred Shares. 137,935 140,950 Preferred Shares, $.01 par value per share, authorized 5,000,000 Shares, issued and outstanding 105.5 Preferred Shares at October 31, 1997 (1); after conversion of the Preferred Shares, there will be -0- Preferred Shares outstanding. 2 0 Additional paid in capital 7,475,250 7,472,237 Accumulated deficit (2,870,007) (2,870,007) ------------ ------------ Total stockholders' equity $ 4,743,180 $ 4,743,180 ------------ ------------ Total Capitalization $ 4,743,180 $ 4,743,180 ============ ============ - -------------------- * Assumes conversion of Preferred Shares. The number of Common Shares into which the Preferred Shares may be converted as been taken for purposes of this table at 301,429 Common Shares. The actual number of Common Shares into which the Preferred Shares are converted may be greater than this number 12 SELECTED FINANCIAL DATA The selected unaudited financial data of the Company set forth below for the six months ended October 31, 1997. Six Months Ended October 31, 1997 --------------------------------- Statement of Income Data: Net Sales $ 1,273,724 Cost of Goods Sold 501,338 Gross Profit 772,386 Total Operating Expenses 839,301 Profit (Loss) From Operations ( 66,915) Other Income (Expenses) 103,900 Net profit 36,985 Net Loss Per Share Primary $ .00 Common Shares Outstanding 13,793,541 Net Loss Per Share Diluted $ .00 Common Shares Outstanding Assuming conversion of convertible preferred shares 14,094,970 As of October 31, 1997 As Adjusted (Pro-forma)* ---------------------- ------------------------ Balance Sheet Data Working Capital $ 4,571,590 $ 4,571,590 Total Assets 4,911,871 4,911,871 Total Liabilities 168,691 168,691 Shareholders' Equity 4,743,180 4,743,180 - ------------------------ * Assumes conversion of Preferred Shares. The number of Common Shares into which the Preferred Shares may be converted has been taken for purposes of this table at 301,429 Common Shares. The formula for calculating the number of Common Shares is $1,055,000 (the aggregate purchase price of the Preferred Shares) divided by the lesser of $3.50 or 75% of the Market Price on the date(s) of conversion. The actual number of Common Shares into which the Preferred Shares are converted may be greater than this number. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS for the years ended April 30, 1996 and 1997 and the six-month periods ended October 31, 1996 and 1997 Development Stage Activities ---------------------------- Until 1991, the Company was involved in marketing educational books and software to schools and municipal libraries and audiovisual educational packages throughout the United States. In 1991, the Company reduced its concentration on this market because of competition, increasing costs of doing business and slow collections from municipalities and sought new technologies in emerging markets. The Company has continued one small segment of its original business, that of selling audiovisual packages to libraries. 13 The Company was considered to be a development stage company with little operating history subsequent to its commencement of development of its newly acquired biomedical technologies which are, at present, its core business. These activities have been funded through the sale of convertible debentures aggregating $1,425,500 which were subsequently converted to Common Shares at $.75 per share, and through the exercise of 143,000 "A" Options at $1.00 per share and 32,000 "B" Options at $1.00 per share aggregating $175,000. In addition, the Company sold 150 Preferred Shares at $10,000 per share for an aggregate consideration of $1,500,000 and net proceeds of $1,405,000, all of which were converted into an aggregate of 633,073 Common Shares. As of October 31, 1997, the Company had also issued 697,445 Common Shares for an aggregate consideration of $2,092,186 through the exercise of nonstatutory stock options. The Company also sold 105.5 "B" and "C" Preferred Shares for an aggregate gross consideration of $1,055,000 and net consideration of $949,600. Because the Company's drug test kits are in commercial production and the Company has, according to Management, adequate resources to adequately fund its operations and has completed research and development of its present product line, the Company no longer considers itself a development stage company. In order to support increased levels of sales in the future and to augment its long-term competitive position, the Company anticipates that it will be required to make significant additional expenditures in manufacturing, research and development, sales and marketing and administration, both in absolute dollars and as a percentage of sales. The Company anticipates that its results of operations may fluctuate for the foreseeable future due to several factors, including whether and when new products are successfully developed and introduced by the Company, market acceptance of current or new products, regulatory delays, product recalls, manufacturing delays, shipment problems, the timing of significant orders, changes in reimbursement policies, competitive pressures on average selling prices, changes in the mix of products sold and patent conflicts. Operating results would also be adversely affected by a downturn in the market for the Company's current and future products, if any, order cancellations and/or order rescheduling. Because the Company is continuing to increase its operating expenses for personnel, the Company's operating results would be adversely affected if its sales did not correspondingly increase. The Company's limited operating history makes accurate prediction of future operating results difficult or impossible. Although the Company has experienced growth in recent years, there can be no assurance that, in the future, the Company will sustain revenue growth or remain profitable on a quarterly or annual basis or that its growth will be consistent with predictions made by securities analysts. The Company manufactures and inventories sufficient product prior to receipt of orders and ships product shortly after receipt of orders and anticipates that it will do so in the future. Accordingly, the Company has developed neither a significant backlog nor inventory and does not anticipate it will develop a significant backlog or inventory in the future. For large orders, deliveries are generally staggered; and the Company manufactures and inventories prior to shipping dates. The Company's computer and other systems will not be adversely affected by the year 2000. 14 Results of Operations for the Year Ended April 30, 1997 as Compared to the Year Ended April 30, 1996. - -------------------------------------------------------------------------------- Revenues from the book segment of the business were $274,678 for the year ended April 30, 1997 as compared to $158,105 for the year ended April 30, 1996, representing a increase of $116,573 or 73.7%. This increase in book sales is directly attributable to the Company's restructuring of its telemarketing activities. Costs of goods sold for the year ended April 30, 1997, were $76,628 as compared to $96,444 for the year ended April 30, 1996 representing a cost of goods sold percentage of 27.9% for the year ended April 30, 1997 as compared to 61.0% for the year ended April 30, 1996. This cost reduction is the result of the purchase of a significant book inventory in bulk at greatly reduced cost. Revenues from sales of drug testing kits were $317,864 for the year ended April 30, 1997. Costs of goods sold for the year ended April 30, 1997 was $183,234 or 57.6% of revenues. General and administrative costs for the year ended April 30, 1997 were $867,903, an increase of 67.3% over expenses of $518,826 for the year ended April 30, 1996. These increased costs were the result of adding employees for positions in sales, marketing, accounting, management and other office personnel of $365,117, legal and professional expenses of $122,993, office expense of $220,248, marketing expense of $120,266, product development of $26,569 and rent of $12,710. Research and development expense of $74,978 for the year ended April 30, 1997 was $283,866 less than the $358,844 expended during the year ended April 30, 1996. This decrease in research and development is the result of gradual completion of development of the drug testing delivery system. Resolution of Friedenberg Litigation and Trial Date in Morris Litigation ------------------------------------------------------------------------ In February, 1994, Robert Friedenberg, as owner of the two medical technology companies, MDI and Gendex, acquired by the Company, in the name of these corporations, filed suit to have the Share Exchange Agreement underlying the acquisitions rescinded on the grounds of breach of contract. In order to avoid the imposition of damages against it, the Company filed a cross-claim, in July, 1994, against Dr. Friedenberg, seeking enforcement of the Share Exchange Agreement. In November, 1995, after a trial, the court dismissed Dr. Friedenberg's lawsuit and allowed the Company's cross-claim to proceed to trial. In September, 1996, Dr. Friedenberg died. A pretrial hearing was held in December, 1996 which set a trial date of April 28, 1997. That trial was decided by a jury on May 5, 1997. The verdict determined that Dr. Friedenberg breached various contracts when he failed to deliver technology to the Company. The jury also found in favor of the Company on two of the three fraud claims against Dr. Friedenberg and awarded the Company approximately $350,000 in damages. The trial judge, who is bound by the jury verdict against Friedenberg, will decide Dr. Friedenberg's claim to the Company's Common Shares which the Company had refused to issue to him. Dr. Friedenberg's previous claims for equitable relief against the Company had been denied. In June, 1995, the Company filed a lawsuit against Jackson Morris, Dr. Friedenberg's counsel, for the breach of attorney-client relationship and breach of his fiduciary duty and negligence in representing the Company in matters relating to Dr. Friedenberg and in the preparation of the Share Exchange Agreement. The Company's lawsuit demands damages in the amount of $1,000,000. Mr. Morris has counterclaimed for Common Shares. The court has set a trial date of September 14, 1998. 15 Since legal counsel had advised Management that the claims against the Company were without merit, the Company did not recognize the claims against it as liabilities. Thus, no adjustment has been made to the Balance Sheet or to the Statement of Operations. The Company intends to recognize income when the judgment against the estate of Robert Friedenberg is collected. Results of Operations for the Year ended April 30, 1996 as Compared to the Year ended April 30, 1995. - -------------------------------------------------------------------------------- The only revenues for fiscal 1996 were revenues from the audio-visual segment of the Company's operations. The Company had no revenues as of April 30, 1996 from the Company's drug testing products. Revenues from the audio-visual segment of the business were $137,891 for the year ended April 30, 1995 as compared to $158,105 for the year ended April 30, 1996 representing an increase of $20,214 or 14.7%. This increase is directly attributable to the increased effectiveness of the Company's use of telemarketing to reach the Company's defined market of schools and libraries, as substantially all marketing of audio-visual materials is through telemarketing. Costs of good sold for the year ended April 30, 1995 were $45,204 as compared to $96,444 for the year ended April 30, 1996, representing a cost of goods sold percentage of 32.8 % for the year ended April 30, 1995 as compared to 61% for the year ended April 30, 1996. The increase in costs is attributable to the product mix of the items sold having a higher wholesale cost. Increases in the wholesale price of products caused a reduction in gross profits of $31,026 from $92,687 for the year ended April 30, 1995, as compared to $61,661 for the year ended April 30, 1996. General and administrative costs for the year ended April 30, 1996 were $518,826, an increase of 300% over expenses of $129,719 for the year ended April 30, 1995. These increased costs are the result of increased labor costs for office personnel and consulting expenses of $427,225. Research and development expenses of $358,844 for the year ended April 30, 1996 increased by $223,432 or 165% over the amount expended of $135,412 for the year ended April 30, 1995. This increase in expenses is the result of increasing amounts expended for development, experimentation and improvement of test chemicals and laboratory and field trial testing of the workplace drug testing delivery system and research and development relating to the Company's other biomedical products. Liquidity and Capital Resources as of the End of Fiscal Year, April 30, 1996 - -------------------------------------------------------------------------------- The Company increased its cash balance to $437,532 and working capital to $329,085 as of the end of fiscal 1996 as the result of the sale in the aggregate of $1,407,000 convertible debentures over a three year period. The Company has expended $565,186 to April 30, 1996 for the research and development of its biomedical products. Other income consisted of the write off of $126,500 in secured debt which counsel has advised Management is time barred as to collectibility. Income tax: As of April 30, 1997, the Company had a tax loss carry-forward of $2,906,992. The Company's ability to utilize its tax credit carry-forwards in future years will be subject to an annual limitation pursuant to the "Change in Ownership Rules" under Section 382 of the Internal Revenue Code of 1986, as amended. However, any annual limitation is not expected to have a material adverse effect on the Company's ability to utilize its tax credit carry-forwards. 16 Liquidity and Capital Resources as of the End of Fiscal Year Ended April 30, 1997. - -------------------------------------------------------------------------------- The Company's cash balance was $1,762,506 with $1,053,000 in treasury bills and certificates of deposit invested for nine months; and working capital was $3,548,508 as at April 30, 1997. These balances are the result of the sale and conversion of convertible debentures in the principal amount of $18,500 and $175,000 respectively through the exerci*e of 143,000 "A" Options and 32,000 "B" Options respectively at $1.00 per share. The Company also sold 150 convertible preferred shares at $10,000 per share for an aggregate consideration of $1,500,000. Finally, as of April 30, 1997, the Company sold 697,445 Common Shares for an aggregate consideration of $2,092,186 through the exercise of nonstatutory stock options. Cash generated from financing activities was utilized for investment in short term marketable securities of $1,053,000, for additional patent applications of $7,783 and for the purchase of machinery and equipment for $114,793 and a loan of $100,000 to an unrelated party. Results of Operations for the Six Months Ended October 31, 1997 as Compared to the Six Months Ended October 31, 1996. - -------------------------------------------------------------------------------- Revenues from the book segment of the business were $265,348 for the six months ended October 31, 1997 as compared to $17,123 for the six months ended October 31, 1996, representing an increase of $248,225 or 1,451%. This increase in book sales was directly attributable to the Company's restructuring of its telemarketing activities and a bulk inventory purchase. Costs of goods sold for the six months ended October 31, 1997, were $66,471 as compared to $5,565 for the six months ended October 31, 1996 representing a cost of goods sold percentage of 25% of sales for the six months ended October 31, 1997 as compared to 32.5% of sales for the six months ended October 31, 1996. Revenues from the sales of drug test kits were $1,008,376 for the six months ended October 31, 1997 as compared to $31,464 for the six months ended October 31, 1996, representing an increase of $976,912 or 3,105%. This increase in sales of drug test kits is directly attributable to the implementation and positive response to the Company's marketing program. Cost of goods sold for the six months ended October 31, 1997 was $434,867 or 43.1% of sales as compared to a cost of goods sold of $22,313 or 64.2% of sales. The reduction in the percentage of cost of goods sold is attributable to price reductions from substantially increased purchases of raw materials and the economy of mass production. 17 General and administrative costs for the six months ended October 31, 1997 were $790,628 or 62.1% of sales as compared to $336,113 or 691% of sales for the six months ended October 31, 1996, representing an increase of $454,515. These increased costs are the result of hiring additional employees in sales, marketing, accounting and executive positions. For the six months ended October 31, 1997, office personnel costs were $385,470, legal and professional expenses, $119,464, office expense, $98,157, marketing expense, $150,288, product development $27,070 and rent, $10,179. Research and development expense was $-0- for the six months ended October 31, 1997 compared to $ 66,750 during the six months ended October 31, 1996. This decrease in research and development is the result of the completion of development of the existing drug testing system. Liquidity and capital resources as of October 31, 1997. - -------------------------------------------------------------------------------- The Company's cash balance was $1,362,238 and working capital was $4,571,591 as at October 31, 1997. The Company completed a series of private placements generating additional cash aggregating $1,055,000 before payment of $93,500 in commissions. Cash generated from financing activities was utilized for the purchase of machinery and equipment for $39,366, additional patent costs of $2,810 and increasing the investment in marketable securities by $23,610. The Company's primary short-term needs for capital, which are subject to change, are for expansion of its manufacturing capacity, and an increase in inventory levels to fill larger anticipated orders and increase in receivables. Management believes that the present cash balance will pay the ongoing cost of the biomedical business. As of October 31, 1997, two customers accounted for 42.2% of accounts receivable. Income tax: As of October 31, 1997, the Company had a tax loss carry-forward of $2,906,922. The Company's ability to utilize its tax credit carry-forwards in future years will be subject to an annual limitation pursuant to the "Change in Ownership Rules" under Section 382 of the Internal Revenue Code of 1986, as amended. However, any annual limitation is not expected to have a material adverse effect on the Company's ability to utilize its tax credit carry-forwards. The Company currently plans to expend approximately $2.0 million for the expansion and development of its manufacturing, marketing and general administrative capabilities in connection with the fulfillment of the Company's marketing program and the anticipated launch of the Company's products currently under development. Additionally, the Company utilizes cash generated from operating activities to meet its capital requirements. 18 The Company expects its capital requirements to increase over the next several years as it commences new research and development efforts, undertakes new product development, increases sales and administration infrastructure and embarks on developing in-house manufacturing capabilities and facilities. The Company's future liquidity and capital funding requirements will depend on numerous factors, including the extent to which the Company's products under development are successfully developed and gain market acceptance, the timing of regulatory actions regarding the Company's potential products, the costs and timing of expansion of sales, marketing and manufacturing activities, facilities expansion needs, procurement and enforcement of patents important to the Company's business, results of clinical investigations and competition. The Company believes that its available cash and cash from operations will be sufficient to satisfy its funding needs for at least the next 36 months. Thereafter, if cash generated from operations is insufficient to satisfy the Company's working capital and capital expenditure requirements, the Company may be required to sell additional equity or debt securities or obtain additional credit facilities. There can be no assurance that such financing, if required, will be available on satisfactory terms, if at all. BUSINESS Summary ------- From its inception in 1986 until 1991, the Company was involved in marketing educational books and software to schools and municipal libraries and audiovisual educational packages to educational institutions and to corporations throughout the United States. In 1991, the Company, because of heightened competition, increasing costs of doing business and slow collections from municipalities, reduced its concentration in this market to that of selling audiovisual packages to libraries and commenced seeking new technologies in emerging medical markets. The Company purchased certain biomedical technologies from its Executive Vice-President and purchased and rescinded the purchase of other technologies from another party who became and then resigned as an officer and director of the Company. The Company has no present intention of entering into transactions in the future with related parties. (See "Certain Transactions.") Since its inception, the Company has an accumulated deficit of $2,906,922 (see Financial Statements - Balance Sheet). Management believes that the Company's accumulated deficit is the result of discontinued operations, the development of its workplace drug test kits and the development of other biomedical products. However, investors should be aware that the Company has not been profitable during its ten year history and that there is no assurance that the Company's biomedical operations will become profitable. 19 The Company is currently in the business of acquiring, developing and marketing biomedical technologies and products. The Company currently owns two technologies for screening drugs of abuse - a workplace screening test and a preliminary test for use by laboratories. The Company produces and markets its workplace screening test and has produced and delivered in excess of 150,000 units of this test. The Company's workplace screening test is a one-step test kit that allows a small urine sample to be tested for the presence or absence of drugs of abuse. The competitively priced test is self-contained with no exposure of the test administrator to the urine sample. In Management's opinion, the Company's drug test kit is easier to use than any competitive product and requires no mixing of reagents. In addition, hundreds of controlled tests conducted by independent laboratories compared the Company's "Rapid Drug Screen Test" with results produced by EMIT II, a standard laboratory test, with 100% correlation of both positive and negative test results. As a result, Management believes that the Company's Rapid Drug Screen Test is as accurate as those laboratory tests. The Company markets a five panel Rapid Drug Screen which tests for cocaine, marijuana, opiates, amphetamine and PCP. It also markets a two panel kit which tests for cocaine and marijuana. The Company has recently completed the development of a test for methamphetamine, a synthetic stimulant and potent form of amphetamine, and has started to produce kits containing a test for methamphetamine. In November, 1997, the Company completed development of tests for benzodiazepines, barbiturates, and tricyclic antidepressants which it intends to market in the near future. The Company has installed and uses equipment suitable for the mass production of the workplace drug screening test. The Company's output was initially lowered by its inability to secure reliable supplies of reagents. This problem was rectified in May, 1997 through increasing reliability of two of its suppliers and the addition of a third supplier. The Company also owns a patented low cost method for producing Keratin proteins. The uses for such proteins include hardening of finger nails and carrying topical lotions and medicines through the skin. In addition, the Company is developing a saliva test for alcohol consumption. Existing saliva tests for alcohol consumption require exposure to the saliva sample and the addition of reagents. The Company's test is self-contained, involves no additional reagents and can be priced lower than existing competitive products. The Company has no intention of developing or marketing its laboratory test, its Keratin technology or its saliva test for alcohol consumption at this time, but intends to concentrate on the production and marketing of its drug screen tests. The Company has fully developed and is preparing to market its anti-dilutant product which detects the presence of dilutants in the urine specimen, added detergents, and tests for pH and specific gravity levels. The Company may develop or acquire additional biomedical technologies or products in the future. However, it has not yet located any technologies which it desires to develop or acquire. 20 Background ---------- According to the "1996 AMA (American Management Association) Survey Workplace Drug Testing and Drug Abuse Policies Summary of Key Findings," an annual report on drug testing in the workplace, 81% of major United States firms now test employees and/or job applicants for drug use, an increase of 277% since 1987 and an increase of 3% since 1995. The AMA attributed the increase to several factors, including Department of Transportation and Department of Defense regulations which, in conjunction with local and state regulations, mandate testing in certain job categories, the Federal Drug-Free Workplace Act of 1988, court decisions recognizing an employer's right to test both employees and job applicants in the private sector for drugs of abuse, action by insurance carriers to reduce accident liability and control health care costs and corporate requirements that vendors and contractors certify that their workplaces are drug-free. The AMA found that business category was the most important determinant in drug testing. The percentages in each category which tests for drugs of abuse are manufacturers (89%), transportation (100%), wholesalers and retailers (79%), general service providers (77%), business service providers (60%) and financial service providers (56%). The survey states that the usual and recommended procedure for urine samples calls for a retesting of positive samples by the gas-chromatography method. It also states that 76% of firms that test utilize a medical review officer ("MRO") who analyzes test findings, judges them against the test subject's medical profile and renders a verdict to the employer which does not see the test results but only the MRO's report. The use of an MRO offers significant protection to employees who may test positive due to the use of prescription drugs or non-controlled substances which register as controlled substances. The Substance Abuse and Mental Health Services Administration, Office of Applied Studies of the United States Department of Health and Human Services, Public Health Service, in its advance report number 18 released in August, 1996 entitled "Preliminary Estimates from the 1995 National Household Survey on Drug Abuse," notes that 14.3% of unemployed adults, age 18 years and older, were current illicit drug users in 1995 compared with 5.5 % of full-time employed adults and that the rate of drug use decreased from 1994's 6.7%. 71% of all current illicit drug users 18 years old and older (7.4 million adults) were employed, including 5.5 million full-time workers and 1.9 million part-time workers. Because of the high incidence of workplace drug use, the testing of employees for the most "popular" drugs has become widespread. Positive tests often result in discharge of, or treatment for, the employee. In addition, the threat of testing, particularly random testing, has the prophylactic effect of reducing workplace drug use. The Company believes that the drugs of abuse testing market is large and growing and that the largest market opportunity for on-site drug screening products is the private sector with an additional large public sector demand. According to Management, drug testing performed in an on-site facility using technologies designed for on-site use can be just as accurate as testing performed in a full-service lab. Drug screening tests are now performed in markets which include: preemployment testing, random testing of employees, drug rehabilitation programs, hospital laboratories, emergency rooms, private security agencies, public transportation, law enforcement agencies, probation and parole programs and Department of Defense contractors. In April, 1997, the Company applied to list its Common Shares on the Nasdaq SmallCap Market. The Common Shares were accepted for listing and began trading on the Nasdaq SmallCap Market on December 24, 1997. 21 Workplace Drug Test - ------------------- Design ------ The first product, trademarked "The Rapid Drug Screen," developed and marketed by the Company, is a workplace test for five drugs of abuse which can be used in offices, factories, "halfway" houses, remote locations and in all situations where an immediate result is required. The product consists of a "NIDA 5 Card," a business-card size card divided into five lengthwise strips, or sections. The person being tested urinates into a test cup, puts on the lid, and hands it to a supervisor or other person administering the test. The test administrator inserts the card into a pre-punched slit in the lid without the danger of spilling, touching or contaminating the urine inside. Thus, the administrator is not exposed to the urine sample nor does he or she have to mix reagents. Within five minutes, the results can be read on the insert card through the side of the cup. A single line in the test area of the Rapid Drug Screen indicates the sample is positive for one of the five specific drugs of abuse - PCP, marijuana, cocaine, amphetamines and opiates - designated by NIDA ("National Institute on Drug Abuse") in the "Drug-Free Workplace Act of 1989" as those to be tested for in most federally regulated drug testing programs. If the results are positive, the cup is sealed with provided materials and sent to a laboratory for confirmation. No adverse action is taken by the test administrator unless confirmation of a positive test is received from an independent laboratory. A double line in the test area of the Rapid Drug Screen indicates that the screen is negative for the presence of the "NIDA 5" drugs of abuse. The Company has designed a five panel card, a two panel card and an eight panel card and can produce, on special order or if the market develops, cards which test for any combination of the NIDA drugs of abuse. The two panel strip, designed for juvenile corrections centers and educational institutions, tests only for cocaine and marijuana. The eight panel strip, designed to rival two competitive products, Biosite and Drug Screen Systems, includes barbiturates, benzodiazepines, tricyclic antidepressants and methamphetamines. These additional tests can be combined in single unit with the NIDA 5 Card so that one sample can test for eight drugs of abuse simultaneously. The Company's test for methamphetamine is incorporated in a two panel test for marijuana and methamphetamine; and the other is a five panel test for methamphetamine, amphetamine, cocaine, opiates and marijuana. In November, 1997, the Cmpany completed development of tests for benzodiazepines, barbiturates, and tricyclic antidepressants making the Company's Rapid Drug Screen capable of detecting various combinations of cocaine, opiates, THC, PCP, amphetamines, methamphetamines, benzodiazepines, barbiturates, and tricyclic antidepressants. In addition to standard two, five, eight, and nine panel versions, the Company is able to customize the test to meet individual customer needs, if given a lead time ranging from two weeks to two months depending on specifications. 22 Benzodiazepines, barbiturates, and tricyclic antidepressants are prescription sedatives which are often abused and can be deadly. In fact, the Florida Alcohol and Drug Abuse Association (FADAA) reports that barbiturates account for approximately one-third of all reported drug-related deaths while tricyclic antidepressants have been identified as a leading cause of fatality from drug ingestion in Australia. Domestic concerns regarding trends of barbiturate abuse focus on the drug's growing popularity among teenagers, as evidenced by the 1996 Monitoring the Future Study which documents a 38% rise in barbiturate use among high school seniors since 1992. One of the problems which often occurs in the use of workplace drug testing is fraud or evasion practiced by the person being tested. The most prevalent method of avoiding adverse test results is the substitution by the person being tested of a hidden "clean" urine sample which he or she brings to the test. As a consequence, each of the Company's drug test strips contains a temperature sensor which helps prevent the substitution of another urine sample as the likelihood is that the substituted sample would not retain proper temperature. Also, the Rapid Drug Screen contains a control line, designed to assure the administrator of the test that the test is working properly. Should the control line not appear, the administrator is instructed to void the test and "retest" the individual being tested by obtaining another specimen sample. The kit contains the following instructions: if only one horizontal band changes color in any NIDA strip, the sample is positive for that drug and the sample should be sent to a laboratory for confirmation. If both bands in any NIDA strip change color, the sample has tested negative for that drug. If neither band changes color, the sample is not urine or the test must be voided; and the employee or other person being tested must submit another urine sample for retesting. Manufacture ----------- After the successful completion of clinical trials in May, 1996, the Company initially subcontracted the manufacture of components, including the test strips, of The Rapid Drug Screen to several outside manufacturers. These components were then assembled for the Company by Columbia Advocacy and Resource Center ("COARC"), an FDA-approved contract manufacturer in Mellenville, New York, which is near the Company's headquarters. COARC is a federal and state licensed not-for-profit agency where non-disabled employees work side by side with several hundred developmentally disabled employees to manufacture a wide variety of products and services. The Company found that the use of subcontractors to produce the test strips was unsatisfactory from a pricing, delivery and quality control standpoint. The Company has installed equipment in a dedicated "white" room in the COARC facility which allows COARC to manufacture the test strip component of the product as well as to undertake its assembly operations on the Company's behalf. The white room dedicated to the workplace drug screening test is temperature and humidity controlled and has an airborne particulate filtering system. The Company owns the equipment which is being be used by employees of COARC. Other employees of COARC assemble, pack and ship the units. COARC has established a stringent Quality Assurance/Quality Control ("QA/QC") Program to insure data reliability and product consistency. The Company intends to continue to contract out the printing and manufacture of specimen cup components. The Company presently produces its test strips using the equipment. The equipment, as installed, is capable of producing up to 500,000 units per month utilizing one shift five days a week. 23 FDA Approval/Patent Application ------------------------------- Though FDA approval is not required for most forms of workplace drug testing, including The Rapid Drug Screen, it is required for use in a clinical setting which Management anticipates may become a future marketplace for the Company's drug testing products. Testing of one hundred samples was completed in July, 1996 and showed 100% correlation to tests performed in a recognized testing laboratory. A Federal Drug Administration ("FDA") "510K" application was filed on July 15, 1996 and was granted on April 15, 1997. Utility and application patents were filed on March 11, 1996. Marketing and Sales ------------------- The Company advertising through trade journals direct mail campaigns; and its representatives attend trade shows. The Company sells primarily to distributors which then resell in the various marketplaces. The Company has garnered orders from distributors, municipal bodies and corporate users as well as from penal facilities. In November, 1997, the Company hired a national sales manager, a director of marketing and five regional managers. (See "Management--Significant Employees.") Also in November, 1997, the Company announced its intention to open a national sales office in Boca Raton, Florida. (See "Risk Factors--Marketing and Sales.") The Company has divided its marketplace into the following categories. Corporate Workplace Drug Testing Programs ----------------------------------------- The Company has developed a network of distributors and administrators of workplace drug testing programs to sell its Rapid Drug Screen testing kit. Its largest initial order for this marketplace is from Zee Services, Inc., a division of McKesson Corp. Zee Services, Inc. utilizes a network of 80 regional distributors which, in turn, employ 1,300 sales representatives each with a well-stocked company van to sell to 350,000 small and medium sized industrial clients a variety of products, ranging from first aid kits to drug testing kits. An initial order of 50,000 test kits has been produced. CannAmm, Inc., a similar company operating in Canada, has likewise become a distributor of the Company's products. In addition, the Company has sold to many regional distributors in this marketplace. Corrections and Law Enforcement ------------------------------- This market includes federal, state and county level correctional facilities, pretrial agencies, probation and parole departments at the federal and state levels and juvenile correction facilities. The Company has received orders from several agencies including the Broward County, Florida, Sheriff's Department, the United States Probation Department and other similar facilities and agencies. The Company has exhibited at the American Corrections Association summer trade show in Nashville in August, 1996 and at the January, 1997 winter show. Rehabilitation Centers ---------------------- This market includes people in treatment for substance abuse in general hospitals, mental health centers and outpatient programs. The importance of this market relates to the high frequency of testing. For example, in many residence programs, patients are tested each time they leave the facility and each time they return. In outpatient programs, patients are generally tested on a weekly basis. The Company has received orders from a chain of 60 rehabilitation centers and is negotiating with others. The Company exhibited at the 1997 Employee Assistance Program convention in Chicago. International Markets --------------------- The Company has entered into a non-exclusive distribution agreement with CanAmm, Inc., a Canadian distributor, an exclusive distribution agreement with Nobel House., a U.S. distributor for Chile, and is negotiating for exclusive distribution for Pacific Rim countries with a Canadian-based distributor. Nobel House has committed to a minimum of 250,000 "two panel" tests for Chile, (to test parochial high school students) and is negotiating purchase agreements with relevant government agencies of other South America, Cental America and Caribbean countries. 24 In September, 1997, the Mexican Secretary of Health approved and registered the Rapid Drug Screen for sale in Mexico. In November, 1997, the Company entered into a 36 month distribution agreement with Laborotorios Devor, S.A. De C.V. of Mexico for a minimum of 603,000 Rapid Drug Screen kits. Also, in September, 1997, the Company entered into a one year distribution agreement with a Manila-based health product distributor. The agreement requires a minimum annual order of 100,000 units, and grants the distributor the exclusive right to market all of the Company's on-site substance abuse testing products in the Philippines. The Company shipped the first 2,000 units to the Philippine distributor in September, 1997. Clinical, Physicians and Hospitals ---------------------------------- The Company was approached and is negotiating an agreement with three major drug companies to distribute the Rapid Drug Screen under a joint label to the worldwide clinical market, which includes physicians' offices, hospitals and laboratories. The Company is actively pursuing this market now that the FDA has approved its drug test kit for sale to clinics, laboratories, physicians and hospitals. Consumer and Over-the-Counter ----------------------------- The Company's Rapid Drug Screen test is ideal for consumer use as it leads to immediate and accurate results at a price less than half that of available consumer kits. Since receiving its FDA 510(k) approval for clinical sales, the Company has been actively investigating the FDA requirements for this market. It has been approached by several store and pharmacy chains. The Company intends to market through distributors or to sell directly to larger retail chains. Additional Markets ------------------ As reported in the "New York Times," October 20, 1996, President Clinton has called for drug testing of all teenagers by state motor vehicle departments prior to granting driving licenses to them. In addition, certain low-income housing funded by the Department of Housing and Urban Development require testing of residents as a condition for continued occupancy. Finally, many high school and college sports programs are requiring random testing for drugs of abuse as a condition of student participation. Samples ------- The Company has found that one of its best marketing methods is the shipping of samples to potential customers which have expressed interest through responses to telemarketing, trade show demonstration, advertising or word of mouth. Although initially expensive, the Company has found that the best way to make sales is through demonstration and testing of the product's features. 25 Competition ----------- Competition to the Company's workplace drug test comes from tests by Roche Diagnostic Systems, Editek, Inc., Biosite Diagnostics, Drug Test Resources International and Drug Screening Systems, Inc. In the Roche test, the tester inverts the cup for ten seconds; and the testing chemistry for those tests is contained in the cup. Editek's Easy Screen involves six steps, including pipeting a drop of urine for each test, applying drops of enzyme conjugates, applying drops of wash buffer and wiping and applying drops of substrate before the test results can be read. Biosite's Triage product involves pipeting drops of urine and reagents. The Drug Test Resources test involves pipeting drops of urine. The Drug Screening Systems test involves pipeting drops of urine and reagents. In addition, Psychemedics introduced a test which requires the subject's lock of hair be sent to its laboratory for analysis, which takes five to fifteen days. The test is several times as expensive as the Company's. Its only advantage over the Company's test is that drug residues remain in the hair longer than in urine so that an employer or parent can gain a perspective of drug use over a longer period of time. (See "Risk Factors--Competition in the Drug Testing Market; Technological Obsolescence.") Principal Suppliers ------------------- The Company's major suppliers are as follows: IVEK Corporation, Springfield, VT, produces the equipment which is used in the manufacture of the test strips; Kinematic Automation, Twin Harte, CA, produces the cutting equipment for the test strip backing; Arpak Plastics, Inc., Plattsburgh, NY, supplies specimen cups and covers; Monarch Plastics, Mount Laurel, NY, prints the plastic test card. The Company has located additional sources of components from which it could purchase if necessary. The Company subcontracts the manufacture of the test strips and the assembly, packaging and fulfillment to COARC, Mellenville, NY, a medical device manufacturer registered with the Federal Drug Administration. This registration requires that COARC submit to periodic "audits" of its facilities to ensure compliance with FDA standards. The COARC facility contains 70,000 square feet of manufacturing, office and assembly space, including a white room specifically designated to the manufacture of the Company's products which has airborne particulate removal equipment and is temperature and humidity controlled. The Company has placed manufacturing equipment in COARC's premises for use by COARC personnel for the production of the Company's drug test kits. The Company places purchase orders with COARC for specific quantities of the test cards. It also pays COARC a per unit fee to assemble the test kits and to pick, pack and ship the kits to the Company's designated customers. Although the Company prefers COARC because it is located within 20 miles of its premises, because of its quality of production, because of its ability to respond quickly to orders and because of its experience in biomedical production, the Company has located additional subcontractors which could, if needed, perform substantially the same services as COARC at similar prices. On December 1, 1997, the Company announced that it intended to construct a 15,000 square foot manufacturing facility and headquarters in Columbia County, New York. The Empire State Development Corporation, an agency of New York State, has agreed in principle to provide financial assistance in the form of grants and below market interest rate loans as well as financial assistance in employee training. Columbia County has announced its intention to transfer 20 acres of land to the Company. Manufacturing is intended to be divided between COARC and the Company's facility. The Company believes that there is a likelihood that the facility will be built; but there is no guarantee that all steps leading to construction be completed. 26 Patents and Trademarks ---------------------- The Company has applied for registration of the following trademarks: "American Bio Medica" and "Rapid Drug Screen" in the United States and in foreign countries in which the Company's products are being marketed. The Company's trademark counsel, Edmund Jaskiewicz, Esq., Executive Vice-President, has opined that there are no similar marks and, as a consequence, the Company feels confident that such marks will be registered. Stan Cipkowski, President, has assigned to the Company for no consideration, his application for a utility and design patent in the United States and Canada on the drug screen kit as an entity. Mr. Jaskiewicz, as patent counsel, has opined that a search has revealed no competing patented products. However, there can no assurance that a patent will be granted or that, if granted, it will withstand challenge. The Company has applied for patents and trademarks in the European Common Market and Japan. (See "Risk Factors--Patents and Trademarks.") Government Regulations ---------------------- It is anticipated that the Company's business will benefit by Federal and state regulations relating to drug free workplaces, particularly the Drug Free Workplace Act of 1988. Clinical sales of the drug test kit which awaited final FDA approval of the tests for two of the NIDA drugs of abuse have commenced and sales are anticipated in due course. Drugs of Abuse Preliminary Screen ("ABM Prescreen") --------------------------------------------------- The second of the Company's products is a preliminary drug screen which is an easy to use, accurate and cost effective test paper for the drug testing market. This test will, if the results are negative, eliminate the possibility that the urine sample contains any of 20 drugs. The laboratory technician places a few drops of pretreated urine on a test paper and reads the results visually within a few minutes. Over 90% of tests submitted to laboratories yield negative results. Thus, the primary use for this product in laboratories is as a means of inexpensively and quickly eliminating, through negative results, over 90% of the testing required. A patent application is in process. Pre-clinical trials for the preliminary drug screen have been completed at two independent laboratories contracted by the Company. Pre-clinical tests include laboratory evaluation of product chemistry and observation of results of addict urine samples tested with the product over a period of time. These tests were conducted under the supervision of John Questal, principal of one of the contract laboratories and were reviewed by Dr. Henry Wells, the Company's Vice-President-Product Development. Based on the success of pre-clinical evaluations, independent clinical tests were conducted by American Medical Laboratories, Chantilly, Virginia. The Company expects to introduce its ABM Prescreen to the market as an inexpensive alternative to the products being offered by the current market leaders, Roche Diagnostic Systems and Biosite Diagnostics. The Company cannot predict when the ABM Prescreen will be introduced. Alcohol/Saliva Test ------------------- The Company has developed a technology that will detect alcohol levels in individuals through a quick, one step, on-site, saliva test that can be calibrated to specific sensitivity levels. Though at an advanced stage of development, additional laboratory work and clinical evaluations will need to be funded and completed prior to any patent applications or commercialization. These activities are expected to commence during fiscal 1998. Law enforcement and workplace testing would be the initial markets targeted by this Company. The Company is only aware of one, nonspecific to sensitivity levels, two step product now available. 27 KDMP (Keratin Derivative Modified Protein) ------------------------------------------ Keratin Derived Modified Protein ("KDMP") is a liquid keratin protein complex containing water soluble peptides and is rich in cysteine. It can be used as an active ingredient in varying concentrations in the formulations of quality skin, nail, and hair care products. Pre-clinical trials have been completed and the Company intends to license or sell the technology. Various patents relating to this technology have been assigned to the Company by Edmund Jaskiewicz, Executive Vice-President, as part of the consideration for his receipt of Common Shares (see "Certain Transactions"). The Company is currently manufacturing this product in small quantities for several companies which have requested samples for evaluation. The Company does not intend to devote any substantial economic or personnel resources to the development or marketing of this product for the near future. As a result, no revenue is expected to be derived from this product until a license is negotiated, of which there is no assurance. The Company's Plan of Operations -------------------------------- The Company intends to continue the establishment of a network of distributors which service customers in non-clinical workplace, correctional institution or drug rehabilitation areas, to market and sell its drug testing kits, to manufacture and ship such kits and, once manufacturing has reached the capacity needed to fulfill orders, to continue research and development on its additional biomedical products. The Company has entered into non-exclusive, non-clinical market distribution agreements with a number of companies, including national companies (such as Zee Services, Inc., a subsidiary of McKesson Corporaton), regional (such as Accuracy Testing Plus, Houston, Texas ) and local distributors (such as Western Pathology Consultants, Scottsbluff, Nebraska, Business Medical Services, Columbus, Ohio and Prima Healthcare Group, Springfield, Missouri) distributors. In addition, the Company, has entered into a non-exclusive distribution agreement for Canada with Ammcan, Inc., Toronto, Ontario. The Company has also entered into a distribution agreement with Quadrangle Research LLC, an affiliate of The American Association of Medical Review Officers, to market the Rapid Drug Screen to its membership of 16,000 physicians, health care providers and other drug testing professionals. These agreements permit the distributors to sell the products of other manufacturers and permit the Company to sell its test kits to other distributors within and outside the territory of each distributor. The agreements are cancelable by either the Company or the distributor upon 30 days' written notice. Each of the Company's domestic distributors has submitted purchase orders which the Company is in the process of fulfilling. The Company intends to enter into distribution agreements on an international basis as such distributors are identified. The Company has entered into an agreement with Noble House, Miami, Florida for representation of the Company in foreign countries, Noble House is negotiating sales on behalf of the Company in Colombia, Argentina, Panama, Costa Rica and Caribbean countries as well as in Puerto Rico. Noble House has secured a contract in Chile to sell, for a two year period, a yearly minimum of 250,000 kits which test for two drugs of abuse - cocaine and marijuana. In May, 1997, the Company entered into a purchase agreement with PhamaGen S.A., a subsidiary of Zeltia, S.A., a holding company traded on the Madrid Stock Exchange, for a minimum of 300,000 units per year of the Rapid Drug Screen. Assuming the minimum annual purchases are achieved, the purchase agreement is exclusive for Spain, Morocco, Portugal, France, Andorra and Italy. The Company has also entered into a distribution agreement for its drug test kits for the Philippines. 28 The Company has retained a national and five regional managers (in Fort Lauderdale, Nashville, Los Angeles, Baltimore and Milwaukee). These representatives call on accounts, such as corporations and correctional institutions directly and support the Company's worldwide distribution network. The Company intends to continue its extensive direct mail campaign and participation in trade shows such as the Employee Assistance Program held in Chicago, in November, 1996 and the American Correctional Show in January, 1997 in Indianapolis, Indiana. The Company demonstrated its products at 14 trade shows during fiscal 1997 and intends to participate in 24 trade shows in fiscal 1998. The Company's present manufacturing equipment and personnel designated by COARC is sufficient to produce 50,000 drug test kits each week, assuming one shift per day, five days a week. In the event the Company desires to increase production, its estimated costs for additional equipment are $40,000. The Company's Rapid Drug Screen Test was featured on "Today's Health," aired on CNBC in July, 1997. Government Regulation --------------------- The development, testing, manufacture and sale of the Company's laboratory test kits and certain additional proposed products are subject to regulation by United States and foreign regulatory agencies. Pursuant to the Federal Food, Drug, and Cosmetic Act, and the regulations promulgated thereunder, the FDA regulates the preclinical and clinical testing, manufacture, labeling, distribution and promotion of medical devices. If the Company fails to comply with applicable requirements it may be subject to fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, failure of the government to grant premarket clearance or premarket approval for devices, withdrawal of marketing clearances or approvals and criminal prosecution. The Company has funded and will continue to fund its marketing, sales and manufacturing activities from cash on hand. The Company does not now nor does it intend to enter into any agreements with affiliated parties for the purchase of technologies, the sale of product or the purchase of inventory. (See "Certain Transactions.") 29 MANAGEMENT Directors and Executive Officers. --------------------------------- The directors and executive officers of the Company and their respective ages, positions with the Company, along with certain biographical information are as set forth below. Name Age Position Since ---- --- ---------------------------------- ----- Stan Cipkowski 49 President and a Director 1986 Edmund Jaskiewicz 75 Chairman of the Board of Directors, Executive Vice-President and Secretary 1992 Jay Bendis 50 Vice-President-Marketing and a Director 1995 John F. Murray 53 Treasurer and a Director 1997 Henry J. Wells 65 Vice-President-Product Development 1995 Jasper R. Clay, Jr. 65 A Director 1997 Karen Russo 36 A Director 1997 Douglas Casterlin 50 Vice-President and General Manager 1997 Stan Cipkowski founded the predecessor of the Company in 1982 and has been an officer and director of the Company since its incorporation in April 1986. From 1982 to 1986, he was sole proprietor of American Micro Media, the predecessor, which was acquired by the Company. In addition, from 1983 to 1987, Mr. Cipkowski was a general partner of Florida Micro Media, a Fort Lauderdale-based marketer of educational software and was a principal shareholder and Chief Financial Officer of Southeast Communications Group, Inc., a publisher of direct response media. In 1982, he became a consultant to Dialogue Systems, Inc., a New York-based developer of training and communications materials, where he served as Vice President of Sales and Marketing. From 1977 to 1982, he was employed by Prentice-Hall Publishing Company, reaching the position of National Sales Manager. Prior to 1977 he was employed as an accountant for the New Seabury Corporation and as Mid-West Area Manager for the Howard Johnson Company. Edmund Jaskiewicz is a lawyer-engineer. He has practiced international patent and corporate law as a sole practitioner since 1963 and has served as Chairman of the Board of Directors since 1992. From 1953 to 1963 Mr. Jaskiewicz was associated with Toulmin and Toulmin, Esqs., Washington, D.C. From 1960 to 1962, he resided in Frankfurt, Germany managing that firm's local office. From 1952 to 1953 he was with the Patent Section of the Bureau of Ordinance of the Department of the Navy working on patent infringement and licensing matters. He received his J.D. in 1952 from George Washington University Law School and his B.S. in Engineering from the University of Connecticut in 1947. Jay Bendis has been an independent consultant to biomedical companies since 1990, specializing in commercializing new concept products in both domestic and international markets. From 1990 to 1992, he served as Vice-President of Sales and Marketing for Scientific Imaging Instruments. From 1985 to 1990, Mr. Bendis served as National Sales Manager of the XANAR Laser Corp., a division of Johnson & Johnson, where he directed its national sales force and developed its marketing strategy for integrating high power lasers into the hospital market. From 1979 to 1984, he was the Eastern Area Sales and Marketing Manager for the IVAC Corp., a division of Eli Lilly. Prior to 1979, Mr. Bendis held sales management positions with Xerox Corporation and A.M. International. Mr. Bendis earned his B.A. in Marketing/Management from Kent State University and is currently a member of the Edison BioTechnology Center Advisory Council for the State of Ohio. 30 Henry Wells, Ph.D. has served since 1990 as a contract chemist with the title of Vice-President-Science and Technology for New Horizons Diagnostics, Inc. where he adapts immuno-chemical technologies for detection of infectious diseases. From 1989 to 1990, he was director of production for Espro, Inc., a producer of in-vivo pesticides. From 1985 to 1989, Dr. Wells was Vice-President-Science and Technology for Keystone Diagnostics, Inc. From 1984 to 1985, he was Director of Research and Development for Hill-Wells Research Corporation, a developer of diagnostics products. From 1981 to 1984, he was Vice-President-Research and Development of Hematec Corporation. From 1979 to 1981, Dr. Wells was Director of Biochemistry for Helena Laboratories. From 1973 to 1979, he was Manager of Chemical Chemistry at Smith Kline Diagnostics. Dr. Wells earned his Ph.D. in Biochemistry from the University of Pittsburgh, his M.A. from University of Pennsylvania and his B.S. in Chemistry from the University of Pittsburgh. John F. Murray has served as Chief Financial Officer of Federal Supply, Inc., Pompano Beach, Florida since April, 1994. From 1988 to 1994, Mr. Murray served as Controller for Bio Therapeutics, Inc., Woodbridge, New Jersey. He also was Controller of Shortline, a group of transportation companies, from 1982 to 1988 and, from 1974 to 1982, of Kleber Tire & Rubber Corp. Mr. Murray was Director of Accounting for Western Union Telegraph Company from 1972 to 1974 and Senior Accountant for S.D. Leidesdorf & Co. (now Ernst & Young) from 1969 to 1992. Mr. Murray received his B.B.A. in Accounting from the Baruch School of the City University of New York in 1968 and became a Certified Public Accountant in the State of New York in 1974. Jasper R. Clay, Jr. served as a United States Parole Commissioner from 1984 to 1996 and from 1991 to 1996, as Vice-Chairman of the United States Parole Commission and Chairman of the National Appeals Board. He served as final authority for all decisions relating to parole, revocation, imposition or modification of parole conditions, or denial of discharge from supervision. From 1976 to 1984, Mr. Clay was State of Maryland Parole Commissioner and from 1969 to 1976, he was an Associate Member of the State of Maryland Board of Parole. Mr. Clay served as an Associate Member of the State of Maryland Board of Parole from 1969 to 1976, District Supervisor of the Baltimore City District Office in 1968, Staff Specialist-Training and Development for the Maryland Division of Parole and Probation from 1966 to 1968, Parole and Probation Agent I and II, Baltimore District, Office of the Maryland Division of Parole and Probation from 1958 to 1966 and as a Psychiatric Aide at the Spring Grove State Hospital from 1957 to 1958. He received an Honorable Discharge from the United States Army Infantry as a First Lieutenant in 1956. He is active in a number of professional organizations including the American Correctional Association (where he is presently a member of the Awards Committee), the Association of Paroling Authorities International (where he serves as an officer) and the National Council of Crime and Delinquency. Mr. Clay earned his B.A. in Psychology from Morgan State University in 1954 and attended the graduate school at Loyola College in areas such as Guidance, Counseling and Psychology. Karen Russo has, since 1995, acted as an independent consultant to training and consulting firms in topics including interpersonal and strategic selling, sales management, service excellence, teamwork and collaboration, management, leadership and prevention of workplace violence and sexual harassment. From 1989 to 1995, Ms. Russo was an account executive with The Forum Corporation, Los Angeles, California, responsible for business development and client service. She served as an Assistant Vice President at Bankers Trust Company from 1987 to 1989. Ms. Russo earned her M.B.A. from Columbia University in 1987 and her B.A. from University of Maryland in 1981. 31 Douglas Casterlin was General Manager of Coarc, Inc., the Company's product assembling, packaging and shipping contractor, from 1979 to 1997. In that capacity, he developed a contract manufacturing business involving plastic injection molding and clean room assembly and packaging of FDA - regulated medical products. He also negotiated a joint venture with a major German healthcare product manufacture to establish its United States operations and established a professional-format videocassette remanufacturing business serving the television broadcase industry. Mr. Casterlin was Workshop Director, Putnam Industries, Inc., from 1976 to 1979 and Production Manager, from 1973 to 1976, of Occupatics, Inc. From 1966 to 1970, Mr. Casterlin served as an Air Force Intelligence Officer and was honorably discharged as Sergeant. He studied Engineering at Lehigh University from 1965 to 1966 and received his B.A. degree in Psychology in 1973 from the State University of New York at New Paltz. Significant Employees --------------------- Lester H. Cohen (50 years old) was from 1996 to 1997 President of Drug Detective Systems, Inc. From 1994 to 1996, he was President and a founder of DrugTest Resources International. He sold his interest in that company to his partner. From 1992 to 1994, Mr. Cohen was Consultant to and Western Regional Manager of Drug Screening Systems, Inc. and from 1985 to 1994, he was President of Criminal Justice Resources, Inc. (formerly Emjay Associates Ltd.). From 1984 to 1985, Mr. Cohen served as Executive Director, American Probation and Parole Association. He was Chief of Planning Policy and Program Development, New York State Division of Probation from 1977 to 1984. Winn Pollock (62 years old), National Sales Manager, served as Regional Manager for Komputer Kingdom, Jacksonville, Florida from 1994 to 1996. From 1991 to 1994, he was Director of Sales and Marketing for ComputerLand of South Florida, Fort Lauderdale, Florida. He served as Director of the Education Division of Caber Systems, Fort Lauderdale, Florida from 1990 to 1991 and Vice-President of Sales for Florida Micro Media, Pompano Beach, Florida from 1982 to 1990. Mr. Pollock received his B.A. from Boston University in 1954. Scientific Advisory Board ------------------------- The Company has established a scientific advisory board of which Henry J. Wells, Ph.D., Vice-President, is chairperson. The members of the scientific advisory board are the following: Anthony G. Costantino, Ph.D., earned his degree in Pharmacy from Dukane University and a Ph.D. in Toxicology from the University of Maryland. He is a Board Certified Forensic Toxicologist and currently serves as Director of Clinical Toxicology at American Medical Laboratories in Chantilly, Virginia. Delmiro A. Vazquez, B.S., M.T., (ASCP), earned his Bachelor of Science degree from the University of Miami and a completed his Medical Technology Rotation in the American Society of Pathologists Approved Program at the University of Miami/Jackson Memorial Hospital. Mr. Vazquez holds postgraduate certificates in Nuclear Medicine (Broward General Hospital) and Biomedical Engineering (University of Miami). He is currently a member of the Forensic Toxicology Department at Columbia Cedars Medical Center. Kenneth Steiner, M.D., received his M.D. from the University of Tennessee and is Board Certified by the National Board of Medical Examiners. He is Board Certified by the American Board of Emergency Medicine and by the American Association of Medical Review Officers. Additionally, Dr. Steiner has been designated as an Federal Aviation Administration Medical Examiner. The Scientific Advisory Board will meet from time to time to consider the Company's present technology and proposed technology development. 32 Executive Compensation ----------------------- The following table sets forth certain information concerning compensation paid or accrued for fiscal 1996 by the Company to or for the benefit of the Company's President. No executive officer's total annual compensation for fiscal year 1996 or 1997 exceeded $100,000. As permitted under the rules of the Commission, no amounts are shown in the table below with respect to any perquisites paid to a named officer because the aggregate amount of such perquisites (e.g. auto allowance) did not exceed the lesser of (i) $50,000 or (ii) 10% of the total annual salary and bonus of a named officer. SUMMARY COMPENSATION TABLE Annual Compensation Long Term Compensation Awards Payouts - -------------------------------------------------------------------------------- (a) (b) (c) (d) (e) (f) (g) (h) (i) Name Other Res- All and Annual tricted Other Principal Compen- Stock Options LTIP Compen- Position Year Salary Bonus sation Awards SARs Payouts sation ($) ($) ($) (#) (#) ($) ($) - -------------------------------------------------------------------------------- Stan 1997 99,068 -0- -0- -0- 550,000 -0- 5,371 Cipkowski, 1996 44,000 -0- -0- -0- -0- -0- 5,232 President All of the Company's current directors will serve as directors until the next annual meeting of stockholders and until their respective successors have been duly elected and qualified, subject to their earlier removal or resignation. Each Director receives a fee of $500 for attendance at meetings of directors. The Board of Directors has established an options committee, an audit committee and a compensation committee. The Company's by-laws provide that the size of the Board of Directors shall be determined by the Board of Directors and shall be between three and nine members. There are presently five directors of the Company. All present members of the Board of Directors were elected by the stockholders in September, 1997, except Karen Russo, who was appointed in November, 1997, to fill a vacancy in the board. The Company's officers are elected by, and serve at the pleasure of, the Board of Directors. The Company has granted stock options to various Management employees and consultants (see "Certain Transactions" and Financial Statements-- Footnotes). Directors and Officers Liability Insurance ------------------------------------------ The Company currently does not have directors and officers liability insurance. It does not anticipate obtaining such coverage unless such insurance can be purchased at a reasonable cost to the Company, of which there can be no assurance. Officers and directors are indemnified by the Company in accordance with the provisions of its certificate of incorporation to the maximum extent permissible by law. 33 PRINCIPAL SHAREHOLDERS The following table sets forth information as to the number of Shares beneficially owned as of the date of the Prospectus by (i) each person who is deemed to be a beneficial owner of more than 5% of the outstanding Shares; (ii) each director; (iii) each executive officer; and (iv) all directors and executive officers as a group. A person is deemed to be a beneficial owner of any securities of which that person has the right to acquire beneficial ownership of such securities within sixty days. All Shares are owned both of record and beneficially. Percent Before Percent After Name of Number Conversion of Conversion of Beneficial Owner of Shares Preferred Shares Preferred Shares(1) ---------------- --------- ---------------- ------------------- Edmund Jaskiewicz 3,047,955 22.5% 21.5% 1730 M Street, NW Washington, DC 20036 Stan Cipkowski 2,742,748 20.3% 19.4% 102 Simons Road Ancramdale, NY 12503 Jay Bendis 645,999 4.8% 4.6% 71 Springcrest Drive Akron, Ohio 44333 Henry J. Wells, Ph.D. -0- -0-% -0-% 9421 Book Row Columbia, Maryland 21046 Jasper R. Clay, Jr. -0- -0-% -0-% 102 Simons Road Ancramdale, NY 12503 John F. Murray -0- -0-% -0-% 102 Simons Road Ancramdale, NY 12503 Karen Russo -0- -0-% -0-% 8675 Falmouth Avenue Playa del Rey, CA 90293 Douglas Casterlin -0- -0-% -0-% 65 Malloy Road Ghent, New York 12065 --------- ----- ------ All Officers and Directors as a Group (6 persons) 6,436,702 47.6% 45.5% - -------------------- 1. Assumes conversion of the total number of the "B" and "C" Preferred Shares into 301,429 Common Shares. 34 CERTAIN TRANSACTIONS In June, 1996, the Company adopted its 1996 Nonstatutory Stock Option Plan (the "1996 Plan"). Options to purchase 2,000,000 Shares are included in the 1996 Plan of which 1,500,000 were issued on June 28, 1996 as follows: Stan Cipkowski, 550,000 options; Edmund Jaskiewicz, 250,000 options; Jay Bendis, 300,000 options; Henry Wells, 150,000 options; Joel Pensley, Esq. 160,000 options, Michael Fugler, Esq. 40,000 options and two non-management employees, 25,000 options each. Each option entitles the holder to purchase one Common Share for $3.00 until June 27, 1999. Options were exercised as follows: Mr. Jaskiewicz, 126,583; Mr. Cipkowski, 246,750; Mr. Bendis, 146,009; Mr. Wells, 76,416, Mr. Fugler, 21,000 and Mr. Pensley, 81,433. On April 30, 1997, the Company issued 20,000 options to Jay Bendis, and an aggregate of 252,000 options to 15 non-management employees and consultants. On August 29, 1997, the Company issued 185,000 options as follows: 10,000 to Jasper Clay, Jr., a Director, 10,000 to John F. Murray, a Director, and 155,000 options to 5 non-management employees. On May 15, 1997, the Company entered into a three year employment agreement with Douglas Casterlin, Vice President and General manager. Under this agreement, Mr. Casterlin will receive an annual salary of $84,000 per year and a bonus equal to 1.0% of net sales of the Company and is entitled to receive health insurance, participate in stock option programs or similar benefit programs generally offered to management or employees. On that date, the Company issued 150,000 options to Mr. Casterlin exercisable at $3.00 per share for a period of three years. The Company does not now nor does it intend to enter into any agreements with affiliated parties for the purchase of technologies, the sale of product or the purchase of inventory. DESCRIPTION OF SECURITIES The authorized capital stock of the Company consists of 30,000,000 Common Shares $.01 par value and 5,000,000 Preferred Shares. Common Shares -------------- 13,793,541 Common Shares were issued as of October 31, 1997. Stockholders (i) have general ratable rights to dividends from funds legally available therefor, when, as and if declared by the Company's Board of Directors; (ii) are entitled to share ratably in all assets of American Bio Medica available for distribution to shareholders upon liquidation, dissolution or winding up of its affairs; (iii) do not have preemptive, subscription or conversion rights, nor are there any redemption or sinking fund provisions applicable thereto; and (iv) are entitled to one vote per Share on all matters on which shareholders may vote at all shareholder meetings. All Common Shares now outstanding are fully paid and nonassessable and all Common Shares to be sold will be fully paid and nonassessable when issued. Stockholders do not have cumulative voting rights. Thus, the holders of more than 50% of such outstanding Common Shares, voting for the election of Directors, can elect all of the Directors to be elected, if they so choose, and in such event, the holders of the remaining Common Shares will not be able to elect any of the Company's Directors. Market for Common Equity and Related Shareholder Matters -------------------------------------------------------- The table on the following page sets forth the range of high and low sales prices for the Common Shares on the NASD Electronic Bulletin Board for each quarter for the fiscal years 1996 and 1997 and the first and second quarters of 1998. There are approximately 2,350 holders of Common Shares. As of October 31, 1997, there were outstanding 13,793,541 Common Shares and 105.5 Preferred Shares each of which is convertible into Common Shares at $10,000 divided by lesser of $3.50 or 75% of the average closing price for the 20 trading days preceding conversion. There are 20 holders of the Preferred Shares which do not trade. The Common Shares have been accepted for trading on the Nasdaq SmallCap market (see Front Cover Page and "Risk Factors--No Assurance of Continued Public Market for Common Shares"). 35 High Low ---- --- Fiscal Year Ending April 30, 1998 Second Quarter $3.97 $2.69 First Quarter 4.13 3.00 Fiscal Year Ending April 30, 1997 Fourth Quarter 4.13 3.69 Third Quarter 4.75 2.75 Second Quarter 7.38 4.31 First Quarter 6.00 2.00 Fiscal Year Ended April 30, 1996 Fourth Quarter 2.00 0.75 Third Quarter 1.00 0.63 Second Quarter 0.63 0.38 First Quarter 0.38 0.13 Preferred Shares ---------------- The Board of Directors of the Company has the authority, without further action by the holders of the outstanding Common Shares, to issue Shares of Preferred Stock from time to time in one or more classes or series, to fix the number of Shares constituting any class or series and the stated value thereof, if different from the par value, and to fix the terms of any such series or class, including dividend rights, dividend rates, conversion or exchange rights, voting rights, rights and terms of redemption (including sinking fund provisions), the redemption price and the liquidation preference of such class or series. The Company has sold 60 "B" Convertible Preferred Shares and 45.5 "C" Preferred Shares at $10,000 per share for an aggregate of $1,055,500 less commissions of $93,500. The Series "B" and Series "C" Preferred Shares are convertible into Common Shares pursuant to the following formula: $10,000 divided by the lesser of $3.50 or 75% of the average of the daily closing bid prices for the 20 consecutive trading days ending on the trading day prior to the day on which Preferred Shares are converted to Common Shares. All accrued but unpaid dividends are payable in cash. Options ------- The Company has issued 500,000 "A" Options which are exercisable at $1.00 through March 14, 1999 and 500,000 "B" Options, which are exercisable at $2.00 through March 14, 1999. Until a registration statement relating to the Common Shares underlying such options is effective, certificates representing the shares into which these options are exercised will bear a legend restricting transfer in the absence of an effective registration with the Commission or an exemption therefrom. The Company has adopted the Fiscal 1996 Nonstatutory Stock Option Plan (the "1996 Plan") and the Fiscal 1998 Nonstatutory Stock Option Plan (the "1998 Plan"). 2,000,000 Common Shares were reserved under the 1996 Plan and 1,000,000 Common shares under the 1998 Plan. The Plan is administered by the Board of Directors. Stock options under either Plan ("Plan Options") may be granted to employees, officers, directors, consultants of the Company or any other parties who have made a significant contribution to the business and success of the Company. The exercise price of Plan Options under either Plan may be more, equal to or less than the then current market price of the Common Shares as deemed to be appropriate. 36 The Company has issued 1,957,000 options pursuant to the 1996 Nonstatutory Option Plan. All Nonstatutory Options are exercisable for a period of three years at $3.00 per share. (See "Certain Transactions.") As of the date of the Prospectus, 697,445 options had been exercised for an aggregate consideration of $2,092,335. Warrants -------- The Company has issued 24,712 Common Share purchase warrants. The Warrants are exercisable at $3.00 per share until January 21, 1999. Transfer, Option and Warrant Agent ---------------------------------- The transfer agent for the Common Shares, Options and Warrants is United Stock Transfer, Englewood, Colorado. Plan of Distribution -------------------- Common Shares acquired through conversion of the Preferred Shares may be sold from time to time by the holders thereof or their pledgees or donees. Such sales may be made in the over-the counter market or in negotiated transactions, at prices and on terms then prevailing or at prices related to the then current market price or at negotiated prices. The Common Shares may be sold by means of (a) purchases by a broker or dealer as principal and resale by such broker or dealer for its account pursuant to the Prospectus and/or (b) ordinary brokerage transactions and transactions in which the broker solicits purchasers. In effecting sales, brokers or dealers engaged by holders may arrange for other brokers or dealers to participate. Brokers or dealers will receive commissions or discounts from the holders in amounts to be negotiated immediately prior to the sale which amounts will not be greater than that normally paid in connection with ordinary trading transactions. The Company will not receive any proceeds from the sale of securities by holder(s) of Preferred Shares who convert their shares. Common Shares may be sold from time to time by selling securityholders or their pledgees or donees. Shares Eligible for Future Sale ------------------------------- In general, under Rule 144, as currently in effect, a person (or persons whose Shares are aggregated), including a person who may be deemed to be an "affiliate" of the Company as that term is defined under the Securities Act, will be entitled to sell within any three-month period a number of Shares beneficially owned for at least one year that does not exceed the greater of (i) one (1%) percent of the then outstanding Common Shares, or (ii) the average weekly trading volume in the Shares during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to certain requirements as to the manner of sale, notice and the availability of current public information about the Company. 64,367 Common Shares may be sold pursuant to Rule 144 in each three month period. However, a person who is not deemed to have been an affiliate of the Company during the 90 days preceding a sale by such person, and who has beneficially owned Common Shares for at least three (3) years, may sell such Shares without regard to the volume, manner of sale or notice requirements of Rule 144. 37 The Company cannot predict the effect, if any, that sales of Common Shares pursuant to Rule 144 or otherwise, or the availability of such shares for sale, will have on the market price prevailing from time to time. Nevertheless, sales by selling stockholders of substantial numbers of Common Shares in the public market could adversely affect prevailing market prices for the Common Shares. In addition, the availability for sale of a substantial number of Shares acquired through the exercise of options under the 1996 or 1998 Plan could adversely affect prevailing market prices for the Shares. (See "Risk Factors--Restricted Resale of Securities.") Commission Position on Indemnification for Securities Act Liabilities --------------------------------------------------------------------- Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the Company's certificate of incorporation, by-laws or provisions of the New York Business Corporation Law, the Company has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. LITIGATION In February, 1994, Robert Friedenberg, former stockholder of two medical technology companies, MDI and Gendex, acquired by the Company, filed suit in the name of the two subsidiaries to have the Share Exchange Agreement under which those companies were acquired rescinded on the grounds of breach of contract. The Company filed a third party claim in July, 1994, against Dr. Friedenberg, seeking enforcement of the Share Exchange Agreement. In November, 1995, after a bifurcated trial, the court dismissed Dr. Friedenberg's lawsuit brought in the name of MDI and Gendex) and allowed the Company's third party claim to proceed to trial. In September, 1996, Dr. Friedenberg died. Trial on the third party claim was decided by a jury on May 5, 1997. The verdict determined that Dr. Friedenberg (represented by his estate) breached various contracts by failing to deliver certain technology to the Company. The jury also found in favor of the Company on two of the three fraud claims against Dr. Friedenberg and awarded the Company approximately $350,000 in damages. The trial judge, who is bound by the jury verdict against Friedenberg, will decide Dr. Friedenberg's Estate's pending claim to shares of Company common stock which the Company refused to issue to Dr. Friedenberg. In June, 1995, the Company filed a lawsuit against Jackson Morris, Esq. for the breach of attorney-client relationship and of his fiduciary duty to the Company for subsequently providing legal services to Dr. Friedenberg in his dispute with the Company. The Company's lawsuit demands damages in the amount of $1,000,000. Mr. Morris has counterclaimed for Common Shares. The court has set a trial date of September 14, 1998. No other legal proceedings are pending to which the Company or any of its property is subject, nor to the knowledge of the Company are any other legal proceedings threatened. 38 LEGAL MATTERS The validity of the securities offered by the Prospectus is being passed upon for the Company by Joel Pensley, Esq., 276 Fifth Avenue, New York, New York 10023. Joel Pensley is the owner of 50,000 Common Shares and 93,567 Options issued under the 1996 Plan. EXPERTS The audited consolidated financial statements of the Company as of April 30, 1997 included in the Prospectus and elsewhere in the Registration Statement have been audited by Thomas P. Monahan, CPA, an independent public accountant, as indicated in his report with respect thereto, and are included herein in reliance upon the authority of Thomas P. Monahan, CPA as an expert in accounting and auditing and in giving said reports. On August 29, 1997, the Board of Directors of the Registrant appointed the firm of Richard A. Eisner & Co., LLP as independent auditors for the fiscal year ending April 30, 1998. There were no disagreements on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedures in connection with audits of the Company's financial statements for the fiscal years ended April 30, 1995, 1996 and 1997 which disagreements, if not resolved to their satisfaction, would have caused Mr. Monahan to issue an adverse opinion or a disclaimer of opinion, or were qualified or modified as to uncertainty, audit scope or accounting principles. ADDITIONAL INFORMATION The Company has filed with the Commission, the Registration Statement on Form SB-2 under the Securities Act with respect to the securities offered hereby. The Prospectus, which constitutes part of the Registration Statement, does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and the securities offered hereby, reference is made to the Registration Statement and the exhibits filed therewith. Statements contained in the Prospectus as to the contents of any contract or any other document referred to are not necessarily complete. In each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement or otherwise filed with the Commission, each such statement being qualified in all respects by such reference. The Registration Statement and the exhibits and schedules thereto may be inspected without charge at the principal offices of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and copies of such material can be obtained from the Public Reference Section of the Commission at prescribed rates. The Registration Statement and exhibits may also be inspected a the Commission's regional offices at 500 West Madison Street, Suite 1400, Chicago, Illinois and at 7 World Trade Center, Suite 1300, New York, New York 10048. The Commission also maintains a World Wide Web site on the Internet that contains copies of reports, proxy and information statements and other information regarding registrants that file electronically on the Commission's Electronic Data Gathering Analysis and Retrieval system ("EDGAR"), including the Company, at http://www.sec.gov. The Company's fiscal year ends on April 30. The Company distributes to its stockholders annual reports containing audited financial statements with a report therein by independent public accountants after the end of each fiscal year. In addition, the Company furnishes to its stockholders quarterly reports for the first three quarters of each fiscal year containing unaudited financial statements and other information after the end of each fiscal quarter, upon written request to the Secretary of the Company or otherwise as required by law. 39 THOMAS P. MONAHAN CERTIFIED PUBLIC ACCOUNTANT 208 LEXINGTON AVENUE PATERSON, NEW JERSEY 07502 (201) 790-8775 To The Board of Directors and Shareholders of American Bio Medica Corporation I have audited the accompanying balance sheet of American Bio Medica Corporation as of April 30, 1997 and the related statements of operations, cash flows and shareholders' equity for the years ended April 30, 1996 and 1997. These financial statements are the responsibility of the Company's Management. My responsibility is to express an opinion on these financial statements based on my audit. I conducted my audit in accordance with generally accepted auditing standards. Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles and significant estimates made by Management, as well as evaluating the overall financial statement presentation. I believe that my audit provides a reasonable basis for my opinion. In my opinion, the financial statements referred to above present fairly, in all material respects, the financial position of American Bio Medica Corporation as of April 30, 1997 and the results of its operations, shareholders equity and cash flows for the years ended April 30, 1996 and 1997 in conformity with generally accepted accounting principles. /s/Thomas P. Monahan Thomas P. Monahan, CPA May 28, 1997 Paterson, New Jersey F-1 AMERICAN BIO MEDICA CORPORATION BALANCE SHEET October 31, April 30, 1997 1997 Unaudited -------- ---------- Assets Current assets Cash and Marketable securities $1,762,506 $1,362,238 Marketable securities, available for sale 1,053,000 1,076,860 Accounts receivable 337,759 1,186,948 Loan receivable 102,250 104,500 Inventory 668,723 981,311 Prepaid expenses 4,425 28,424 --------- -------- Current assets 3,928,663 4,740,281 Capital assets-net 110,834 135,205 Other assets License rights 38,470 4,792 Patent-costs 28,783 31,593 ------- ------ Total other assets 67,253 36,385 ------- ------ Total assets $4,106,750 $4,911,871 ========== ========== Liabilities and Stockholders' Equity Current liabilities Accounts payable and accrued expenses $380,155 $168,691 -------- -------- Total current liabilities 380,155 168,691 Capital stock Common Shares - authorized 30,000,000 common shares, par value $.01 each, at April 30, 1997 and October 31, 1997, the shares outstanding were 13,379,507 and 13,793,541 respectively. 133,795 137,935 Preferred shares - authorized 5,000,000 preferred shares, par value $.01 each, at April 30, 1997 and October 31, 1997, the number of shares outstanding was 90 and 105.5 respectively. 1 2 Additional paid in capital 6,499,791 7,475,250 Retained Earnings (2,906,992) (2,870,007) ----------- ----------- Total stockholders' equity 3,726,595 4,743,180 ---------- ---------- Total liabilities and stockholders' equity $4,106,750 $4,911,871 ========== ========== See accompanying notes to financial statements. F-2 AMERICAN BIO MEDICA CORPORATION STATEMENT OF OPERATIONS
For the six For the six For the year For the year months ended months ended ended ended October 31, October 31, April 30, April 30, 1996 1997 1996 1997 Unaudited Unaudited --------- --------- - ----------- ----------- Income 158,105 $610,876 $ 48,587 $1,273,724 Less cost of goods sold 96,444 259,862 25,778 501,338 ------- ------- - --------- --------- Gross profit 61,661 351,014 22,809 772,386 Operations: General and administrative 518,826 867,903 336,113 790,628 Depreciation and amortization 77,600 96,134 23,000 48,673 Research and development 358,844 74,978 66,750 -------- ------ - ------- ------- Total expense 955,270 1,039,015 425,863 839,301 Loss before other income and expenses (893,609) (688,001) (403,054) (66,915) Other income and expenses Retirement of debt (Note 10) 126,500 126,500 Interest income 356 56,180 1,336 103,900 Interest expense (103,205) --------- ------- - ------- ------- Total other income and expenses (102,849) 182,680 127,836 103,900 --------- ------- - ------- ------- Net Profit (Loss) from operations $(996,458) $(505,321) $(275,218) $36,985 ========== ========== ========== ======= Net income (loss) per share $(.08) $(.04) $(.02) $(.00) ====== ====== ====== ====== Number of shares outstanding 12,528,266 12,728,180 12,450,860 13,718,265 ========== ========== ========== ==========
See accompanying notes to financial statements. F-3 AMERICAN BIO MEDICA CORPORATION STATEMENT OF OPERATIONS For the three For the three months ended months ended October 31, October 31, 1996 1997 (Unaudited) (Unaudited) ------------ ------------ Revenue $ 21,143 $ 456,807 Less cost of goods sold 19,552 144,556 ------------ ------------ Gross profit 1,591 312,251 Operations: General and administrative 161,166 401,073 Depreciation and amortization 3,600 24,474 Research an development 9,492 ------- ------- Total expenses 174,258 425,547 Income (loss) from operations (172,667) (113,296) Other income and expenses Interest income 939 28,293 ------------ ------------ Total other income and expenses 939 28,293 ------------ ------------ Net Profit (Loss) from operations $ (171,728) $ (85,003) ============ ============ Net income (loss) per share $(.01) $(.01) ============ ============ Weighted number of shares outstanding 12,450,860 13,718,265 ========== ========== See accompanying notes to financial statements AMERICAN BIO MEDICA CORPORATION STATEMENT OF CASH FLOWS
For the six For the six For the year For the year months ended months ended ended ended October 31, October 31, April 30, April 30, 1996 1997 1996 1997 Unaudited Unaudited -------- -------- - ----------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net profit (loss) $(996,458) $(505,321) $(275,218) $36,985 Amortization and depreciation 77,600 96,134 23,000 48,673 Consulting fees 306,250 Compensation agreement 125,000 50,000 Retirement of debt (Note 9) (126,500) 126,500 ---------- --------- - -------- ------- (487,608) (535,687) (75,718) 85,658 Adjustments to reconcile net income to net cash Loan receivable (102,250) (2,250) Accounts receivable 38,079 (303,259) (13,714) (849,189) Inventory 5,250 (646,422) (28,741) (312,588) Prepaid expenses 15,089 (4,425) ( 23,999) Accounts payable (30,828) 346,907 (5,421) (211,464) --------- ----------- - --------- ----------- TOTAL CASH FLOWS FROM OPERATIONS (460,018) (1,245,136) (123,594) (1,313,832) CASH FLOWS FROM FINANCING ACTIVITIES Convertible debenture 693,000 (132,000) (132,000) 949,600 Notes payable (89,289) Sale of stock 150,000 3,877,686 1,481,903 30,000 Issuance of stock for services 61,006 -------- ---------- - ---------- --------- TOTAL CASH FLOWS FROM FINANCING ACTIVITIES 814,717 3,745,686 1,349,903 979,600 CASH FLOWS FROM INVESTING ACTIVITIES Investment short term (1,053,000) (1,411,866) (23,860) Patent costs (7,783) (2,000) (2,810) Capital assets (114,793) (61,496) (39,366) -------- ----------- - ----------- -------- TOTAL CASH FLOWS FROM INVESTING ACTIVITIES (1,175,576) (1,475,362) (66,036) NET INCREASE (DECREASE) IN CASH 354,699 1,324,974 (249,053) (400,268) CASH BALANCE BEGINNING OF PERIOD 82,833 437,532 437,532) 1,762,506 -------- ---------- - ----------- ---------- CASH BALANCE END OF PERIOD $437,532 $1,762,506 $188,479 $1,362,238 ======== ========== ========== ==========
See accompanying notes to financial statements. F-4 AMERICAN BIO MEDICA CORPORATION STATEMENT OF SHAREHOLDERS' EQUITY
Additional Common Common Preferred Preferred Paid in Retained Date Stock Stock Shares Shares Capital Earnings Total ---- ------- ------ --------- --------- -------- - -------- -------- 04-30-1994 11,238,174 $112,382 $ 726,294 $(1,099,885) $(261,209) 10-18-1995(1) (3,000,000) (30,000) 30,000 04-30-1995 (305,328) (305,328) ----------- -------- ------- -------- - ----------- --------- 04-30-1995 8,238,174 82,382 756,294 (1,405,213) (566,537) 11-03-1995 500,000 5,000 120,000 125,000 04-30-1996(2) 1,700,002 17,000 1,258,000 1,275,000 04-30-1996(3) 25,000 250 24,750 25,000 04-30-1996(4) 250,000 2,500 122,500 125,000 04-30-1996(5) 489,181 4,892 56,083 60,975 04-30-1996(6) 125,000 1,250 61,250 62,500 04-30-1996(7) 100,000 1,000 64,000 65,000 04-30-1996(8) 550,000 5,500 173,250 178,750 04-30-1996 Net loss (996,458) (996,458) ---------- -------- -------- ------- - ------------ --------- 04-30-1996 11,977,357 $119,774 $2,636,127 $(2,401,671) $354,230 06-04-1996(2) 11,333 113 8,387 8,500 06-04-1996(9) 25,000 250 24,750 25,000 07-31-1996(2) 176,000 1,760 130,240 132,000 07-31-1996(2) 13,333 133 9,867 10,000 07-31-1996(6) 100,000 1,000 49,000 50,000 07-31-1996(9) 32,000 320 31,680 32,000 07-31-1996(10 100,000 1,000 99,000 100,000 09-09-1996(9) 18,000 180 17,820 18,000 09-23-1996(11) $ 1 $ 1 1,409,999 1,410,000 01-31-1996(12) 697,445 6,975 2,085,211 2,092,186 04-30-1997(13) 229,039 2,290 (2,290) -0- 04-30-1997 Net loss (505,321) (505,321) ---------- -------- ------ ------ ----------- - ------------ ----------- 04-30-1997 13,379,507 $133,795 $ 1 $ 1 $6,499,791 $(2,906,992) $3,726,595 UNAUDITED 07-31-1997(13) 301,120 3,011 (3,011) 10-31-1997 (1) (1) 1 10-31-1997(12) 10,000 100 29,900 30,000 10-31-1997(13) 102,914 1,029 (1,029) 10-31-1997(14) 105.5 2 949,598 949,600 10-31-1997 Net profit 36,985 36,985 ---------- ------- ------ ------ ----------- - ------------ ---------- 10-31-1997 13,793,541 $137,935 $105.5 $ 2 $7,475,250 $(2,870,007) $4,743,180 ========== ======= ====== ====== =========== ============ ==========
(1) Return of common shares by Edmund Jaskiewicz. (2) Common shares issued for conversion of debt. (3) Common shares issued pursuant to sale of 25,000 Units. (4) Common shares issued for Warrant conversion at $.50. (5) Common shares issued in consideration for services under Regulation D at $.125 per share. (6) Common shares issued pursuant to Rule 504 at $.50 per share. (7) Common shares issued under Rule 504 at $.65 per share. (8) Common shares issued pursuant Regulation D at $.325 per share. (9) Common shares issued upon exercise of "B" Warrants. (10) Common shares issued upon exercise of "A" Warrants. (11) Shares of preferred stock for $1,500,000 less $90,000 in offering expense. (12) Common shares issued upon exercise of warrants. (13) Conversion of convertible preferred shares into common shares. (14) Sale of 60 Convertible "B" Preferred Shares and 45.5 Convertible "C" Preferred Shares. See accompanying notes to financial statements. F-5 AMERICAN BIO MEDICA CORPORATION NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED APRIL 30, 1997 AND THE SIX MONTHS ENDED OCTOBER 31, 1997 (UNAUDITED) Note 1 - Organization of the Company and Issuance of Common Shares a. Creation of the Company American Bio Medica Corporation (the "Company") was formed under the laws of the State of New York on April 10, 1986 under the name, American Micro Media, Inc. The authorized capital was 200 common shares without par value. On May 20, 1986, the Company amended its certificate of incorporation to increase the number of authorized common shares to 20,000,000 shares of $.01 par value per share. On September 12, 1986, the Company amended its certificate of incorporation to remove preemptive rights. On September 28, 1992, the Company amended its certificate of incorporation to increase the aggregate number of authorized common shares to 30,000,000 shares of $.01 par value per share ("Common Shares") and to change its name to American Bio Medica Corporation. In October, 1996, the Company amended its certificate of incorporation authorizing the issuance of 5,000,000 Preferred Shares, ("Preferred Shares"), $.01 par value each. b. Description of the Company From inception until 1991, the Company was involved in marketing educational books and software to schools and municipal libraries and audio-visual educational packages to corporations throughout the United States. In 1991, the Company reduced its concentration on this market because of competition, increasing costs of doing business and slow collections from municipalities and sought new technologies in emerging medical markets. The Company has, however, continued to sell audiovisual packages to libraries. The Company is currently in the business of acquiring, developing and marketing biomedical technologies and products. The Company is currently manufacturing and selling tests for screening drugs of abuse, a workplace screening test and a preliminary test for use by laboratories and owns additional technologies which it plans to develop and market in the future. The Company was considered to be a development stage company with little operating history subsequent to the commencement of development of its newly acquired biomedical technologies which are, at present, its core business. These activities have been funded through the sale of convertible debentures which were subsequently converted to Common Shares, the exercise of warrants and options and the sale of convertible preferred shares. The Company is in full scale commercial production of its drug test kits and has what management maintains are adequate resources to fund its operations. c. Issuance of Securities On November 5, 1995, the Company entered into a three year employment agreement with Jay Bendis, Vice-President-Marketing. Pursuant to this agreement, the Company has issued 500,000 Common Shares. 400,000 of such shares are subject to vesting provisions. As of April 30, 1996, the Company had borrowed an aggregate of $2,121,000 on a convertible debenture basis, the principal amount of each debentures convertible at the option of the holder into Common Shares at $.75 per share. As of April 30, 1996, the principal amount of all the convertible debentures had been converted into an aggregate of 1,700,002 Common Shares. F-6 AMERICAN BIO MEDICA CORPORATION NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED APRIL 30, 1997 AND THE SIX MONTHS ENDED OCTOBER 31, 1997 (UNAUDITED) As of April 30, 1996, the Company sold, through a private placement, 25,000 Units consisting of 25,000 Common Shares, 500,000 "A" Options and 50,000 "B" Options for an aggregate consideration of $25,000. As of April 30, 1996, Unit holders exercised 250,000 "A" Warrants into 250,000 Common Shares at an exercise price of $.50, for an aggregate of $125,000. As of April 30, 1996, the Company issued 489,181 Common Shares in consideration for past services to five individuals in the amount of $60,975 or an average consideration of $.125 per share. As of April 30, 1996, the Company issued to OTC Communications 100,000 Common Shares under Rule 504 ("Rule 504") to the Securities Act of 1933, as amended, (the "Securities Act") as consideration for financial consulting services rendered per contract at a value of $.65 per share. As of April 30, 1996, the Company issued to Riverside Consulting Group, Inc. 25,000 Common Shares under Rule 504 in consideration for financial consulting services of $12,500 at $.50 per share. As of April 30, 1996, the Company issued 100,000 Common Shares to two persons at $.50 per share in consideration for financial consulting services. As of April 30, 1996, the Company approved the issuance to OTC Communications 500,000 Common Shares under Regulation D to the Securities Act as consideration for financial consulting services rendered per contract and 50,000 Common Shares for expenses at a value of $178,750 or $.325 per share. On June 4, 1996, the Company sold $8,500 of convertible debentures and converted them into 11,333 Common Shares. On June 4, 1996, the Company sold 25,000 Common Shares at $1.00 through the exercise of 25,000 "A" Warrants for an aggregate consideration of $25,000. As of July 31, 1996, the Company had converted the balance of the outstanding convertible debentures in the amount of $132,000 into 176,000 Common Shares at $.75 per share. As of July 31, 1996, the Company sold an additional convertible debenture in the amount of $10,000 which was converted into 13,333 Common Shares at $.75 per share. As of July 31, 1996, the Company sold 100,000 Common Shares at $1.00 through the exercise of 100,000 "A" Warrants for an aggregate consideration of $100,000. As of July 31, 1996, the Company sold 32,000 Common Shares at $1.00 per share through the exercise of 32,000 "B" Warrants for an aggregate consideration of $32,000. As of July 31, 1996, the Company issued 100,000 Common Shares under Rule 504 of the Securities Act of 1933, as amended at $.50 per share for an aggregate consideration of $50,000. F-7 AMERICAN BIO MEDICA CORPORATION NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED APRIL 30, 1997 AND THE SIX MONTHS ENDED OCTOBER 31, 1997 (UNAUDITED) As of September 30, 1996, the Company sold 18,000 Common Shares at $1.00 per share through the exercise of 18,000 "B" Warrants for an aggregate consideration of $18,000. As of April 30, 1997, 697,445 nonstatutory options were exercised for an aggregate consideration of $2,092,186. As of October 31, 1997, the remaining 90 "A" Preferred Shares had been converted into 404,034 Common Shares. As of October 31, 1997, the Company sold 10,000 Common Shares through the exercise of 10,000 options for an aggregate consideration of $30,000 or $3.00 per share. The Company has sold 60 "B" Preferred Shares and 45.5 "C" Preferred Shares at $10,000 per share for an aggregate of $1,055,500 less commissions of $93,500. The "B " and "C" Preferred Shares are convertible into Common Shares pursuant to the following formula: $10,000 divided by the lesser of $3.50 or 75% of the average of the daily closing bid prices for the 20 consecutive trading days ending on the trading day prior to the day on which Preferred Shares are converted to Common Shares. All accrued but unpaid dividends are payable in cash. Note 2 - Summary of Significant Accounting Policies a. Basis of Financial Statement Presentation The financial statements presented consist of the balance sheet dated April 30, 1997 and the unaudited balance sheet dated October 31, 1997 and the related statements of operations, retained earnings and cash flows for the years ended April 30, 1996 and 1997 and the related unaudited statements of operations, retained earnings and cash flows for the six months and three months ended October 31, 1996 and 1997. b. Earnings per Share Primary earnings per share are based on the weighted average number of common and dilutive common equivalent shares outstanding at April 30, 1996 and 1997 and the six months and three months ended October 31, 1996 and 1997. The weighted average shares for computing primary earnings per share were 12,528,266, 12,728,180 12,450,860 and 13,718,265 respectively. c. Revenue Recognition Revenue is recognized when merchandise is shipped. d. Organization Expense The cost of organizing the Company was charged to operations on a straight line basis over a five year period. F-8 AMERICAN BIO MEDICA CORPORATION NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED APRIL 30, 1997 AND THE SIX MONTHS ENDED OCTOBER 31, 1997 (UNAUDITED) e. Cash and Cash Equivalents Cash and cash equivalents consist of cash and highly liquid investments with a maturity of three months or less. Excess cash balances are primarily invested in U.S. treasury bills with lesser amounts invested in high quality commercial paper and time deposits. f. Research and Development Expenses Research and development costs are charged to operations when incurred. g. Patents and License Agreements Certain costs incurred to acquire exclusive licenses of patentable technology are capitalized and amortized over a five year period or the term of the license, whichever is shorter. The portion of these amounts determined to be attributable to patents is amortized over their remaining lives and the remainder is amortized over the estimated period of benefit but not more than 40 years. h. Concentration of Credit Risk The Company sells its products primarily to United States distributors (which resell to end-users in the United States and abroad) and to end-users in the United States. Credit is extended based on an evaluation of the customer's financial condition, and generally collateral is not required. Credit losses have been minimal and within Management's expectations. The Company invests its excess cash in debt instruments of financial institutions and corporations with strong credit ratings. The Company has established guidelines relative to diversification and maturities that maintain safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates. The Company has not experienced any realized losses on its marketable securities. i. Stock Options The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its stock options. Under APB 25, because the exercise price of the Company's employee stock options is not less than the fair value of the underlying stock on the date of grant, no compensation was recorded j. Unaudited Financial Information In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting only of normal recurring items) necessary to present fairly the financial position of the Company as of October 31, 1996 and 1997. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the "Commission"). The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. F-9 AMERICAN BIO MEDICA CORPORATION NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED APRIL 30, 1997 AND THE SIX MONTHS ENDED OCTOBER 31, 1997 (UNAUDITED) Note 3 - Marketable Securities, Available for Sale The Company has adopted Financial Accounting Standards Board ("FASB") Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities", which requires that investments in equity securities that have readily determinable fair values and investments in debt securities be classified in three categories: held-to-maturity, trading and available-for-sale. Based on the nature of the assets held by the Company and Management's investment strategy, the Company's investments have been classified as available-for-sale. Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Securities classified as available-for-sale are carried at estimated fair value, as determined by quoted market prices, with unrealized gains and losses, net of tax, reported in a separate component of stockholders' equity. At October 31, 1997, the Company had no investments that were classified as trading or held-to-maturity as defined by the Statement. Note 4 - Balance Sheet Information a. Inventory Inventory has been recorded at the lower of cost or market under the first-in-first-out method. Inventory components were as follows: April 31, 1997 October 31, 1997 -------------- ---------------- Books held for resale $ 43,527 $ 30,934 Workplace drug screening tests: Raw materials 292,456 375,654 Work in process 183,500 210,052 Finished Goods 149,239 364,671 ------- ------- Total workplace drug screening tests: 625,195 $ 950,377 ------- ------- Total inventory $ 668,722 $ 981,311 ========= ========= b. Property, equipment and leasehold improvements consist of the following: April 30, 1997 October 31, 1997 -------------- ---------------- Office equipment $ 45,702 $ 52,578 Manufacturing and warehouse equipment 87,666 118,478 ---------- ---------- Total 133,368 171,056 Less accumulated depreciation (22,534) ( 35,851) ---------- ---------- Total $ 110,834 $ 135,205 ========== ========== F-10 AMERICAN BIO MEDICA CORPORATION NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED APRIL 30, 1997 AND THE SIX MONTHS ENDED OCTOBER 31, 1997 (UNAUDITED) c. Cash, Cash Equivalents and Marketable Securities, Available for Sale The following is a summary of cash, cash equivalents and available-for-sale securities by balance sheet classification at April 30, 1997: Estimated Gross Gross Fair Unrealized Unrealized Market Cost Gains Losses Value ---- ----- ------ ------ Cash $ 99,039 $-0- $-0- $ 99,039 Certificates of deposit 90 days and less 1,663,467 -0- -0- 1,663,467 ----------- ---- ---- ----------- Total cash and cash equivalents $ 1,762,506 $-0- $-0- $ 1,762,506 =========== ==== ==== =========== Marketable Securities Due in one year or less-Certificates of Deposit $1,053,000 $-0- $-0- $ 1,053,000 ========== ==== ==== =========== The following is a summary of cash, cash equivalents and available-for-sale securities by balance sheet classification at October 31, 1997: Estimated Gross Gross Fair Unrealized Unrealized Market Cost Gains Losses Value --------- ----------- ----------- ----------- Cash $ 99,640 $-0- $-0- $ 99,640 Certificates of deposit 90 days and less 1,262,598 -0- -0- 1,262,598 ----------- ------------ ----------- ----------- Total cash and cash equivalents $ 1,362,238 $-0- $-0- $ 1,362,238 =========== ============= =========== =========== Marketable Securities Due in one year or less Certificates of Deposit $ 1,076,860 $-0- $-0- $ 1,076,860 =========== ============= =========== =========== F-11 AMERICAN BIO MEDICA CORPORATION NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED APRIL 30, 1997 AND THE SIX MONTHS ENDED OCTOBER 31, 1997 (UNAUDITED) Note 5 - Related Party Transaction a. Nonstatutory Option Plans In June, 1996, the Company adopted its Fiscal 1996 Nonstatutory Stock Option Plan (the "1996 Plan"). Options to purchase 2,000,000 Common Shares are included in the 1996 Plan. In June, 1996, 1,500,000 were issued. In April, 1997, the Company issued an aggregate of 272,000 options. On August 29, 1997, the Company issued 185,000 options. In June, 1997, the Company adopted the Fiscal 1998 Nonstatutory Stock Option Plan (the "1998 Plan"). Options to purchase 1,000,000 Common Shares are included in the 1998 Plan. In June, 1997, 150,000 options were issued under the 1998 Plan. All Nonstatutory Options which the Company has issued are exercisable for a period of three years at $3.00 per share. b. Employment Agreement with Jay Bendis On November 3, 1995, the Company entered into a three year employment agreement with Jay Bendis, Vice-President-Marketing and Sales. Under this agreement, Mr. Bendis received an annual salary of $24,000 per year until April 30, 1996 and $48,000 per year until the Company generated an aggregate of $500,000 gross revenues from the sale of biomedical products. Mr. Bendis' salary is presently $60,000 per year. In addition to his salary, Mr. Bendis will receive a bonus equal to 2% of the gross revenues of the Company in excess of $1,000,000 per fiscal year until such annual revenues reach $3,000,000, 1.5% of gross revenues between $3,000,000 and $5,000,000 per year and 1% thereafter. In consideration of past services valued at $125,000 or $.25 per share, Mr. Bendis also received the right to receive 500,000 common shares. Certificates representing 400,000 Common Shares were held by the Company for vesting as follows: 100,000 shares upon the Company achieving $1,000,00 in gross revenues from sales of biomedical products (these shares have vested); 100,000 shares upon the Company achieving $2,000,00 in gross revenues from sales of biomedical products; 100,000 shares upon the Company achieving $3,000,00 in gross revenues from sales of biomedical products; 100,000 shares upon the Company achieving $4,000,00 in gross revenues from sales of biomedical products. F-12 AMERICAN BIO MEDICA CORPORATION NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED APRIL 30, 1997 AND THE SIX MONTHS ENDED OCTOBER 31, 1997 (UNAUDITED) Certificates representing shares which have not vested on or before April 30, 1998 (or the end of the next succeeding fiscal year in the event the Company changes its fiscal year) will be returned to the Company's stock transfer agent for cancellation. No bonuses will be paid nor will shares vest subsequent to any election by Mr. Bendis to terminate agreement or his discharge for cause from employment by the Company. Mr. Bendis also is entitled to receive health insurance, participate in stock option or similar plans or other benefits offered generally to Management employees and reimbursement of out-of-pocket expenses. c. Employment Agreement with Edmund Jaskiewicz On November 3, 1995, the Company entered into a three year employment agreement with Edmund Jaskiewicz, Executive Vice-President. Under this agreement, Mr. Jaskiewicz received an annual salary of $24,000 per year until April 30, 1996 $48,000 per year until the Company generated an aggregate of $500,000 gross revenues from the sale of biomedical products. Mr. Jaskiewicz' salary is presently $60,000 per year. In addition, to his salary, Mr. Jaskiewicz will receive a bonus equal to 2% of the gross revenues of the Company in excess of $1,000,000 per fiscal year until such annual revenues reach $3,000,000, 1.5% of gross revenues between $3,000,000 and $5,000,000 per year and 1% thereafter. No bonuses will be paid or shares vest subsequent to any election by Edmund Jaskiewicz to terminate this agreement or his discharge for cause from employment by the Company. Mr. Jaskiewicz also is entitled to receive health insurance, participate in stock option or similar plans or other benefits offered generally to management employees and reimbursement of out-of-pocket expenses. d. Employment Agreement with Stan Cipkowski On November 3, 1995, the Company entered into a three year employment agreement with Stan Cipkowski, President. Under this agreement, Mr. Cipkowski received an annual salary of $36,000 per year until April 30, 1996, $60,000 per year until the Company generated an aggregate of $500,000 gross revenues from the sale of biomedical products. Mr. Cipkowski's salary is presently $72,000 per year. In addition, to his salary, Mr. Cipkowski will receive a bonus equal to 2% of the gross revenues of the Company in excess of $1,000,000 per fiscal year until such annual revenues reach $3,000,000, 1.5% of gross revenues between $3,000,000 and $5,000,000 per year and 1% thereafter. No bonuses will be paid or shares vest subsequent to any election by Mr. Cipkowski to terminate agreement or his discharge for cause from employment by the Company. Mr. Cipkowski also is entitled to receive health insurance, participate in stock option or similar plans or other benefits offered generally to Management employees and reimbursement of out-of-pocket expenses. e. Employment Agreement with Douglas Casterlin On May 15, 1997, the Company entered into a three year employment agreement with Douglas Casterlin, Vice President and General manager. Under this agreement, Mr. Casterlin receives an annual salary of $84,000 per year, and a bonus equal to 1.0% of net sales of the Company and is entitled to receive health insurance, participate in stock option programs or similar benefit programs generally offered to management or employees. Pursuant to his employment agreement, in June, 1997, Mr. Casterlin received 150,000 nonstatutory options exercisable at $3.00 for a period of three years. F-13 AMERICAN BIO MEDICA CORPORATION NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED APRIL 30, 1997 AND THE SIX MONTHS ENDED OCTOBER 31, 1997 (UNAUDITED) Note 6 - 12% Convertible Subordinated Debentures As of July 31, 1996, the principal amount, aggregating $2,131,000, of convertible debentures had been converted into 2,841,333 Common Shares, at $.75 per share. Note 7 - Preferred Shares a. Private Placement of Convertible A Preferred Shares The Company, in October, 1996, amended its certificate of incorporation authorizing the issuance of 5,000,000 Preferred Shares $.01 par value each. The board of directors of the Company has the authority, without further action by the holders of the outstanding Common Shares, to issue Preferred Shares from time to time in one or more classes or series, to fix the number of shares constituting any class or series and the stated value thereof, if different from the par value, and to fix the terms of any such series or class, including dividend rights, dividend rates, conversion or exchange rights, voting rights, rights and terms of redemption (including sinking fund provisions), the redemption price and the liquidation preference of such class or series. The Company sold 150 "A" Preferred Shares ("A Preferred Shares") for $10,000 per share for an aggregate consideration of $1,500,000 less $90,000 in commissions and $5,000 in offering expenses for a net consideration of $1,405,000. Each A Preferred Share was convertible into Common Shares pursuant to the following formula: $10,000 divided by the lesser of $6.07 or 75% of the average of the daily closing bid prices for the five consecutive trading days ending on the trading day prior to the day on which A Preferred Shares were converted to Common Shares. All accrued but unpaid dividends were payable in cash. The Company registered the Common Shares underlying the A Preferred Shares with the Commission. As of April 30, 1997, 60 "A" Preferred Shares had been converted into 229,039 Common Shares. In May, 1997, the remaining 70 "A" Preferred Shares had been converted into 301,120 Common Shares. b. Outstanding Warrants The Company has issued 24,712 Common Share purchase warrants. The Warrants are exercisable at $3.00 per share until January 21, 1999. F-14 AMERICAN BIO MEDICA CORPORATION NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED APRIL 30, 1997 AND THE SIX MONTHS ENDED OCTOBER 31, 1997 (UNAUDITED) c. Private Placement of Series B Convertible Preferred Shares In September, 1997, the Company sold 60 8% Series B Convertible Preferred Shares, ('"B" Preferred Shares') at $10,000 each for an aggregate consideration of $600,000 less an 8% commission of $48,000 for net proceeds of $552,000. Each "B" Preferred Share (plus accumulated but unpaid dividends) is convertible into common shares calculated by dividing $10,000 by the lesser of $3.50 or 75% of the average closing price of the Common Shares for the 20 trading days preceding conversion. Neither the Preferred Shares nor the Common Shares into which they may be converted may be sold or transferred in public markets without an effective registration under the Securities Act of 1933. During the period the"B" Preferred Shares are outstanding, no dividend shall be paid or set apart for payment on the Common Shares or any other class of shares ranking junior to the "B" Preferred Shares in either payment of dividends or liquidation unless full dividends on all outstanding B Preferred Shares have been paid in full for all past dividend periods and the dividends for the current period have been paid or declared and sufficient funds set apart. The Company has agreed to register the Common Shares underlying the B Preferred Shares. d. Private Placement of Series C Convertible Preferred Shares During the month of September, 1997, the Company sold 45.5 Shares of Series C Convertible Preferred Shares ('"C" Preferred Shares') for an aggregate consideration of $455,000 less a 10% commission of $45,500 for net proceeds of $409,500. Each "C" Preferred Share (plus accumulated dividends) is convertible into Common Shares calculated by dividing $10,000 by the lesser of $3.50 or 75% of the average closing price of the Common Shares for the 20 trading days preceding conversion. Neither the "C" Preferred Shares nor the Common Shares into which they may be converted may be sold or transferred in public markets without an effective registration under the Securities Act of 1933. The Company has agreed to register the Common Shares underlying the C Preferred Shares. Note 8 - Income Taxes The Company provides for the tax effects of transactions reported in the financial statements. The provision if any, consists of taxes currently due plus deferred taxes related primarily to differences between the basis of assets and liabilities for financial and income tax reporting. The deferred tax assets and liabilities, if any, represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. As of April 30, 1997 and October 31, 1997, the Company had no material current tax liability, deferred tax assets, or liabilities to impact on the Company's financial position because the deferred tax asset related to the Company's net operating loss carry forward and was fully offset by a valuation allowance. At October 31, 1997, the Company had net operating loss carry forwards for income tax purposes of $2,870,007. This carry forward is available to offset future taxable income, if any, and expires in the year 2010. The Company's utilization of this carry forward against future taxable income may become subject to an annual limitation in the event that there is a cumulative change in ownership of the Company of more than 50%. F-15 AMERICAN BIO MEDICA CORPORATION NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED APRIL 30, 1997 AND THE SIX MONTHS ENDED OCTOBER 31, 1997 (UNAUDITED) The components of the net deferred tax asset as of April 30, 1997 were as follows: Deferred tax asset: Net operating loss carry forward $ 975,802 Valuation allowance $ (975,802) ------- Net deferred tax asset $ -0- The Company recognized no income tax benefit from the loss generated in the year ended April 30, 1997 and for the six months ended October 31, 1997. SFAS No. 109 requires that a valuation allowance be provided if it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Company's ability to realize benefit of its deferred tax asset will depend on the generation of future taxable income. Because the Company has yet to recognize significant revenue from the sale of its products, the Company believes that a full valuation allowance should be provided. Note 9 - Commitments and Contingencies a. Lawsuits In February, 1994, Robert Friedenberg, former stockholder of two medical technology companies, MDI and Gendex, acquired by the Company, filed suit in the name of the two subsidiaries to have the Share Exchange Agreement under which the companies were acquired rescinded on the grounds of breach of contract. The Company filed a third party claim in July, 1994, against Dr. Friedenberg, seeking enforcement of the Share Exchange Agreement. In November, 1995, after a bifurcated trial, the court dismissed Dr. Friedenberg's lawsuit brought in the name of MDI and Gendex) and allowed the Company's third party claim to proceed to trial. In September, 1996, Dr. Friedenberg died. Trial on the third party claim was decided by a jury on May 5, 1997. The verdict determined that Dr. Friedenberg (represented by his estate) breached various contracts by failing to deliver certain technology to the Company. The jury also found in favor of the Company on two of the three fraud claims against Dr. Friedenberg and awarded the Company approximately $350,000 in damages. The trial judge, who is bound by the jury verdict against Friedenberg, will decide Dr. Friedenberg's Estate's pending claim to shares of Company common stock which the Company had refused to issue them to Dr. Friedenberg. F-16 AMERICAN BIO MEDICA CORPORATION NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED APRIL 30, 1997 AND THE SIX MONTHS ENDED OCTOBER 31, 1997 (UNAUDITED) In June, 1995, the Company filed a lawsuit against Jackson Morris, Esq. for the breach of attorney-client relationship and of his fiduciary duty to the Company for subsequently providing legal services to Dr. Friedenberg in his dispute with the Company. The Company's lawsuit demands damages in the amount of $1,000,000. Mr. Morris has counterclaimed for Common Shares. The court has set a trial date of September 14, 1998. b. Public Relations Agreement In February, 1996, the Company entered into an agreement with OTC Communications ("OTC") for financial public relations and communications services to the Company and to serve when requested as the Company's liaison and spokesman to the financial and investment community. In March, 1996, the Company granted, under Regulation D to the Securities Act of 1933, to OTC the right to receive 100,000 Common Shares at a value of $.65 per share for a total consideration of $65,000 in lieu of an initial payment, monthly retainers and/or expense reimbursement, including communications and mailing for a period of one year. 550,000 Common Shares were granted for years 2 and 3 for a consideration of $.325 per share representing one-half the market price of the Common Shares at March 14, 1996, the date of the contract. This valuation reflects the receipt of unregistered Common Shares and the market risk of the holding period until they may be sold publicly. Of the 550,000 shares, 50,000 shares were allocated to expense reimbursement and 500,000 shares allocated to public relations consulting. Certificates representing the 100,000 Common Shares were issued in July, 1996. The Company has also issued to OTC 500,000 "A" Options which are exercisable at $1.00 through March 14, 1999 and 500,000 "B" Options, which are exercisable at $2.00 through March 14, 1999. Until a registration statement relating to the Common Shares underlying the options is effective, certificates representing the shares into which the options are exercised will bear a legend restricting transfer in the absence of an effective registration with the Commission or an exemption therefrom. c. Nonstatutory Option Plans The Company has adopted the Fiscal 1996 Nonstatutory Stock Option Plan (the "1996 Plan") and the Fiscal 1998 Nonstatutory Stock Option Plan (the "1998 Plan"). 2,000,000 Common Shares were reserved under the 1996 Plan and 1,000,000 options under the 1998 Plan. Both plans are administered by the Option Committee of the Board of Directors. Stock options under the Plan may be granted to employees, officers, directors, consultants of the Company or any other parties who have made a significant contribution to the business and success of the Company. The exercise price under the Plan may be more, equal to or less than the then current market price of the Common Shares as deemed to be appropriate. All Nonstatutory Options are exercisable for a period of three years at $3.00 per share. As of October 31, 1997, the Company had issued 1,957,000 options under the 1996 Plan and 150,000 options under the 1998 Plan. All options were exercisable at $3.00 per share for a period of three years. F-17 AMERICAN BIO MEDICA CORPORATION NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED APRIL 30, 1997 AND THE SIX MONTHS ENDED OCTOBER 31, 1997 (UNAUDITED) As of October 31, 1997, 697,445 nonstatutory stock options had been exercised under the 1996 Plan for an aggregate consideration of $2,092,186. Following is a further breakdown of the options outstanding under the 1996 and 1998 Plans as of October 31, 1997:
WEIGHTED AVERAGE WEIGHTED AVERAGE REMAINING EXERCISE PRICE OF RANGE OF EXERCISE OPTIONS CONTRACTUAL LIFE WEIGHTED AVERAGE OPTIONS OPTIONS PRICE OUTSTANDING IN YEARS EXERCISE PRICE EXERCISABLE EXERCISABLE ----- ----------- -------- -------------- ----------- ----------------- $3.00 802,555 1.50 $3.00 802,555 $3.00 3.00 457,000 2.50 3.00 457,000 3.00 3.00 150,000 2.75 3.00 150,000 3.00 ------- ---- ---- ------- ----- 1,409,555 2.00 $3.00 1,409,555 $3.00
Adjusted pro forma information regarding net income is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using the Black-Scholes method for option pricing with the following weighted-average assumptions for both 1996 and 1997: risk-free interest rates of 6%; volatility of 50%; dividend yields of 0%; and an expected life of the option of six years. For purposes of adjusted pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's adjusted pro forma information follows: Years Ended Six Months Ended April 30, October 31, 1996 1997 1996 1997 ----------- ----------- ----------- ----------- Adjusted pro forma net income $ (996,458) $ (590,321) $ (275,218) $ (2,297) Adjusted pro forma net income per share $ (0.08) $ (0.05) $ (.02) $ (.00) F-18 AMERICAN BIO MEDICA CORPORATION NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED APRIL 30, 1997 AND THE SIX MONTHS ENDED OCTOBER 31, 1997 (UNAUDITED) The pro forma effects on net income for 1996 and 1997 is not likely to be representative of the effects on reported net income or loss in future years. In management's opinion, existing stock option valuation models do not provide a reliable single measure of the fair value of employee stock options that have vesting provisions and are not transferable. In addition, option valuation models require the input of highly subjective assumptions, including expected stock price volatility. Changes in such subjective input assumptions can materially affect the fair value estimate of employee stock options. e. Leased Office Space The Company leases 4,000 square feet of office and warehouse space in two locations from unrelated parties on a month to month basis at an aggregate rent of $1,000 per month. Note 10 - Secured Loan In April, 1996, a potential obligation aggregating $126,500 to a finance company became barred by New York State's six-year statute of limitations. The Company wrote off the obligation during the second quarter of fiscal 1997. Note 11 - Business and Credit Concentrations The amount reported in the financial statements for cash represents fair market value. Because the difference between cost and the lower of cost or market is immaterial, no adjustment has been recognized and investments are recorded at cost. The Company sells its products primarily to distributors located in the United States. Credit is extended based on an evaluation of the customer's financial condition and, generally, collateral is not required. Credit losses have been minimal and within Management's expectations. At October 31, 1997, two customers accounted for 42.2% of accounts receivable. F-19 The Company invests its excess cash in debt instruments of financial institutions and corporations with strong credit ratings. The Company has established guidelines relative to diversification and maturities that maintain safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates. The Company has not realized any losses on its marketable securities. Note 12 - Development Stage Company The Company was considered to be a development stage company with little operating history subsequent to the commencement of development of bio-medical technologies which are, at present, its core business. The Company is in commercial production of its drug test kits and has what management maintains are adequate resources to adequately fund its continuing operations. The Company is no longer considered to be a development stage Company. Note 13 - Subsequent Events The Company has been accepted for a listing on the Nasdaq SmallCap market. F-20 AMERICAN BIO MEDICA CORPORATION Part II Information Not Required in Prospectus Item 24. Indemnification of Directors and Officers The New York Business Corporation Law provides for the indemnification of the Company's officers, directors and corporate employees and agents under certain circumstances as follows: 721 NONEXCLUSIVITY OF STATUTORY PROVISIONS FOR INDEMNIFICATION OF DIRECTORS AND OFFICERS. The indemnification and advancement of expenses granted pursuant to, or provided by, this article shall not be deemed exclusive of any other rights to which a director or officer seeking indemnification or advancement of expenses may be entitled, whether contained in the certificate of incorporation or the by-laws or, when authorized by such certificate of incorporation or by-laws, (i) a resolution of shareholders, (ii) a resolution of directors, or (iii) an agreement providing for such indemnification, provided that no indemnification may be made to or on behalf of any director or officer if a judgment or other final adjudication adverse to the director or officer establishes that his acts were committed in bad faith or were the result of active and deliberate dishonesty and were material to the cause of action so adjudicated, or that he personally gained in fact a financial profit or other advantage to which he was not legally entitled. Nothing contained in this article shall affect any rights to indemnification to which corporate personnel other than directors and officers may be entitled by contract or otherwise under law. 722 AUTHORIZATION FOR INDEMNIFICATION OF DIRECTORS AND OFFICERS. (a) A corporation may indemnify any person, made, or threatened to be made, a party to an action or proceeding other than one by or in the right of the corporation to procure a judgment in its favor, whether civil or criminal, including an action by or in the right of any other corporation of any type or kind, domestic or foreign, or any partnership joint venture, trust, employee benefit plan or other enterprise, which any director or officer of the corporation served in any capacity at the request of the corporation, by reason of the fact that he, his testator or intestate, was a director or officer of the corporation, or served such other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise in any capacity, against judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys' fees actually and necessarily incurred as a result of such action or proceeding, or any appeal therein, if such director or officer acted, in good faith, for a purpose which he reasonably believed to be in, or, in the case of service for any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise, not opposed to, the best interests of the corporation and, in criminal actions or proceedings, in addition, had no reasonable cause to believe that his conduct was unlawful. (b) The termination of any such civil or criminal action or proceeding by judgment, settlement, conviction or upon a plea of nolo contendere, or its equivalent, shall not in itself create a presumption that any such director or officer did not act, in good faith, for a purpose which he reasonably believed to be in, or, in the case of service for any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise, not opposed to, the best interests of the corporation or that he had reasonable cause to believe that his conduct was unlawful. iv (c) A corporation may indemnify any person made, or threatened to be made, a party to an action by or in the right of the corporation to procure a judgment in its favor by mason of the fact that he, his testator or intestate, is or was a director or officer of the corporation, or is or was seeing at the request of the corporation as a director or officer of any other corporation of any type or kind, domestic or foreign, of any partnership, joint venture, trust, employee benefit plan or other enterprise, against amounts paid in settlement and reasonable expenses, including attorneys' fees, actually and necessarily incurred by him in connection with the defense or settlement of such action, or in connection with an appeal therein if such director or officer acted, in good faith, for a purpose which he reasonably believed to be in, or, in the case of service for any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise, not opposed to, the best interests of the corporation, except that no indemnification under this paragraph shall be made in respect of (1) a threatened action, or a pending action which is settled or otherwise disposed of, or (2) any claim issue or matter as to which such person shall have been adjudged to be liable to the corporation. unless and only to the extent that the court on which the action was brought, or, if no action was brought, any court of competent jurisdiction, determines upon application that, in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for such portion of the settlement amount and expenses as the court deems proper. (d) For the purpose of this section, a corporation shall be deemed to have requested a person to serve an employee benefit plan where the performance by such person of his duties to the corporation also imposes duties on, or otherwise involves services by, such person to the plan or participants or beneficiaries of the plan; excise taxes assessed on a person with respect to an employee benefit plan pursuant to applicable law shall be considered fines; and action taken or omitted by a person with respect to an employee benefit plan in the performance of such person's duties for a purpose reasonably believed by such person to be in the interest of the participants and beneficiaries of the plan shall be deemed to be for a purpose which is not opposed to the best interests of the corporation. 723 PAYMENT OF INDEMNIFICATION OTHER THAN BY COURT AWARD. (a) A person who has been successful, on the merits or otherwise, in the defense of a civil or criminal action or proceeding of the character described in section 722 shall be entitled to indemnification as authorized in such section. (b) Except as provided in paragraph (a), any indemnification under section 722 or otherwise permitted by section 721, unless ordered by a court under section 724 (Indemnification of directors and officers by a court), shall be made by the corporation, only if authorized in the specific case: (1) By the board acting by a quorum consisting of directors who are not parties to such action or proceeding upon a finding that the director or officer has met the standard of conduct set forth in section 722 or established pursuant to section 721, as the case may be, or, v (2) If a quorum under subparagraph (1) is not obtainable or, even if obtainable, a quorum of disinterested directors so directs; (A) By the board upon the opinion in writing of independent legal counsel that indemnification is proper in the circumstances because the applicable standard of conduct set forth in such sections has been met by such director or officer, or (B) By the shareholders upon a finding that the director or officer has met the applicable standard of conduct set forth in such sections. (c) Expenses incurred in defending a civil or criminal action or proceeding may be paid by the corporation in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount as, and to the extent, required by paragraph (a) of section 725. 724 INDEMNIFICATION OF DIRECTORS AND OFFICERS BY A COURT. (a) Notwithstanding the failure of a corporation to provide indemnification, and despite any contrary resolution of the board or of the shareholders in the specific case under section 723 (Payment of indemnification other than by court award), indemnification shall be awarded by a court to the extent authorized under section 722 (Authorization for indemnification of directors and officers) and paragraph (a) of section 723. Application therefore may be made, in every case, either (1) In the civil action or proceeding in which the expenses were incurred or the amounts were paid, or (2) to the supreme court in a separate proceeding, in which case the application shall set forth the disposition of any previous application made to any court for the same or similar relief and also reasonable cause for the failure to make application for such relief in the action or proceeding in which the expenses were incurred or other amounts were paid (b) the application shall be made in such manner and form as may be required by the applicable rules of court or, in the absence thereof, by direction of a court to which it is made. Such application shall be upon notice to the corporation. The court may also direct that notice by given at the expense of the corporation to the shareholder and such other person as it may designate in such manner as it may require. (c) Where indemnification is sought by judicial action, the court may allow a person such reasonable expenses, including attorneys' fees, during the pendency of the litigation as are necessary in connection with his defense therein, if the court shall find that the defendant has by his pleadings or during the course of the litigation raised genuine issues of fact or law. 725 OTHER PROVISIONS AFFECTING INDEMNIFICATION OF DIRECTORS AND OFFICERS. (a) All expenses incurred in defending a civil or criminal action or proceeding which are advanced by the corporation under paragraph (c) of section 723 (Payment of indemnification other than by court award) or allowed by a court under paragraph (c) of section 724 (Indemnification of directors and officers by a court) shall be repaid in case the person receiving such advancement or allowance is ultimately found, under the procedure set forth in this article, not to be entitled to indemnification or, where indemnification is granted, to the extent the expenses so advanced by the corporation or allowed by the court exceed the indemnification to which he is entitled. vi (b) No indemnification, advancement or allowance shall be made under this article in any circumstance where it appears: (1) That the indemnification would be inconsistent with the law of the jurisdiction of incorporation of a foreign corporation which prohibits or otherwise limits such indemnification (2) That the indemnification would be inconsistent with a provision of the certificate of incorporation, a by-law, a resolution of the board or of the shareholders, an agreement or other proper corporate action, in effect at the time of the accrual of the alleged cause of action asserted in the threatened or pending action or proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or (3) If there has been a settlement approved by the court, that the indemnification would be inconsistent with any condition with respect to indemnification expressly imposed by the court in approving the settlement. (c) If any expenses or other amounts are paid by way of indemnification, otherwise than by court order or action by the shareholders, the corporation shall, not later than the next annual meeting of shareholders unless such meeting is held within three months from the date of such payment, and in any event, within fifteen months from the date of such payment, mail to its shareholders of record at the time entitled to vote for the election of directors a statement specifying the persons paid, the amounts paid, and the nature and status at the time of such payment of the litigation or threatened litigation. (d) If any action with respect to indemnification of directors and officers is taken by way of amendment of the by-laws, resolution of directors, or by agreement, then the corporation shall, not later than the next annual meeting of shareholders, unless such meeting is held within three months from the date of such action, and, in any event, within fifteen months from the date of such action, mail to its shareholders of record at the time entitled to vote for the election of directors a statement specifying the action taken. (e) Any notification required to be made pursuant to the foregoing paragraph (c) or (d) of this section by any domestic mutual insurer shall be satisfied by compliance with the corresponding provisions of section one thousand two hundred sixteen of the insurance law. 726 INSURANCE FOR INDEMNIFICATION OF DIRECTORS AND OFFICERS. a) Subject to paragraph (b), a corporation shall have power to purchase and maintain insurance: (1) To indemnify the corporation for any obligation which it incurs as a result of the indemnification of directors and officers under the provisions of this article, and (2) To indemnify directors and officers in instances in which they may be indemnified by the corporation under the provisions of this article, and vii (3) To indemnify directors and officers in instances in which they may not otherwise be indemnified by the corporation under the provisions of this article provided the contract of insurance covering such directors and officers provides, in a manner acceptable to the superintendent of insurance, for a retention amount and for coinsurance. (b) No insurance under paragraph (a) may provide for any payment, other than cost of defense, to or on behalf of any director or officer: (1) if a judgment or other final adjudication adverse to the insured director or officer establishes that his acts of active and deliberate dishonesty were material to the cause of action so adjudicated, or that he personally gained in fact a financial profit or other advantage to which he was not legally entitled, or (2) in relation to any risk the insurance of which is prohibited under the insurance law of this state. (c) Insurance under any or all subparagraphs of paragraph (a) may be included in a single contract or supplement thereto. Retrospective rated contracts are prohibited. (d) The corporation shall, within the time and to the persons provided in paragraph (c) of section 725 (Other provisions affecting indemnification of directors or officers), mail a statement in respect of any insurance it has purchased or renewed under this section, specifying the insurance carrier, date of the contract, cost of the insurance, corporate positions insured, and a statement explaining all sums, not previously reported in a statement to shareholders, paid under any indemnification insurance contract. (e) This section is the public policy of this state to spread the risk of corporate management, notwithstanding any other general or special law of this state or of any other jurisdiction including the federal government. Item 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The expenses payable by the Registrant in connection with the issuance and distribution of the securities are estimated as follows: Amount ----- SEC Registration Fee $400 Printing and Mailing $1,000 Legal Fees and Expenses $10,000 Accounting Fees $5,000 Transfer Agent Fees $1,000 Miscellaneous $2,600 ------- Total $20,000 viii Item 26. RECENT SALES OF UNREGISTERED SECURITIES The following unregistered securities have been issued by the Registrant: The title and amount of securities issued and the aggregate offering price or other consideration are as follows: In February, 1996, the Registrant sold, through a private placement, 25,000 units (the "Units") pursuant to Rule 504 ("Rule 504") to the Securities Act of 1933, as amended, (the "Securities Act") consisting of an aggregate of 25,000 Common Shares, 500,000 "A" Warrants and 50,000 "B" Warrants for an aggregate consideration of $25,000. As of April 30, 1996, the Registrant issued 489,181 restricted Common Shares in consideration for past services to five individuals in the amount of $60,975 or an average consideration of $.125 per share. As of April 30, 1996, the Registrant issued to OTC Communications 100,000 Common Shares under Rule 504 as consideration for financial consulting services rendered per contract at a value of $.65 per share. As of April 30, 1996, the Registrant issued to Riverside Consulting Group, Inc. 25,000 common shares under Rule 504 in consideration for financial consulting services of $12,500 at $.50 per share. As of April 30, 1996, the Registrant issued an aggregate of 100,000 Common Shares to two persons under Rule 504 valued at $.50 per share in consideration for financial consulting services. As of April 30, 1996, the Registrant authorized the issuance to OTC Communications 550,000 restricted Common Shares, 500,000 shares as consideration for financial consulting services rendered per contract and 50,000 as expense reimbursement at a value of $178,750 or $.325 per share From 1993 through 1996, the Company sold an aggregate of $1,417,000 of 12% convertible Debentures, under Rule 504, the principal amount of each Debenture convertible at the option of the holder into Common Shares at $.75 per share. All the Debentures have been converted at $.75 per share into 1,888,333 Common Shares. There are no outstanding Debentures. All the "A" Warrants issued as part of the Units have been exercised at $.50 each into Common Shares and all the "B" Warrants issued as part of the Units have been exercised at $1.00 each into Common Shares pursuant to Rule 504. In September, 1996, the Registrant issued 150 "A" Preferred Shares to Midland Walwyn Capital, Inc. for a total purchase price of $1,500,000. Each Preferred Share was convertible into Common Shares at the option of the holder pursuant to the following formula: $10,000 (the purchase price of each Preferred Share) divided by the lesser of $6.07 or 75% of the Market Price. ("Market Price" was defined as the average closing price of the Common Shares for the five days prior to the date of conversion of the "A" Preferred Shares.) In September, 1996, the Registrant issued 24,712 Warrants to a non-management consultant. Each warrant was exercisable into one Common Share originally at $6.07 and subsequently adjusted to $3.00 for a period of two years commencing the effective date of a registration statement relating to the underlying Common Shares. An effective registration statement covers the Common Shares underlying these warrants. In March, 1996, the Registrant issued to OTC Communications 500,000 "A" Options exercisable until March 14, 1999 at $1.00 per share and 500,000 "B" Options exercisable until March 14, 1999 at $2.00 per share. These options and the shares underlying them are restricted. ix In June, 1996, the Company adopted its 1996 Nonstatutory Stock Option Plan under which a maximum of 2,000,000 Nonstatutory Options may be issued. 1,500,000 Nonstatutory Options were issued on June 28, 1996 as follows: Stan Cipkowski, President, 550,000 options; Edmund Jaskiewicz, Executive Vice-President, 250,000 options; Jay Bendis, Vice-President-Marketing, 300,000 options; Henry Wells, Vice-President-Product Development, 150,000 options; and four non-management employees and consultants, 225,000 options each. Each Nonstatutory Option entitles the holder to purchase one Common Share for $3.00 for a period of three years. In November, 1996, 131,000 options were issued to two consultants, each option exercisable at $3.00 until November 12, 1999. On April 30, 1997, the Company issued 20,000 options to Jay Bendis, Executive-Vice-President and 252,000 options to 15 non-Management employees and consultants. Each Nonstatutory Option entitles the holder to purchase one Common Share for $3.00 for a period of three years. As of October 31, 1997, the Company had issued 150,000 Nonstatutory Options to Douglas Casterlin, Vice-President. Each Nonstatutory Option entitles the holder to purchase one Common Share for $3.00 for a period of three years. As of October 31, 1997, 697,445 nonstatutory stock options had been exercised for an aggregate consideration of $2,092,186. On August 29, 1997, the Company issued 185,000 options as follows: 10,000 to Jasper Clay, Jr., a Director, 10,000 to John F. Murray, a Director, and 165,000 options to 5 non-management employees. In September, 1997, the Registrant issued 60 "B" and 44.5 "C" Preferred Shares to a total of 12 investors for a total purchase price of $1,055,000 Each Preferred Share is convertible into Common Shares at the option of the holder pursuant to the following formula: $10,000 (the purchase price of each Preferred Share) divided by the lesser of $3.50 or 75% of the Market Price. ("Market Price" is defined as the average closing price of the Common Shares for the 20 days prior to the date of purchase or conversion, as the case may be, of the "B" and "C" Preferred Shares.) The Common Shares underlying the Nonstatutory Options have been registered under the Securities Act. Exemption from registration of the issue of said securities is claimed under Section 4(2) of the Securities Act. Neither the Issuer nor any person acting on its behalf offered or sold the securities by means of any form of general solicitation or general advertising. Prior to the making any offer, the Registrant had reasonable grounds to believe and believed that each subscriber was capable of evaluating the merits and risks of the prospective investment or was able to bear the economic risk of the investment. Prior to making any sale, the issuer had reasonable grounds to believe and believed that each subscriber was capable of evaluating the merits and risks of the prospective investment or was able to bear the economic risk of the investment. Each purchaser represented in writing that he acquired the securities for his own account. Except for the securities sold under Rule 504, the certificates of which bear no restrictive legend, a legend was placed on each certificate stating that the securities have not been registered under the Securities Act; and setting forth the restrictions on their transferability and sale. Each purchaser signed a written agreement that the securities will not be sold without registration under the Securities Act of exemption therefrom. x Item 27. EXHIBITS Exhibits Exhibit List 3.1 Certificate of Incorporation* 3.2 First Amendment to Certificate of Incorporation* 3.3 Second Amendment to Certificate of Incorporation* 3.4 Third Amendment to Certificate of Incorporation* 3.5 Bylaws* 3.6 Fourth Amendment to Certificate of Incorporation* 4.1 Specimen Common Share Certificate* 4.2 Specimen "B" Warrant Certificate** 4.3 Terms of Series "A" Preferred Shares** 4.4 Private Securities Subscription Agreement to Series "A" Preferred Shares** 4.5 Registration Rights Agreement relating to Common Shares underlying Series "A" Preferred Shares** 4.6 Form of Subscription Agreement relating to Series "B" Convertible Preferred Shares 4.7 Form of Designation Agreement Relating to Terms of Series "C" Convertible Preferred Shares 4.8 Registration Rights Agreement relating to Common Shares underlying Series "C" Preferred Shares 5.3 Opinion of Pensley & Fugler** 5.4 Opinion of Joel Pensley, Esq. 10.1 Contract with OTC Communications* 10.2 Employment Contract between the Registrant and Stan Cipkowski* 10.3 Employment Contract between the Registrant and Edmund Jaskiewicz* 10.4 Employment Contract between the Registrant and Jay Bendis* 10.5 Employment Contract between the Registrant and Douglas Casterlin 23.4 Consent of Thomas P. Monahan, CPA** 23.5 Consent of Pensley & Fugler** 23.6 Consent of Joel Pensley, Esq. 23.7 Consent of Thomas P. Monahan, CPA to First Amendment** 23.8 Consent of Thomas P. Monahan, CPA to Post Effective Amendment** 23.9 Consent of Thomas P. Monahan, CPA *Previously submitted as exhibits to Form 10-SB ** Previously submitted as exhibits to Form SB-2 Financial Statement Schedules: None - -------------------------- xi Item 28. UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned hereby undertakes: (a) to file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) to include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) to reflect in the prospectus any facts or events arising after the effective date of this Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in this Registration Statement; and (iii)to include any material information with respect to the plan of distribution not previously disclosed in this Registration Statement or any material change to such information in this Registration Statement; (b) that, for the purposes of determining any liability under said Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; (c) to remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering; Subject to the terms and conditions of Section 15(d) of the Securities and Exchange Act of 1934, the undersigned hereby undertakes to file with the Securities and Exchange Commission such supplementary and periodic information, documents, and reports as may be prescribed by any rule or regulation of the Commission heretofore or hereafter duly adopted pursuant to its authority. xii SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the Town of Ancramdale and State of New York on the 24th day of December, 1997. AMERICAN BIO MEDICA CORPORATION (Registrant) By: /s/Stan Cipkowski ------------------ Stan Cipkowski, President and Principal Executive Officer By: /s/John F. Murray -------------------- John F. Murray, Treasurer and Principal Financial Officer Date: December 24, 1997 Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed below by the following persons in the capacities and on the dates indicated: /s/Stan Cipkowski - --------------------- Director December 24, 1997 Stan Cipkowski /s/Edmund Jaskiewicz - --------------------- Edmund Jaskiewicz Director December 24, 1997 /s/Jay Bendis - --------------------- Jay Bendis Director December 24, 1997 - --------------------- John F. Murray Director - --------------------- Jasper R. Clay, Jr. Director /s/Karen Russo - --------------------- December 24, 1997 Karen Russo Director xiii EX-5 2 OPINION OF JOEL PENSLEY Exhibit 5.4 Opinion of Joel Pensley Joel Pensley Attorney at Law 276 Fifth Avenue Suite 715 New York, New York 10001 212-725-7110 Fax: 212-725-7527 December 24, 1997 American Bio Medica Corporation 102 Simons Road Ancramdale, New York 12503 Re: Registration Statement on Form SB-2 Gentlemen: I refer to the registration statement on Form SB-2 (the "Registration Statement") of American Bio Medica Corporation, a New York corporation (the "Company"), to be delivered for electronic filing to the Securities and Exchange Commission by mail, relating to 301,429 common shares, $.01 par value each ("Common Shares") underlying Series "B" and "C" convertible preferred shares (the "Preferred Shares") (subject to adjustment). I have reviewed such documents and records as I have deemed necessary to enable us to express an informed opinion on the matters covered thereby and we are of the opinion that: (i) The Company has been duly incorporated and is a validly existing corporation in good standing under the laws of the State of New York. (ii) The Common Shares to be issued upon conversion of the Preferred Shares have been duly authorized and, when issued, will be validly issued, fully paid and nonassessable; Very truly yours, /s/Joel Pensley --------------- Joel Pensley EX-10 3 EMPLOYMENT CONTRACT WITH DOUGLAS CASTERLIN Exhibit 10.5 Employment Contract Between American Bio Medica Corporation and Douglas Casterlin EMPLOYMENT AGREEMENT This agreement (the "Agreement") made and entered into this 17th day of April, 1997 by and between American Bio Medica, a New York Corporation with its office located at 102 Simons Road, Ancramdale, New York 12503 ("Employer") and Douglas Casterlin individual residing at 65 Ballory Road, Ghent, NY 12075 ("Employee") (Employer and Employee are sometimes collectively referred to as the "Parties") WHEREAS, Employer is engaged in the business of research and development, design, manufacture and marketing of drug testing kits and other biomedical products; and WHEREAS, Employee is experienced in production and operations of biomedical products including drug testing kits. WHEREAS, both Employer and Employee are desirous of entering into an employment agreement whereby Employee would devote his time and Employer would compensate him as an employee. NOW THEREFORE, in consideration of the premises and of the mutual covenants herein contained, the Parties agree as follows: 1. Employment and Duties: Employer hereby employs Employee as Vice President and General Manager. 2. Performance: Employee will devote substantially his full working time and efforts as an employee of Employer. "Full working time," in this context, shall mean at least an average of 40 hours per week. 3. Term: The Employment Term shall commence on May 26, 1977 and, unless extended by mutual agreement of the parties hereto, or sooner terminated or canceled pursuant to Section 14 hereof, shall terminate and expire on May 25, 2000. 4. Compensation: Employee shall be paid a base annual salary of $84,000 per annum. Employer may from time to time enter into supplemental agreements or memoranda in writing with Employee for the award and payment to him of additional compensation or bonuses upon such terms and conditions as Employer shall deem to be in its business interest. In addition, effective with the date of this contract: Employee shall be paid, on a quarterly basis, a bonus equal to 1% net sales after gross revenues of $1,000,000 per fiscal year. Employee shall receive 150,000 options at $3.00 per share vesting immediately. No bonuses will be earned subsequent to the Employee's election to terminate the Agreement or Employer's discharge of Employee for cause. In the event of Termination due to death of Employee or inability due to illness of Employee to render services under the Agreement to Employer, no bonuses shall be paid; but shares shall vest pursuant to the formula set forth in this section. In the event that American Bio Medica Corporation is merged or acquired by another company, all unvested shares and/or options become immediately vested. If the employee is terminated without cause, all unvested shares and/or options become immediately vested and the balance of annual salary due for the term of the contract is paid as severance. 5. Employee Benefits: Employee shall be entitled to be covered by any employee health insurance policy, dental plan, pension plan, stock option or similar plans or other employee benefit(s) offered generally to management employees of Employer. Employee shall not be obligated to contribute any money to be covered under said plain except in the event the Company enacts a contributory pension plan for other employees. Employee shall be entitled to three weeks paid vacation at times to be mutually agreed upon between Employer and Employee. 6. Expenses: In addition to the compensation provided Employee under the Agreement, Employer shall reimburse Employee for any and all authorized expenses which he shall incur directly relating to his functions as an employee. Reimbursable expenses shall include, but are not limited to, travel (except to and from the office) and entertainment and purchase of supplies. Reimbursement of expenses shall not be deemed as compensation to Employee. 7. Recommendations for Operations: Employee shall provide Employer all information regarding Employer's business of which Employee has knowledge. Employee shall make all suggestions and recommendations that will be of mutual benefit to Employer and Employee. 8. Confidentiality: Employee recognizes that Employer has and will have information relating to inventions, equipment and machinery, products, prices, apparatus, costs, discounts, future plans, business affairs, process information, trade secrets, technical information, customer lists, product design, copyrights, patents and other vital information )collectively, the "Information") which are valuable, special and unique assets of Employer. Employee agrees that Employee will not at any time or in any manner, either directly of indirectly, divulge, disclose, or communicate any Information to any third party without the prior written consent of Employer. Employee will protect the Information and treat it as strictly confidential. A violation of Employee of this paragraph shall be a material violation of the Agreement and will justify immediate Termination and legal and/or equitable relief. 9. Unauthorized Disclosure of Information: If it appears that employee has disclosed (or has threatened to disclose) Information in violation of the Agreement, Employer shall be entitled to an injunction to restrain Employee from disclosing, in whole or in part, such Information, or from providing any services to any party to whom such Information has been disclosed or may be disclosed. Employer shall not be prohibited by this provision from pursuing other remedies, including a claim for losses and damages. 10. Confidentiality After Termination of Employment: The confidentiality provisions of the Agreement shall remain in full force and effect for a two year period after Termination. During such two year period, neither Party shall make or permit the making of any public announcement or public statement of any kind that Employee was formerly employed by or connected with Employer except as may be required by the Securities Act of 1933, the Securities Exchange Act of 1934 or any relevant state securities laws. 11. Development of New Products/Technologies: All products or technologies developed during the term of the Agreement shall become the property of Employer. Employee shall transfer to Employer all ideas, prototypes, drawings, descriptions, patents, copyrights, trademarks or other intellectual property to Employer. Employer has the right to accept or reject any such assets; in the event of rejection, all ownership rights will revert to Employee. 12. Non-Compete: Recognizing that the various items of Information are special and unique assets of the company. Employee covenants that for a period of two years following voluntary Termination, Employee may not directly or indirectly engage in a business competitive with Employer in any of the eastern seaboard States in which the Employer is presently producing or distributing its products and also in eastern seaboard States in which Employee knows or has reason to believe Employer intends to extend its production or distribution activities. Employee will not be compensated by the Company during this period. Employee may not, directly or indirectly, contact, (including, but not limited to employees of Employer), solicit, hire, sell to, purchase from, obtain financing from or recommend the contacting, selling to, purchasing from or financing from any person, institution, entity or company with which Employer has dealt during the one year period preceding the date of the Agreement. The term "directly or indirectly engaging in any competitive business" includes, but is not limited to, (I) engaging in a business as owner, partner, or agent, (II) becoming an employee of any third party engaged in such business, (III) becoming interested directly or indirectly in any such business, or (IV) soliciting any customer of Employer for the benefit or a third party engaged in such business. 13. Employee's Inability to Contract for Employer: Employee shall not have the right to make any contracts or commitments for or on behalf of Employer out of the area of normal business operations without first obtaining the express written consent of board of directors of Employer or a relevant committee of the board of directors for the specific contract or commitment or class of contract or commitment. 14. Termination: The Agreement shall terminate upon the happening of any of the following events: (a) Death of Employee; (b) Discontinuance of the business of Employer for a period of sixty (60) days; (c) Resignation of Employee; (d) Unwillingness or inability caused by illness or otherwise to fulfill the duties and obligations of his employment for a continuous period of 60 days or an aggregate of 90 days in any yearly period; (e) Reasonable cause, including but not limited to, the breach of agreement, covenant, representation or warranty of Employee set forth herein, or gross misconduct which brings him or Employer into disrepute or is detrimental to Employers business. (f) Intention and notice to terminate pursuant to paragraph 3. 15. Assignment: The rights and obligations of the Employer under this agreement shall inure to the benefit of and shall be binding upon the successors and assigns of the Employer. 16. Severability: If any term of the Agreement shall, to any extent, be determined through arbitration or by court of competent jurisdiction to be invalid or unenforceable, the remainder of the Agreement shall not be effected thereby and each other term of the Agreement shall be valid and enforceable to the fullest extent permitted by law. 17. Arbitration: Any controversy arising from or related to the Agreement shall be determined by arbitration in New York City in accordance with the rules of the America Arbitration Association any such determination or award may be enforced by any court having jurisdiction thereof. 18. Complete Agreement: The Agreement constitutes the entire agreement between the Parties regarding the subject matter herein and supersedes any other previous and/or collateral agreements or resolutions of the board of directors pertaining thereto. Agreement may not be modified or amended other than by a written instrument duly executed by or on behalf of the parties hereto. 20. Governing Law: The Agreement shall be interpreted and construed under the internal laws of the State of New York. 21. Indemnification: The personal liability of the directors and officers of the Corporation is eliminated to the fullest extent permitted by the provisions of paragraph (b) of Section 402 of the Business Corporation Law, as the same may be amended and supplemented. Section 402(b) of the Business Corporation Law of New York is printed in full in the Company's Form 10-SB-2-A on file with the Securities and Exchange Commission in Item 5, pages 23 through 28. IN WITNESS WHEREOF, the Parties have executed the Agreement as of the date first written above. AMERICAN BIO MEDICA CORPORATION By: /s/ Stan Cipkowski Stan Cipkowski its President /s/Douglas Casterlin Douglas Casterlin EX-23 4 CONSENT OF JOEL PENSLEY, ESQ. Exhibit 23.6 Consent of Joel Pensley CONSENT I hereby consent to the use of my name in the prospectus filed as a part of the registration statement of American Bio Medica Corporation on Form SB-2 under the caption "LEGAL MATTERS." December 24, 1997 /s/Joel Pensley --------------- Joel Pensley EX-23 5 CONSENT OF THOMAS P. MONAHAN, CPA Exhibit 23.9 Consent of Thomas P. Monahan, CPA CONSENT I, Thomas P. Monahan, CPA, hereby consent to the use of my report relating to the audited financial statements for the years ended April 30, 1996 and 1997 in a registration statement on Form SB-2 of American Bio Medica Corporation. to be filed with the Securities and Exchange Commission. Dated: December 24, 1997 /s/Thomas P. Monahan -------------------- Thomas P. Monahan EX-4 6 SUBSCRIPTION AGREEMENT SERIES B PREFERRED SHARES Exhibit 4.6 Form of Subscription Agreement Relating to the Series B Convertible Preferred Shares SUBSCRIPTION AGREEMENT AMERICAN BIO MEDICA CORPORATION THE SECURITIES WHICH ARE THE SUBJECT TO THIS SUBSCRIPTION AGREEMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER THE SECURITIES LAWS OF ANY STATE AND WILL BE OFFERED AND SOLD IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF THESE LAWS BY VIRTUE OF AMERICAN BIO MEDICA CORPORATION'S INTENDED COMPLIANCE WITH SECTIONS 3(b), 4(2) AND 4(6) OF THE SECURITIES ACT OF 1933, THE PROVISIONS OF REGULATION D UNDER SUCH ACT AND SIMILAR EXEMPTIONS UNDER STATE LAW. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY ANY REGULATORY AUTHORITY. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The undersigned purchaser (hereafter, the "Purchaser") hereby offers to purchase certain 8% Series B Convertible Preferred Stock, par value $.01 per share (referred to herein as a "Share" or collectively as "Shares"), of American Bio Medica Corporation (the "Company"), a publicly held corporation formed under the laws of the State of New York. This offer to purchase may, for any reason whatsoever, be revoked by the Purchaser or rejected by the Company prior to acceptance of this offer by the Company. Section 1.1 Purchase and Sale of Shares. Upon the following terms and conditions, the Company shall issue and sell to the Purchaser, and the Purchaser shall purchase from the Company, the number of Shares indicated herein, which Shares shall have the rights, designations and preferences set forth in Schedule I hereto, incorporated herein by reference. Section 1.2 Purchase Price. The purchase price for the Shares (the "Purchase Price") shall be $10,000 per Share. Section 1.3 The Closing. (a) The closing of the purchase and sale of the Shares (the "Closing"), shall take place at the offices of Joel Pensley, Esq. (Counsel for the Company), 276 Fifth Avenue - Suite 715, New York, New York 10001, at 10:00 a.m., local New York, New York time, on the later of the following: (i) the date on which the last to be fulfilled or waived of the conditions set forth in Section 4.1 and 4.2 hereof and applicable to the Closing shall be fulfilled or waived in accordance herewith, or (ii) such other time and place and/or on such other date as the Purchaser and the Company may agree. The date on which the Closing occurs is referred to herein as the "Closing Date." (b) On the Closing Date, the Company shall deliver to the Purchaser certificates representing the Shares registered in the name of the Purchaser or deposit such Shares into accounts designated by the Purchaser, and the Purchaser shall deliver to the Company the Purchase Price for all the Shares by cashier's check or wire transfer in immediately available funds to such account as shall be designated in writing by the Company. In addition, each party shall deliver all documents, instruments and writings required to be delivered by such party pursuant to this Agreement at or prior to the Closing. 1 Section 1.4 Covenant to Register. (a) For purposes of this Section, the following definitions shall apply: (i) The terms "register," "registered," and "registration" refer to a registration under the Securities Act of 1933, as amended (the "Act"), effected by preparing and filing a registration statement or similar document in compliance with the Act, and the declaration or ordering of effectiveness of such registration statement, document or amendment thereto. (ii) The term "Registrable Securities" means the shares of the Company's Common Shares, par value $.01 per shares (the "Common Stock") issuable upon conversion of shares of the Shares, or upon conversion of any other stock, if any, issued in payment of dividends on the Shares, or otherwise issuable pursuant to this Agreement or the provisions of Schedule I hereto, and any securities of the Company or securities of any successor corporation issued as, or issuable upon the conversion or exercise of any warrant, right or other security that is issued as a dividend or other distribution with respect to, or in exchange for, or in replacement of, the Shares. (iii)The term "holder of Registrable Securities" means the Purchaser and any permitted assignee of registration rights pursuant to Section 1.4(h). (b) (i) The Company shall, as soon as practicable after the Closing Date, file a registration statement on Form S-1, SB-2 or S-3 covering all the Registrable Securities, and shall use its best efforts to cause such registration statement to become effective on or before one hundred twenty (120) days after the Closing Date (the "Initial Registration"). In the event such registration is not so declared effective or does not include all Registrable Securities, a holder of Registrable Securities shall have the right to require by notice in writing that the Company register all or any part of the Registrable Securities held by such holder (a "Demand Registration") and the Company shall thereupon effect such registration in accordance herewith (which may include adding such shares to an existing shelf registration). The parties agree that if the holder of Registrable Securities demands registration of less than all of the Registrable Securities, the Company, at its option, may nevertheless file a registration statement covering all of the Registrable Securities. If such registration statement is declared effective with respect to all Registrable Securities and the Company is in compliance with its obligations under Subsection (d) of this Section 1.4, the demand registration rights granted pursuant to this Subsection (b)(i) shall cease. If such registration statement is not declared effective with respect to all Registrable Securities or if the Company is not in compliance with such obligations, the demand registration rights described herein shall remain in effect. 2 (ii) The Company shall not be obligated to effect a Demand Registration under Subsection (b)(i) above: (A) if all of the Registrable Securities held by the holder of Registrable Securities which are demanded to be covered by the Demand Registration are, at the time of such demand, included in an effective registration statement and the Company is in compliance with its obligations under Subsection (d) of this Section 1.4; (B) if all of the Registrable Securities may be sold under Rule 144(k) of the Act and the Company's transfer agent has accepted an instruction from the Company to such effect; or (C) at any time after two (2) years from the Closing Date. (iii)Subject to Subsection (iv)(B) hereof, the Company may suspend the effectiveness of any such registration effected pursuant to this Subsection (b) in the event and for such period of time as, such a suspension is required by the rules and regulations of the Securities and Exchange Commission ("SEC"). The Company will use its best efforts to cause such suspension to terminate at the earliest possible date. (iv) (A) If the effectiveness of the Registration Statement is suspended or a current prospectus meeting the requirements of Section 10 of the Act is not available for delivery by the Purchaser (either referred to herein as a "suspension"), the Company shall pay Purchaser as liquidated damages an amount equal to two percent (2%) of the total Purchase Price of Shares and any Registrable Securities then held by Purchaser for the first thirty (30) day period after the date of the suspension, plus amount equal to two percent (2%) of the total Purchase Price of Shares and any Registrable Securities then held by Purchaser for each subsequent thirty (30) day period thereafter. Such amounts shall be pro-rated daily and paid to the Purchaser by cashier's check or wire transfer in immediately available funds to such account as shall be designated in writing by the Purchaser. (B) Any amount payable pursuant to the foregoing provisions of this subsection (iv) shall be delivered on or before the fifth (5th) day following the end of the calendar month in which such payment obligation arose. The "Purchase Price" of Registrable Securities shall be (1) if derived from conversion or substitution of Shares, the Purchase Price of the Shares, and (2) if received in satisfaction of a Company obligation, the dollar amount of such obligation. (C) This subsection is in addition to the provisions of Section 7.2(a) hereof. (c) If the Company proposes to register (including for this purpose a registration effected by the Company for shareholders other than the Purchaser) any of its stock or other securities under the Act in connection with a public offering of such securities (other than a registration on Form S-4, Form S-8 or other limited purpose form) and all Registrable Securities have not theretofore been included in a registration statement under Subsection (b) of this Section 1.4 which remains effective, the Company shall, at such time, promptly give all holders of Registrable Securities written notice of such registration. Upon the written request of any holder of Registrable Securities given within twenty (20) days after receipt of such notice by the holder of Registrable Securities, the Company shall use its best efforts to cause to be registered under the Act all Registrable Securities that such holder of Registrable Securities requests to be registered. However, the Company shall have no obligation under this Subsection 3 (c) if (i) the Registrable Securities may be sold without registration under Rule 144(k) and the Company's transfer agent has accepted an instruction from the Company to such effect, (ii) the Registration Statement is filed more than two (2) years after the Closing Date, or (iii) to the extent that, with respect to any underwritten offering initiated by the Company later than one calendar year following the Closing, the managing underwriter of such offering reasonably notifies such holder(s) in writing of its determination that the Registrable Securities or a portion thereof shall be excluded therefrom. (d) Whenever required under this Section 1.4 to effect the registration of any Registrable Securities including, without limitation, the Initial Registration, the Company shall, as expeditiously as reasonably possible: (i) Prepare and file with the SEC a registration statement or amendment thereto with respect to such Registrable Securities and use its best efforts to cause such registration to become effective as provided in Section 1.4(b)(i), provide notice to each holder of Registrable Securities by telefacsimile on the day a registration statement filed hereunder becomes effective advising that the registration statement has become effective, and keep such registration statement effective for so long as any holder of Registrable Securities desires to dispose of the securities covered by such registration statement; provided, however, that in no event shall the Company be required to keep the Registration Statement effective for a period greater than two (2) years from the Closing Date; (ii) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement and notify the holders of the filing and effectiveness of such Registration Statement and any amendments or supplements; (iii)Furnish to each holder of Registrable Securities such numbers of copies of a current prospectus, including a preliminary prospectus, conforming with the requirements of the Act, copies of the registration statement any amendment or supplement to any thereof and any documents incorporated by reference therein and such other documents, all free of charge, as such holder of Registrable Securities may reasonably require in order to facilitate the disposition of Registrable Securities owned by such holder of Registrable Securities; (iv) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or "Blue Sky" laws of such jurisdictions as shall be reasonably requested by the holder of Registrable Securities; (v) Notify each holder of Registrable Securities immediately of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing, and use its best efforts to promptly update and/or correct such prospectus; 4 (vi) Furnish, at the Company's expense upon the request of any holder of Registrable Securities in connection with a registration statement filed pursuant to this agreement or any underwritten public offering, (A) an opinion of counsel of the Company, dated the effective date of the registration statement, in form and substance reasonably satisfactory to the holder and its counsel and covering, without limitation, such matters as the due authorization and issuance of the securities being registered and certain matters pertaining to disclosure under and compliance with securities laws by the Company in connection with the registration thereof and/or (B) a "comfort" letter or letters of the Company's independent public accountants provided at the Company's expense in form and substance reasonably satisfactory to the holder and its counsel; (vii)Use its best efforts to list and maintain the listing of the Registrable Securities covered by such registration statement with any national market or securities exchange on which such securities are then listed; (viii) Make available for inspection by any holder of Registrable Securities, upon request by such holder, all SEC Documents (as defined below) filed subsequent to the Closing and require the Company's officers, directors and employees to supply all information reasonably requested by any holder of Registrable Securities in connection with such registration statement; and (ix) Furnish to each holder of Registrable Securities prompt notice of the commencement of any stop-order proceedings under the Act, together with copies of all documents in connection therewith, and use its best efforts to obtain withdrawal of any such stop order as soon as possible. (e) Upon request of the Company, each holder of Registrable Securities will furnish to the Company in connection with any registration under this Section such information regarding itself, the Registrable Securities and other securities of the Company held by it, and the intended method of disposition of such securities as shall be reasonably required to effect the registration of the Registrable Securities held by such holder of Registrable Securities. The intended method of disposition (Plan of Distribution) of such securities as so provided by each such holder shall be included without alteration in the Registration Statement covering the Registrable Securities and shall not be changed without the prior written consent of such holder. (f) (i) The Company shall indemnify, defend and hold harmless each holder of Registrable Securities which are included in a registration statement pursuant to the provisions of Subsections (b) or (c) hereof and each of its officers, directors, employees, agents, partners or controlling persons (within the meaning of the Act) (each, an "indemnified party") from and against, and shall reimburse such indemnified party with respect to, any and all claims, suits, demands, causes of action, losses, damages, liabilities, costs or expenses ("Liabilities") to which such indemnified party may become subject under the Act or otherwise, arising from or relating to (A) any untrue statement or alleged untrue statement of any material fact contained in such registration statement, any prospectus contained therein or any amendment or supplement thereto, or (B) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading; provided, however, that the Company shall not be liable in any such case to the extent that any such Liability arises out of or is based upon an untrue statement or omission so made in strict conformity with information furnished by such indemnified party in writing specifically for use in a registration statement. 5 (ii) In the event of any registration under the Act of Registrable Securities pursuant to Subsections (b) or (c) hereof, each holder of such Registrable Securities hereby severally agrees to indemnity, defend and hold harmless the Company, and its officers, directors, employees, agents, partners, or controlling persons (within the meaning of the Act) (each, an "indemnified party") from and against, and shall reimburse such indemnified party with respect to, any and all Liabilities to which such indemnified party may become subject under the Act or otherwise, arising from or relating to (A) any untrue statement or alleged untrue statement of any material fact contained in such registration statement, any prospectus contained therein or any amendment or supplement thereto, or (B) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading; provided, that such holders will be liable in any such case to the extent and only to the extent, that any such Liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, prospectus or amendment or supplement thereto in reliance upon and in conformity with written information furnished by such holder specifically for use in the preparation thereof. (iii) Promptly after receipt by any indemnified party of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against another party (the "indemnifying party") hereunder, notify such party in writing thereof, but the omission so to notify such party shall not relieve such party from any Liability which it may have to the indemnified party other than under this Section and shall only relieve it from any Liability which it may have to the indemnified party under this Section if and to the extent an indemnifying party is materially prejudiced by such omission. In case any such action shall be brought against any indemnified party and such indemnified party shall notify an indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in and, to the extent it shall wish, to assume and undertake the defense thereof with counsel reasonably satisfactory to such indemnified party, and, after notice from the indemnifying party to the indemnified party of its election so to assume and undertake the defense thereof, the indemnifying party shall not be liable to the indemnified party under this Section for any legal expenses subsequently incurred by the indemnified party in connection with the defense thereof other than reasonable costs of investigation and of liaison with counsel so selected; provided, however, that if the defendants in any such action include both parties and the indemnified party shall have reasonably concluded that there may be reasonable defenses available to them which are different from or additional to those available to the indemnifying party or if the interests of the indemnified party reasonably may be deemed to conflict with the interests of the indemnifying party, the indemnified party shall have the right to select a separate counsel and to assume such legal defenses and otherwise to participate in the defense of such action, with the reasonable expenses and fees of one such separate counsel and other reasonable expenses related to such participation to be reimbursed by the indemnifying party as incurred. 6 (g) (i) With respect to the inclusion of Registrable Securities in a registration statement pursuant to Subsections (b) or (c), all fees, costs and expenses of and incidental to such registration, inclusion and public offering shall be borne by the Company; provided, however, that any security holders participating in such registration shall bear their pro-rata share of the underwriting discounts and commissions, if any, incurred by them in connection with such registration. (ii) The fees, costs and expenses of registration to be borne by the Company as provided in this Subsection (g) shall include, without limitation, all registration, filing and NASD fees, printing expenses, fees and disbursements of counsel and accountants for the Company, all expenses associated with any opinion or "comfort" letters, and all legal fees and disbursements and other expenses of complying with state securities or Blue Sky laws of any jurisdiction or jurisdictions in which securities to be offered are to be registered and qualified. Subject to appropriate agreements as to confidentiality, the Company shall make available to the holders of Registrable Securities and their counsel its documents and personnel for due diligence purposes. Except as otherwise provided herein, fees and disbursements of counsel and accountants for the selling security holders shall be borne by the respective selling security holders. (h) The rights to cause the Company to register all or any portion of Registrable Securities pursuant to this Section l.4 may be assigned by Purchaser to a transferee or assignee. Within a reasonable time after such transfer, the Purchaser shall notify the Company of the name and address of such transferee or assignee, and the securities with respect to which such registration rights are being assigned. Such assignment shall be effective only if, immediately following such transfer, the further disposition of such securities by the transferee or assignee is restricted under the Act. Any transferee asserting registration rights hereunder shall be bound by the applicable provisions of this Agreement. (i) The Company shall not agree to allow the holders of any securities of the Company to include any of their securities in any registration statement filed by the Company pursuant to Subsection (b) unless such inclusion will not reduce the amount of the Registrable Securities included therein. Section 1.5 Company Standoff. Except in a business combination, or under existing employee stock incentive or purchase plans, the Company shall not for its own account effect any public sale or distribution of any securities similar to the Registrable Securities or any securities exercisable for or convertible or changeable into the Registrable Securities during the thirty (30) days prior to, and during the sixty (60) days immediately following, the effective date of any registration statement filed pursuant to Section 1.4(b) hereof; provided, however, that the Company may effect such public sale or distribution during the thirty (30) days immediately following the effective date of such registration statement if such sale or distribution of securities is at a price equal to or greater than 130% of the last trade price of the Company's Common Stock on the Closing Date. 7 Section 2.1 Representations and Warranties of the Purchaser. The Purchaser makes the following representations and warranties to the Company: (a) Accredited Investor. The Purchaser is an "accredited investor", as such term is defined in Rule 501(a) of Regulation D, promulgated under the Act. (b) Speculative Investment. The Purchaser is aware that an investment in the Shares is highly speculative and subject to substantial risks. The Purchaser is capable of bearing the high degree of economic risk and the burden of this venture, including, but not limited to, the possibility of complete loss of the Purchaser's investment in the Shares and underlying Common Stock which make liquidation of this investment impossible for the indefinite future. (c) Disposition. The Purchaser understands that neither the Shares nor the underlying Common Stock have been registered under the Act. The Shares are being acquired by reason of a specific exemption under the Act as well as under certain state statutes for transactions by an issuer not involving any public offering and that any disposition of the Shares may, under certain circumstances, be inconsistent with this exemption and may make the Purchaser an "underwriter" within the meaning of the Act. The Purchaser acknowledges that the Shares purchased must be held and may not be sold, transferred, or otherwise disposed of for value unless they are subsequently registered under the Act, sold pursuant to Rule 144 of the Act, or an exemption from registration under the Act is available. (d) Privately Offered. The offer to acquire the Shares was directly communicated to the Purchaser in such manner that the Purchaser was able to ask questions of and receive answers concerning the terms and conditions of this transaction. At no time was the Purchaser presented with or solicited by or through any leaflet, public promotional meeting, television advertisement, or any other form of general advertising. (e) Purchase for Investment. The Shares are being acquired solely for the Purchaser's own account, for investment, and are not being purchased with view to the resale, distribution, subdivision or fractionalization thereof without a valid registration with applicable governmental authorities. Section 2.2 Representations and Warranties of the Company. The Company hereby makes the following representations and warranties to the Purchaser: (a) Organization and Qualification. The Company is a corporation duly incorporated and existing in good standing under the laws of the State of New York and has the requisite corporate power to own its properties and to carry on its business as now being conducted. The Company does not have any subsidiaries. The Company is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary other than those in which the failure so to qualify would not have a Material Adverse Effect. "Material Adverse Effect", for purposes of this Subscription Agreement (as it may be amended from time to time, the "Agreement"), means any adverse effect on the business, operations, properties, prospects, or financial condition of the entity with respect to which such term is used and which is material to such entity and other entities controlled by such entity taken as a whole. 8 (b) Authorization; Enforcement. (i) The Company has the requisite corporate power and authority to enter into and perform this Agreement and to issue the Shares and Registrable Securities in accordance with the terms hereof, (ii) the execution and delivery of this Agreement by the Company and the consummation by it of the transactions contemplated hereby have been duly authorized by all necessary corporate action, and no further consent or authorization of the Company or its Board of Directors or stockholders is required, (iii) this Agreement has been duly executed and delivered by the Company, (iv) this Agreement constitutes a valid and binding obligation of the Company enforceable against the Company in accordance with its terms (except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally the enforcement of, creditors' rights and remedies or by other equitable principles of general application) and (v) prior to the Closing Date, any necessary Certificate of Amendment to the Company's the Company's Certificate of Incorporation as in effect on the date hereof (the "Charter") authorizing Company to issue all of the Shares and Registerable Securities, in accordance with Schedule I, will have been filed with the New York Department of State and will be in full force and effect, enforceable against the Company in accordance with the terms of such amended Charter. (c) Authorized Capital; Rights or Commitments to Stock. The authorized capital stock of the Company consists of 30,000,000 shares of Common Stock, and 5,000,000 shares of Preferred Stock; there are 13,680,627 shares of Common Stock issued and outstanding and there are no shares of such Preferred Stock issued and outstanding; and, upon issuance of the Shares in accordance with the terms hereof, there will be 13,680,627 shares of Common Stock and 105 shares of 8% Series B Preferred Stock issued and outstanding. All of the outstanding shares of the Company's Common Stock have been validly issued and are fully paid and nonassessable. Except as set forth in Exhibit A, attached hereto and incorporated herein by reference, or as described in the SEC Documents, no shares of Common Stock are entitled to preemptive rights or registration rights and there are no outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company, or contracts, commitments, understandings, or arrangements by which the Company is or may become bound to issue additional shares of capital stock of the Company or options, warrants, scrip, rights to subscribe to, or commitments to purchase or acquire, any shares, or securities or rights convertible into shares, of capital stock of the Company. The Company has furnished or made available to the Purchaser true and correct copies of the Company's Charter, and the Company's By-Laws, as in effect on the date hereof (the "By-Laws"). (d) Issuance of Shares. The issuance of the Shares has been duly authorized and, when paid for and issued in accordance with the terms hereof, the shall be validly issued, fully paid and non-assessable and entitled to the rights and preferences set forth in Schedule I hereto. The Common Stock issuable upon conversion of the Shares will be duly authorized and reserved for issuance and, upon conversion, will be validly issued, fully paid and non-assessable and the holders shall be entitled to all rights and preferences accorded to a holder of Common Stock. 9 (e) No Conflicts. The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby do not and will not (i) result in a violation of the Company's Charter or By-Laws or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company is a party, or result in a violation of any federal, state, local or foreign law, rule, regulation, order, judgment or decree (including Federal and state securities laws and regulations) applicable to the Company or by which any property or assets of the Company or any of its subsidiaries is bound or affected (except for such conflicts, defaults, terminations, amendments, accelerations, cancellations and violations as would not, individually or in the aggregate, have a Material Adverse Effect); provided that, for purposes of such representation as to Federal, state, local or foreign law, rule or regulation, no representation is made herein with respect to any of the same applicable solely to the Purchaser and not to the Company. The business of the Company is not being conducted in violation of any law, ordinance or regulations of any governmental entity, except for violations which either singly or in the aggregate do not and will not have a Material Adverse Effect. The Company is not required under Federal, state or local law, rule or regulation in the United States to obtain any consent, authorization or order of, or make any filing (other than any filing of a vote establishing a class or series of stock with the New York Department of State) or registration with, any court or governmental agency in order for it to execute, deliver or perform any of its obligations under this Agreement or issue and sell the Shares in accordance with the terms hereof (other than any SEC, NASD or state securities filings which may be required to be made by the Company subsequent to the Closing, and any registration statement which may be filed pursuant hereto); provided that, for purposes of the representation made in this sentence, the Company is assuming and relying upon the accuracy of the relevant representations and agreements of the Purchaser herein. (f) SEC Documents, Financial Statements. The Common Stock of the Company is registered pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and, except as set forth in Exhibit A, the Company has filed on a timely basis all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the reporting requirements of the Exchange Act, including material filed pursuant to Section 13(a) or 15(d), in addition to one or more registration statements and amendments thereto heretofore filed by the Company with the SEC under the Act (all of the foregoing including filings incorporated by reference therein being referred to herein as the "SEC Documents"). The Company directly or through its agent has delivered to the Purchaser true and complete copies of the SEC Documents. The Company has not provided to the Purchaser any information which, according to applicable law, rule or regulation, should have been disclosed publicly by the Company but which has not been so disclosed, other than with respect to the transactions contemplated by this Agreement. 10 Except as set forth in Exhibit A, as of their respective dates the SEC Documents complied in all material respects with the requirements of the Act or the Exchange Act as the case may be and the rules and regulations of the SEC promulgated thereunder and other federal, state and local laws, rules and regulations applicable to such SEC Documents, and none of the SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. Except as set forth in Exhibit A, the financial statements of the Company included in the SEC Documents comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC or other applicable rules and regulations with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto or (ii) in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Company as of the dates thereof and the results of operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). (g) No Material Adverse change. Since the date through which the most recent quarterly report of the Company on Form 10-Q has been prepared and filed with the SEC, a copy of which is included in the SEC Documents, no Material Adverse Effect has occurred or exists with respect to the Company. (h) No Undisclosed Liabilities. The Company has no material liabilities or obligations not disclosed in the SEC Documents, other than those incurred in the ordinary course of the Company's business since the date of the most recently filed SEC Documents which, individually or in the aggregate, do not or would not have a Material Adverse Effect on the Company. (i) No Undisclosed Events or Circumstances. No event or circumstance has occurred or exists with respect to the Company or any of its subsidiaries or their respective businesses, properties, prospects, operations or financial condition which, under applicable law, rule or regulation, requires public disclosure or announcement by the Company but which has not been so publicly announced or disclosed. (j) No General Solicitation. Neither the Company nor any of its affiliates or, to the best of the Company's knowledge, any person acting on its or their behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D under the Act) in connection with the offer or sale of the Shares. (k) No Integrated Offering. Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would require registration of the Shares under the Act. 11 Section 3.1 Securities Compliance. The Company shall notify the SEC and the NASD, in accordance with their respective requirements, if any, of the transactions contemplated by this Agreement, and shall take all other necessary action and proceedings as may be required and permitted by applicable law, rule and regulation, for the legal and valid issuance of the Shares, and the Common Stock issuable upon conversion thereof, to the Purchaser. Section 3.2 Registration and Listing. Until at least two (2) years after all Shares have been converted into Registrable Securities, the Company will cause its Common Stock to continue to be registered under Sections 12(b) or 12(g) of the Exchange Act, will comply in all respects with its reporting and filing obligations under such Exchange Act, will comply with all requirements related to any registration statement filed pursuant to this Agreement and will not take any action or file any document (whether or not permitted by the Act or the Exchange Act or the rules thereunder) to terminate or suspend such registration or to terminate or suspend its reporting and filing obligations under said Acts, except as permitted herein. Until at least two (2) years after all Shares have been converted into Common Stock, the Company will take all action within its power to continue the listing or trading of its Common Stock on the Principal Market (as defined in Section 7.10 hereof) and will comply in all respects with the Company's reporting, filing and other obligations under the bylaws or rules of the Principal Market authority. The covenants set forth in this Section 3.2 shall not be deemed to prohibit a merger, sale of all assets or other corporate reorganization if the entity surviving or succeeding to the Company is bound by this Agreement with respect to its securities issued in exchange for or in replacement of the Shares or Common Stock or the consideration received for or in replacement of the Shares or Common Stock is cash. Section 3.3 Right of First Refusal and Most-Favored-Nation Clause. If at any time before the end of the thirty (30) day period following the effective date of a registration statement filed pursuant to Section 1.4 hereof the Company proposes to issue Common Stock or securities convertible into or exercisable for Common Stock or other convertible securities, pursuant to an offering exempt from registration under the Act, the Company shall provide to Purchaser reasonable advance notice of all the terms of such proposed issuance. The Purchaser shall have the right to purchase or refuse to purchase all or any part of such securities proposed to be issued in such offering, and shall have at least seventy two (72) hours after receipt of such notice to review the terms of the proposed issuance. If the Company issues Common Stock or securities convertible into or exercisable for Common Stock or other convertible securities at a time when any of the Shares remain outstanding at an effective price per share of Common Stock which is lower than the conversion price of the Shares at that time, then the Company shall issue to each holder upon conversion an additional number of shares of Common Stock necessary to reduce the effective conversion price to such lower issue price. This Section shall not be applicable to issuances of Common Stock, or options granted at market price, pursuant to any shareholder-approved option plan covering not more than 10% of the Company's outstanding stock. 12 Section 4.1 Conditions Precedent to the Obligation of the Company to Sell the Shares. The obligation hereunder of the Company to issue and/or sell the Shares to the Purchaser is subject to the satisfaction, at or before the Closing, of each of the conditions set forth below. These conditions may be waived by the Company at any time in its sole discretion. (a) Accuracy of the Purchaser's Representations and Warranties. The representations and warranties of the Purchaser shall be true and correct in all material respects as of the date when made and as of the Closing Date as though made at that time (except for representations and warranties that speak as of a particular date). (b) Performance by the Purchaser. The Purchaser shall have performed all agreements and satisfied all conditions required to be performed or satisfied by the Purchaser at or prior to the Closing. (c) No Injunction. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by this Agreement. (d) Legal action. No legal action, suit or proceeding shall be pending or threatened which seeks to restrain or prohibit the transactions contemplated by this Agreement. Section 4.2 Conditions Precedent to the Obligation of the Purchaser to Purchase the Shares. The obligation hereunder of the Purchaser to acquire and pay for the Shares is subject to the satisfaction, at or before the Closing, of each of the conditions set forth below. These conditions may be waived by the Purchaser at any time in its sole discretion. (a) Accuracy of the Company's Representations and Warranties. The representations and warranties of the Company shall be true and correct in all material respects as of the date when made and as of the Closing Date as though made at that time (except for representations and warranties that speak as of a particular date). (b) Performance by the Company. The Company shall have performed all agreements and satisfied all conditions required to be performed or satisfied by the Company at or prior to the Closing. (c) Suspension. From the date hereof to the Closing Date, trading in the Company's Common Stock shall not have been suspended by the SEC or the Principal Market (except for any suspension of trading of limited duration agreed to between the Company and the Principal Market solely to permit dissemination of material information regarding the Company), and trading in securities generally as reported by the Principal Market shall not have been suspended, or limited or minimum prices shall not have been established on securities whose trades are reported by the Principal Market. (d) No Injunction. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by this Agreement. (e) Opinion of Counsel, Etc. The Purchaser shall have received before or at the Closing an opinion of counsel to the Company (covering, without limitation, such of the matters set forth in Section 2.2(a) through (e)), as are in form and substance reasonably satisfactory to the Purchaser and its counsel, and such other certificates and documents as the Purchaser or its counsel shall reasonably require incident to the Closing. 13 Section 5.1 Legend on Stock. Each certificate representing the Shares and, if necessary, Common Stock issued upon conversion thereof, shall be stamped or otherwise imprinted with a legend substantially in the following form: THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND ANY APPLICABLE STATE SECURITIES LAW OR AN APPLICABLE EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS. The Company agrees to reissue certificates representing the Shares or, if applicable, the Common Stock issued upon conversion thereof without the legend set forth above at such time as (a) the holder thereof is permitted to dispose of such Shares (or securities issued upon conversion thereof) pursuant to Rule 144(k) under the Act, (b) the securities are sold to a purchaser or purchasers who (in the opinion of counsel to such holders, in form and substance reasonably satisfactory to the Company and its counsel) are able to dispose of such securities publicly without registration under the Act, or (c) such securities are registered under the Act. Section 6.1 Termination by Mutual Consent. This Agreement may be terminated at any time prior to the Closing by the mutual written consent of the Company and the Purchaser. Section 6.2 Other Termination. This Agreement may be terminated by action of the Board of Directors or other governing body of the Purchaser or the Company at any time if the Closing shall not have been consummated by the fifth (5th) business day following the date of this Agreement, provided that the party seeking to terminate the Agreement is not in breach of the Agreement. Section 6.3 Automatic Termination. This Agreement shall automatically terminate without any further action of either party hereto if the Closing shall not have occurred by the seventh (7th) business day following the date of this Agreement, provided, however, that any such termination shall not terminate the liability of any party which is then in breach of the Agreement. Section 7.1 Fees and Expenses. Except as otherwise set forth in Section 1.4 hereof, each party shall pay the fees and expenses of its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement. The Company shall pay all stamp and other taxes and duties levied in connection with the issuance of the Shares and Common Stock pursuant hereto. Section 7.2 Specific Enforcement, Consent to Jurisdiction. (a) The Company and the Purchaser acknowledge and agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent or cure breaches of the provisions of this Agreement and to enforce specifically the terms and provisions hereof, this being in addition to any other remedy to which either of them may be entitled by law or equity. 14 (b) The Company and the Purchaser each (i) hereby irrevocably submits to the jurisdiction of the United States District Court and other courts of the United States sitting in Texas for the purposes of any suit, action or proceeding arising out of or relating to this Agreement and (ii) hereby waives, and agrees not to assert in any such suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of such court, that the suit, action or proceeding is brought in an inconvenient forum or that the venue of the suit, action or proceeding is improper. The Company and the Purchaser each consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing in this paragraph shall affect or limit any right to serve process in any other manner permitted by law. Section 7.3 Entire Agreement: Amendment. This Agreement contains the entire understanding of the parties with respect to the matters covered hereby and, except as specifically set forth herein, neither the Company nor the Purchaser makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be waived or amended other than by a written instrument signed by the party against whom enforcement of any such amendment or waiver is sought. Section 7.4 Notices. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be effective (a) upon hand delivery or delivery by telex (with correct answer back received), telecopy or facsimile at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b) on the second (2nd) business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur. The addresses for such communications shall be: to the Company: Stan Cipkowski, President America Bio Medica Corporation 102 Simons Road Ancramdale, New York 12503 to the Purchaser: At the address set forth at the foot of this Agreement or as specified in writing by Purchaser. Any party hereto may from time to time change its address for notices by giving at least ten (10) days' written notice of such changed address to the other party hereto. Section 7.5 Waivers. No waiver by either party of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the exercise of any such right accruing to it thereafter. 15 Section 7.6 Headings. The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof. Section 7.7 Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the internal laws of the present state of incorporation of the Company without regard to such state's principles of conflict of laws. Section 7.8 Survival. The representations and warranties of the Company and the Purchaser contained in herein and the agreements and covenants set forth in Sections 1.1 through 1.5, 3.1 through 3.4 and 7.1 through 7.15 shall survive the Closing. Section 7.9 Publicity. The Company agrees that it will not disclose, and will not include in any public announcement, the name of the Purchaser without its consent, unless and until such disclosure is required by law or applicable regulation, and then only to the extent of such requirement. Section 7.10 Principal Market. The term "Principal Market" refers to the NASD Bulletin Board, NASDAQ Small Cap Market, or other principal market or national securities exchange, on which the Common Stock of the Company is principally traded. Section 7.11 Acceptance. Execution and delivery of this Agreement shall constitute an offer to purchase the Shares, which offer, unless previously revoked by the Purchaser, may be accepted or rejected by the Company, in its sole discretion for any cause or for no cause and without liability to the Purchaser. The Company shall indicate acceptance of this Agreement by signing as indicated on the signature page hereof. Section 7.12 Binding Agreement. Upon acceptance of this Agreement by the Company, the Purchaser agrees that he may not cancel, terminate or revoke any agreement of the Purchaser made hereunder, and that this Agreement shall survive the death or disability of the Purchaser and shall be binding upon heirs, successors, assigns, executors, administrators, guardians, conservators or personal representatives of the Purchaser. Section 7.13 Incorporation by Reference. All information set forth on the signature page is incorporated as integral terms of this Agreement. Section 7.14 Counterparts. This Agreement may be signed in multiple counterparts, which counterparts shall constitute one and the same original instrument. THIS SPACE HAS BEEN LEFT BLANK INTENTIONALLY. THE SIGNATURE PAGE FOLLOWS. 16 IN WITNESS WHEREOF, the Purchaser has executed this Agreement on the date set forth below. For the purchase price of $10,000 per Share, the Purchaser tenders herewith the full purchase price of: The exact name(s) (Including correct, legible spelling) and the information under which title to the Shares will be taken is as follows (Please print or type): Address of Purchaser: Social Security or IRS Employer Identification Number(s): Signature of Purchaser: Name of Purchaser: By: Dated: Name: Title: Accepted by: AMERICA BIO MEDICA CORPORATION, a New York corporation By: Print Name: Title: 17 SCHEDULE I AMERICAN BIO MEDICA CORPORATION RESOLUTION ESTABLISHING RIGHTS AND PREFERENCES FOR 8% SERIES B CONVERTIBLE PREFERRED STOCK RESOLVED, that there shall be a series of shares of the Corporation designated "8% Series B Convertible Preferred Stock"; that the number of shares of such series shall be 1,000, that the Corporation issue such shares, and that the rights and preferences of such series (the "8% Preferred") and the limitations or restrictions thereon, shall be as set forth herein. The following terms and conditions shall be adopted and incorporated by reference into the foregoing resolutions as if fully set forth therein: 1. Dividends. (a) The holders of the 8% Preferred shall be entitled to receive out of any assets legally available therefor cumulative dividends at the rate of $800 per share per annum, payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year, in preference and priority to any payment of any dividend on the Common Stock or any other class or series of stock of the Corporation. Such dividends shall accrue on any given share from the day of original issuance of such share and shall accrue from day to day whether or not earned or declared. If at any time dividends on the outstanding 8% Preferred at the rate set forth above shall not have been paid or declared and set apart for payment with respect to all preceding periods, the amount of the deficiency shall be fully paid or declared and set apart for payment, but without interest, before any distribution, whether by way of dividend or otherwise, shall be declared or paid upon or set apart for the shares of any other class or series of stock of the Corporation. (b) All dividends on the 8% Preferred shall be paid in cash. If the Corporation shall have received the prior written consent of all holders of the 8% Preferred at least ten (10) days before the record date for a dividend, which consent may be arbitrarily withheld, the dividend may be payable in shares of 8% Preferred valued at $10,000 per share; provided the Common Stock issuable upon conversion of such 8% Preferred has been registered for resale under the Securities Act of 1933, as amended (the "Act"), and the registration statement including a current prospectus with respect thereto remains in effect at the date of delivery of such shares. 2. Liquidation Preference; Redemption. (a) In the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, the holders of the 8% Preferred shall be entitled to receive, prior and in preference to any distribution of any assets of the Corporation to the holders of any other class or series of shares the amount of $10,000 per share plus any accrued but unpaid dividends (the "Liquidation Preference"). (b) A consolidation or merger of the Corporation with or into any other corporation or corporations, or a sale of all or substantially all of the assets of the Corporation, shall, at the option of the holders of the 8% Preferred, be deemed a liquidation, dissolution or winding up within the meaning of this Section 2 if the shares of stock of the Corporation outstanding immediately prior to such transaction represent immediately after such transaction less than a majority of the voting power of the surviving corporation (or of the acquirer of the Corporation's assets in the case of a sale of assets). Such option may be exercised by the vote or written consent of holders of a majority of the 8% Preferred at any time within thirty (30) days after written notice (which shall be given promptly) of the essential terms of such transaction shall have been given to the holders of the 8% Preferred in the manner provided by law for the giving of notice of meetings of shareholders. (c) The Corporation may, at its option, cause all outstanding shares of the 8% Preferred to be redeemed after the date on which a registration statement under the Act ("Registration Statement") has been declared effective (the "effective date"), provided the Corporation has given notice of its intention to redeem to the holders of the 8% Preferred at least five (5) days prior to the redemption date. On the redemption date, the Corporation shall pay such holders by cashier's check or wire transfer in immediately available funds the amount of $14,000 per share if the redemption date is on or before the ninetieth (90th) day after the effective date, plus any accrued but unpaid dividends. Promptly thereafter, the holders shall surrender the certificate or certificates representing the 8% Preferred, duly endorsed, at the office of the Corporation or of any transfer agent for such shares, or at such other place designated by the Corporation. 3. 8% Preferred - Forced Conversion. (a) The Corporation may, at its option, cause all outstanding shares of the 8% Preferred to be converted into Common Stock at any time beginning one (1) year after the date of issuance, on at least twenty (20) days' advance notice, at a conversion price determined as set forth in Section 4 hereof (the "Conversion Price") as of the date specified in such notice (the "Conversion Date") and otherwise on the terms set forth in Section 4 hereof; provided, that the Corporation may not exercise such right of conversion unless (i) the Closing Price (last trade price) of the Common Stock as reported by the Principal Market (as defined in Section 3(d)(iv) hereof) for the twenty (20) consecutive trading days prior to the date the Conversion Notice is mailed has not on any day been less than one hundred forty percent (140%) of the last trade price of the Company's Common Stock on the day of Closing (subject to adjustment for stock dividends, stock splits and reverse stock splits), and (ii) the shares issuable upon conversion of the 8% Preferred are registered for resale by an effective Registration Statement which became effective not more than one hundred twenty (120) days after the date of issuance of the 8% Preferred, and a current prospectus meeting the requirements of Section 10 of the Act is available for delivery at the Conversion Date. (b) At least twenty (20) days prior to the Conversion Date, written notice (the "Conversion Notice") shall be mailed, first class postage prepaid, by the Corporation to each holder of record of the 8% Preferred, at the address last shown on the records of the Corporation for such holder, notifying such holder of the conversion which is to be effected, specifying the Conversion Date and calling upon each such holder to surrender to the Corporation, in the manner and at the place designated, a certificate or certificates representing the number of shares of 8% Preferred held by such holder. Subject to the provisions of the following subsection (c), on or after the Conversion Date, each holder of 8% Preferred shall surrender to the Corporation the certificate or certificates representing the shares of 8% Preferred owned by such holder as of the Conversion Date, in the manner and at the place designated in the Conversion Notice, and thereupon the shares issuable upon such conversion shall be delivered as provided in Section 4(b) hereof. (c) If, on the Conversion Date, the registration condition specified in clause (ii) of subsection (a) shall not be satisfied, then no shares shall be converted and the Conversion Notice shall be deemed to be withdrawn. In such event, any certificates for 8% Preferred which have been surrendered for conversion shall be returned to the persons surrendering the same; provided, however, that if a holder has received shares of Common Stock upon conversion of 8% Preferred after the Conversion Notice was given but before the Conversion Date, such holder may elect either to retain such Common Stock or rescind such conversion by tendering such shares of Common Stock to the Corporation. (d) On the second anniversary of the issuance of the 8% Preferred, all then outstanding shares of 8% Preferred shall be automatically converted into Common Stock at the Conversion Price and otherwise pursuant to the applicable provisions set forth in Section 4 hereof. 4. 8% Preferred - Optional Conversion. The holders of the 8% Preferred shall have optional conversion rights as follows: (a) Right to Convert. Subject to the succeeding sentence, Shares of 8% Preferred shall be convertible, at the option of the holder thereof, into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing (A) the Liquidation Preference of the 8% Preferred determined pursuant to Section 2 hereof on the date the notice of conversion is given, by (B) the Conversion Price determined as hereinafter provided in effect on the applicable conversion date. No holder of Shares, except for ProFutures Special Equities Fund, L.P. and Deere Park Capital Management, Inc. (nominee), shall be entitled to convert Shares, and enter into any short sale or long sale transaction with respect to the Company's Common Stock, directly or indirectly, at any time before the period ending sixty (60) days after the effective date of any registration statement filed pursuant to Section 1.4(b) hereof (the "Open Selling Date"). The Corporation shall prohibit any other party purchasing restricted convertible securities of the Corporation at any time during the period beginning thirty (30) days prior to the Closing Date and ending on the Open Selling Date from converting any of such securities during such period. (b) Mechanics of Conversion. To convert shares of 8% Preferred into shares of Common Stock, the holder shall give written notice to the Corporation (which notice may be given by telefacsimile transmission) that such holder elects to convert the shares and shall state therein date of the conversion, the number of shares to be converted and the name or names in which such holder wishes the certificate or certificates for shares of Common Stock to be issued. Promptly thereafter, the holder shall surrender the certificate or certificates representing the shares of 8% Preferred to be converted, duly endorsed, at the office of the Corporation or of any transfer agent for such shares, or at such other place designated by the Corporation; provided, that the holder shall not be required to deliver all certificates representing such shares if the holder is waiting to receive all or part of the certificates from the Corporation. The Corporation shall, immediately upon receipt of such notice, issue and deliver to or upon the order of such holder, against delivery of the certificates representing the shares which have been converted, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled and such certificate or certificates shall not bear any restrictive legend; provided (A) the Common Stock evidenced thereby are sold pursuant to an effective registration statement under the Act, (B) the holder provides the Corporation with an opinion of counsel reasonably acceptable to the Corporation to the effect that a public sale of such shares may be made without registration under the Act, or (C) such holder provides the Corporation with reasonable assurance that such shares can be sold free of any limitations imposed by Rule 144, promulgated under the Act. The Corporation shall cause such issuance to be effected as soon as possible days and shall cause the transmission of the certificates by messenger or overnight delivery service to reach the address designated by such holder within three (3) business days after the receipt of such notice. Absent any circumstances substantially beyond the control of the Corporation, the Corporation shall immediately pay such holder in cash or by wire transfer in immediately available funds $500 per day as liquidated damages for each day such shares have not been delivered to the holder after the end of such three (3) business day period. The notice of conversion may be given by a holder via telefacsimile at any time during the day up to 5:00 p.m. New York, New York time and such conversion shall be deemed to have been made on the date that such notice is transmitted to the Corporation. The person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock at the close of business on such date. (c) Conversion Required. The Corporation acknowledges and understands that a delay in the issuance of the Common Stock pursuant to the provisions hereof below could result in economic loss to the holders of the 8% Preferred. As compensation to any holder when the Corporation has failed with respect to such holder to comply with the Corporation's obligations under Subsection (a) above, and not as a penalty, the Corporation shall pay, in addition to any amounts due under subsection 4(b) above, to such holder liquidated damages an amount equal to two percent (2%) of the total Purchase Price of 8% Preferred and any Common Stock then held by the holder for the first thirty (30) day period after the date on which the Common Stock should have been issued by the Corporation (i.e., the end of the three (3) business day period described in Subsection (b)), plus amount equal to two percent (2%) of the total Purchase Price of 8% Preferred and any Common Stock then held by the holder for each subsequent thirty (30) day period thereafter. Such amounts shall be pro-rated daily and paid to the holder by cashier's check or wire transfer in immediately available funds to such account as shall be designated in writing by the holder. (d) Determination of Conversion Price. (i) Subject to adjustment hereunder, the "Conversion Price" for purposes of hereof shall be equal to seventy five percent (75%) (the "Conversion Percentage") of the average closing bid price of the Common Stock as reported by the Principal Market during the five (5) consecutive trading days preceding the conversion date (but not including such date); provided, however, that in no event may the Conversion Price be more than three dollars and fifty cents ($3.50) per share (the "Maximum Conversion Price"). If the registration statement covering all Common Stock registrable upon conversion of the 8% Preferred is not effective by the one hundred twentieth (120th) day after the date of issuance of the 8% Preferred, the Conversion Percentage shall be decreased by two percent (2%) (pro-rated daily) beginning on the one hundred twenty first (121st) day, and shall be decreased by an additional two percent (2%) (pro-rated daily) for each thirty (30) day period thereafter until such registration statement becomes effective. (For example, if the registration statement becomes effective on the 151st day after the date of issuance, the Conversion Percentage will be 71% [75% minus a total of 4%].) (ii) The "closing bid price" of the Common Stock on a trading day shall be the closing bid price of the Common Stock on the Principal Market. The term "trading day" means a day on which trading is reported on the Principal Market on which prices of the Common Stock are reported. (iii)If, during the period of consecutive trading days provided for above, the Corporation shall declare or pay any dividend on the Common Stock payable in Common Stock or in rights to acquire Common Stock, or shall effect a stock split or reverse stock split, or a combination, consolidation or reclassification of the Common Stock, the Conversion Price and Maximum Conversion Price shall be proportionately decreased or increased, as appropriate, to give effect to such event. (iv) The term "Principal Market" refers to the NASD Bulletin Board, NASDAQ Small Cap Market, or other principal market or national securities exchange, on which the Common Stock of the Company is principally traded. (e) Distributions. If the Corporation shall at any time or from time to time make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Corporation or any of its subsidiaries other than additional shares of Common Stock, then in each such event provision shall be made so that the holders of 8% Preferred shall receive, upon the conversion thereof, the securities of the Corporation which they would have received had they been the owners on the date of such event of the number of shares of Common Stock issuable to them upon conversion. (f) Certificates as to Adjustments. Upon the occurrence of any adjustment or readjustment of the Conversion Price and the Maximum Conversion Price pursuant to this Section 4, the Corporation shall at its expense promptly compute such adjustment or readjustment in accordance with the terms hereof and cause the independent public accountants regularly employed to audit the financial statements of the Corporation to verify such computation and prepare and furnish to each holder of 8% Preferred a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of 8% Preferred, furnish or cause to be furnished to such holder a like certificate prepared by the Corporation setting forth (i) such adjustments and readjustments, and (ii) the number of other securities and the amount, if any, of other property which at the time would be received upon the conversion of 8% Preferred with respect to each share of Common Stock received upon such conversion. (g) Notice of Record Date. In the event of any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any security or right convertible into or entitling the holder thereof to receive additional shares of Common Stock, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, the Corporation shall mail to each holder of 8% Preferred at least ten (10) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution, security or right and the amount and character of such dividend, distribution, security or right. (h) Issue Taxes. The Corporation shall pay any and all issue and other taxes, excluding any income, franchise or similar taxes, that may be payable in respect of any issue or delivery of shares of Common Stock on conversion of shares of 8% Preferred pursuant hereto; provided, however, that the Corporation shall not be obligated to pay any transfer taxes resulting from any transfer requested by any holder in connection with any such conversion. (i) Reservation of Stock Issuable Upon Conversion. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the 8% Preferred, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the 8% Preferred, and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the 8% Preferred, the Corporation will take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose, including, without limitation, engaging in best efforts to obtain any requisite shareholder approval. (j) Fractional Shares. No fractional shares shall be issued upon the conversion of any share or shares of 8% Preferred. All shares of Common Stock (including fractions thereof) issuable upon conversion of more than one share of 8% Preferred by a holder thereof shall be aggregated for purposes of determining whether the conversion would result in the issuance of any fractional share. If, after the aforementioned aggregation, the conversion would result in the issuance of a fraction of a share of Common Stock, the Corporation shall, in lieu of issuing any fractional share, pay the holder otherwise entitled to such fraction a sum in cash equal to the fair market value of such fraction on the date of conversion (as determined in good faith by the Board of Directors of the Corporation). (k) Notices. Any notice required by the provisions of this Section to be given to the holders of shares of 8% Preferred shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at its address appearing on the books of the Corporation. (l) Reorganization or Merger. In case of any reorganization or any reclassification of the capital stock of the Corporation or any consolidation or merger of the Corporation with or into any other corporation or corporations or a sale of all or substantially all of the assets of the Corporation to any other person, and the holders of 8% Preferred do not elect to treat such transaction as a liquidation, dissolution or winding up as provided in Section 2 hereof, then, as part of such reorganization, consolidation, merger or sale, provision shall be made so that each share of 8% Preferred shall thereafter be convertible into the number of shares of stock or other securities or property (including cash) to which a holder of the number of shares of Common Stock deliverable upon conversion of such share of 8% Preferred would have been entitled upon the record date of (or date of, if no record date is fixed) such event and, in any case, appropriate adjustment (as determined by the Board of Directors) shall be made in the application of the provisions herein set forth with respect to the rights and interests thereafter of the holders of the 8% Preferred, to the end that the provisions set forth herein shall thereafter be applicable, as nearly as equivalent as is practicable, in relation to any shares of stock or the securities or property (including cash) thereafter deliverable upon the conversion of the shares of 8% Preferred. 5. Re-issuance of Certificates. In the event of a conversion (or, if applicable, redemption) of 8% Preferred in which less than all of the shares of 8% Preferred of a particular certificate are converted or redeemed, as the case may be, the Corporation shall promptly (but no later than five (5) business days after a conversion date) cause to be issued and delivered to the holder of such certificate, a certificate representing the remaining shares of 8% Preferred which have not been so converted or redeemed. 6. Other Provisions. For all purposes of this Resolution, the term "date of issuance" and the terms "Closing" or "Closing Date" shall mean the day on which shares of the 8% Preferred are first issued by the Corporation. Any provision herein which conflicts with or violates any applicable usury law shall be deemed modified to the extent necessary to avoid such conflict or violation. 7. Restrictions and Limitations. The Corporation shall not undertake the following actions without the consent of the holders of a majority of the 8% Preferred: (i) modify its Certificate of Incorporation or Bylaws so as to amend or change any of the rights, preferences, or privileges of the 8% Preferred, (ii) authorize or issue any other preferred equity security senior to or on a parity with the 8% Preferred, as to dividends, liquidation preferences, conversion rights, redemption rights or other rights, preferences or privileges for a period of thirty (30) days after Closing, as applicable or (iii) purchase or otherwise acquire for value any Common Stock or other equity security of the Corporation either junior or senior to or on a parity with the 8% Preferred while there exists any arrearage in the payment of cumulative dividends hereunder other than redemptions of stock from terminating employees pursuant to contractual rights in favor of the Corporation. 8. Voting Rights. Except as provided herein or as provided for by law, the 8% Preferred shall have no voting rights. 9. Attorneys' Fees. Any holder of 8% Preferred shall be entitled to recover from the Corporation the reasonable attorneys' fees and expenses incurred by such holder in connection with enforcement by such holder of any obligation of the Corporation hereunder. 10. No Adverse Actions. The Corporation shall not in any manner, whether by amendment of the Articles of Incorporation (including, without limitation, any vote establishing a class or series of stock), merger, reorganization, re-capitalization, consolidation, sales of assets, sale of stock, tender offer, dissolution or otherwise, take any action, or permit any action to be taken, solely or primarily for the purpose of increasing the value of any class of stock of the Corporation if the effect of such action is to reduce the value or security of the 8% Preferred. EX-4 7 TERMS OF SERIES C PREFERRED SHARES Exhibit 4.7 Form of Designation of Terms and Conditions Relating to the Series C Convertible Preferred Shares TERMS OF 8% CONVERTIBLE PREFERRED SHARES, SERIES C AMERICAN BIO MEDICA CORPORATION (the "Corporation") 1. Designation and Amount. There is hereby established a series of Preferred Shares to be designated as the "8% Convertible Preferred Shares, Series C" (the "Series C Convertible Preferred Shares") and the number of shares which shall constitute such series shall be one hundred (100) shares, with a stated value (the "Stated Value") of U.S. $10,000 per share. 2. Dividends. (a) General. The Holders of Series C Convertible Preferred Shares shall be entitled to receive preferential dividends in an amount equal to a rate of return of 8% of the Stated Value per annum from the date of issuance (with appropriate proration for any partial dividend period). Such cumulative dividends shall be payable in cash. (b) Dividends Cumulative. Dividends on the Series C Convertible Preferred Shares shall accrue and be cumulative from the date of issuance, whether or not earned and whether or not in any dividend period there shall be surplus or net profits of the Corporation legally available for the payment of such dividends. (c) Equality of Shares. No dividend shall be declared or set apart for any of the Series C Convertible Preferred Shares for any period unless at the same time a like proportionate dividend for the same period shall be declared or set apart for all the Series C Convertible Preferred Shares then outstanding and entitled to receive such dividend. (d) Restrictions with Respect to Junior Shares. So long as any Series C Convertible Preferred Shares shall remain outstanding, no dividend shall be declared or paid or set apart for payment on the Common Shares or any other class of shares ranking junior to the Series C Convertible Preferred Shares in either payment of dividends or liquidation (all such junior classes of shares including, without limitation, the Common Shares, hereinafter referred to collectively as the "Junior Shares") unless full dividends (including interest on any accumulations of dividends) on all outstanding Series C Convertible Preferred Shares shall have been paid in full for all past dividend periods and the dividends on all outstanding Series C Convertible Preferred Shares for the then current dividend period shall have been paid or declared and sufficient funds set apart for payment thereof. 3. Liquidation Preference. (a) General. The Series C Convertible Preferred Shares shall be preferred over the Common Shares and any other class or series of Junior Shares. In the event of any liquidation or dissolution or winding up of the Corporation, the Holders of Series C Convertible Preferred Shares shall be entitled to receive, after payment or provision for payment of the debts and other liabilities of the Corporation, out of the assets of the Corporation available for distribution to its shareholders, all accumulated and unpaid dividends before any distribution of the assets shall be made to the Holders of the Common Shares or any other class or series of Junior Shares. After payment of accumulated dividends on the Series C Convertible Preferred Shares shall have been made in full as provided in the preceding sentence, but not prior thereto, the Preferred Shares, the Common Shares and any other series or class of Junior Shares shall, subject to the respective terms and provisions, if any, applying thereto, be entitled to receive any and all assets remaining to be paid or distributed, with the Series C Convertible Preferred Shares sharing therein in an amount per share of Series C Convertible Preferred Shares equal to the amount to be distributed on each share of Common Shares multiplied by a fraction the numerator of which is the Stated Value of such share of Series C Convertible Preferred Shares and the denominator of which is the then current Conversion Price (as defined below). 1 (b) Distributions Pro Rata. If upon any liquidation or dissolution or winding up of the Corporation the amounts payable on or with respect to the Series C Convertible Preferred Shares together with the amounts payable on or with respect to all classes or series of shares ranking on a parity with the Series C Convertible Preferred Shares as to distribution of assets are not paid in full, the Holders of Series C Convertible Preferred Shares together with all classes or series of shares ranking on a parity with the Series C Convertible Preferred Shares as to distribution of assets shall share pro rata in any distribution of assets in respect of the shares held by them upon such distribution in proportion to the amounts that would have been distributable to each such class or series if all amounts payable on or with respect to the Series C Convertible Preferred Shares and any other class or series of shares that so ranks on a parity with the Series C Convertible Preferred Shares had been paid in full. (c) Merger or Consolidation. Neither the merger or consolidation of the Corporation with another corporation nor the sale or lease of all or substantially all of the assets of the Corporation shall be deemed to be a liquidation or dissolution or winding up of the Corporation. (d) Notice Required. Written notice of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, stating the payment date and the place where the distributable amount shall be payable and stating the anticipated amount of any such distributable amount, shall be given by mail, postage prepaid, not less than thirty (30) days prior to the payment date stated therein, to the Holders of record of Series C Convertible Preferred Shares at their respective addresses as the same shall then appear on the books of the Corporation. 4. Conversion. (a) General. Series C Convertible Preferred Shares may be converted at the option of the Holder thereof, or otherwise as provided below, into fully paid and nonassessable Common Shares of the Corporation at a price (the "Conversion Price") equal to the lesser of: (i) $3.50, or (ii) twenty-five percent (25%) off the Market Price per share of Common Shares on the date of conversion. For purposes of this subparagraph (a) the Market Price per share of Common Shares on any date shall be deemed to be the average of the daily closing bid prices for the twenty (20) consecutive trading days ending on the trading day prior to the day in question. "Closing price" on any day when used with respect to the Common Shares means the reported closing bid price therefor as reported by Reuters, or if not so reported the average of the closing bid and asked prices as furnished by any member of the National Association of Securities Dealers, Inc. selected from time to time by the Holder for that purpose. (b) Adjustments. The Conversion Price and the kind and amounts of securities and property for which Series C Convertible Preferred Shares may be converted shall be subject to adjustment from time to time as follows: 2 (i) If, at any time after the issuance of Series C Convertible Preferred Shares, the Corporation shall (A) declare or pay a dividend, or make a distribution, to all Holders of its Common Shares in Common Shares, (B) subdivide its outstanding Common Shares into a greater number of Common Shares, (C) combine its outstanding Common Shares into a smaller number of Common Shares, or (D) issue by reclassification of its Common Shares (other than a subdivision or combination thereof or a change in par value) any securities, the Conversion Price in effect immediately prior to such action shall be adjusted so that any Holder of Series C Convertible Preferred Shares thereafter surrendered for conversion shall be entitled to receive the kind and number of Common Shares of the Corporation and/or other securities which he would have owned or been entitled to receive immediately following such action had such Series C Convertible Preferred Shares been converted immediately prior thereto. Any adjustment made pursuant to this Paragraph (b)(i) shall become effective immediately after the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification. (ii) If, at any time after the date of issuance of Series C Convertible Preferred Shares, the Corporation shall distribute to all or substantially all Holders of its Common Shares either (A) evidences of indebtedness or assets (excluding cash dividends or distributions) or (B) any other securities of the Corporation or any rights, warrants or options to subscribe for, purchase or otherwise acquire securities of the Corporation in a transaction not covered by Paragraph (b)(i) above (any of which are referred to herein as "Other Securities"), then and in any such case the Corporation shall either distribute such Other Securities to the Holders of Series C Convertible Preferred Shares or reserve for the benefit of the Holders of Series C Convertible Preferred Shares such amount of such Other Securities as the Holders of all Series C Convertible Preferred Shares then outstanding would have owned or been entitled to receive immediately following such action had the Series C Convertible Preferred Shares been converted into Common Shares immediately prior thereto. In addition, the Corporation shall either distribute to, or reserve for the benefit of, the Holders of Series C Convertible Preferred Shares any principal, interest, dividends or other property payable with respect to such Other Securities as and when such interest, dividends or other property is distributed to the Holders of Common Shares. If such a reserve is made, as and when each such share of Series C Convertible Preferred Shares is converted, the Holder of such share shall be entitled to receive from the Corporation his share of such Other Securities together with the principal, interest, dividends or other property payable with respect thereto. (iii)All calculations under this Section 4 shall be made to the nearest one-tenth of a cent or to the nearest one thousandth of a share, as the case may be. No adjustment shall be required unless such adjustment would result in an increase or decrease of at least one percent (1%) of the Conversion Price; provided, however, that any adjustments which by reason of this subparagraph (iii) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. 3 (iv) Whenever the Conversion Price is adjusted or Other Securities are reserved as herein provided, the Corporation shall mail or cause to be mailed a copy of a statement, verified by its independent certified public accountants, setting forth the required adjustments or the nature and amount of Other Securities, as the case may be, to each person who is a registered Holder of Series C Convertible Preferred Shares at such person's last address as the same appears on the books of the Corporation. Each adjustment shall remain in effect until a subsequent adjustment is required hereunder. Failure to give or receive such notice or any defect therein shall not affect the legality or validity of any action taken. Following any adjustment to the Conversion Price, the Holders of Series C Convertible Preferred Shares shall be entitled, by themselves or through attorneys or accountants retained by them, to inspect the books and records of the Corporation in order to verify such adjustment. Such inspection shall be at the expense of the Holders of Series C Convertible Preferred Shares requesting such inspection unless such inspection reveals an error in the adjustment equal to 5% or more of the lower applicable Conversion Price, in which case the Corporation shall promptly reimburse the Holders for all expenses incurred in connection therewith. (v) If at any time, as a result of an adjustment made pursuant to Paragraph (ii) above, the Holders of Series C Convertible Preferred Shares shall become entitled to receive upon conversion any Other Securities, thereafter the number of such Other Securities receivable upon conversion of Series C Convertible Preferred Shares and the price of the Other Securities shall be subject to adjustment from time to time and in a manner and on terms as nearly equivalent as practicable to the provisions with respect to Series C Convertible Preferred Shares contained in Paragraphs (i) and (ii), above. (c) Merger or Consolidation. In case of a merger or consolidation of the Corporation with or into another corporation, or the sale or transfer of all, or substantially all, of the property or assets of the Corporation, the Holders of Series C Convertible Preferred Shares shall thereafter have the right to convert each of such shares into the kind and amount of shares or other securities and property (including cash) receivable (the "Consideration") upon such merger, consolidation or sale by a Holder of the number of Common Shares (whether whole or fractional) into which such Series C Convertible Preferred Shares might have been converted immediately prior to such merger, consolidation or sale (all of which Consideration shall be reserved and become payable upon conversion in the same manner as for Other Securities pursuant to Paragraph (b)(ii) above and shall be adjusted as provided in Paragraph (b) above), and shall have no other conversion rights under these provisions and, in addition, the Corporation shall reserve, on a current basis as and when distributed, for payment upon conversion, in the same manner as required for Other Securities pursuant to Paragraph (b)(ii) above, any interest, dividends, other shares, securities or property distributable with respect to the Consideration, the same as if such Series C Convertible Preferred Shares had been converted immediately prior to such merger, consolidation, or sale of assets; and effective provision shall be made in the charter of the resulting or surviving corporation or otherwise, so that the provisions set forth herein for the adjustment of the conversion terms of the Series C Convertible Preferred Shares shall thereafter be applicable, as nearly as reasonably may be, to any of the Consideration deliverable upon conversion of Series C Convertible Preferred Shares remaining outstanding or other convertible Preferred Shares received in place thereof. Any such resulting or surviving corporation shall expressly assume the obligation to deliver the Consideration, upon the exercise of the conversion right, (and, to that end, shall reserve sufficient Consideration to issue, distribute and/or pay the Holders of Series C Convertible Preferred Shares as if all such shares were converted) as Holders of Series C Convertible Preferred Shares remaining outstanding, or other convertible Preferred Shares received by such Holders in place thereof, shall be entitled to receive pursuant to the provisions hereof, and to make provision for protection of conversion rights as above provided. 4 (d) Notices. If, at any time while Series C Convertible Preferred Shares are outstanding, the Corporation shall (i) declare a dividend (or any other distribution) on its Common Shares, other than in cash, or (ii) reclassify its Common Shares (other than through a subdivision or combination thereof or a change in par value) or become a party to any consolidation or merger or sale or transfer of all or substantially all of the assets of the Corporation, for which approval of the holders of its shares is required, then the Corporation shall cause to be mailed to registered Holders of Series C Convertible Preferred Shares, at their last addresses as they shall appear on the books of the Corporation, at least thirty (30) days prior to the applicable record date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend or distribution, or, if a record is not to be taken, the date as of which Holders of Common Shares of record to be entitled to such dividend or distribution are to be determined, or (y) the date on which any such reclassification, consolidation, merger, sale or transfer is expected to become effective, and the date as of which it is expected that Holders of record of Common Shares shall be entitled to exchange their Common Shares for securities or other property, if any, deliverable upon such reclassification, consolidation, merger, sale or transfer. Failure to give or receive the notice required by this Paragraph (d) or any defect therein shall not affect the legality or validity of any such dividend, distribution, reclassification, consolidation, merger, sale, transfer or other action. (e) Exercise of Conversion Rights. The Holder of any Series C Convertible Preferred Shares may exercise his/her/its option to convert such shares into Common Shares only by surrendering for such purpose to the Corporation the certificates representing the shares to be converted, accompanied or preceded by written notice (which may be transmitted by telecopier) that such holder elects to convert such shares in accordance with the provisions of this Section 5. Said notice shall also state the name or names (with addresses) in which the certificate or certificates for Common Shares which shall be issuable on such conversion shall be issued. Each certificate or certificates surrendered for conversion shall, unless the shares issuable on conversion are to be issued in the same name as that in which such certificate or certificates are registered, be accompanied by instruments of transfer, in form reasonably satisfactory to the Corporation, duly executed by the Holder or his duly authorized attorney. Each conversion shall be deemed to have been effected on the date on which such notice shall have been received by the Corporation as aforesaid (the "Conversion Date"), provided that the certificates to which such notice relates are received by the Corporation no later than the third business day following the date of receipt of such notice, and the person or persons in whose name or names any certificate or certificates for Common Shares shall be issuable upon such conversion shall be deemed to have become on said date the Holder or Holders of record of the shares represented thereby notwithstanding that the transfer books of the Corporation may then be closed or that certificates representing such Common Shares shall not then be actually delivered to such person. As promptly as practicable on or after the Conversion Date, but within three (3) days thereafter, the Corporation shall issue and deliver to the person or persons entitled to receive the same a certificate or certificates representing the number of Common Shares issuable upon such conversion and shall pay or cause the payment of such Other Securities or Consideration or other property as may be payable upon conversion pursuant to Paragraphs (b) (iii) or (c) of this Section (4). 5 (f) Fractional Shares. No fractional Common Shares shall be issued in connection with the conversion of Series C Convertible Preferred Shares into Common Shares. Instead of any fractional Common Share which would otherwise be issuable on conversion, the Corporation shall pay a cash adjustment with respect to such fractional Common Share computed on the basis of the then current fair market value of the Common Shares, as determined in good faith by the Corporation's Board of Directors. (g) Tax on Conversion. The issuance of share certificates on conversions of Series C Convertible Preferred Shares shall be made without charge to converting shareholders for any tax in respect of the issuance thereof except any tax on the income or gain derived by the converting shareholders as a result of the issuance thereof. The Corporation shall not, however, be required to pay any tax which may be payable in respect of any registration of transfer involved in the issue and delivery of shares in any name other than that of the Holder of the Series C Convertible Preferred Shares converted, and the Corporation shall not be required to so issue or deliver any share certificate unless and until the person or persons requesting the registration of transfer shall have paid to the Corporation the amount of such tax or shall have established to the satisfaction of the Corporation that such tax has been paid. (h) Securities Reserved. The Corporation shall at all times reserve and keep available out of its authorized Common Shares (and any Other Securities or Consideration or property) the full number of Common Shares (and any Other Securities or Consideration or property) deliverable upon the conversion of all outstanding Series C Convertible Preferred Shares. The Corporation shall not enter into any agreement or take any action which would impair or restrict its legal authority to issue such Common Shares, Other Securities or Consideration or property upon conversion or to defeat in any way the right of the Holders of Series C Convertible Preferred Shares to receive such consideration upon conversion. In addition, whenever the Corporation is required to reserve any interest, dividends or other property payable upon conversion of Series C Convertible Preferred Shares, the Corporation shall, as to cash, deposit such amounts in one or more separate accounts for the sole benefit of the Holders of Series C Convertible Preferred Shares upon conversion and, as to other property, physically segregate or otherwise set such property aside in such a manner as to protect the rights of the Holders of Series C Convertible Preferred Shares to the receipt of such property upon conversion. (i) Effect of Conversion. All Series C Convertible Preferred Shares which shall have been converted into Common Shares shall assume the status of authorized but unissued Preferred Shares undesignated as to series. 5. Voting Rights. No Holder of Series C Convertible Preferred Shares shall be entitled to vote on any matter submitted to the shareholders of the Corporation for their vote, waiver, release or other action, except as may be otherwise expressly required by law. 6. Amendment. Notwithstanding the provisions of Section 5 above, so long as any share of Series C Convertible Preferred Shares is outstanding, the Articles of Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series C Convertible Preferred Shares so as to affect them adversely without the affirmative vote of the Holders of a majority of the outstanding Series C Convertible Preferred Shares, voting separately as a class. 6 EX-4 8 REGISTRATION RIGHTS AGREEMENT Exhibit 4.8 Registration Rights Agreement Relating to Common Shares Underlying Series "C" Preferred Shares REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT, dated as of September , 1997 (this "Agreement"), is made by and among American Bio Medica Corporation, a New York corporation (the "Corporation"), and the person named on the signature page hereto (the "Investor"). W I T N E S S E T H : WHEREAS, the Corporation is offering a maximum of 100 Series C Convertible Preferred Shares, $.01 par value each, ("Preferred Shares") at $10,000 each pursuant to a Private Security Subscription Agreement (the "Offering"); and WHEREAS, in connection with the Private Securities Subscription Agreement, dated as of September , 1997, between the Investor and the Corporation (the "Subscription Agreement"), the Corporation has agreed, upon the terms and subject to the conditions of the Subscription Agreement, to issue and sell to the Investor Series C Convertible Preferred Shares (the "Preferred Shares"), convertible into common shares, $.0l par value (the "Common Shares"); and WHEREAS, to induce the Investor to execute and deliver the Subscription Agreement, the Corporation has agreed to provide certain registration rights under the Securities Act of 1933, as amended, and the rules and regulations thereunder, or any similar successor statute (collectively, the "Securities Act"), and applicable state securities laws with respect to the Shares; NOW, THEREFORE, in consideration of the premises set forth above and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Corporation and the Investor hereby agree as follows: 1. Definitions. (a) As used in this Agreement, the following terms shall have the following meanings: (i) "Investor" means the Investor and any transferee or assignee who agrees to become bound by the provisions of this Agreement in accordance with Section 9 hereof. (ii) "register," "registered," and "registration" refer to a registration effected by preparing and filing a Registration Statement or Statements in compliance with the Securities Act on such appropriate registration form promulgated by the United States Securities and Exchange Commission ("SEC") as shall be selected by the Corporation, and, when requested by the Investor pursuant to Section 2(b) hereof, shall (A) be reasonably acceptable to the holders of a majority of the Registrable Securities to which such registration relates, and (B) shall permit the disposition of Registrable Securities in accordance with the intended method or methods specified in the Investor's request for such registration, and the declaration or ordering of effectiveness of such Registration Statement by the SEC. (iii)"Registrable Securities" means those shares issuable, upon conversion of the Preferred Shares issued and sold to the Investor including any shares issued or issuable as dividends in respect thereof. (iv) "Registration Statement" means a registration statement under the Securities Act registering securities of the Corporation. 1 (b) As used in this Agreement, the term Investor includes (i) each Investor (as defined above) and (ii) each person who is a permitted transferee or assignee of the Registrable Securities pursuant to Section 9 of this Agreement. (c) Capitalized terms used herein and not otherwise defined herein shall have the respective meanings set forth in the Subscription Agreement. 2. Registration. (a) Piggy-Back Registrations. If at any time the Corporation shall determine to prepare and file with the SEC a Registration Statement relating to an offering for its own account or the account of others under the Securities Act any of its equity securities, other than on Form S-4 or Form S-8 or their then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in connection with stock option or other employee benefit plans, the Corporation shall send to each Investor who is entitled to registration rights under this Section 2(a) written notice of such determination and, if within twenty (20) days after receipt of such notice, such Investor shall so request in writing, the Corporation shall include in such Registration Statement all or any part of the Registrable Securities such Investor requests to be registered, except that if, in connection with any underwritten public offering for the account of the Corporation the managing underwriter(s) thereof shall impose a limitation on the number of Common Shares which may be included in the Registration Statement because, in such underwriter(s)' judgment, such limitation is necessary to effect an orderly public distribution, then the Corporation shall be obligated to include in such Registration Statement only such limited portion, if any, of the Registrable Securities with respect to which such Investor has requested inclusion hereunder. Any exclusion of Registrable Securities shall be made pro rata among the Investors seeking to include Registrable Securities, in proportion to the number of Registrable Securities sought to be included by such Investors; provided, however, that the Corporation shall not exclude any Registrable Securities unless the Corporation has first excluded all outstanding securities the holders of which are not entitled by right to inclusion of securities in such Registration Statement; and provided further, however, that, after giving effect to the immediately preceding proviso, any exclusion of Registrable Securities shall be made pro rata with holders of other securities having the right to include such securities in the Registration Statement to the extent such pro rata allotment is permitted under the Corporation's currently existing agreements with such holders of the Corporation's securities. No right to registration of Registrable Securities under this Section 2(a) shall be construed to limit any registration required under Section 2(b) hereof. The obligations of the Corporation under this Section 2(a) may be waived by Investors holding a majority in interest of the Registrable Securities and shall expire at the earlier of (i) the Corporation having afforded the opportunity for the Investors to exercise registration rights under this Section 2(a) for two registrations; provided, however, that any Investor who shall have had any Registrable Securities excluded from any Registration Statement in accordance with this Section 2(a) shall be entitled to include in an additional Registration Statement filed by the Corporation the Registrable Securities so excluded or (ii) when all of the Registrable Securities held by any Investor may be sold by such Investor under Rule 144 under the Securities Act ("Rule 144") within any three-month period. 2 (b) Demand Registration. As soon as practicable after the closing of the Offering, the Corporation shall prepare and file a Registration Statement covering such Registrable Securities with the SEC. (c) If any offering pursuant to a Registration Statement pursuant to Section 2(b) hereof involves (at the Corporation's election) an underwritten offering, the Investors who hold a majority in interest of the Registrable Securities subject to such underwritten offering shall have the right to select one legal counsel and an investment banker or bankers and manager or managers to administer the offering, which investment banker or bankers or manager or managers shall be reasonably satisfactory to the Corporation. The Investors who hold the Registrable Securities to be included in such underwriting shall pay all underwriting discounts and commissions and other fees and expenses of such investment banker or bankers and manager or managers so selected in accordance with this Section 2(c) (other than fees and expenses relating to registration of Registrable Securities under federal or state securities laws which are payable by the Corporation pursuant to Section 5 hereof) with respect to their Registrable Securities and the fees and expenses of such legal counsel selected by the Investors. (d) Payments by the Corporation. It shall be the Corporation's obligation that the Registration Statement be declared effective on or before December 31, 1997. If this date is not met, and Investor shall have performed its obligations as set forth in this Agreement with respect to such registration, then the Corporation will make payments to each holder of Registrable Securities (each, a "Holder") in such amounts and at such times as shall be determined pursuant to this Section 2(d). The amount to be paid by the Corporation to the Holders shall be determined as of each Computation Date, and such amount shall be equal to two percent (2%) of the aggregate subscription price paid by the Investor for the Shares pursuant to the Subscription Agreement for each month (the "Periodic Amount"); provided, however, that if any Computation Date is less than 30 days subsequent to another Computation Date, then the Periodic Amount payable on the later Computation Date shall be prorated. The Periodic Amount shall be divided among all the Holders in the same proportion as each Holder's Registrable Securities bears to the total of the outstanding Registrable Securities. The Periodic Amount shall be paid by the Corporation within five (5) business days after each Computation Date and shall be payable in cash. "Computation Date" means December 31, 1997 and each 30 days thereafter. with respect to the Subscription Agreement under Section 2(b) and, if the Registration Statement required to be filed by the Corporation pursuant to Section 2(b) has not theretofore been declared effective by the SEC, each date which is 30 days after a Computation Date and, if the Registration Statement required to be filed by the Corporation pursuant to Section 2(b) is not declared effective by the SEC within 90 days, or 120 days in the event of an S-1 or an underwritten offering, after the exercise of demand registration rights under Section 2(b), the date on which such Registration Statement is declared effective. 3 3. Obligations of the Corporation. In connection with the registration of the Registrable Securities, the Corporation shall: (a) prepare file with the SEC as soon as practicable a Registration Statement or Statements with respect to all Registrable Securities to be included therein, and thereafter use its best efforts to cause the Registration Statement to become effective on or before December 31, 1997. The Corporation shall keep the Registration Statement effective at all times until such date as is two years after the date such Registration Statement is first ordered effective by the SEC. In any case, the Registration Statement (including any amendments or supplements thereto and prospectuses contained therein) filed by the Corporation shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading; provided, however, that, subject to the conditions set forth in Section 4(a) below, each Investor may notify the Corporation in writing that it wishes to exclude all or a portion of its Registrable Securities from such Registration Statement. (b) prepare and file with the SEC such amendments (including post-effective amendments) and supplements to the Registration Statement and the prospectus used in connection with the Registration Statement as may be necessary to keep the Registration Statement effective at all times until such date as is two years after the date such Registration Statement is first ordered effective by the SEC, and, during such period, comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities of the Corporation covered by the Registration Statement until such time as all of such Registrable Securities have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof as set forth in the Registration Statement; (c) furnish to each Investor whose Registrable Securities are included in the Registration Statement, such number of copies of a prospectus, including a preliminary prospectus, and all amendments and supplements thereto and such other documents as such Investor may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such Investor; (d) use reasonable efforts to (i) register and qualify the Registrable Securities covered by the Registration Statement under such other securities or blue sky laws of such jurisdictions as the Investors who hold a majority in interest of the Registrable Securities being offered reasonably request, (ii) prepare and file in those jurisdictions such amendments (including post-effective amendments) and supplements, (iii) take such other actions as may be necessary to maintain such registrations and qualifications in effect at all times until such date as is the earlier of three years after the date such Registration Statement is first ordered effective by the SEC or is three years after the Investor acquired the Shares and (iv) take all other actions reasonably necessary or advisable to qualify the Registrable Securities for sale in such jurisdictions; provided, however, that the Corporation shall not be required in connection therewith or as a condition thereto to (I) qualify to do business in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), (II) subject itself to general taxation in any such jurisdiction, (III) file a general consent to service of process in any such jurisdiction, (IV) provide any undertakings that cause more than nominal expense or burden to the Corporation or (V) make any change in its charter or by-laws, which in each case the Board of Directors of the Corporation determines to be contrary to the best interests of the Corporation and its shareholders; 4 (e) in the event Investors who hold a majority in interest of the Registrable Securities being offered in the offering select underwriters for the offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, including, without limitation, customary indemnification and contribution obligations, with the managing underwriter of such offering; (f) as promptly as practicable after becoming aware of such event, notify each Investor who holds Registrable Securities being sold pursuant to such registration of the happening of any event of which the Corporation has knowledge, as a result of which the prospectus included in the Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and use its best efforts promptly to prepare a supplement or amendment to the Registration Statement to correct such untrue statement or omission, and deliver a number of copies of such supplement or amendment to each Investor as such Investor may reasonably request; (g) as promptly as practicable after becoming aware of such event, notify each Investor who holds Registrable Securities being sold pursuant to such registration (or, in the event of an underwritten offering, the managing underwriters) of the issuance by the SEC of any stop order or other suspension of effectiveness of the Registration Statement at the earliest possible time; (h) permit a single firm of counsel designated as selling shareholders' counsel by the Investors who hold a majority in interest of the Registrable Securities being sold pursuant to such registration to review the Registration Statement and all amendments and supplements thereto a reasonable period of time prior to their filing with the SEC, and shall not file any document in a form to which such counsel reasonably objects; (i) make generally available to its shareholders as soon as practicable, all periodic filings pursuant to the Securities Exchange Act of 1934; but not later than ninety (90) days after the close of the period covered thereby, an earnings statement (in form complying with the provisions of Rule 158 under the Securities Act) covering a twelve-month period beginning not later than the first day of the Corporation's fiscal quarter next following the date of the Registration Statement; (j) at the request of the Investors who hold a majority in interest of the Registrable Securities being sold pursuant to such registration, furnish on the date that Registrable Securities are delivered to an underwriter for sale in connection with the Registration Statement (i) a letter, dated such date, from the Corporation's independent certified public accountants in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters; and (ii) an opinion, dated such date, from counsel representing the Corporation for purposes of such Registration Statement, in form and substance as is customarily given in an underwritten public offering, addressed to the underwriters and Investors; 5 (k) make available for inspection by any Investor whose Registrable Securities are being sold pursuant to such registration, any underwriter participating in any disposition pursuant to the Registration Statement, and any attorney, accountant or other agent retained by any such Investor or underwriter (collectively, the "Inspectors"), all pertinent financial and other records, pertinent corporate documents and properties of the Corporation (collectively, the "Records"), as shall be reasonably necessary to enable each Inspector to exercise its due diligence responsibility, and cause the Corporation's officers, directors and employees to supply all information which any Inspector may reasonably request for purposes of such due diligence; provided, however, that each Investor and each Inspector shall hold in confidence and shall not make any disclosure (except to an Investor) of any Record or other information which the Corporation determines in good faith to be confidential, and of which determination the Investors or Inspectors, respectively, are so notified, unless (i) the disclosure of such Records is necessary to avoid or correct a misstatement or omission in any Registration Statement, (ii) the release of such Records is ordered pursuant to a subpoena or other order from a court or government body of competent jurisdiction or (iii) the information in such Records has been made generally available to the public other than by disclosure in violation of this or any other agreement. The Corporation shall not be required to disclose any confidential information in such Records to any Inspector until and unless such Inspector shall have entered into confidentiality agreements (in form and substance satisfactory to the Corporation) with the Corporation with respect thereto, substantially in the form of this Section 3(k). Each Investor agrees that it shall, upon learning that disclosure of such Records is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt notice to the Corporation and allow the Corporation, at its expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, the Records deemed confidential. The Corporation shall hold in confidence and shall not make any disclosure of information concerning an Investor provided to the Corporation pursuant to Section 4(e) hereof unless (i) disclosure of such information is necessary to comply with federal or state securities laws, (ii) the disclosure of such information is necessary to avoid or correct a misstatement or omission in any Registration Statement, (iii) the release of such information is ordered pursuant to a subpoena or other order from a court or governmental body of competent jurisdiction or (iv) such information has been made generally available to the public other than by disclosure in violation of this or any other agreement. The Corporation agrees that it shall, upon learning that disclosure of such information concerning an Investor is sought in or by a court or governmental body of competent jurisdiction or through other means, give prompt notice to such Investor, at its expense, to undertake appropriate action to prevent disclosure of, or to obtain a protective order for, such information; (l) use its best efforts either to secure designation of all the Registrable Securities covered by the Registration Statement as a National Association of Securities Dealers Automated Quotations System ("NASDAQ") "Small Cap" or, if, despite the Corporation's best efforts to satisfy the preceding clause, the Corporation is unsuccessful in satisfying the preceding clause to secure such a listing for such Registrable Securities and, without limiting the generality of the foregoing, to arrange for at least three market makers to register with the National Association of Securities Dealers, Inc. ("NASD") as such with respect to such Registrable Securities; (m) provide a transfer agent and registrar, which may be a single entity, for the Registrable Securities not later than the effective date of the Registration Statement; 6 (n) cooperate with the Investors who hold Registrable Securities being sold and the managing underwriter or underwriters, if any, to facilitate the timely preparation and delivery of certificates (not bearing any restrictive legends) representing Registrable Securities to be sold pursuant to the denominations or amounts as the case may be, and registered in such names as the managing underwriter or underwriters, if any, or the Investors may reasonably request; and, within five business days after a Registration Statement which includes Registrable Securities is ordered effective by the SEC, the Corporation shall deliver, and shall cause legal counsel selected by the Corporation to deliver, to the transfer agent for the Registrable Securities (with copies to the Investors whose Registrable Securities are included in such Registration Statement) instructions to the transfer agent to issue new share certificates without a legend and an opinion of such counsel that the shares have been registered; and (o) take all other reasonable actions necessary to expedite and facilitate disposition by the Investor of the Registrable Securities pursuant to the Registration Statement. 4. Obligations of the Investors. In connection with the registration of the Registrable Securities, the Investors shall have the following obligations: (a) It shall be a condition precedent to the obligations of the Corporation to take any action pursuant to this Agreement with respect to each Investor that such Investor shall furnish to the Corporation such information regarding itself, the Registrable Securities held by it and the intended method of disposition of the Registrable Securities held by it as shall be reasonably required to effect the registration of the Registrable Securities and shall execute such documents in connection with such registration as the Corporation may reasonably request. At least five (5) days prior to the first anticipated filing date of the Registration Statement, the Corporation shall notify each Investor of the information the Corporation requires from each such Investor (the "Requested Information") if such Investor elects to have any of such Investor's Registrable Securities included in the Registration Statement. If within three (3) business days prior to the filing date the Corporation has not received the Requested Information from an Investor (a "Non-Responsive Investor"), then the Corporation may file the Registration Statement without including the Registrable Securities of such Non-Responsive Investor; (b) Each Investor by such Investor's acceptance of the Registrable Securities agrees to cooperate with the Corporation as reasonably requested by the Corporation in connection with the preparation and filing of the Registration Statement hereunder, unless, in connection with the preparation and filing of the Registration Statement, such Investor has notified the Corporation in writing of such Investor's election to exclude all of such Investor's Registrable Securities from the Registration Statement; 7 (c) In the event Investors holding a majority in interest of the Registrable Securities being registered determine to engage the services of an underwriter, each Investor agrees to enter into and perform such Investor's obligations under an underwriting agreement, in usual and customary form, including, without limitation, customary indemnification and contribution obligations, with the managing underwriter of such offering and to take such other actions as are reasonably required in order to expedite or facilitate the disposition of the Registrable Securities, unless such Investor has notified the Corporation in writing of such Investor's election to exclude all of such Investor's Registrable Securities from the Registration Statement; (d) Each Investor agrees that, upon receipt of any notice from the Corporation of the happening of any event of the kind described in Section 3(f) or 3(g), such Investor will immediately discontinue disposition of the Registrable Securities pursuant to the Registration Statement covering such Registrable Securities until such Investor's receipt of the copies of the supplemented or amended prospectus contemplated by Section 3(f) or 3(g) and, if so directed by the Corporation, such Investor shall deliver to the Corporation (at the expense of the Corporation) or destroy (and deliver to the Corporation a certification of destruction) all copies in such Investor's possession, of the prospectus covering such Registrable Securities current at the time of receipt of such notice; and (e) No Investor may participate in any underwritten registration hereunder unless such Investor (i) agrees to sell such Investor's Registrable Securities on the basis provided in any underwriting arrangements approved by the Investors entitled hereunder to approve such arrangements, (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements and (iii) agrees to pay its pro rata share of all underwriting discounts and commissions and other fees and expenses of investment bankers and any manager or managers of such underwriting and legal expenses of the underwriter applicable with respect to its Registrable Securities, in each case to the extent not payable by the Corporation pursuant to the terms of this Agreement. 5. Expenses of Registration. All expenses (other than underwriting discounts and commissions and other fees and expenses of investment bankers and other than brokerage commissions) incurred in connection with registrations, filings or qualifications pursuant to Section 3, including, without limitation, all registration, listing and qualifications fees, printers and accounting fees and the fees and disbursements of counsel for the Corporation, shall be borne by the Corporation; provided, however, that the Investors shall bear the fees and out-of-pocket expenses of the one legal counsel selected by the Investors pursuant to Section 3(h) hereof. 8 6. Indemnification. In the event any Registrable Securities are included in a Registration Statement under this Agreement: (a) To the extent permitted by law, the Corporation will indemnify and hold harmless each Investor who holds such Registrable Securities, the directors, if any, of such Investor, the officers, if any, of such Investor, each person, if any, who controls any Investor within the meaning of the Securities Act or the Exchange Act, any underwriter (as defined in the Securities Act) for the Investors, the directors, if any, of such underwriter and the officers, if any, of such underwriter, and each person, if any, who controls any such underwriter within the meaning of the Securities Act or the Exchange Act (each, an "Indemnified Person"), against any losses, claims, damages, expenses or liabilities (joint or several) (collectively "Claims") to which any of them become subject under the Securities Act, the Exchange Act or otherwise, insofar as such Claims (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any of the following statements, omissions or violations in the Registration Statement, or any post-effective amendment thereof, or any prospectus included therein: (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any post-effective amendment thereof or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus if used prior to the effective date of such Registration Statement, or contained in the final prospectus (as amended or supplemented, if the Corporation files any amendment thereof or supplement thereto with the SEC) or the omission or alleged omission to state therein any material fact necessary to make the statements made therein, in light of the circumstances under which the statements therein were made, not misleading or (iii) any violation or alleged violation by the Corporation of the Securities Act, the Exchange Act or any state securities law or any rule or regulation (the matters in the foregoing clauses (i) through (iv) being, collectively, "Violations"). Subject to the restrictions set forth in Section 6(d) with respect to the number of legal counsel, the Corporation shall reimburse the Investors and each such underwriter or controlling person, promptly as such expenses are incurred and are due and payable, for any legal fees or other reasonable expenses incurred by them in connection with investigating or defending any such Claim. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(a) (I) shall not apply to a Claim arising out of or based upon a Violation which occurs in reliance upon and in conformity with information furnished in writing to the Corporation by any Indemnified Person or underwriter for such Indemnified Person expressly for use in connection with the preparation of the Registration Statement or any such amendment thereof or supplement thereto, if such prospectus was timely made available by the Corporation pursuant to Section 3(c) hereof; (II) with respect to any preliminary prospectus shall not inure to the benefit of any such person from whom the person asserting any such Claim purchased the Registrable Securities that are the subject thereof (or to the benefit of any person controlling such person) if the untrue statement or omission of material fact contained in the preliminary prospectus was corrected in the prospectus, as then amended or supplemented, if such prospectus was timely made available by the Corporation pursuant to Section 3(c) hereof, and (III) shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of the Corporation, which consent shall not be unreasonably withheld. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Indemnified Persons and shall survive the transfer of the Registrable Securities by the Investors pursuant to Section 9. 9 (b) In connection with any Registration Statement in which an Investor is participating, each such Investor agrees to indemnify and hold harmless, to the same extent and in the same manner set forth in Section 6(a), the Corporation, each of its directors, each of its officers who signs the Registration Statement, each person, if any, who controls the Corporation within the meaning of the Securities Act or the Exchange Act, any underwriter and any other shareholder selling securities pursuant to the Registration Statement or any of its directors or officers or any person who controls such shareholder or underwriter within the meaning of the Securities Act or the Exchange Act (collectively and together with an Indemnified Person, an "Indemnified Party"), against any Claim to which any of them may become subject, under the Securities Act, the Exchange Act or otherwise, insofar as such Claim arises out of or is based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished to the Corporation by such Investor expressly for use in connection with such Registration Statement; and such Investor will promptly reimburse any legal or other expenses reasonably incurred by them in connection with investigating or defending any such Claim; provided, however, that the indemnity agreement contained in this Section 6(b) shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the prior written consent of such Investor, which consent shall not be unreasonably withheld; provided further, however, that the Investor shall be liable under this Section 6(b) for only that amount of a Claim as does not exceed the net proceeds to such Investor as a result of the sale of Registrable Securities pursuant to such Registration Statement. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Indemnified Party and hall survive the transfer of the Registrable Securities by the Investors pursuant to Section 9. Notwithstanding anything to the contrary contained herein, the indemnification agreement contained in this Section 6(b) with respect to any preliminary prospectus shall not inure to the benefit of any Indemnified Party if the untrue statement or omission of material fact contained in the preliminary prospectus was corrected on a timely basis in the prospectus, as then amended or supplemented. (c) The Corporation shall be entitled to receive indemnities from underwriters, selling brokers, dealer managers and similar securities industry professionals participating in any distribution, to the same extent as provided above, with respect to information such persons so furnished in writing by such persons expressly for inclusion in the Registration Statement. (d) Promptly after receipt by an Indemnified Person or Indemnified Party under this Section 6 of notice of the commencement of any action (including any governmental action), such Indemnified Person or Indemnified Party shall, if a Claim in respect thereof is to be made against any indemnifying party under this Section 6, deliver to the indemnifying party a written notice of the commencement thereof and his indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense thereof with counsel mutually satisfactory to the indemnifying parties; provided, however, that an Indemnified Person or Indemnified Party shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if, in the reasonable opinion of counsel retained by the indemnifying party, the representation by such counsel of the Indemnified Person or Indemnified Party and the indemnifying party would be inappropriate due to actual or potential differing interests between such Indemnified Person or Indemnified Party and other party represented by such counsel in such 10 proceeding. The Corporation shall pay for only one separate legal counsel for the Investors; such legal counsel shall be selected by the Investors holding a majority in interest of the Registrable Securities. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the Indemnified Person or Indemnified Party under this Section 6, except to the extent that the indemnifying party is prejudiced in its ability to defend such action. The indemnification required by this Section 6 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as such expense, loss, damage or liability is incurred and is due and payable. 7. Contribution. To the extent any indemnification provided for herein is prohibited or limited by law, the indemnifying party agrees to make the maximum contribution with respect to any amounts for which it would otherwise be liable under Section 6 to the fullest extent permitted by law; provided, however, that (a) no contribution shall be made under circumstances where the maker would not have been liable for indemnification under the fault standards set forth in Section 6, (b) no seller of Registrable Securities guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any seller of Registrable Securities who was not guilty of such fraudulent misrepresentation, and (c) contribution by any seller of Registrable Securities shall be limited in amount to the net amount of proceeds received by such seller from the sale of such Registrable Securities. 8. Reports under Exchange Act. With a view to making available to the Investors the benefits of Rule 144 or any other similar rule or regulation of the SEC that may at any time permit the Investors to sell securities of the Corporation to the public without registration, until such time as the Investors have sold all the Registrable Securities pursuant to a Registration Statement or Rule 144, the Corporation agrees to: (a) make and keep public information available, as those terms are understood and defined in Rule 144; (b) file with the SEC in a timely manner all reports and other documents required of the Corporation under the Securities Act and the Exchange Act; and (c) furnish to each Investor so long as such Investor owns Registrable Securities, promptly upon request, (i) a written statement by the Corporation that it has complied with the reporting requirements of Rule 144, the Securities Act and the Exchange Act, (ii) a copy of the most recent annual or quarterly report of the Corporation and such other reports and documents so filed by the Corporation and (iii) such other information as may be reasonably requested to permit the Investors to sell such securities pursuant to Rule 144 without registration. 9. Assignment of the Registration Rights. The rights to have the Corporation register Registrable Securities pursuant to this Agreement shall be automatically assigned by the Investors to transferees or assignees of all or any portion of such securities only if: (a) the Corporation is, within a reasonable time after such transfer or assignment, furnished with written notice of (i) the name and address of such transferee or assignee and (ii) the securities with respect to which such registration rights are being transferred or assigned, (b) immediately following such transfer or assignment the further disposition of such securities by the transferee or assignee is restricted under the Securities Act and applicable state securities laws, and (c) at or before the time the Corporation received the written notice contemplated by clause (a) of this sentence the transferee or assignee agrees in writing with the Corporation to be bound by all of the provisions contained herein. 11 10. Amendment of Registration Rights. Any provision of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Corporation and Investors who hold a majority in interest of the Registrable Securities. Any amendment or waiver effected in accordance with this Section 10 shall be binding upon each Investor and the Corporation. 11. Miscellaneous. (a) A person or entity is deemed to be a holder of Registrable Securities whenever such person or entity owns of record such Registrable Securities. If the Corporation receives conflicting instructions, notices or elections from two or more persons or entities with respect to the same Registrable Securities, the Corporation shall act upon the basis of instructions, notice or election received from the registered owner of such Registrable Securities. (b) Notices required or permitted to be given hereunder shall be in writing and shall be deemed to be sufficiently given when personally delivered or when sent by registered mail, return receipt requested, addressed (i) if to the Corporation, at American Bio Medica Corporation, 102 Simons Road, Ancramdale, New York 12503, Attention: Stan Cipkowski, (ii) if to the Investor, at the address set forth under its name in the Subscription Agreement and (iii) if to any other Investor, at such address as such Investor shall have provided in writing to the Corporation, or at such other address as each such party furnishes by notice given in accordance with this Section 11(b), and shall be effective, when personally delivered, upon receipt, and when so sent by certified mail, four business days after deposit with the United States Postal Service. (c) Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof. (d) This Agreement shall be enforced, governed by and construed in accordance with the laws of the State of New York applicable to the agreements made and to be performed entirely within such state. In the event that any provision of this Agreement is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any provision hereof which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision hereof. (e) This Agreement constitutes the entire agreement among the parties hereto with respect to the subject matter hereof. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein. This Agreement supersedes all prior agreements and understandings among the parties hereto with respect to the subject matter hereof. (f) Subject to the requirements of Section 9 hereof, this Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto. (g) All pronouns and any variations thereof refer to the masculine, feminine or neuter, singular or plural, as the context may require. 12 (h) The headings in the Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (i) This Agreement may be executed in two or more counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement. This Agreement, once executed by a party, may be delivered to the other party hereto by telephone line facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed by their respective officers thereunto duly authorized as of day and year first above written. AMERICAN BIO MEDICA CORPORATION By: Stan Cipkowski, President ------------------------ If an entity by: -------------------- Title: ----------------- 13 -----END PRIVACY-ENHANCED MESSAGE-----