-----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, TffVFkmm27CtZwjhuZ9xsF+EwiqP5zrZFoYBi0tywhMuHVna95pBpGSdbo8r3gJZ 82msFmGEfIhxV4PZFxf9tw== 0000896747-98-000005.txt : 19980521 0000896747-98-000005.hdr.sgml : 19980521 ACCESSION NUMBER: 0000896747-98-000005 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19980520 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN BIO MEDICA CORP CENTRAL INDEX KEY: 0000896747 STANDARD INDUSTRIAL CLASSIFICATION: MEASURING & CONTROLLING DEVICES, NEC [3829] IRS NUMBER: 223378935 STATE OF INCORPORATION: NY FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: SB-2 SEC ACT: SEC FILE NUMBER: 333-53133 FILM NUMBER: 98628913 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 May 18, 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.) 300 Fairview Avenue, Hudson, New York 12534 800-227-1243 ------------------------------------------------------------- (Address and telephone number of principal executive offices) 300 Fairview Avenue, Hudson, New York 12534 800-227-1243 - -------------------------------------------------------------------------------- (Address of principal place of business or intended principal place of business) Stan Cipkowski, 300 Fairview Avenue, Hudson, New York 12534 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 625,000(3) $4.00 $2,500,000(3) $ 757.58 of "D" Preferred Shares Shares Common Shares Underlying exercise of Common Share Purchase 107,355 $4.81 $516,377.55 156.48 Warrants -------- Total registration fee $ 914.06 (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 "D" Preferred Shares is rounded up to nearest whole share. "Maximum aggregate offering price" represents the actual gross proceeds received from the sale of the "D" 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: 625,000 common shares, $.01 par value each ("Common Shares") (subject to conversion ratio, into which 2,500 Series "D" convertible preferred shares, $.01 par value each, ("'D' Preferred Shares"), may be converted) and 107,355 common share purchase warrants (the "Warrants"). Each "D" Preferred Share is convertible at the lesser of (i) 95% of the "Market Price" (the average of the closing bid prices of the Common Shares over any three trading days, selected by the holder of the "D" Preferred Shares (the "Holder"), in the 20 trading days immediately preceding the date of conversion ("Conversion Date") and 125% of the price on the closing date ($3.70) (the "Closing Price"), except that if the 10 day average closing bid price ending on the effective date (the "Effective Price") of this registration statement (the "Registration Statement") is greater than 125% of the Closing Price, the maximum Conversion Price will be such Effective Price, not to exceed, in any case, 135% of the Closing Price. Each Warrant entitles the holders ("Warrantholders") to purchase one Common Share at a price of $4.81 per share until April 24, 2001. The exercise price of the Warrants has been determined through negotiation between the Company and the Warrantholders and such price does not necessarily bear any direct relationship to the current market value, asset value or net book value of the Company or other generally accepted criteria of value. The formula for the conversion of the Preferred Shares and the exercise price of the Warrants has been determined by the Company, the Holder and the selling agent (the "Selling Agent") 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 trade 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 "D" 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 "D" Preferred Shares $4.00 (3) $0.30 $3.70 - -------------------------------------------------------------------------------- Total Shares Underlying Conversion of "D" Preferred Shares $2,500,000 $187,500 $2,312,500 - -------------------------------------------------------------------------------- Per Share Underlying Exercise of Warrants $4.81 $-0- $4.81 - -------------------------------------------------------------------------------- Total Shares Underlying Exercise of Warrants $ 516,377.55 $-0- $ 516,377.55 - -------------------------------------------------------------------------------- Total $3,016,377.55 $187,500 $2,828,877.55 - -------------------------------------------------------------------------------- AMERICAN BIO MEDICA CORPORATION 300 Fairview Avenue Hudson, New York 12534 800-227-1243 (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.") In addition to commissions of 7.5% of the funds raised, Shoreline Pacific, the Selling Agent, received 7,355 of the Warrants registered herein. (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 $4.00. The actual conversion price may be greater or less than $4.00. (See "Description of Securities - Preferred Shares.") 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. 2 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 develops, manufactures and markets biomedical technologies and products. The Company, from inception to date, has accumulated losses of $3,534,922. 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, trademarked "Rapid Drug Screen." 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. The Company produces a marijuana/cocaine two panel Rapid Drug Screen test kit, a five panel (marijuana, cocaine, opiates, PCP and amphetamines) test kit and an eight panel (marijuana, cocaine, opiates, PCP, amphetamines, benzodiazepines, methamphetamines and barbituates) kit. It has received Federal Drug Administration ("FDA") approval of all the tests in its eight panel Rapid Drug Screen test kit and has commenced marketing test kits to laboratories and other medical facilities. It has also developed a test for tricyclic antidepressants and intends to apply for FDA approval in the near future. 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. 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 300 Fairview Avenue, Hudson, New York 12534. 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. 3 Securities ---------- Common Shares ------------- The Company is authorized to issue 30,000,000 common shares, $.01 par value per share. As of April 30, 1998, 14,432,039 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. The Company has issued 2,500 "D" Preferred Shares. Each "D" Preferred Share is convertible at the lesser of (i) 95% of the "Market Price" (the average of the closing bid prices of the Common Shares over any three trading days, selected by the Holder in the 20 trading days immediately preceding the Conversion Date and 125% of the Closing Price of $3.70, except that if the 10 day average closing bid price ending on the Effective Date is greater than 125% of the Closing Price, the maximum Conversion Price will be the Effective Price, not to exceed, in any case, 135% of the Closing Price.(See Front Cover Page, "Description of Securities--Preferred Shares" and Financial Statements--Footnotes.) Options ------- The Company has issued 500,000 Options which are exercisable at $1.00 through March 14, 1999 and 500,000 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 $1.00 or $2.00 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 Fiscal 1998 Plan. Both plans are 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 ("Plan Options") pursuant to the Fiscal 1996 Plan. All Plan Options were exercisable for a period of three years at $3.00 per share. As of April 30, 1998, 806,038 Plan Options have been exercised for an aggregate exercise price of $2,418,114. 271,000 Plan Options have been issued pursuant to the Fiscal 1998 Plan, 235,000 options exercisable at $3.50 per share, 24,000 options at $4.00 per share and 12,000 options at $3.00 per share. No Plan Options issued pursuant to the Fiscal 1998 Plan have been exercised. (See "Certain Transactions.") 4 Securities Registered ---------------------- Common Shares into which the 2,500 "D" Preferred Shares may be converted and the 107,355 Warrants may be exercised are being registered herein. The actual number of Common Shares into which the "D" Preferred Shares will be converted, estimated at 625,000 Common Shares, will depend on the Market Price of the Common Shares and may be greater or lesser than 625,000 Common Shares. (See Front Cover Page, "Risk Factors" and "Description of Securities.") Dilution -------- If all the "D" Preferred Shares are converted into Common Shares at $4.00 per share and all 107,355 Warrants are exercised, there will be 15,164,394 Common Shares outstanding. Persons who convert their "D" Preferred Shares and exercise the Warrants will own 732,355 Shares or 4.8% 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.") Certain Risk Factors -------------------- Conversion of the "D" Preferred Shares into Common Shares, exercise of the Warrants and the purchase of the Common Shares involves substantial risks due to the highly speculative nature of the Company's business. The Holder as well as investors in the Common Shares should review the entire Prospectus, particularly the "Risk Factors." Determination of Conversion/Exercise Price ------------------------------------------ The formulas for the conversion of the "D" Preferred Shares and the exercise of the Warrants were determined by the Company and the Holder and the Selling Agent and bear 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.") 5 SUMMARY FINANCIAL INFORMATION For the year ended April 30, 1997 and the nine months ended January 31, 1998 -------------------------------------------------------------------- April 30, 1997 January 31, 1998 Unaudited -------------- ---------------- Statement of Operations Data: Sales $ 610,876 $ 1,773,948 Cost of sales 259,862 675,361 Gross Profit 351,014 1,098,587 Operating expenses 1,039,015 1,846,308 Operating loss (688,001) (747,721) Other income (expense) - net 182,680 119,791 Net profit (loss) (505,321) (627,930) Net loss per common share primary $ (.04) $ .05 Shares used in computing net profit (loss) per share 13,379,507 13,737,781 Net profit (loss) per common share fully diluted $ (.04) $ .04 Shares used in computing fully diluted 13,731,174 14,576,334 Cash dividends per share -0- -0- Pro-forma Pro-forma Adjusted As of January 31, 1998 As of January 31, 1998 (1) (2) ---------------------- ----------------------- Balance Sheet Data: Current assets $ 4,429,143 $ 7,238,020 Current liabilities 142,449 142,449 Working capital 4,286,694 7,095,571 Total assets 4,605,629 7,414,506 Long term debt, less current portion -0- -0- Accumulated deficit (3,534,922) (3,534,922) Stockholders' equity $ 4,475,180 $ 7,284,057 ------------------------------ 1. Stockholders' equity represents a pro-forma number consisting of the balance as of January 31, 1998 of $4,463,180 plus $12,000 representing the exercise of 4,000 Plan Options at $3.00 per share for an aggregate of $4,475,180. 2. Assumes pro-forma stockholders' equity pursuant to footnote 1 and conversion of the "D" Preferred Shares and exercise of the Warrants. The number of Common Shares into which the "D" Preferred Shares may be converted has been taken for purposes of this table as 625,000 Shares ($4.00 per share). The actual number of Common Shares into which the Preferred Shares are converted may be greater or less than 625,000 Common Shares. (See Front Cover Page and "Securities - Preferred Shares" for the conversion formula.) The 107,355 Warrants are exercisable at $4.81 per share. 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, EXERCISE OF THE WARRANTS 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, 7 and may also depend upon their timely introduction into the marketplace. There can be no assurance that development of the Company's proposed products will be successfully completed on a timely basis, if at all, that they will meet projected price or performance objectives, satisfactorily perform all of the functions for which they are being designed, or prove to be sufficiently reliable in widespread commercial application. Moreover, there can be no assurance that unanticipated problems will not arise with respect to technologies incorporated into its test kits or that product defects will not become apparent after commercial introduction of its additional test kits. In the event that the Company is required to remedy defects in any of its products after commercial introduction, the costs to the Company could be significant, which could have a material adverse effect on the Company revenues or earnings. (See "Business.") 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. 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 pending application for a design patent is granted, the Company expects other companies to attempt to develop technologies or products which will compete with the Company's products. See "Business--Competition.") 8 5. Dilution as a Result of Conversion of Preferred Shares and Exercise of Warrants. The number of Common Shares into which the outstanding "D" Preferred Shares, in the aggregate, will be convertible will be $2,500,000 divided by the lesser of 95% of the Market Price or 125% of the Closing Price. There is a distinct possibility that the Market Price will be less than the Closing Price and, thus, the number of shares to be issued upon conversion of the "D" Preferred Shares may represent 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.") 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 received "510(k)" approval from the FDA for its two, five and eight panel drug test kits. 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.") 9 10. Restricted Resale of the Securities. 6,436,502 Common Shares presently issued and outstanding as of the date hereof are "restricted securities" as that term is defined under the Securities Act of 1933, as amended, (the "Securities Act") and in the future may be sold in compliance with Rule 144 of the Securities Act, or pursuant to a Registration Statement filed under the Securities Act. Rule 144 provides, in essence, that a person holding restricted securities for a period of one year may sell those securities in unsolicited brokerage transactions or in transactions with a market maker, in an amount equal to one percent of the Company's outstanding Common Shares every three months. Sales of unrestricted shares by affiliates of the Company are also subject to the same limitation upon the number of shares that may be sold in any three month period. Such information is deemed available if the issuer satisfies the reporting requirements of sections 13 or 15(d) of the Securities and Exchange Act of 1934 (the "Securities Exchange Act") or of Rule 15c2-11 thereunder. Rule 144(k) also permits the termination of certain restrictions on sales of restricted securities by persons who were not affiliates of the Company at the time of the sale and have not been affiliates in the preceding two months. Such persons must satisfy a one 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.") 11. Preferred Shares; Convertibility into Common Shares; Dilution. The Company has the authority to issue up to 5,000,000 Preferred Shares with such designations, rights and preferences as may be determined by the Board of Directors. The Company is empowered, without further shareholder approval, to issue Preferred Shares with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of the Common Shares. The Company, as of the date of the Prospectus, has issued and outstanding 2,500 "D" Preferred Shares which are convertible into an estimated 625,000 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.") 10 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 625,000 Common Shares and exercise of the Warrants into 107,355 Common Shares (see "Dilution"), Management of the Company will own in excess of 35% 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 trade on the Nasdaq SmallCap Market. In the event that the market makers cease to function as such, public trading in the Common Shares will be adversely affected or may cease entirely. Presently, market makers for the Company's Common Shares include GVR Co., Fahnestock & Co., Inc., Hill Thompson Magid & Co., J.B. Oxford & Co. Kalb Voorhis & Co., Nash Weiss & Co., Inc., Paragon Capital Corp., Troster Singer Corp., Comprehensive Capital Corp., Herzog, Heine, Geduld, Inc., Mayer & Schweitzer, Inc., Knight Securities, Ltd., Naib Trading Corp., National Financial Securities Corp., Sharpe Capital, Inc. and Wien Securities Corp., Sherwood Securities Corp., H. J. Meyers & Co., Inc., M. H. Meyerson & Co., Inc., National Financial Service Corp. 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.") 11 17. Determination of Conversion/Exercise Prices. The formula for the conversion of the "D" Preferred Shares and the exercise of the Warrants 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 trade 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 As of January 31, 1998, as adjusted for the issuance of Common Shares between January 31, 1998 and April 30, 1998 and the consideration received therefor, and assuming conversion of the Preferred Shares into 625,000 Common Shares (15,057,039 shares), the net tangible book value of the Company would be $6,728,603 or $.45 per share. After giving effect to exercise of the 107,355 Warrants and the receipt of the proceeds therefrom, the net tangible book value would be $.48 per share. This represents an immediate increase in net tangible book value of $.03 per share to the existing stockholders (including the Holder of the "D" Preferred Shares after conversion), and an immediate dilution of $4.33 to the holders of the Warrants upon exercise thereof. 12 These figures are set forth in the following table: Exercise Price per Warrant (1) $4.81 Pro forma net tangible book value per Share before exercise (2) $0.45 Increase per Common Share attributable to exercise of Warrants. $0.03 Pro forma net tangible book value per Share after exercise $0.48 Dilution per Common Share attributable to exercise $4.33 - ------------------------ (1) Net tangible book value per Common Share is determined by dividing the tangible net worth of the Company by the number of Common Shares outstanding. (2) Pro-forma net tangible book value per Common Share after exercise/conversion is determined by dividing the tangible net worth of the Company (taking into consideration registration expenses) by the number of Common Shares outstanding after exercise of the Warrants. (3) Dilution represents the difference between the amount per Common Share paid by holders of Warrants who exercise them and the net tangible book value after such exercise. The following table sets forth, as of January 31, 1997, as adjusted for the issuance of Common Shares between January 31, 1998 and April 30, 1998 and the consideration received therefor, the differences among the existing shareholders of the Company, including the Holder of the "D" Preferred Shares and the Warrants after exercise the total consideration paid and the average price per Common Share paid. Common Shares Purchased Total Consideration Percent Percent Average Price Number of Total Amount of Total Per Share ---------- -------- ----------- -------- ------------- Common Shares 14,432,039 95.2% $ 8,010,100 72.9% $0.56 2,500 Convertible Preferred Shares* 625,000 4.1 $ 2,500,000 22.7% $4.00 Total Common Shares* prior to conversion 15,057,039 99.3 $10,510,100 95.6% $0.70 Exercise of Warrants 107,355 0.9 $ 481,000 4.4% $4.81 Total Common Shares after exercise 15,164,394 100.0% $10,991,100 100.0% $0.72 ---------------------- * The number of Common Shares into which the Preferred Shares may be converted as been taken, for purposes of this table, at 625,000 Common Shares. The actual number of Common Shares into which the "D" Preferred Shares are converted may be greater or lesser than 625,000 Common Shares (see Front Cover Page and "Securities -- "D" Preferred Shares"). 13 CAPITALIZATION The table below sets forth the pro-forma capitalization of the Company as at January 31, 1998 on an historical basis and as adjusted to give effect of the exercise of the Warrants and conversion of the "D" Preferred Shares. As Adjusted for Exercise of Warrants and Conversion of "D" Historical Basis Preferred Shares* ---------------- ----------------- Long Term Liabilities $ 0 $ 0 Stockholders' Equity Common Shares, $.01 par value per share, authorized 30,000,000 Common Shares, issued and outstanding 14,432,039 shares at January 31, 1998; 15,164,394 Common Shares will be issued and outstanding after conversion of the Preferred Shares and exercise of Warrants . 139,258 1451,644 "D" Preferred Shares, $.01 par value per share, authorized 5,000,000 Shares, issued and outstanding 2,500,000 Preferred Shares as at January 31, 1998 (1); after conversion of the Preferred Shares, there will be -0- Preferred Shares outstanding. 2 0 Additional paid in capital 7,870,842 10,667,333 Accumulated deficit (3,534,922) (3,534,922) ------------ ------------ Total stockholders' equity $ 4,475,180 $ 7,284,055 ------------ ------------ Total Capitalization $ 4,475,180 $ 7,284,055 ============ ============ - -------------------- * Stockholders' equity represents a pro-forma number consisting of the balance as of January 31, 1998 of $4,463,180 plus $12,000 representing the exercise of 4,000 Plan Options at $3.00 per share for an aggregate of $4,475,180.Assumes conversion of 2,500 "D" Preferred Shares and exercise of 107,355 Warrants. The number of Common Shares into which the Preferred Shares may be converted as been taken for purposes of this table at 625,000 Common Shares. The actual number of Common Shares into which the "D" Preferred Shares are converted may be greater or less than 625,000 Common Shares. The Warrants are exercisable at $4.81 per share. The total number of Common Shares outstanding and Shareholders' Equity have been adjusted on a pro forma basis to reflect Common Shares issued by the Company between February 1, 1998 and April 30, 1998 and the consideration received by the Company therefor. 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS for the years ended April 30, 1996 and 1997 and the nine-month periods ended January 31, 1997 and 1998 The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that except for the description of historical facts contained herein, the Registration Statement contains certain forward looking statements that involve risks and uncertainties as detailed herein and from time to time in the Company's filings with the Securities and Exchange Commission and elsewhere. Such statements are based on management's current expectations and are subject to a number of factors and uncertainties which could cause actual results to differ materially from those described in the forward-looking statements. These factors include, among others: (a) the Company's fluctuations in sales and operating results, risks associated with international operations and regulatory, competitive and contractual risks and product development; (b) the ability to achieve strategic initiatives, including but not limited to the ability to achieve sales growth across the business segments through a combination of increased pricing, enhanced sales force, new products, and improved customer service; and acquisitions. 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. The Company was considered to be a development stage company with little operating history subsequent to its commencement of development of its biomedical technologies which are its core business. These activities have been funded through the sale of convertible debentures, exercise of options and warrants and sale of four series of convertible preferred shares. Because the Company's drug test kits are in commercial production and the Company has, according to Management, adequate resources to fund its operations and has completed research and development of its present product line, the Company no longer considers itself a development stage company. 15 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. 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. 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 general and administrative 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. 16 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 expense is the result of gradual completion of development of the drug testing delivery system. Resolution of Friedenberg Litigation and Trial Date in Morris Litigation ------------------------------------------------------------------------ The Company is awaiting a judicial determination of the entitlement to common shares by the estate of Robert Friedenberg, a former stockholder of two companies the purchase of which the Company rescinded. A jury has determined in favor of the Company on two of three fraud claims against the estate and has awarded the Company $300,000 in damages. The judge is bound by the jury verdict. In June, 1995, the Company filed a lawsuit against Jackson Morris, Esq. for breach of the 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. 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. 17 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. 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 exercise of 175,000 options 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 nine months ended January 31, 1998 as compared to the nine months ended January 31, 1997. - -------------------------------------------------------------------------------- Revenues from the book segment of the business were $410,254 for the nine months ended January 31, 1998 as compared to $237,538 for the nine months ended January 31, 1997, representing an increase of $172,716 or 72.7%. This increase in book sales is directly attributable to the Company's reorganization of its telemarketing activities and a bulk inventory purchase. Cost of goods sold for the nine months ended January 31, 1998, was $102,642 as compared to $87,820 for the nine months ended January 31, 1997 representing a cost of goods sold percentage of 25.0% of sales for the nine months ended January 31, 1998 as compared to 37.0% of sales for the nine months ended January 31, 1997. 18 Revenues from the sales of drug testing kits were $1,363,916 for the nine months ended January 31, 1998 as compared to $ 192,963 for the nine months ended January 31, 1997, representing an increase of $1,170,953 or 707%. This increase in sales of drug testing kits is directly attributable to the implementation of and positive response to the Company's marketing program. Cost of goods sold for the nine months ended January 31, 1998 was $572,719 or 42.0% of sales as compared to a cost of goods sold of $62,601 or 32.4% of sales. The increase in the percentage of cost of goods sold is attributable to additional overhead. General and administrative costs for the nine months ended January 31, 1998 were $1,676,176 or 99.9% of sales as compared to $583,569 or 135% of sales for the nine months ended January 31, 1997, representing an increase of $1,092,627. These increased costs are the result of hiring additional employees in sales, marketing, accounting and executive positions. For the nine months ended January 31, 1998, personnel costs were $491,512, legal and professional expenses, $143,712, office expense, $241,297, marketing expense, $502,255, product development, $75,606, rent, $21,437 and bad debt expense of $200,377. Research and development expense was $96,766 for the nine months ended January 31, 1998 compared to $74,978 for the nine months ended January 31, 1997. This increase in research and development is the result of the development of three additional drug tests during the quarter. Results of operations for the three months ended January 31, 1998 as compared to the three months ended January 31, 1997. - -------------------------------------------------------------------------------- Revenues from the book segment of the business were $144,906 for the three months ended January 31, 1998 as compared to $220,415 for the three months ended January 31, 1997, representing an decrease of $75,509 or 34.3%. This decrease in book sales is directly attributable to the Company's delayed delivery of a bulk inventory purchase. Costs of goods sold for the three months ended January 31, 1998, were $36,171 as compared to $82,255 for the three months ended January 31, 1997 representing a cost of goods sold percentage of 25.0% of sales for the three months ended January 31, 1998 as compared to 37.3% of sales for the three months ended January 31, 1997. Revenues from the sales of drug testing kits were $355,540 for the three months ended January 31, 1998 as compared to $161,498 for the three months ended January 31, 1997, representing an increase of $194,042 or 120.1%. This increase in sales of drug testing kits is directly attributable to the implementation of and positive response to the Company's marketing program. Cost of goods sold for the three months ended January 31, 1998 was $137,852 or 38.8% of sales as compared to a cost of goods sold of $40,288 or 24.9% of sales. The increase in the percentage of cost of goods sold is attributable to additional overhead. General and administrative costs for the three months ended January 31, 1998 were $934,720 or 186.8% of sales as compared to $247,456 or 64.8% of sales for the three months ended January 31, 1997, representing an increase of $734,878. These increased costs are the result of hiring additional employees in sales, marketing, accounting and executive positions. For the three months ended January 31, 1998, personnel costs were $138,298, legal and professional expenses, $24,248, office expense, $143,140, marketing expense, $368,863, product development, $48,536, rent, $11,258 and bad debt expense of $200,377. Research and development expense was $47,614 for the three months ended January 31, 1998 compared to $8,228 during the three months ended January 31, 1997. This increase in research and development is the result of the development of three additional drug tests during the quarter. 19 Liquidity and capital resources as of the end of the nine months ended January 31, 1998. - -------------------------------------------------------------------------------- The Company's cash balance was $303,939 and working capital was $4,286,694 as at January 31, 1998. The Company completed a series of private placements generating additional cash aggregating $1,055,000 before payment of $ 93,500 in commissions and issuing 138,305 Common Shares through the exercise of options for an aggregate consideration of $414,915. Cash generated from financing activities was utilized for the purchase of machinery and equipment for $49,093, additional patent costs of $22,652 and an increase in the investment in marketable securities of $846,609 and an increase in accounts receivable of $795,159. The Company's primary short-term needs for capital, which are subject to change, are for expansion of its manufacturing capacity, an increase in inventory levels to fill larger anticipated orders and an increase in associated accounts receivables. As of January 31, 1998, two customers account for 44.2% of the Company's accounts receivable and no one customer accounted for more than 10% of drug test kit sales during the quarter. Management believes that the present cash balance will pay the immediate ongoing cost of the biomedical business but the Company may seek additional funding sources for continued research and development into new products. The Company is in full scale commercial production of its drug testing kits. Income tax: As of January 31, 1998, the Company had a tax loss carry-forward of $3,534,922. The Company's ability to utilize its tax credit carry-forward 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 its marketing program and the anticipated launch of the Company's new products currently under development. Additionally, the Company will utilize cash generated from operating activities to meet its capital requirements. 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 increasing development efforts related to 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. 20 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 ------- The Company's primary business is acquiring, developing and marketing biomedical technologies and products. The Company currently owns a technology for screening drugs of abuse, trademarked the "Rapid Drug Screen." The Company produces and markets its workplace screening test at its manufacturing facility in Columbia County, New York. 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 preventing exposure of the test administrator to the urine sample. In Management's opinion, the Company's drug test kit, which requires no mixing of reagents, is easier to use than any competitive product. In addition, hundreds of controlled tests conducted by independent laboratories compared the 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 that laboratory test. The Company manufactures and markets a two panel (cocaine and marijuana), five panel (cocaine, marijuana, opiates, amphetamine and PCP) and an eight panel (THC, cocaine, opiates, PCP, amphetamines, benzodiazepines, methamphetamines and barbiturates) Rapid Drug Screen. All three tests have been cleared by the FDA and can be sold in clinical markets as well as workplace markets. The Company has also completed a test for tricyclic antidepressants which it intends to submit to the FDA for approval and to market in the near future as part of a nine-panel test. 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 improved reliability 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. 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 and pursuing development and acquisition strategies related to substance abuse testing. The Company has fully developed and is preparing to market its anti-dilutant product which detects the presence of dilutants and added detergents in the urine specimen and also tests for pH and specific gravity levels. 21 The Company may develop or acquire additional biomedical technologies or products in the future unrelated to substance abuse. From its inception in 1986 until 1991, the Company was involved in marketing educational books and software to schools and municipal libraries and audiovisual educational packages to educational institutions and to corporations throughout the United States. In 1991, the Company, because of heightened competition, increasing costs of doing business and slow collections from municipalities, reduced its involvement in this market to that of selling audiovisual packages to libraries and commenced seeking new technologies in emerging medical markets. 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. (See "Litigation.") The Company has no present intention of entering into transactions in the future with related parties. Since its inception to January 31, 1998, the Company has an accumulated deficit of $$3,534,922 (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 history and that there is no assurance that the Company's biomedical operations will become profitable. Background ---------- According to the "1996 AMA (American Management Association) Survey Workplace Drug Testing and Drug Abuse Policies Summary of Key Findings," 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 increases 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. 22 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 screening performed in a full-service lab. Drug screening tests are now performed in markets which include: preemployment testing, random testing of employees, drug rehabilitation programs, hospital laboratories, emergency rooms, private security agencies, public transportation, law enforcement agencies, probation and parole programs and Department of Defense contractors. The Common Shares were accepted for listing and began trading on the Nasdaq SmallCap Market on December 24, 1997. Workplace Drug Test ------------------- Design ------ The first product, trademarked "The Rapid Drug Screen," developed and marketed by the Company, is a workplace test for two, five or eight drugs of abuse which can be used in offices, factories, "halfway" houses, remote locations and in all situations where an immediate 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 to eight minutes, the results can be read on the card inserted 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. 23 The Company has designed a five panel card, a two panel card and an eight panel card and can produce, on special order or if the market demands, cards which test for any combination of drugs of abuse. The two panel strip, designed for juvenile corrections centers and educational institutions, tests only for cocaine and marijuana. The eight panel strip, designed to rival two competitive products, Biosite and Drug Screen Systems, includes barbiturates, benzodiazepines and methamphetamines. These additional tests can be combined in single unit with the NIDA 5 Card so that one sample can test simultaneously for eight drugs of abuse. The Company's test for methamphetamine is also incorporated in a two panel test for marijuana and methamphetamine and in a five panel test for methamphetamine, amphetamine, cocaine, opiates and marijuana. The Company has also completed a test for tricyclic antidepressants which it intends to submit to the FDA and to market in the near future as part of a nine-panel test. Benzodiazepines, barbiturates, and tricyclic antidepressants are prescription sedatives which are often abused and can be deadly. In fact, the Florida Alcohol and Drug Abuse Association (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 screens contains a temperature sensor which helps prevent the substitution of another urine sample as the likelihood is that the substituted sample would be of a lower temperature than a sample produced from the body on the spot. 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 strip, the sample is positive for that drug and the sample should be sent to a laboratory for confirmation. If both bands in any 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. 24 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. FDA Approval/Patent Application ------------------------------- Although FDA approval is not required for most forms of workplace drug testing, including The Rapid Drug Screen, it is required for use in a clinical setting which Management anticipates may become a future marketplace for the Company's drug testing products. Testing to date has shown 100% correlation to tests performed in a recognized testing laboratory. FDA "510K" clearances have been granted for the Company tests included on its eight-panel Rapid Screen. The Company intends to apply to the FDA for its test for tricyclic antidepressants. Utility and application patents were filed on March 11, 1996, but have not yet been granted. Marketing and Sales ------------------- The Company advertises through trade journals and direct mail campaigns; and its representatives attend trade shows. The Company sells primarily to distributors which then resell in the various marketplaces. The Company has garnered orders from distributors, municipal bodies and corporate users as well as from penal facilities. In November, 1997, the Company hired a national sales manager, a director of marketing and five regional managers. (See "Management--Significant Employees.") The Company has opened a national sales office in Boca Raton, Florida. (See "Risk Factors--Marketing and Sales.") 25 The Company has divided its marketplace into the following categories. Corporate Workplace Drug Testing Programs ----------------------------------------- The Company has developed a nationwide network of distributors and administrators of workplace drug testing programs to sell its Rapid Drug Screen testing kit. 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 shipped orders to 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 trade shows, winter and summer, for the past three years. Rehabilitation Centers ---------------------- This market includes people in treatment for substance abuse in general hospitals, mental health centers and outpatient programs. The importance of this market relates to the high frequency of testing. For example, in many residence programs, patients are tested each time they leave the facility and each time they return. In outpatient programs, patients are generally tested on a weekly basis. The Company has received orders from a chain of 60 rehabilitation centers and is negotiating with others. The Company exhibited at the 1997 Employee Assistance Program convention in Chicago. International Markets --------------------- The Company has entered into distribution agreements with companies in several countries and is pursuing a course of multinational distribution of its products through both clinical and non-clinical distribution companies . 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. In January, 1998, the Rapid Drug Screen was approved by the Hungarian National Institute of Laborities for sale in Hungary. The Company intends to market in Hungary through Health Products Marketing, LLC. In February, 1998, the Company entered into a distribution agreement with Associated Process Controls, Ltd, which distributes testing and monitoring equipment to businesses, hospitals and police departments throughout New Zealand. 26 Clinical, Physicians and Hospitals ---------------------------------- 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. The Company has entered into an exclusive distribution contract with and has started shipments to a subsidiary of Murex International Technologies Corp., traded on Nasdaq, (majority owned by Abbott Laboratories (NYSE)) to market the Rapid Drug Screen product line to hospitals and clinics in North America. The Company hopes to expand this distribution to additional countries. In addition, the Company has been selected to supply products to the Physicians Drug Test Network which, in turn, markets to participating physicians who provide drug screening for families, individuals, schools and employers. 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 upon final FDA determination of on-site drug testing as a over-the-counter alternative. 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. 27 Competition ----------- Competition to the Company's workplace drug test comes from tests by Roche Diagnostic Systems, Medtox (formerly Editek, Inc.), Biosite Diagnostics and Drug Testing Resources International. In the Roche test, the test administrator 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 Testing Resources test involves pipeting drops of urine. In addition, Psychemedics introduced a test which requires that a lock of hair taken from the subject 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. 28 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. 29 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. 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. 30 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. 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 trade shows during fiscal 1997 and 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.") 31 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. 32 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 Parolefrom 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. 33 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. Martin R. Gould (47 years old), Technical Director, was consultant to the president of Arista Biologicals Inc. from 1997 to 1998. From 1987 to 1994, he was Chief Executive Office and a founder of Ampcor, Inc. which was sold to Neogen Corporation in 1994. From 1994 to 1997, he was General Manager of Ampcor Diagnostic Inc., a subsidiary of Ampcor Inc., where he was responsible for sales and manuacturing of clinical and microbiological food testing products. From 1973 to 1987, Mr. Gould served E. Merck sucessively as Product Manager, R&D Acting Director, R&D Manager, R&D Senior Scientist and Quality Assurance Senior Scientist. Mr. Gould received his B.S. in Animal Science/Chemistry from Delaware Valley College, and received his M.S. and is completing his Ph.D. in Biomedical Sciences and Engineering at Drexel University. 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. 34 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. 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). 35 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. 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 "D" Conversion of "D" Beneficial Owner of Shares Preferred Share Preferred Shares(1) and Exercise of and Exercise of the Warrants the Warrants ---------------- --------- ----------------- ------------------- Edmund Jaskiewicz 2,005,572 13.9% 13.3% 1730 M Street, NW Washington, DC 20036 Stan Cipkowski 2,599,250 18.0% 17.3% 300 Fairview Avenue Hudson, New York 12534 Jay Bendis 645,999 4.5% 4.3% 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-% 4964 Moonfall Way Columbia, Maryland 21044 John F. Murray 3,620 -0-% -0-% 1821 Lyons Road Pompano Beach, Florida 33063 Karen Russo 1,250 -0-% -0-% 8675 Falmouth Avenue Playa del Rey, CA 90293 Douglas Casterlin 112,500 0.8% 0.7% 65 Malloy Road Ghent, New York 12065 --------- ----- ------ All Officers and Directors as a Group (8 persons) 5,368,191 37.2% 35.6% - -------------------- 1. Assumes conversion of the total number of the "D" Preferred Shares into 625,000 Common Shares and exercise of 107,355 Warrants. 35 CERTAIN TRANSACTIONS In August, 1997, the Company issued 185,000 Plan Options pursuant to the Fiscal 1996 Plan as follows: 10,000 to Jasper Clay, Jr., a Director, 10,000 to John F. Murray, a Director, and 155,000 options to five non-management employees. As of December 31, 1997, Edward Jaskiewicz, Executive Vice-President, gifted a total of 964,300 Common Shares to members of his family. Stan Cipkowski gifted an aggregate of 40,000 Common Shares to three trusts/foundations. During fiscal 1998, Karen Russo and John Murray, Directors, purchased 1,250 and 3,620 Common Shares in brokerage transactions. As of December 31, 1997, Stan Cipkowski gifted to Douglas Casterlin, Vice-President 112,500 Common Shares. Between September 1, 1997 and April 30, 1998, the company issued 271,000 Plan Options pursuant to the Fiscal 1998 Plan exercisable for a period of three years to 22 persons of which 12,000 options were exercisable at $3.00; 235,000 options at $3.50 and 24,000 options at $4.00. DESCRIPTION OF SECURITIES The authorized capital stock of the Company consists of 30,000,000 Common Shares $.01 par value per share and 5,000,000 Preferred Shares $.01 par value per share. Common Shares -------------- 14,432,039 Common Shares were issued as of April 30, 1998. 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, 1997 and 1998. There are approximately 2,500 holders of Common Shares. As of April 30, 1998, there were outstanding 14,432,039 Common Shares and 2,500 "D" Preferred Shares each of which is convertible into Common Shares at the lesser of (i) 95% of the "Market Price" (the average of the closing bid prices of the Common Shares over any three trading days, selected by the Holder, in the 20 trading days immediately preceding the Conversion Date and 125% of $3.70, the Closing Price, except that if the 10 day average closing bid price ending on the Effective Price is greater than 125% of the Closing Price, the maximum Conversion Price will be such Effective Price, not to exceed, in any case, 135% of the Closing Price. The Common Shares trade on the Nasdaq SmallCap market (see Front Cover Page and "Risk Factors--No Assurance of Continued Public Market for Common Shares"). 36 High Low ---- --- Fiscal Year Ending April 30, 1998 Fourth Quarter $4.43 $3.40 Third Quarter 6.50 3.25 Second Quarter 3.97 2.69 First Quarter 4.13 3.00 Fiscal Year Ending April 30, 1997 Fourth Quarter 4.13 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. On April 24, 1998, the Company has sold 2,500 "D" Preferred Shares and issued 100,000 Warrants (see "Warrants" herein) to the Holder, CC Investments, LLD. Each of the "D' Preferred Shares is convertible into Common Shares at the lesser of (i) 95% of the "Market Price" (the average of the closing bid prices of the Common Shares over any three trading days, selected by the Holder, in the 20 trading days immediately preceding the Conversion Date and 125% of $3.70, the Closing Price, except that if the 10 day average closing bid price ending on the Effective Date is greater than 125% of the Closing Price, the maximum Conversion Price will be such Effective Price, not to exceed, in any case, 135% of the Closing Price. All accrued but unpaid dividends are payable in cash or Common Shares. If, on or after the Effective Date, the average closing bid price of the Common Shares over any 20 consecutive trading days is equal to or greater than 300% of the Closing Price, all outstanding Preferred Shares will be automatically converted into shares of Common Stock at the lowest Conversion Price in effect on such 20th trading day. The Registration Statement relates in part to the Common Shares underlying the "D" Preferred Shares. 37 Unless Shareholder approval is obtained, the Company shall not be obligated to issue, in the aggregate, more than 2,745,000 Common Shares upon conversion of the "D" Preferred Shares. In the absence of Shareholder approval, conversion by the Holder shall be honored by payment to the Holder of cash in an amount equal to the Closing Bid Price on the trading day of delivery of a notice of conversion multiplied by the number of Common Shares which would be issuable in satisfaction of such notice of conversion. The Holder has committed to purchase from the Company an additional 2,000 "D" Preferred Shares (and receive 80,000 Warrants) in the event the Company consummates an acquisition which conforms to certain economic parameters. There is no assurance that a qualifying acquisition will be made. Warrants -------- On April 24, 1998, the Company issued 107,355 Warrants, 100,000 Warrants to the Holder, CC Investments LLD, as part of the sale of securities, and 7,355 Warrants to Shoreline Pacific, the Selling Agent, as part of its compensation for effecting the sale of the securities (see Front Cover Page). Each Warrant entitles the holder to purchase one Common Share at a price of $4.81 per share until April 24, 2001. The Registration Statement relates in part to the Common Shares underlying the Warrants. Options ------- The Company has issued 500,000 Options which are exercisable at $1.00 through March 14, 1999 and 500,000 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 Plan and the Fiscal 1998 Plan. 2,000,000 Common Shares were reserved under the 1996 Plan and 1,000,000 Common shares under the 1998 Plan. Each plan is administered by the Board of Directors. Plan Options under either 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 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. The Company has issued 1,957,000 options ("Plan Options") pursuant to the Fiscal 1996 Plan. All Plan Options were exercisable for a period of three years at $3.00 per share. As of April 30, 1998, 806,038 Plan Options have been exercised for an aggregate exercise price of $2,418,114. 271,000 Plan Options have been issued pursuant to the Fiscal 1998 Plan, 235,000 options exercisable at $3.50 per share, 24,000 options at $4.00 per share and 12,000 options at $3.00 per share. No Plan Options issued pursuant to the Fiscal 1998 Plan have been exercised.(See "Certain Transactions.") 38 Transfer, Option and Warrant Agent ---------------------------------- The transfer agent for the Common Shares and Warrants is United Stock Transfer, Englewood, Colorado. Plan of Distribution -------------------- Common Shares acquired through conversion of the "D" Preferred Shares may be sold from time to time by the holders thereof or their pledgees or donees. Such sales may be made on Nasdaq 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 upon conversion of its shares. Common Shares may be sold from time to time by the Selling Securityholder or its 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. 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. 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.") 39 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 The Company is awaiting a judicial determination of the entitlement to common shares by the estate of Robert Friedenberg, a former stockholder of two companies the purchase of which the Company rescinded. A jury has determined in favor of the Company on two of three fraud claims against the estate and has awarded the Company $300,000 in damages. The judge is bound by the jury verdict. In June, 1995, the Company filed a lawsuit against Jackson Morris, Esq. for breach of the 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. 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 35,000 Common Shares, 20,000 options issued under the Fiscal 1996 Plan and 20,000 options under the Fiscal 1998 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. 40 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. 41 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 April 30, January 31, 1997 1998 (Unaudited) ------------- ------------- Assets Current assets Cash and cash equivalents $ 1,762,506 $ 303,939 Marketable securities, available for sale 1,053,000 1,899,609 Accounts receivable 337,759 1,132,918 Loan receivable 102,250 142,000 Inventory 668,723 936,858 Prepaid expenses 4,425 13,819 ------------- ------------- Current assets 3,928,663 4,429,143 Fixed assets-net 110,834 137,409 Other assets License rights 38,470 Patent costs 28,783 39,077 ------------- ------------- Total other asset 67,253 39,077 ------------- ------------- Total assets $ 4,106,750 $ 4,605,629 ============= ============= Liabilities and Stockholders' Equity Current liabilities Accounts payable and accrued expenses $ 380,155 $ 142,449 ------------- ------------- Total current liabilities 380,155 142,449 Capital stock Common stock -authorized 30,000,000 common shares, par value $.01 per share, at April 30, 1997 and January 31, 1998 the common shares outstanding were 13,379,507 and 13,921,846 respectively. 133,795 139,218 Preferred stock -authorized 5,000,000 preferred shares, par value $.01 per share, at April 30, 1997 and January 31, 1998 the number of preferred shares outstanding was 90 and 105.5 respectively 1 2 Additional paid in capital 6,499,791 7,858,882 Retained earnings (2,906,992) (3,534,922) ------------ ------------- Total stockholders' equity 3,726,595 4,463,180 ------------ ------------- Total liabilities and stockholders' equity $ 4,106,750 $ 4,605,629 ============ ============= See accompanying notes to financial statements. F-2 AMERICAN BIO MEDICA CORPORATION STATEMENT OF OPERATIONS For the For the For the three For the three year ended year ended months ended months ended April 30, April 30, January 31, January 31, 1996 1997 1997 1998 (Unaudited) (Unaudited) ----------- ----------- ------------ ------------ Revenue $ 158,105 $ 610,876 $ 381,914 $ 500,224 Less cost of goods sold 96,444 259,862 124,643 174,023 ----------- ----------- --------- --------- Gross profit 61,661 351,014 257,271 326,201 Operations: General and administrative 518,826 867,903 247,456 934,720 Depreciation and amortization 77,600 96,134 49,490 24,673 Research and development 358,844 74,978 8,228 47,614 -------- ------- ------- -------- Total expenses 955,270 1,039,015 305,174 1,007,007 Income (loss) from operations (893,609) ( 688,001) ( 47,903) (680,806) Other income and expenses Retirement of debt 126,500 Interest income 356 56,180 2,259 15,892 Interest expense (103,205) -------- ------- -------- -------- Total other income and expenses (102,849) 182,680 2,259 15,892 -------- ------- -------- -------- Net Profit (Loss) from operations $(996,458) $(505,321) $ ( 45,644) $ (664,914) ========= ========== =========== =========== Net income (loss) per share $( .08) $( .04) $(.00) $(.05) ========= ========= ========= ========= Weighted number of shares outstanding 12,528,266 12,728,180 13,718,265 13,737,781 ========== ========== ========== ========== See accompanying notes to financial statements. F-3 AMERICAN BIO MEDICA CORPORATION STATEMENT OF OPERATIONS For the nine For the nine months ended months ended January 31, January 31, 1997 1998 (Unaudited) (Unaudited) ------------ ------------ Revenue $ 430,501 $ 1,773,948 Less cost of goods sold 150,421 675,361 ------------ ------------ Gross profit 280,080 1,098,587 Operations: General and administrative 583,569 1,676,196 Depreciation and amortization 72,490 73,346 Research and development 74,978 96,766 ------------ ------------ Total expenses 731,037 1,846,308 Income (loss) from operations (450,957) (747,721) Other income and expenses Retirement of debt 126,500 Interest income 3,595 119,791 ------------ ------------ Total other income and expenses 130,095 119,791 ------------ ------------ Net Profit (Loss) from operations $ (320,862) $ (627,930) ============ ============ Net income (loss) per share $(.02) ($.05) ============ ============ Weighted number of shares outstanding 13,718,265 13,737,781 ============ ============ See accompanying notes to financial statements. F-4 AMERICAN BIO MEDICA CORPORATION STATEMENT OF CASH FLOWS
For the nine For the nine For the year For the year months ended months ended ended ended January 31, January 31, April 30, April 30, 1997 1998 1996 1997 Unaudited Unaudited -------- -------- - ------------ ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net profit (loss) $(996,458) $(505,321) $(320,862) $(627,930) Retirement of debt (126,500) Amortization and depreciation 77,600 96,134 72,490 73,346 Consulting fees 306,250 Compensation agreement 125,000 50,000 Retirement of debt (Note 9) (126,500) 126,500 Adjustments to reconcile net income to net cash Loan receivable (102,250) Accounts receivable 38,079 (303,259) (301,342) (795,159) Inventory 5,250 (646,422) (247,726) (268,135) Prepaid expenses 15,089 (4,425) (4,425) (9,395) Loan receivable (100,000) ( 39,750) Accounts payable (30,828) 346,907 149,289 237,705) -------- ------- - ------- -------- TOTAL CASH FLOWS FROM OPERATIONS (460,018) (1,245,136) (879,076)(1,904,728) CASH FLOWS FROM FINANCING ACTIVITIES Convertible debenture 693,000 (132,000) (132,000) Notes payable (89,289) Sale of stock 150,000 3,877,686 3,983,436 1,364,515 Issuance of stock for services 61,006 ------ --------- - --------- ------- TOTAL CASH FLOWS FROM FINANCING ACTIVITIES 814,717 3,745,686 3,851,436 1,364,515 CASH FLOWS FROM INVESTING ACTIVITIES Investment short term (1,053,000) (1,021,867) ( 864,609) Patent costs (7,783) ( 2,725) ( 22,652) Capital assets (114,793) ( 82,734) ( 49,093) --------- - ---------- ------ TOTAL CASH FLOWS FROM INVESTING ACTIVITIES (1,175,576) (1,107,326) ( 918,354) NET INCREASE (DECREASE) IN CASH 354,699 1,324,974 1,865,034 (1,458,567) CASH BALANCE BEGINNING OF PERIOD 82,833 437,532 ------ ------- - ---------- --------- CASH BALANCE END OF PERIOD $437,532 $1,762,506 $2,302,566 $ 303,939 ======== ========== ========== ========= See accompanying notes to financial statements.
F-5 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) 30,0000 4-30-1995 (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 01-31-1998(12) 128,305 1,283 383,632 384,915 01-31-1997 Net loss (627,930) (627,930) ---------- --------- ------ ------- ------------ - ------------ ----------- 01-31-1998 13,921,846 $ 139,218 105.5 $ 2 $ 7,858,882 $(3,534,922) $4,463,180 ========== ========= ======= ======= ============ ============ ===========
F-6 (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 150 Convertible "A" Preferred Shares. (12) Common shares issued upon exercise of warrants. (13) Conversion of convertible Convertible "A" 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-7 AMERICAN BIO MEDICA CORPORATION NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED APRIL 30, 1997 AND THE NINE MONTHS ENDED JANUARY 31, 1998 (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 primarily in the business of acquiring, developing and marketing biomedical technologies and products. The Company manufactures and sells 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 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; and is thus no long considered to be a development stage company. F-8 c. Issuance of Securities 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. As of September 30, 1996, the Company sold 150 Series "A" Convertible Preferred Shares for an agregate consideration of $1,500,000. (All of the Series "A" Convertible Preferred Shares have been converted into 633,073 Common Shares.) 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 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. As of January 31, 1998. the Company 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. As of January 31, 1998, option and warrant holders exercised 128,305 options and warrants for an aggregate consideration $384,915 ($3.00 per share). F-9 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 January 31, 1998 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 nine months and three months ended January 31, 1997 and 1998. b. Earnings per Share Primary earnings per share are based on the weighted average number of common and dilutive common equivalent shares outstanding during each quarter. The weighted average shares for computing primary earnings per share were 13,718,265 and 13,737,781 for the quarters ended January 31, 1997 and 1998, 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. 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. F-10 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 January 31, 1998. 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-11 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 January 31, 1998, 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 30, 1997 January 31, 1998 -------------- ---------------- Books held for resale $ 43,528 $ 13,517 Workplace drug screening tests: Raw materials 292,456 365,682 Work in process 183,500 205,115 Finished Goods 149,239 352,544 ---------- ---------- Total workplace drug screening tests: $ 625,195 $ 923,341 ---------- ---------- Total inventory $ 668,723 $ 936,858 ========== ========== b. Property, equipment and leasehold improvements consist of the following: April 30, 1997 January 31, 1998 -------------- ---------------- Office equipment $ 45,702 $ 55,882 Manufacturing and warehouse equipment 87,666 124,901 ---------- ---------- Total 133,368 180,783 Less accumulated depreciation (22,534) ( 43,374) ---------- ---------- Total $ 110,834 $ 137,409 ========== ========== F-12 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 January 31, 1998: Estimated Gross Gross Fair Unrealized Unrealized Market Cost Gains Losses Value --------- ------------- ----------- ----------- Cash $ 303,939 $-0- $-0- $ 303,939 Certificates of deposit 90 days and less -0- -0- -0- -0- ----------- -------------- ----------- ----------- Total cash and cash equivalents $ 303,939 $-0- $-0- $ 303,939 =========== =============== =========== =========== Marketable Securities Due in one year or less Certificates of Deposit $ 1,899,609 $-0- $-0- $ 1,899,609 =========== =============== =========== =========== F-13 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 were included in the 1996 Plan. 1,957,000 options have been issued. Shares have been reserved for the exercise of all options under the 1996 Plan. All Nonstatutory Options which the Company has issued are exercisable for a period of three years at $3.00 per share. 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, 200,000 options were issued under the 1998 Plan. 150,000 options are exercisable at $3.00 per share and 50,000 options are $3.50 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. 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. F-14 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-15 Note 6 - Preferred Shares a. Private Placement of Convertible A Preferred Shares The Company sold 150 Series 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. The Series A Preferred Shares were converted into an aggregate of 633,073 Common Shares. c. Private Placement of Series B and Series C Convertible Preferred Shares In September, 1997, the Company sold 60 8% Series B Convertible Preferred Shares, 45.5 Shares of Series C Convertible Preferred Shares at $10,000 each for an aggregate gross consideration of $1,055,000 and net proceeds of $961,500. Note 7 - 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 January 31, 1998, 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 January 31, 1998, the Company had net operating loss carry forwards for income tax purposes of $3,534,922. 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-16 The components of the net deferred tax asset as of January 31, 1998 were as follows: Deferred tax asset: Net operating loss carry forward $ 1,201,873 Valuation allowance $ (1,201,873) --------- 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 nine months ended January 31, 1998. 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 8 - Commitments and Contingencies a. Lawsuits The Company is awaiting a judicial determination of the entitlement to common shares by the estate of Robert Friedenberg, a former stockholder of two companies the purchase of which the Company rescinded. A jury has determined in favor of the Company on two of three fraud claims against the estate and has awarded the Company $300,000 in damages. The judge is bound by the jury verdict. In June, 1995, the Company filed a lawsuit against Jackson Morris, Esq. for breach of the 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. F-17 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. 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 January 31, 1998:
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 1.25 $3.00 802,555 $3.00 3.00 457,000 2.25 3.00 457,000 3.00 3.00 150,000 2.50 3.00 150,000 3.00 3.50 50,000 2.75 3.50 50,000 3.50 --------- ---- ----- - --------- ----- 1,331,250 2.31 $3.12 1,331,250 $3.13
F-18 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 Nine Months Ended April 30, January 31 1996 1997 1997 1997 ----------- ----------- ----------- ----------- Adjusted pro forma net income $ (996,458) $ (505,321) $ (320,862) $ (667,212) Adjusted pro forma net income per share $ (0.08) $ (0.05) $ (.02) $ (.05) 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 9 - 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. F-19 Note 10 - 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 January 31, 1998, two customers accounted for 42.2% of accounts receivable. 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 11 - 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 12 - Subsequent Events In April, 1998, the Company issued 2,500 Series "D" Preferred Shares and 107,355 common share purchase warrants. for gross consideration fo $2,500,000 less commissions of 7.5%. Each Series "D" Preferred Share is convertible at the lesser of (i) 95% of the "Market Price" (the average of the closing bid prices of the Common Shares over any three trading days, selected by the holder in the 20 trading days immediately preceding the conversion date and 125% of the closing price of $3.70, except that if the 10 day average closing bid price ending on the Effective Date is greater than 125% of the closing price, the maximum conversion price will be the price on the effective date, not to exceed, in any case, 135% of the closing price. Each warrant entitles the holder to purchase one Common Share at a price of $4.81 per share until April 24, 2001. On April 1 , 1998, the Company leased 15,000 square feet office, warehouse and manufacturing premises in Hudson, New York from a non-affiliated party for a period of one year at a monthly rent of $3,750. The Company has the option to extend the lease for an additional year. Subsequent to the date of the financial statements, the "B" an "C" Preferred Shares were converted into an aggregate of 393,143 Common Shares. 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 $ 900 Printing and Mailing $ 1,000 Legal Fees and Expenses $10,000 Accounting Fees $ 4,500 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. (All "A" and "B' Warrants have been exercised.) 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 Registrant 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 such debentures have been converted at $.75 per share into 1,888,333 Common Shares.) 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 Series A Preferred Shares to Midland Walwyn Capital, Inc. for a total purchase price of $1,500,000. (The Series A Preferred Shares were converted into an aggregate of 633,073 Common 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. (All such warrants have been exercised.) In March, 1996, the Registrant issued to OTC Communications 500,000 Options exercisable until March 14, 1999 at $1.00 per share and 500,000 Options exercisable until March 14, 1999 at $2.00 per share. ix 1,500,000 Nonstatutory Options ("Plan Options") were issued pursuant to the Fiscal 1996 Nonstatutory Stock Option Plan ("Fiscal 1996 Plan") 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 Registrant issued 20,000 Plan Options to Jay Bendis, Executive-Vice-President and 252,000 Plan Options to 15 non-Management employees and consultants pursuant to the Fiscal 1996 Plan. Each Plan Option entitles the holder to purchase one Common Share for $3.00 for a period of three years. As of October 31, 1997, the Registrant had issued 150,000 Plan Options to Douglas Casterlin, Vice-President pursuant to the Fiscal 1998 Stock Option Plan ("Fiscal 1998 Plan"). Each Plan 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 Plan Options pursuant to the Fiscal 1996 Plan had been exercised for an aggregate consideration of $2,092,186. On August 29, 1997, the Registrant issued 185,000 Plan Options pursuant to the Fiscal 1996 Plan 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 Series B and 44.5 Series C Preferred Shares to a total of 12 investors for a total purchase price of $1,055,000. (The Series B and Series C Preferred Shares have been converted into an aggregate of 393,143 Common Shares.) Between September 1, 1997 and April 30, 1998, the Registrant issued 271,000 Plan Options pursuant to the Fiscal 1998 Plan exercisable for a period of three years to 22 persons of which 12,000 options were exercisable at $3.00; 235,000 options at $3.50 and 24,000 options at $4.00. Between November 1, 1997 and April 30, 1998, 36,605 Plan Options pursuant to the Fiscal 1996 Plan were exercised for an aggregate consideration of $109,815. In April, 1998, the Registrant issued 2,500 Series "D" Preferred Shares and 100,000 common share purchase warrants to CC Investments LDC for gross consideration fo $2,500,000 less commissions of 7.5%. Each Series D Preferred Share is convertible at the lesser of (i) 95% of the "Market Price" (the average of the closing bid prices of the Common Shares over any three trading days, selected by the holder in the 20 trading days immediately preceding the conversion date and 125% of the closing price of $3.70, except that if the 10 day average closing bid price ending on the Effective Date is greater than 125% of the closing price, the maximum conversion price will be the price on the effective date, not to exceed, in any case, 135% of the closing price. In addition, the Registrant issued to Shoreline Pacific 7,355 warrants. Each warrant entitles the holder to purchase one Common Share at a price of $4.81 per share until April 24, 2001. x The Common Shares underlying the Plan 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 (prior to the Registrant's becoming a "reporting company"), the certificates of which bore 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 or an exemption therefrom. xi Item 27. EXHIBITS Exhibits Exhibit List 3.07 Fifth Amendment to Certificate of Incorporation 4.09 Specimen Certificate, Series D Preferred Stock* 4.10 Form of Securities Purchase Agreement between the Company and the purchaser* 4.11 Form of Registration Rights Agreement by and among the Company, the placement agent and the purchaser* 4.12 Form of Common Stock Purchase Warrant Certificate* 4.13 Form of Certificate of Designation of Series D Preferred Stock of the Company* 5.05 Opinion and Consent of Joel Pensley, Esq. 23.10 Consent of Joel Pensley, Esq. (contained in wxhibit 5.5) 23.11 Consent of Thomas P. Monahan, CPA *Previously submitted as exhibits to Form 8-K filed on April 30, 1998 Financial Statement Schedules: None - -------------------------- xii 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. xiii 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 13th day of May, 1998. 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: May 14, 1998 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 May 14, 1998 Stan Cipkowski /s/Edmund Jaskiewicz - --------------------- Edmund Jaskiewicz Director May 14, 1998 /s/Jay Bendis - --------------------- Jay Bendis Director May 14, 1998 /s/John F. Murray - --------------------- John F. Murray Director May 14, 1998 - --------------------- Jasper R.Clay,Jr. Director - --------------------- Karen Russo Director xiv EX-3.(I) 2 AMENDMENT TO CERTIFICATE OF INCORPORATION CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF AMERICAN BIO MEDICA CORPORATION THE UNDERSIGNED, Stan Cipkowski and Edmund Jaskiewicz, being the President and Secretary of American Biomedica Corporation (the "Company"), hereby certify that: Article 1. The name of the Company is American Biomedica Corporation, originally known as American Micro Media, Inc. Article 2. The Certificate of Incorporation was filed by the Department of State on the 10th day of April, 1986. Article 3. The Certificate of Incorporation is amended to establish the designations, powers, preferences and rights of the Series D Convertible Preferred Stock of the Company. To effect the foregoing, the Certificate of Incorporation is hereby amended by adding the following provisions to the end of Article Fourth. I. DESIGNATION AND AMOUNT The designation (this "Certificate of Designation") of this series, which consists of Four Thousand Five Hundred (4,500) shares of Preferred Stock of American Bio Medica Corporation a New York corporation together with any additional shares of Preferred Stock issued as a dividend or otherwise in payment of obligations hereunder, not to exceed, in the aggregate Six Thousand (6,000) shares, is the Series D Preferred Stock (the "Preferred Stock" or "Preferred Shares") and the face amount per share shall equal One Thousand U.S. Dollars ($1,000) (the "Face Amount"). II. DIVIDENDS. A. General. The holders of the Preferred Stock shall be entitled to receive cumulative dividends at the rate of eight percent (8%) of the Face Amount per annum (the "Dividend"). Such cumulative Dividends shall be payable quarterly in arrears within three Business Days of the last day of each April, July, October and January, commencing July, 1998, in cash or additional Preferred Shares, at the Company's option. Dividends on the Preferred Stock shall accrue and be cumulative on a daily basis from the date of issuance (with appropriate proration for any partial dividend period), whether or not earned and whether or not in any dividend period there shall be surplus or net profits of the Company legally available for the payment of such dividends. B. Payment of Dividend in Preferred Shares. Should the Company elect to pay accrued but unpaid Dividends in additional shares of Preferred Stock, the number of Preferred Shares to which the Holder shall be entitled will be equal to the aggregate cash value of such unpaid Dividends, divided by the Face Amount. 1 C. Dividend Adjustment. Following the Effective Date, if the average Closing Bid Price of the Common Stock over any 20 consecutive trading days is greater than 145% of the Closing Price, the Dividend will thereafter be reduced from eight percent (8%) to five percent (5%) per annum, with appropriate pro-ration for partial dividend periods. III. CERTAIN DEFINITIONS For purposes of this Certificate of Designation, the following terms shall have the following meanings. A. "Business Day" means any day other than a Saturday, Sunday or a day on which banks in New York, New York are permitted or required by law to be closed. B. "Closing Bid Price" means, for any security as of any date, the closing bid price of such security on the principal securities exchange or trading market where such security is listed or traded as reported by Bloomberg Financial Markets or a comparable reporting service of national reputation selected by the Company and reasonably acceptable to the Holders then holding a majority of the then outstanding shares of Preferred Stock ("Majority Holders") if Bloomberg Financial Markets is not then reporting closing bid prices of such security (collectively, "Bloomberg"), or if the foregoing does not apply, the last reported sale price of such security in the over-the-counter market on the electron ic bulletin board of such security as reported by Bloomberg, or, if no sale price is reported for such security by Bloomberg, the average of the bid prices of any market makers for such security as reported in the "pink sheets" by the National Quotation Bureau, Inc. If the Closing Bid Price cannot be calculated for such security on such date on any of the foregoing bases, the Closing Bid Price of such security on such date shall be the fair market value as mutually determined by the Company and the Majority Holders, or, if they are unable to agree on such value, it shall be determined by an investment banking firm selected by the Company and reasonably acceptable to the Majority Holders, with the costs of such appraisal to be borne by the Company. C. Closing Date" means the date of the "First Closing" as defined in the Securities Purchase Agreement. D. "Closing Price" means the average Closing Bid Price of the Company's Common Stock over the five (5) consecutive trading days immediately preceding the Closing Date. E. "Common Stock" means the common stock, $0.01 par value, of the Company. 2 F. "Conversion Price" means the lesser of (i) 95% of the Market Price and (ii) 125% of the Closing Price, except that if the 10 day average Closing Bid Price ending on the Effective Date (the "Effective Price") is greater than 125% of the Closing Price, the maximum Conversion Price will be such Effective Price, not to exceed, in any case, 135% of the Closing Price. G. "Effective Date" means the date the registration statement registering the resale of the shares of Common Stock into which the Preferred Shares are convertible is declared effective by the Securities and Exchange Commission. H. "Holders" means the initial Holders of the Preferred Stock and their transferees. I. "Market Price" means the average of the Closing Bid Prices of the Common Stock over any 3 trading days, selected by the Holder, in the 20 trading days immediately preceding the Conversion Date. J. "Material Adverse Change" means the occurrence of a material adverse change or development in the business, properties, operations, financial condition, results of operation or prospects of the Company. K. "Registration Deadline" means the 90th day following the Closing Date. L. "Securities Purchase Agreement" means the Securities Purchase Agreement dated as of April 24, 1998, among the Company and the purchaser named therein, as amended from time to time in accordance with the terms thereof. M. "Warrants" means certain stock purchase warrants to acquire shares of Common Stock issued by the Company to the initial Holders in connection with the transactions contemplated by the Securities Purchase Agreement. IV. CONVERSION A. Conversion at the Option of Holder. Beginning on the earliest to occur of (i) the Effective Date, (ii) the Registration Deadline, (iii) the occurrence of any event or circumstance that, with the passing of time or the giving of notice, would constitute a Redemption Event, and (iv) any Material Adverse Change, each Holder may, at any time and from time to time convert any or all of its shares of Preferred Stock into a number of fully paid and nonassessable shares of Common Stock determined by dividing the aggregate Face Amount of the Preferred Shares being converted by the Conversion Price. The Conversion Price is subject to adjustment as provided in Article X. 3 B. Mechanics of Conversion. To convert the Preferred Shares, a Holder shall: (i) fax (or otherwise deliver by other means resulting in notice) a copy of the fully executed Notice of Conversion in the form of Exhibit A hereto to the Company and (ii) within three (3) Business Days surrender or cause to be surrendered to the Company (or satisfy the provisions of Section XIII(A), if applicable) the certificates representing the Preferred Stock being converted (the "Preferred Stock Certificates") accompanied by duly executed stock powers and the original executed version of the Notice of Conversion. The date of the Company's receipt of the Notice of Conversion described in clause (i) shall be the "Conversion Date". C. Conversion Disputes. In the case of any dispute with respect to a conversion, the Company shall promptly issue such number of shares of Common Stock as are not disputed in accordance with the other provisions of this Article IV. If such dispute involves the calculation of the Conversion Price, the Company shall submit the disputed calculations to an independent accounting firm of national standing, acceptable to Holder, via facsimile within two (2) Business Days of receipt of the Notice of Conversion. The accounting firm shall audit the calculations and notify the Company and the Holder of the results no later than two (2) Business Days from the date it receives the disputed calculations. The accounting firm' s calculation shall be deemed conclusive, absent manifest error. The Company shall then issue the appropriate number of shares of Common Stock in accordance with this Article IV. D. Timing of Conversion. No later than the third Business Day following the Conversion Date (the "Delivery Period"), provided that the Company has received prior to such date the Preferred Stock Certificates (or the Holder has satisfied the provisions of Section XIII(A), if applicable), the Company shall deliver to the Holder (or at its direction) (x) that number of shares of Common Stock issuable upon conversion of the number of Preferred Shares being converted and (y) a certificate representing the number of Preferred Shares not being converted, if any. The person or persons entitled to receive shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder of such shares at the close of business on the Conversion Date and such shares shall be issued at such time, unless the Notice of Conversion is revoked as provided in Section IV(D). The Delivery Period shall be extended until the Business Day following the date of delivery to the Company of the Preferred Stock Certificates to be converted or satisfaction of the provisions of Section XIII(A), if applicable. 4 E. Revocation of Notice of Conversion. In addition to any other remedies which may be available to the Holder, in the event the Company fails for any reason to effect delivery to the Holder of certificates representing the shares of Common Stock receivable upon conversion of the Preferred Shares (or, solely as expressly permitted pursuant to Sections V(B) and V(E), to effect a Cash Conversion (as defined below)) by the Business Day following the expiration of the Delivery Period (which certificates shall be unlegended after the Effective Date), the Holder may revoke the Notice of Conversion by delivering a notice to such effect to the Company. Upon receipt by the Company of such a revocation notice, the Company shall immediately return the subject Preferred Stock certificates and other conversion documents, if any, delivered by Holder, to the Holder, and the Company and the Holder shall each be restored to their respective positions held immediately prior to delivery of the Notice of Conversion; provided however, that the Company shall remain liable for payment of the amounts determined pursuant to Section VI(A) hereof for each day falling between the trading day following the Delivery Period and the date of the revocation notice is received by the Company, and shall also remain liable for any damages suffered by Holder. F. Mandatory Conversion. Notwithstanding the other provisions of this Article IV, if on or after the Effective Date the average closing bid price of the Common Stock over any 20 consecutive trading days is equal to or greater than 300% of the Closing Price, all outstanding Preferred Shares will be automatically converted into shares of Common Stock at the lowest Conversion Price in effect on such 20th trading day, so long as, on the date of conversion and for the 10 consecutive trading days prior to such date, (i) the shares of Common Stock issued pursuant to such mandatory conversion are (a) authorized and reserved for issuance, (b) registered under the Securities Act of 1933, as amended, for resale by the Holder subject to such conversion, and registered under the Securities Exchange Act of 1934 and (c) eligible to be traded on either the Nasdaq National Market System, the Nasdaq Small Cap Market, the New York Stock Exchange, the American Stock Exchange, or any successor national exchange, (ii) no event or circumstance has occurred that, with the giving of notice or the passage of time, would constitute a Redemption Event (as defined below), (iii) such conversion would not result in any Holder holding shares in excess of the 4.9% Limitation (as defined below), and (iv) the Company has not disclosed to the Holder any material non-public information about the Company. The Company shall give the Holders three (3) Business Days' notice of any mandatory conversion pursuant to this Section IV(F). G. Maturity; Required Redemption. All Preferred Shares outstanding on the third anniversary of the Closing Date will be redeemed on such date in cash equal to the aggregate Face Amount thereof. To the extent that the Preferred Shares are not so redeemed in cash on such date, the Holder may continue to convert such Preferred Shares in accordance with the other terms of this Certificate of Designation. H. Stamp, Documentary and Other Similar Taxes. The Company shall pay all stamp, documentary, issuance and other similar taxes which may be imposed with respect to the issuance and delivery of the shares of Common Stock pursuant to conversion of the Preferred Stock; provided that the Company will not be obligated to pay stamp, transfer or other taxes resulting from the issuance of Common Stock to any person other than the registered holder of the Preferred Stock. 5 I. No Fractional Shares. No fractional shares of Common Stock are to be issued upon the conversion of Preferred Stock, but the Company shall pay a cash adjustment in respect of any fractional share which would otherwise be issuable in an amount equal to the same fraction of the Closing Bid Price on the Conversion Date of a share of Common Stock; provided that in the event that sufficient funds are not legally available for the payment of such cash adjustment any fractional shares of Common Stock shall be rounded up to the next whole number. J. Electronic Transmission. In lieu of delivering physical certificates representing the Common Stock issuable upon conversion, provided the Company's transfer agent is participating in the Depository Trust Company ("DTC") Fast Automated Securities Transfer program (the "FAST Program"), upon request of a Holder who shall have previously instructed such Holder's prime broker to confirm such request to the Company's transfer agent and upon the Holder's compliance with Section IV(B), the Company shall use its commercially reasonable efforts to cause its transfer agent to electronically transmit the Common Stock issuable upon conversion to the Holder by crediting the account of Holder's prime broker with DTC through its Deposit Withdrawal Agent Commission ("DWAC") system. Subject to the foregoing, the Company will use its commercially reasonable efforts to maintain the eligibility of its Common Stock for the FAST Program. K. Five Percent Holdings. Notwithstanding anything to the contrary contained herein, the Preferred Stock shall not be convertible by a Holder to the extent (but only to the extent) that, if convertible by such Holder, such Holder, or any of its affiliates (as defined under Rule 12b-2 of the Securities Exchange Act of 1934, as amended), would beneficially own in excess of 4.9% of the shares of Common Stock (the "4.9% Limitation"). To the extent the foregoing limitation applies, the determination of whether Preferred Stock shall be convertible (vis-a-vis other securities owned by such Holder) and of which Preferred Stock shall be convertible (as among shares of Preferred Stock) shall be in the sole discretion of the Holder and submission of the Preferred Stock for conversion shall be deemed to be the Holder' s determination of whether such Preferred Stock is convertible (vis-a-vis other securities owned by such Holder) and of which shares of Preferred Stock are convertible (as among shares of Preferred Stock), subject to such aggregate percentage limitation. No prior inability to convert Preferred Stock pursuant to this Section shall have any effect on the applicability of the provisions of this Section with respect to any subsequent determination of convertibility. For the purposes of this Section, beneficial ownership and all determinations and calculations, including without limitation, with respect to calculations of percentage ownership, shall be made in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and regulation 13D and G thereunder. The provisions of this Section 6 may be implemented in a manner otherwise than in strict conformity with the terms of this Section with the approval of the Board of Directors of the Company and a Holder: (i) with respect to any matter to cure any ambiguity herein, to correct this subsection (or any portion thereof) which may be defective or inconsistent with the intended 4.9% beneficial ownership limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such 4.9% limitation; and (ii) with respect to any other matter, with the further consent of the holders of majority of the then outstanding shares of Common Stock. The Provisions of this Section may be waived by a Holder upon ninety (90) days prior written notice from such Holder to the Company, including, without limitation, a limited waiver to increase the 4.9% limit herein contained to any other percentage specified by Holder. The limitations contained in this Section shall apply to a successor Holder of Preferred Stock if, and to the extent, elected by such successor Holder concurrently with its acquisition of such Preferred Stock, such election to be promptly confirmed in writing to the Company (provided no transfer or series of transfers to a successor Holder or Holders shall be used by a Holder to evade the limitations contained herein). V. RESERVATION OF AUTHORIZED SHARES OF COMMON STOCK; LIMITATION ON NUMBER OF CONVERSION SHARES A. Reservation of Common Stock. Subject to the provisions of this Article V, the Company 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 Preferred Stock and the exercise of the Warrants a sufficient number of shares of Common Stock to provide for the conversion of all outstanding Preferred Shares upon issuance of shares of Common Stock and the exercise of all Warrants (the "Reserved Amount"). The Reserved Amount shall be allocated among the Holders as provided in Section V(C). If the Reserved Amount for any three (3) consecutive trading days (the last of such three (3) trading days being the Authorization Trigger Date) is less than one hundred seventy-five percent (175%) of the number of shares of Common Stock issuable on such trading days upon conversion of the outstanding Preferred Stock and exercise of the then outstanding Warrants (in each case without giving effect to any limitation on conversion or exercise thereof) then the Company shall immediately notify the Holders of such occurrence and shall immediately take all necessary action (including stockholder approval to authorize the issuance of additional shares of Common Stock) to increase the Reserved Amount to two hundred percent (200%) of the number of shares of Common Stock issuable upon conversion of the outstanding Preferred Stock and exercise of all outstanding Warrants (in each case, without giving effect to any limitation on conversion or exercise thereof). 7 B. Limitation on Number of Common Shares to be Issued. (i) Unless the Stockholder Approval (as defined below) is obtained, the Company shall not be obligated to issue, in the aggregate, more than 2,745,000 shares of Common Stock upon conversion of the Preferred Shares (the "Common Share Limit" ), such amount to be proportionally and equitably adjusted from time to time in the event of stock splits, stock dividends, combinations, reverse stock splits, reclassifications, capital reorganizations and similar events relating to the Common Stock). If the Stockholder Approval has not been obtained at any time that the Common Share Limit with respect to any Holder has been reached, Notices of Conversion by such Holder shall be honored by payment to such Holder of cash in an amount equal to the Closing Bid Price on the trading day of delivery of the applicable Notice of Conversion multiplied by the number of shares of Common Stock which would be issuable in satisfaction of the applicable Notice of Conversion (such payment being referred to herein as a Cash Conversion. (ii) If the Stockholder Approval has been obtained at any time, the Company shall have the right, subject to delivery of the notice required by Section V(E) below, to honor any Notices of Conversion for shares of Common Stock in excess of the Common Share Limit by (a) delivery of shares of Common Stock or (b) by Cash Conversion. C. Allocation of Reserved Amount, Common Share Limit. The Reserved Amount and the Common Share Limit shall be allocated among the Initial Holders according to the number of Preferred Shares issued to each such Holder on the Closing Date. Any shares of Common Stock which were initially allocated to any Holder remaining after such Holder no longer owns any Preferred Shares shall be allocated among the remaining Holders pro rata, based on the number of Preferred Shares then held by such Holders. D. Share Authorization. The Company shall solicit by proxy the authorization (the "Stockholder Approval") by the stockholders of the Company of the issuance of shares of Common Stock upon conversion of shares of Preferred Stock pursuant to the terms hereof and the exercise of the Warrants pursuant to the terms thereof in the aggregate in excess of twenty (20) percent of the outstanding shares of Common Stock and to eliminate any prohibitions under the rules or regulations of any stock exchange, interdealer quotation system or other self-regulatory organization with jurisdiction over the Company or any of its securities on the Company's ability to issue shares of Common Stock in excess of the Common Share Limit and use its commercially reasonable efforts to obtain the Stockholder Approval no later than one hundred and twenty (120) days following the date of the First Closing. 8 E. Obligation to Notify. If the Company has not received the Stockholder Approval by the date that is one hundred and twenty (120) days following the First Closing, the Company shall, on or prior to such date, notify the Holders. The Company shall immediately notify the Holders if, at any time, the Stockholder Approval is obtained. Following receipt of Stockholder Approval, the Company shall have the right, by notice to all of the Holders not less than five (5) Business Days prior to the first day of any month, to elect to honor all Notices of Conversion solely by Cash Conversion (and not by delivery of Common Stock) during such month. Each such notice (a "Notice of Cash Conversion") shall be effective only with respect to the single month designated therein, and shall specify, as of the date of delivery of such notice, the unissued portion of the Common Share Limit of the Holder to whom such notice is being delivered. VI. FAILURE TO CONVERT A. Conversion Defaults. If, at any time, (x) the Conversion Date has occurred and the Company fails for any reason to deliver, on or prior to the second Business Day following the expiration of the Delivery Period for such conversion (said period of time being the "Extended Delivery Period"), such number of shares of Common Stock to which such Holder is entitled upon such conversion, or (y) the Company provides notice (including by way of public announcement) to any Holder at any time of its intention not to issue shares of Common Stock upon exercise by any Holder of its conversion rights in accordance with the terms of this Certificate of Designation (other than because such issuance would exceed such Holder's allocated portion of the Reserved Amount) (each of (x) and (y) being a "Conversion Default"), then the Company shall pay to the affected Holder, in the case of a Conversion Default described in clause (x) above, and to all Holders, in the case of a Conversion Default described in clause (y) above, an amount equal to 1% of the Face Amount of the Preferred Stock with respect to which the Conversion Default exists (which amount shall be deemed to be the aggregate Face Amount of all outstanding Preferred Stock in the case of a Conversion Default described in clause (y) above) for each day thereafter until the Cure Date. "Cure Date" means (i) with respect to a Conversion Default described in clause (x) of its definition, the date the Company effects the conversion of the portion of the Preferred Stock submitted for conversion and (ii) with respect to a Conversion Default described in clause (y) of its definition, the date the Company undertakes in writing to issue Common Stock in satisfaction of all conversions of Preferred Stock in accordance with the terms of this Certificate of Designation (provided that the Company thereafter so performs such obligations). The Company shall promptly provide each Holder with notice of the occurrence of a Conversion Default with respect to any of the other Holders. Notwithstanding anything in this Section VI(A) or anywhere else in this Agreement to the contrary, no Conversion Default shall be deemed to occur if, prior to expiration of the Delivery Period, the Company has made to the Holder the cash payment permitted to be made pursuant to Section V(B) following issuance to such Holder of such Holder's allocated portion of the Common Share Limit. 9 B. Conversion Default Payments. The payments to which a Holder shall be entitled pursuant to Section VI(A) are referred to herein as "Conversion Default Payments." Conversion Default Payments shall be paid in cash within two (2) Business Days of written demand from a Holder. Such payment shall be made in accordance with and be subject to the provisions of Section XIII(B). C. Adjustments to Conversion Price. If a Holder has not received certificates for all shares of Common Stock prior to the tenth (10th) day after the expiration of the Delivery Period with respect to a conversion of Preferred Stock (or, if applicable, the cash payment permitted to be made pursuant to Section V(B)) for any reason (other than as a result of such conversion exceeding such Holder's pro rata portion of the Reserved Amount) then the Conversion Price in respect of any shares of Preferred Stock held by such Holder shall thereafter be the lesser of (i) the Conversion Price on the Conversion Date specified in the Notice of Conversion which resulted in the Conversion Default and (ii) the lowest Conversion Price in effect during the period beginning on, and including, such Conversion Date through but excluding the Cure Date. If there shall occur a Conversion Default of the type described in clause (y) of Section VI(A), then the Conversion Price with respect to any conversion thereafter shall be the lower of the Conversion Price and the lowest Conversion Price in effect at any time during the period beginning on, and including, the date of the occurrence of such Conversion Default through but excluding the Cure Date. The Conversion Price shall thereafter be subject to further adjustment as described in Article X. VII. REDEMPTION DUE TO CERTAIN EVENTS A. Redemption Events. A "Redemption Event" means any one of the following: (i) the Common Stock (including any of the shares of Common Stock issuable upon conversion of the Preferred Stock or upon exercise of the Warrants or required from time to time to be reserved pursuant to this Certificate of Designation or the Warrants) is suspended from trading on, or is not listed (and authorized) for trading on, the Nasdaq, the Nasdaq Small Cap Market, the American Stock Exchange, or the New York Stock Exchange for an aggregate of ten (10) trading days in any twelve (12) month period; (ii) the Company fails, and any such failure continues uncured for seven (7) Business Days after the Company has been notified thereof in writing by the Holder, to remove any restrictive legend on any certificate for any shares of Common Stock issued after the Effective Date to the Holders upon conversion of the Preferred Stock or upon exercise of the Warrants as and when required by this Certificate of Designation, the Warrants, the Securities Purchase Agreement or the Registration Rights Agreement dated as of April 24, 1998, by and among the Company and the other signatories thereto (the "Registration Rights Agreement"); 10 (iii) the Company fails: (x) to file the registration statement required pursuant to Section 2.1 of the Registration Rights Agreement on or before the thirtieth (30th) day following Closing, and to cause the registration statement to be declared effective on or before the one hundred fiftieth (150th) day following Closing, in a manner which would allow the sale of all Registrable Securities (as defined in the Registration Rights Agreement); or (y) to cause the holders of Preferred Stock to be able to utilize such registration statement for the resale of all of their Registrable Securities (as defined in the Registration Rights Agreement), unless the Company is using its best efforts to remedy such inability to utilize such registration statement, subject to the Company's Board of Directors having determined in their good faith business judgment by resolution that the continued effectiveness of such registration statement would have a material adverse effect on the Company's ability to consummate a financing, acquisition, merger or joint venture, in each case for which substantive discussions are underway, the failure of which to consummate would have a material adverse effect on the Company's financial condition, results of operations or future prospects; provided that in no event shall such failure exist for a total of more than twenty (20) days in any twelve (12) month period; or (iv) the Company fails for any reason to (A) issue shares of Common Stock within ten (10) Business Days after the expiration of the Extended Delivery Period with respect to any conversion of Preferred Stock, or (B) if applicable, to make the cash payment to the extent permitted to be made pursuant to Section V(B)). (v) the Company provides notice to any Holder, including by way of public announcement, at any time, of its intention not to issue shares of Common Stock to any Holder upon conversion in accordance with the terms of this Certificate of Designation (other than (i) because of unavailability of authorized shares, or (ii) because such issuance would exceed such Holder's allocated portion of the Common Share Limit, for which failures the Holders shall have the remedies set forth elsewhere herein); (vi) the Company breaches any material covenant or other material term of this Certificate of Designation, the Securities Purchase Agreement, the Warrants or the Registration Rights Agreement, the breach of which would have a material adverse effect on the Company or the rights of the Holder with respect to its shares of Preferred Stock or the shares of Common Stock issuable upon conversion of the Preferred Stock or upon exercise of the Warrants, and such breach continues for a period of five (5) Business Days after written notice thereof to the Company; (vii) any representation or warranty of the Company made in any agreement, statement or certificate given in writing in connection with the issuance of the Preferred Stock (including, without limitation, the Warrants, the Securities Purchase Agreement or the Registration Rights Agreement), shall be false or misleading in any material respect when made and the breach of which has had or could reasonably be expected to have a material adverse effect on the Company or on the Holder with respect to its investment in the shares of Preferred Stock or Warrants or the shares of Common Stock issuable upon conversion of the Preferred Stock or upon exercise of the Warrants; or 11 (viii) the Company fails to increase the Reserved Amount (A) within ten (10) days following an Authorization Trigger Date if such increase requires solely approval of the Company's Board of Directors or (B) otherwise within sixty (60) days thereafter. B. Redemption By Holder. Following the occurrence of a Redemption Event, each Holder shall have the right to elect at any time and from time to time by delivery of a Redemption Notice (as defined herein) to the Company while such Redemption Event continues, to require the Company to purchase for cash for an amount per share equal to the Redemption Amount (as defined herein) any or all of the then outstanding shares of Preferred Stock, together with accrued and unpaid dividends thereon and any Conversion Default Payments applicable thereto, held by such Holder. The "Redemption Amount" with respect to a share of Preferred Stock means an amount equal to the greater of (i) 1.5 times the aggregate Face Amount of the Preferred Shares for which a demand is being made and (ii) an amount determined by the following formula: Face Amount x M ---------------- CP When: "CP" means the lowest Conversion Price during the period beginning on the date of the Redemption Notice and ending on the date of redemption; and "M" means the highest Closing Bid Price of the Company's Common Stock during the period beginning on the date of the Redemption Notice and ending on the date of the redemption, as reported in the principal securities exchange or trading market in which the Common Stock is traded. C. Optional Redemption by the Company. Beginning upon the earlier to occur of (i) the date that the Company completes an underwritten public offering of its Common Stock, or (ii) the first anniversary of the Closing Date, the Company may, at its option, redeem for cash out of funds legally available therefor, all of the outstanding Preferred Shares ("Optional Redemption") at a price per share equal to the greater of (i) 125% of the Face Amount of the Preferred Stock or (ii) the product of (X) 125% of the Closing Bid Price of the Common Stock on the trading day preceding the Company's Optional Redemption Notice (as defined below) to the Preferred Shareholders, multiplied by (Y) the number of shares of Common Stock issuable upon conversion of the Preferred Stock being redeemed. 12 The Company may not deliver an Optional Redemption Notice for a redemption for cash unless such redemption is with respect to all then-outstanding shares of Preferred Stock and unless the Company had ("Funding Availability"): (a) the full amount to be paid for the Preferred Shares pursuant to the Optional Redemption (the "Optional Redemption Amount") in cash, available in a demand or other immediately available account in a bank or similar financial institution; or (b) immediately available credit facilities, in the full amount of the Optional Redemption Amount in cash with a bank or similar financial institution (or binding commitment letters with respect thereto which commitment letters shall be subject only to commercially reasonable conditions to closing as to which the Company's Board of Directors has made a good faith business judgment will be fulfilled to permit consummation of the redemption hereunder); or (c) an agreement with a standby underwriter or qualified buyer ready, willing and able to purchase from the Company a sufficient number of shares of stock to provide proceeds necessary to redeem for the Optional Redemption Amount in cash any stock that is not converted prior to redemption; or (d) a combination of the items set forth in the preceding clauses (A), (B) and (C), aggregating the full amount of the Optional Redemption Amount in cash. Any Optional Redemption Notice delivered in accordance with the immediately preceding sentence shall be accompanied by a statement executed by a duly authorized officer of the Company certifying that the Company has Funding Availability and by other appropriate documentation as evidence thereof. The Company shall provide each Holder with at least 30 days' notice of any proposed optional redemption pursuant this Section VII(C) (an "Optional Redemption Notice"). Any optional redemption pursuant to this Section VII(C) shall be made ratably among Holders in proportion to the Face Amount of Preferred Stock then outstanding and held by such Holders. The Optional Redemption Notice shall state the Face Amount of Preferred Stock to be redeemed and the date on which the Optional Redemption is to occur (which shall not be less than thirty (30) or more than sixty (60) Business Days after the date of delivery of the Optional Redemption Notice) and shall be delivered by the Company to the Holders at the address of such Holder appearing on the register of the Company for the Preferred Stock. Within seven (7) business days after the date of delivery of the Optional Redemption Notice, each Holder shall provide the Company with instructions as to the account to which payments associated with such Optional Redemption should be deposited. On the date of the Optional Redemption, provided for in the relevant Optional Redemption Notice, (x) the Company will deliver the redemption amount via wire transfer to the account designated by the Holders, (y) the Holders will deliver the certificates relating to that number of shares of Preferred Stock being redeemed, duly executed for transfer or accompanied by executed stock powers, in either case, transferring that number of shares to be redeemed. Upon the occurrence of the wire transfer (or, in the absence of a Holder designating an account to which funds should be transferred, delivery of a certified check in the amount due such Holder in connection with such Optional Redemption to the address of such Holder appearing on the register of the Company for the Preferred Stock), that number of shares to be redeemed pursuant to such Optional Redemption as represented by the previously issued certificates will be deemed no longer outstanding. Notwithstanding anything to the contrary in this Certificate of Designation, each Holder may continue to convert Preferred Stock in accordance with the terms hereof until the date such Preferred Stock is actually redeemed pursuant to an Optional Redemption. 13 D. Redemption Payment Defaults. If the Company fails to pay any Holder the Redemption Amount with respect to any share of Preferred Stock, as provided in this Article VII, within five (5) Business Days of its receipt or delivery, as applicable, of a notice requiring such redemption, then each Holder (i) shall be entitled to interest on the Redemption Amount at a floating per annum rate equal to the lower of (x) eighteen percent (18%) and (y) the highest interest rate permitted by applicable law from the date of the Redemption Notice until the date of redemption hereunder, payable in cash within two (2) Business Days of written demand from a Holder. In the event the Company is not able to redeem all of the shares of Preferred Stock subject to Redemption Notices, the Company shall redeem shares of Preferred Stock from each Holder pro rata, based on the total number of shares of Preferred Stock included in the Redemption Notice relative to the total number of shares of Preferred Stock in all of the Redemption Notices. E. Capital Impairment. In the event that any section of the New York Business Corporation Law ("NYBCL"), would be violated by the redemption of any shares of Preferred Stock that are otherwise subject to redemption pursuant to this Article VII, the Company: (i) will redeem the greatest number of shares of Preferred Stock possible without violation of said Section; (ii) the Company thereafter shall use its best efforts to take all necessary steps permitted pursuant to this Certificate of Designation and the agreements entered into in connection with the issuance of Preferred Stock pursuant hereto in order to remedy its capital structure in order to allow further redemptions without violation of said Section (and not take any actions inconsistent therewith); and (iii) from time to time thereafter as promptly as possible the Company shall redeem shares of Preferred Stock at the request of the Holders to the greatest extent possible without causing a violation of the NYBCL (such redemption to be at the greater of the Redemption Price in effect at the time of the original Redemption Event giving rise to such violation and the redemption price which would be applicable for a Redemption Event at the time of such later election under this clause (iii). In such case, any Holder shall have the right, at any time and from time to time, to require the Company, upon written notice, to immediately convert (in accordance with the terms of Article IV all or any portion of the Redemption Amount plus any interest or other charges which have accrued into shares of Common Stock on a dollar for dollar basis based upon the most recently reported trading price for the Common Stock. In the event the Company is not able to redeem all the shares of the stock subject to Redemption Notices, the Company shall redeem shares of Preferred Stock from each Holder pro rata, based on the total number of shares of Preferred Stock included by such Holder in the Redemption Notice relative to the total number of Preferred Stock in all Redemption Notices. In addition, and notwithstanding anything to the contrary contained in this Section VII(E), so long as the Company is prevented from redeeming shares of Preferred Stock pursuant to this Section VII(E) the 14 Company shall be (and shall be deemed to be) in breach of the redemption obligations set forth in this Section VII(E) and each Holder shall have all rights and remedies under this Certificate of Designation or otherwise at law for damages, with respect to such breach. Upon a Redemption Event described in Section VII(A)(iv), to the extent that the Company has not yet obtained the Stockholder Approval, any Holder who has not had its Preferred Stock converted in accordance with the terms of this Certificate of Designation may elect one or both of the following: (i) require, with the consent of the Holders, the Company to terminate the listing of its Common Stock on Nasdaq or the Nasdaq Small Cap Market and to cause its Common Stock to be listed on the over-the-counter electronic bulletin board, at the option of the requesting Holder; and (ii) require the Company to issue shares of Common Stock in accordance with such holder's Notice of Conversion at a conversion price equal to the Conversion Price in effect on the date of the Holder's written notice to the Company of its election to receive shares of Common Stock pursuant to this subparagraph (ii). VIII. RANK; PARTICIPATION A. Rank. All shares of the Preferred Stock shall rank (i) prior to the Common Stock; (ii) prior to any class or series of capital stock of the Company now outstanding or hereafter created (unless, with the consent of a majority of the Holders obtained in accordance with Article XII hereof, such hereafter created class or series of capital stock specifically, by its terms, ranks senior to or pari passu with the Preferred Stock) (collectively, with the Common Stock, "Junior Securities"); and (iii) pari passu with any class or series of capital stock of the Company hereafter created (with the consent of a majority of the Holders obtained in accordance with Article XII hereof) specifically ranking, by its terms, on parity with the Preferred Stock (the "Pari Passu Securities"); and (iv) junior to any class or series of capital stock of the Company hereafter created (with the consent of a majority of the Holders obtained in accordance with Article XII hereof) specifically ranking, by its terms, senior to the Preferred Stock (the "Senior Securities"), in each case as to distribution of assets upon liquidation, dissolution or winding up of the Company, whether voluntary or involuntary. B. Participation. Subject to the rights of the holders (if any) of Pari Passu Securities and Senior Securities, the Holders shall, as such Holders, be entitled to such dividends paid and distributions made to the holders of Common Stock to the same extent as if such Holders had converted their shares of Preferred Stock into Common Stock (without regard to any limitations on conversion herein or elsewhere contained) and had been issued such Common Stock on the day before the record date for said dividend or distribution. Payments under the preceding sentence shall be made concurrently with the dividend or distribution to the holders of Common Stock. 15 IX. LIQUIDATION PREFERENCE A. Liquidation of the Company. If the Company shall commence a voluntary case under the U.S. Federal bankruptcy laws or any other applicable bankruptcy, insolvency or similar law, or consent to the entry of an order for relief in an involuntary case under any law or to the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other similar official) of the Company or of any substantial part of its property, or make an assignment for the benefit of its creditors, or admit in writing its inability to pay its debts generally as they become due, or if a decree or order for relief in respect of the Company shall be entered by a court having jurisdiction in the premises in an involuntary case under the U.S. Federal bankruptcy laws or any other applicable bankruptcy, insolvency or similar law resulting in the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other similar official) of the Company or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and any such decree or order shall be unstayed and in effect for a period of sixty (60) consecutive days and, on account of any such event, the Company shall liquidate, dissolve or wind up, or if the Company shall otherwise liquidate, dissolve or wind up (a "Liquidation Event"), no distribution shall be made to the Holders of any shares of capital stock of the Company (other than Senior Securities and, together with the Holders of Preferred Stock the Pari Passu Securities) upon liquidation, dissolution or winding up unless prior thereto the Holders shall have received the Liquidation Preference (as herein defined) with respect to each share. If, upon the occurrence of a Liquidation Event, the assets and funds available for distribution among the Holders and holders of Pari Passu Securities shall be insufficient to permit the payment to such Holders of the preferential amounts payable thereon, then the entire assets and funds of the Company legally available for distribution to the Preferred Stock and the Pari Passu Securities shall be distributed ratably among such shares in proportion to the ratio that the Liquidation Preference payable on each such share bears to the aggregate Liquidation Preference payable on all such shares. B. Certain Acts Not a Liquidation. The purchase or redemption by the Company of stock of any class, in any manner permitted by law, shall not, for the purposes hereof, be regarded as a liquidation, dissolution or winding up of the Company. Neither the consolidation or merger of the Company with or into any other entity nor the sale or transfer by the Company of less than substantially all of its assets shall, for the purposes hereof, be deemed to be a liquidation, dissolution or winding up of the Company. C. Definition of Liquidation Preference. The "Liquidation Preference" with respect to a share of Preferred Stock means an amount equal to the Face Amount thereof plus any other amounts that may be due from the Company with respect thereto pursuant to this Certificate of Designation through the date of final distribution. The Liquidation Preference with respect to any Pari Passu Securities shall be as set forth in the Certificate of Designation filed in respect thereof. 16 X. ADJUSTMENTS TO THE CONVERSION PRICE; CERTAIN PROTECTIONS The Conversion Price shall, in order to accomplish the results contemplated in this Certificate of Designation, be subject to adjustment from time to time as follows: A. Stock Splits, Stock Dividends, Etc. If at any time on or after the Closing Date, the number of outstanding shares of Common Stock is increased by a stock split, stock dividend, combination, reclassification or other similar event, the number of shares of Common Stock issuable upon conversion of the Preferred Stock shall be proportionately increased, or if the number of outstanding shares of Common Stock is decreased by a reverse stock split, combination or reclassification of shares, or other similar event, the number of shares of Common Stock issuable upon conversion of the Preferred Stock shall be proportionately reduced. In such event, the Company shall notify the Company's transfer agent of such change on or before the effective date thereof. B. Certain Public Announcements. In the event that (i) the Company makes a public announcement that it intends to consolidate or merge with any other entity (other than a merger in which the Company is the surviving or continuing entity and its capital stock is unchanged and there is no distribution thereof) or to sell or transfer all or substantially all of the assets of the Company or (ii) any person, group or entity (including the Company) publicly announces a tender offer in connection with which such person, group or entity seeks to purchase 50% or more of the Common Stock (the date of the announcement referred to in clause (i) or (ii) of this paragraph is hereinafter referred to as the "Announcement Date"), then the Conversion Price shall, effective upon the Announcement Date and continuing through the consummation of the proposed tender offer or transaction or the Abandonment Date (as defined below), be equal to the lesser of (x) the Conversion Price calculated as provided in Article IV the (y) the Conversion Price which would have been applicable for Conversion occurring on the Announcement Date. From and after the Abandonment Date, as the case may be, the Conversion Price shall be determined as set forth in Article IV. The " Abandonment Date" means with respect to any proposed transaction or tender offer for which a public announcement as contemplated by this paragraph has been made, the date which is seven (7) trading days after the date upon which the Company (in the case of clause (i) above) or the person, group or entity (in the case of clause (ii) above) publicly announces the termination or abandonment of the proposed transaction or tender offer which causes this paragraph to become operative. 17 C. Major Transactions. If the Company shall consolidate with or merge into any corporation or reclassify its outstanding shares of Common Stock (other than by way of subdivision or reduction of such shares) (each a "Major Transaction"), then each Holder shall thereafter be entitled to receive consideration, in exchange for each share of Preferred Stock held by it, equal to the greater of, as determined in the sole discretion of such Holder: (i) the number of shares of stock or securities or property of the Company, or of the entity resulting from such Major Transaction (the "Major Transaction Consideration"), to which a Holder of the number of shares of Common Stock delivered upon conversion of such shares of Preferred Stock would have been entitled upon such Major Transaction had the Holder's Preferred Shares been converted (without regard to any limitations on conversion herein contained) on the trading date immediately preceding the public announcement of the transaction resulting in such Major Transaction and had such Common Stock been issued and outstanding and had such Holder been the holder of record of such Common Stock at the time of such Major Transaction, and the Company shall make lawful provision therefore as a part of such consolidation, merger or reclassification; and (ii) 125% of the Face Amount of such shares of Preferred Stock in cash. No sooner than ten (10) days nor later than five (5) days prior to the consummation of the Major Transaction, but not prior to the public announcement of such Major Transaction, the Company shall deliver written notice ("Notice of Major Transaction") to each Holder, which Notice of Major Transaction shall be deemed to have been delivered one (1) Business Day after the Company's sending such notice by telecopy (provided that the Company sends a confirming copy of such notice on the same day by overnight courier). Such Notice of Major Transaction shall indicate the amount and type of the Major Transaction Consideration which such Holder would receive under clause (i) of this Section X(C). If the Major Transaction Consideration does not consist entirely of United States dollars, such Holder may elect to receive United States dollars in an amount equal to the value, determined by a reputable accounting firm selected by the Company that is reasonably acceptable to a majority of the Holders of the Major Transaction Consideration in lieu of the Major Transaction Consideration which does not consist entirely of United States Dollars, by delivering notice of such election to the Company within five (5) days of the Holder's receipt of the Notice of Major Transaction. D. Issuance of Other Securities. If, at any time after the First Closing the Company shall issue any securities which are convertible into or exchangeable for Common Stock ("Convertible Securities") either (i) at a conversion or exchange rate based on a discount from the market price of the Common Stock at the time of conversion or exercise or (ii) with a fixed conversion or exercise price less than the Conversion Price, then, at the Holder's option: (x) in the case of clause (i), the Conversion Price in respect of any conversion of Preferred Stock after such issuance shall be calculated utilizing the greatest discount applicable to any such Convertible Securities, to the extent such calculation would result in a lower Conversion Price; and (y) in the case of clause (ii), the Conversion Price will be reduced to such lesser conversion or exercise price, to the extent that this would result in a lower Conversion Price. 18 E. Adjustment Due to Distribution. If at any time after the Closing Date, the Company shall declare or make any distribution of its assets (or rights to acquire its assets) to holders of Common Stock as a partial liquidating dividend, by way of return of capital or otherwise (including any dividend or distribution to the Company's stockholders in cash or shares (or rights to acquire shares) of capital stock of a subsidiary (i.e. a spin-off)) (a "Distribution"), then the Conversion Price shall be equitably adjusted to take account of such distribution. F. Purchase Rights. If at any time after the Closing Date, the Company issues any Convertible Securities or rights to purchase stock, warrants, securities or other property (the "Purchase Rights") pro rata to the record holders of any class of Common Stock, then the Holders will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such Holder could have acquired if such Holder had held the number of shares of Common Stock acquirable upon complete conversion of the Preferred Stock (without regard to any limitations on conversion or exercise herein or elsewhere contained) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights. G. Notice of Adjustments. Upon the occurrence of each adjustment or readjustment of the Conversion Price pursuant to this Article X, the Company, at its expense, shall promptly compute such adjustment or readjustment and prepare and furnish to each Holder a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Company shall, upon the written request at any time of any Holder, furnish to such Holder a like certificate setting forth (i) such adjustment or readjustment, (ii) the Conversion Price at the time in effect and (iii) the number of shares of Common Stock and the amount, if any, of other securities or property which at the time would be received upon conversion of a share of Preferred Stock. XI. VOTING RIGHTS No holder of the Preferred Stock shall be entitled to vote on any matter submitted to the shareholders of the Company for their vote, waiver, release or other action, except as may be otherwise expressly required by law. 19 XII. PROTECTION PROVISIONS So long as any Preferred Shares are outstanding, the Company shall not, without first obtaining the approval of a majority of the Holders: (a) alter or change the rights, preferences or privileges of the Preferred Stock; (b) alter or change the rights, preferences or privileges of any capital stock of the Company so as to affect adversely the Preferred Stock; (c) create any Senior Securities; (d) create any Pari Passu Securities; (e) increase the authorized number of shares of Preferred Stock; (f) redeem or declare or pay any cash dividend or distribution on any Junior Securities, or (g) do any act or thing not authorized or contemplated by this Certificate of Designation which would result in any taxation with respect to the Preferred Stock under Section 305 of the Internal Revenue Code of 1986, as amended, or any comparable provision of the Internal Revenue Code as hereafter from time to time amended, (or otherwise suffer to exist any such taxation as a result thereof). XIII. MISCELLANEOUS A. Lost or Stolen Certificates. Upon receipt by the Company of (i) evidence of the loss, theft, destruction or mutilation of any Preferred Stock Certificate(s) and (ii) (y) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to the Company, or (z) in the case of mutilation, upon surrender and cancellation of the Preferred Stock Certificate(s), the Company shall execute and deliver new Preferred Stock Certificate(s) of like tenor and date. However, the Company shall not be obligated to reissue such lost, stolen, destroyed or mutilated Preferred Stock Certificate(s) if the Holder contemporaneously requests the Company to convert such Preferred Stock. B. Statements of Available Shares. Upon request, the Company shall deliver to each Holder a written report notifying the Holders of any occurrence which prohibits the Company from issuing Common Stock upon any such conversion. The report shall also specify (i) the total number of shares of Preferred Stock outstanding as of the date of the request, (ii) the total number of shares of Common Stock issued upon all conversions of Preferred Stock through the date of the request, (iii) the total number of shares of Common Stock which are reserved for issuance upon conversion of the Preferred Stock as of the date of the request, and (iv) the total number of shares of Common Stock which may thereafter be issued by the Company upon conversion of the Preferred Stock before the Company would exceed the Common Share Limit and Reserved Amount. The Company shall, within five (5) days after delivery to the Company of a written request by any Holder, provide all of the information enumerated in clauses (i)- (v) of this Section XIII(B) and, at the request of a Holder, make public disclosure thereof. C. Payment of Cash; Defaults. Whenever the Company is required to make any cash payment to a Holder under this Certificate of Designation (as a Conversion Default Payment, Redemption Amount or otherwise), such cash payment shall be made to the Holder by the method (by certified or cashier's check or wire transfer of immediately available funds) elected by such Holder. If such payment is not delivered when due such Holder shall thereafter be entitled to interest on the unpaid amount until such amount is paid in full to the Holder at a per annum rate equal to the lower of (x) eighteen percent (18%) and (y) the highest interest rate permitted by applicable law. 20 D. Conversion of Default Amounts. In addition, and notwithstanding anything to the contrary contained in this Certificate, a Holder may elect in writing to convert all or any portion of accrued Default Amounts, at any time and from time to time, into Common Stock at the lowest Conversion Price in effect during the period beginning on the date of the default with respect thereto through the cure date for such default. In the event that a Holder elects to convert all or any portion of the Default Amounts into Common Stock, the Holder shall so notify the Company on a Notice of Conversion of such portion of the Default Amounts which such holder elects to so convert and such conversion shall otherwise be effected in accordance with the provisions of, and subject to limitations contained in, Article IV. E. Remedies, Characterizations, Other Obligations, Breaches and Injunctive Relief. The remedies provided in this Certificate of Designation shall be cumulative and in addition to all other remedies available under this Certificate of Designation, at law or in equity (including a decree of specific performance and/or other injunctive relief), no remedy contained herein shall be deemed a waiver of compliance with the provisions giving rise to such remedy and nothing herein shall limit a Holder's right to pursue actual damages for any failure by the Company to comply with the terms of this Certificate of Designation (including, without limitation, damages incurred to effect "cover" purchase of shares of Common Stock anticipated to be received upon a conversion hereunder and not received in accordance with the terms hereof). Company covenants to each Holder that there shall be no characterization concerning this instrument other than as expressly provided herein; provided, however, that the Company shall be entitled to prepare summaries of this Certificate of Designation for purposes of complying with its disclosure obligations and in connection with bona fide disputes as to the operations of the provisions of this Certificate of Designation. Amounts set forth or provided for herein with respect to payments, conversion and the like (and the computation thereof) shall be the amounts to be received by the Holder hereof and shall not, except as expressly provided herein, be subject to any other obligation of the Company (or the performance thereof). The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the holders of Preferred Stock and that the remedy at law for any such breach may be inadequate. The Company therefore agrees that, in the event of any such breach or threatened breach, the Holders shall be entitled, in addition to all other available remedies, to an injunction restraining any breach, without the necessity of showing economic loss and without any bond or other security being required. F. Specific Shall Not Limit General; References to "Preferred Stock". No specific provision contained in this Certificate of Designation shall limit or modify any more general provision contained herein. This Certificate of Designation shall be deemed to be jointly drafted by the Company and the Holders and shall not be construed against any person as the drafter. Any reference herein to Preferred Shares, Preferred Stock or an unspecified amount of Preferred Shares or Preferred Stock shall be deemed to include, without limitation, all shares of Preferred Stock issued or then issuable as a dividend or otherwise in satisfaction of any obligation of the Company with respect to any Preferred Stock issued on the date hereof. 21 G. Failure or Indulgency Not Waiver. No failure or delay on the part of a Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, not shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. IN WITNESS WHEREOF, this certificate has been subscribed to this 24th day of April, 1998 by the undersigned, who affirm that the statements made herein are true under penalties of perjury. American Bio Medica Corporation By: /s/Stan Cipkowski Name: Stan Cipkowski Title: President By: /s/Edmund Jaskiewicz Name: Edmund Jaskiewicz Title: Secretary 22 EX-5 3 OPINION AND CONSENT OF JOEL PENSLEY Exhibit 5.4 Opinion and Consent 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 May 14, 1998 American Bio Medica Corporation 300 Fairview Avenue Hudson, New York 12534 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, relating to xxx,xxx common shares, $.01 par value each ("Common Shares") underlying Series "D" convertible preferred shares (the "Preferred Shares") (subject to adjustment) and to 100,000 Common Shares underlying the exercise of common share purchase warrants (the "Warrants"). In my capacity as counsel to the Company, I have examined the Company's Certificate of Incorporation and By-laws, as amended to date, and the minutes and other corporate proceedings of the Company. With respect to factual matters, I have relied upon statements and certificates of officers of the Company. I have also reviewed such other matters of law and examined and relied upon such other documents, records and certificates as we have deemed relevant hereto. In all such examinations I have assumed conformity with the original documents of all documents submitted to us as conformed or photostatic copies, the authenticity of all documents submitted to me as originals and the genuineness of all signatures on all documents submitted to me. (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 and exercise of the Warrants pursuant to the Registration Statement have been duly authorized and, when issued, will be validly issued, fully paid and nonassessable, I hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference made to me under the caption "Legal Matters" in the prospectus constituting the Registration Statement. Very truly yours, /s/Joel Pensley --------------- Joel Pensley EX-23 4 CONSENT OF THOMAS P. MONAHAN, CPA Exhibit 23.11 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: May 14, 1998 /s/Thomas P. Monahan -------------------- Thomas P. 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