FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2003
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period -------------- to -------------------
Commission File Number: 0-28666
AMERICAN BIO MEDICA CORPORATION
(Name of Small Business Issuer in its charter)
NEW YORK 14-1702188
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
122 SMITH ROAD 12106
KINDERHOOK, NEW YORK 12106 (Zip Code)
(Address of principal executive offices)
Issuer's telephone number (800) 227-1243
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
COMMON SHARES, $0.01 PAR VALUE
COMMON SHARE PURCHASE WARRANTS
Title of each class
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. [ ] Yes [X]
No
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $12,484,000
The aggregate market value of 17,574,848 voting Common Shares held by
non-affiliates of the issuer was approximately $17,574,848 based on the average
bid and asked prices of the issuer's Common Shares, $.01 par value, as reported
on the NASDAQ SmallCap Market on May 4, 2004.
As of May 4, 2004, the issuer had outstanding 21,282,268 Common Shares,
$.01 par value.
The aggregate market value of 1,259,500 Common Share Purchase Warrants
held by non-affiliates of the issuer was approximately $0 based on the average
bid and asked price of the issuer's Common Share Purchase Warrants, as reported
on the NASDAQ SmallCap Market on May 4, 2004 (there were no recorded bids or
asks for the Company's Common Share Purchase Warrants on this date).
As of May 4, 2004, the issuer had outstanding 1,272,000 Common Share
Purchase Warrants.
Documents Incorporated by reference:
(1) Other documents incorporated by reference on this report are listed
in the Exhibit Reference Table
Transition Small Business Disclosure Format: [ ] YES [X] NO
AMERICAN BIO MEDICA CORPORATION
INDEX TO ANNUAL REPORT ON FORM 10-KSB
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
PART I. PAGE
----
Item 1. Description of Business 1
Item 2. Description of Property 16
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
PART II
Item 5. Market for Common Equity and Related Shareholder 16
Matters
Item 6. Management's Discussion and Analysis or Plan of 17
Operations
Item 7. Financial Statements 20
Item 8. Changes In and Disagreements With Accountants on 20
Accounting and Financial Disclosure
Item 8A. Controls and Procedures 21
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; 22
Compliance with Section 16(a) of the Exchange Act
Item 10. Executive Compensation 24
Item 11. Security Ownership of Certain Beneficial Owners and 27
Management
Item 12. Certain Relationships and Related Transactions 29
Item 13. Exhibits and Reports on Form 8-K 29
Item 14. Principal Accountant Fees & Services 29
SIGNATURES S-1
This Form 10-KSB may contain certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. For this
purpose any statements contained in this Form 10-KSB that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, words such as "may," "will," "expect," "believe," "anticipate,"
"estimate" or "continue" or comparable terminology is intended to identify
forward-looking statements. It is important to note that our actual results
could differ materially from those anticipated from the forward-looking
statements depending on various important factors. These important factors
include our history of losses and ability to continue as a going concern, the
uncertainty of acceptance of current and new products in our markets,
competition in our markets, our dependence on our distributors and the other
factors discussed in our "Risk Factors" found on page 10.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS DEVELOPMENT
Our Company was incorporated on April 2, 1986 under the laws of the State
of New York under the name American Micro Media, Inc. On September 9, 1992, we
filed an amendment to our Articles of Incorporation to change our name to
American Bio Medica Corporation. Our principal business office is located at 122
Smith Road, Kinderhook, New York, 12106. We also have a research & development
(R&D) and production facility located at 603 Heron Drive, Unit #3, Logan
Township, New Jersey, 08085.
In November 2001, we purchased our facility located in Kinderhook, New
York from Avoba, Inc. for $950,000. Included in the purchase were the facility,
its contents and 107 acres of land surrounding the facility. In March 2003, the
Company sold approximately 85 acres of land at its Kinderhook facility to a
third party.
OUR BUSINESS
We develop, manufacture and market immunoassay diagnostic test kits,
primarily for the immediate, point of collection screening for drugs of abuse.
Our drugs of abuse screening products offer health care, law enforcement,
government, industrial safety and educational professionals, self-contained,
one-step screening devices capable of identifying illicit drug use within
minutes. In addition to our manufacture and distribution of our drugs of abuse
screening products, in late 2001 we also began performing contract strip
manufacturing for other point of collection diagnostic companies. While we do
not currently derive a significant portion of our revenues from contract
manufacturing, we do expect to continue to explore additional applications for
our technology and as a result contract manufacturing could become a greater
portion of our revenues in the future. Our long-term objective is to provide an
extensive product portfolio to the expanding $6 billion immunoassay market.
OUR PRODUCTS
RAPID DRUG SCREEN(R): We manufacture the Rapid Drug Screen, or
RDS(R), our primary product line. The Rapid Drug Screen is a patented, rapid,
point of collection, test kit that detects the presence or absence of drugs of
abuse in a urine specimen. We market the RDS as easy to-use, cost-effective and
highly reliable. There have been a number of studies that have reported on the
Rapid Drug Screen's accuracy and reliability, including the Rosita Roadside
Study conducted in Europe which rated the Rapid Drug Screen products "Very Good"
for user friendliness, the highest rating given to any of the products in the
study. In addition, a study conducted by the Department of Health and Human
Services ("DHHS") ranked the Rapid Drug Screen the most accurate multi-drug
device for all drugs when compared to GC/MS, a laboratory test consisting of a
combination of two microananlytical techniques: GC, a separation technique, and
MS, an identification technique.
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We produce several versions (panels) of the Rapid Drug Screen. Each panel
screens for a specified number of drugs (up to 10 classes of drugs)
simultaneously. We can also custom produce panels for the screening of any
quantity or combination of the following classes of drugs: cocaine, THC
(marijuana), opiates, amphetamine, PCP, benzodiazepines, methamphetamines,
barbiturates, tricyclic antidepressants, methadone, MDMA (Ecstasy), Oxycodone
and Propoxyphene.
To use our Rapid Drug Screen product, an individual slides a panel into a
self-contained, disposable, urine-filled cup and within minutes accurate results
are shown on the panel. A single line in the test window indicates a positive
reading, and a double line indicates a negative reading for the presence of
drugs. We believe that this ease of use is a competitive advantage over lab
products, as well as products that need to add reagents, manipulate the test or
utilize trained professionals to understand results.
One of the problems that may occur in point of collection drug testing is
that of fraud or evasion practiced by the person being tested. The most
prevalent method of avoiding adverse test results is the substitution, by the
person being tested, of a hidden "clean" urine sample, which he or she brings to
the test. As a consequence, each of our urine drug screens contains a
temperature sensor, which helps prevent the substitution of another urine
sample. A substituted sample would normally be of a lower temperature than a
sample produced from the body on the spot. In addition, both our urine and
saliva-based drug screens (See "OralStat" on page 3) contain a control line,
designed to assure the test administrator that the test is working properly and
that the reagents are present and not destroyed by any outside agent. Should the
control line not appear, the administrator is instructed to void the test and
re-test the individual by obtaining another sample. A positive result is
normally confirmed by laboratory testing.
Our Rapid Drug Screen is currently marketed in the following standard
configurations: two different 2-panel tests, three different 3-panel tests, two
different 4-panel tests, four different 5-panel tests, one 8-panel test, one
9-panel test and one 10-panel test. We can also produce, on special order, or if
a market demands, tests that can screen for any quantity (from two - ten) or
configuration of classes of drugs. Our standard configurations are:
o Two panel tests, designed for the criminal justice and education
markets that screen for cocaine and THC or methamphetamines and THC.
o Three panel tests, designed for various non-clinical markets, that
screen for THC, cocaine and opiates; THC, cocaine and amphetamines;
or THC, cocaine and methamphetamines.
o Four panel tests, designed for various non-clinical markets,
including corporate/workplace and the criminal justice markets, that
screen for cocaine, THC, opiates and alternatively amphetamines and
methamphetamines.
o Five panel tests, designed for the corporate/workplace market, that
screen for the "SAMHSA 5" (SAMHSA stands for the Substance Abuse and
Mental Health Services Administration, an Agency of the US
Department of Health and Human Services): cocaine, THC, opiates, PCP
and amphetamine and 2 additional versions of this test with
methamphetamines or benzodiazepines replacing PCP. A new standard
configuration of THC, cocaine, opiates, methamphetamines and
Oxycodone is also available.
o An eight panel test, designed for the clinical market, primarily for
hospitals and physicians, that screens for the "SAMHSA 5" (listed
above), plus benzodiazepines, methamphetamines and barbiturates.
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o A nine panel test, also designed for the clinical market, that
screens for drugs of abuse from the eight panel test, as well as
tricyclic antidepressants (TCA).
o A ten panel test, designed for specific workplace markets that
screens for the drugs of abuse from the eight panel test, as well as
methadone and propoxyphene.
RAPID ONE(R): We manufacture the Rapid One product line which consists of
13 single drug tests, each of which screens for the presence or absence of drugs
of abuse in a urine specimen. The Rapid One product line utilizes the same
technology as the Rapid Drug Screen. It includes a single dip platform, an
identification and date area, and does not require the use of pipettes or
reagents. The Rapid One is designed for correctional facilities and other
markets where the person subject to substance abuse testing is known to use a
specific drug. It can also be used to enhance a Rapid Drug Screen by means of
allowing screening of an additional drug. The Rapid One product line consists of
the following 13 classes of drugs: cocaine, THC (marijuana), opiates (available
at either 300 ng/ml or 2000 ng/ml), amphetamine, PCP, benzodiazepines,
methamphetamines, barbiturates, tricyclic antidepressants, methadone, Oxycodone
(a synthetic opiate found in several legitimate and effective pain medications,
including OxyContin(R), but is being used by drug abusers to create a
heroin-like high), MDMA (Ecstasy), an illegal designer drug, and Propoxyphene,
mild narcotic analgesic structurally related to methadone that can be habit
forming and therefore abused.
RAPID TEC(R): In August 2001, we launched a new version of the Rapid One
called the Rapid Tec, in which one individual drug testing strip would include
the chemistry to detect more than one class of drug. The Rapid Tec is designed
for those customers who require a less expensive product but still need to test
for more than one drug of abuse utilizing one urine sample. In the year ended
December 31, 2003, the Company developed 3 new additional versions of the Rapid
Tec. The Company currently offers the following versions of the Rapid Tec:
o Rapid Tec-2: screens for THC and cocaine
o Rapid Tec-3: screens for
THC, cocaine and methamphetamines; or
THC, cocaine and opiates
o Rapid Tec-4: screens for THC, cocaine, methamphetamines
and opiates 300
o Rapid Tec-5: screens for
THC, cocaine, opiates, amphetamines and benzodiazepines; or
THC, cocaine, amphetamine, PCP and opiates 2000; or
THC, cocaine, amphetamine, PCP and opiates 300
RAPID DRUG SCREEN SCAN-R(R): In August 2001, we introduced a software
system that provides a rapid, clear and convenient method to document point of
collection drug screening results. Subsequent to the launch, and prior to any
sales of the Rapid Drug Screen Scan-R, and throughout the year ending December
31, 2002, we continued to make modifications to this product. Additional
modifications made in 2003 resulted in a substantially different product and the
original Rapid Drug Screen Scan-R product was abandoned. For more information on
the new product see "Rapid Reader" on page 4.
ORALSTAT(R): In August 2001, we signed a licensing agreement with ANSYS
Technologies, Inc., to market a point of collection saliva-based test for drugs
of abuse. The licensing agreement allows us to market this product to the
criminal justice, workplace and drug treatment sectors. We sell this product
under an ABMC-owned registered trademark of OralStat. The OralStat can
simultaneously test for six classes of drugs: THC, opiates, cocaine, PCP,
amphetamines and methamphetamines. Utilizing a simple saliva sample, it delivers
easy-to-read positive or negative results within 10-15 minutes. The test
requires no reader and no messy saliva collection or handling. Pending
submission for FDA 510(k)
3
clearance, the product is labeled and made available "for forensic use only",
which means for use in legal determinations only; it is not intended or promoted
for a health or medical use or purpose.
Since its introduction, the OralStat has been increasingly accepted in the
workplace/corporate markets, particularly in the temporary staffing segment. In
May 2002, we entered into a contract to provide the OralStat to one of the
leading providers of staffing services in the world.
RAPID TEC CUP(TM): In July 2001, we began providing contract strip
manufacturing to Starplex Scientific, Inc. As a result of this relationship, in
December 2002, we entered into a private-label agreement with Starplex
Scientific, Inc for its point of collection drugs of abuse self-contained cup.
We adopted the trademark of Rapid Tec Cup for this product, as the strip
utilized in the product is the same as in our Rapid Tec product line. Currently
we offer a 5 panel cup that tests for THC, cocaine, opiates, amphetamines and
PCP. We expect the Rapid Tec Cup will be useful in the Corporate/Workplace and
Corrections/Government markets where a self-contained product may be required.
RAPID READER(TM). As previously noted in the section titled "Rapid Drug
Screen Scan-R", as a result of modifications to the Rapid Drug Screen Scan-R
product, a new device was created, the Rapid Reader. The Rapid Reader is a
compact, portable device that, when connected to any computer, captures a
picture of the test results on an ABMC drug screen using a high-resolution
camera. The Rapid Reader's proprietary software analyzes this image and
interprets the results. The information is then sent to a data management
system, which enables the user to interpret, store, transmit and print the drug
test results. The Rapid Reader system can only be used to interpret and record
the results of ABMC drug screens. As this product virtually eliminates human
error in the interpretation and recording of drug screen results and allows
secure electronic sharing and storing of test results, the Rapid Reader may
alleviate concerns any potential customer may have about using point of
collection drug tests. The Company does not expect sales of the Rapid Reader
alone to materially impact sales, rather it will enable them to secure the
business of customers that would otherwise not use a point of collection drug
test thereby increasing sales of the Company's drug screens.
CONTRACT MANUFACTURING
Through the fiscal year ending December 31, 2003, we provided bulk strip
contract manufacturing services to a number of point of collection diagnostic
companies. Currently we manufacture test components for the detection of
tuberculosis, drugs of abuse and HIV for 4 non-affiliated companies. We do not
currently derive a significant portion of our revenues from contract
manufacturing.
OUR MARKETS
CORPORATE/WORKPLACE
We sell primarily in this market through our direct sales force. We also
have a nationwide network of distributors and administrators of workplace drug
testing programs that sell our drugs of abuse product line in this market. We
believe that the market for utilization of point of collection drug screens for
pre-employment and random employee testing is expanding.
o In September 2001, the Office of National Drug Control Policy (the
"ONDCP") reported that between 1992 and 1998, the overall cost of
drug abuse to society increased at a rate of 5.9% annually. By 1998,
the societal cost of drug abuse was $143.4 billion.
o According to the 2002 SAMHSA National Survey on Drug Use and Health
(formerly the National Household Survey on Drug Abuse), released in
Sept
4
2003, 74.6% of adults who use illegal drugs are employed, either
full or part-time.
o Studies reported by the Institute for a Drug-Free Workplace show:
o Of all workplace drug users who test positive, 52% are daily
users
o Employees who test positive for drugs were 60% more likely to
be responsible for plant accidents, used a third more sick
leave and have many more unexcused absences.
According to the American Management Association ("AMA"), drug testing is
performed by 65% of major U.S. firms. For the reasons, stated above, not only
are there financial benefits of drug testing, but a drug-free environment is a
safer one. Incentives encourage employers to adopt Drug Free Workplace Programs.
Drug testing is an integral part of a Drug Free Workplace Program. In some
states, there are workman's compensation and unemployment insurance premium
reductions, tax deductions and other incentives for adopting these programs. The
Drug Free Workplace Act requires employers receiving federal contracts of
$100,000 or more to enact a Drug Free Workplace program (the Federal Acquisition
Streamlining Act of 1994 (FASA) raised the threshold of contracts covered by the
Drug Free Workplace Act from $25,000 to those exceeding $100,000).
GOVERNMENT, CORRECTIONS AND LAW ENFORCEMENT
Our direct sales team sells our drugs of abuse screening products in this
market. This market includes federal, state and county level agencies, including
correctional facilities, pretrial agencies, probation, drug courts and parole
departments at the federal and state levels and juvenile correctional
facilities. According to the Bureau of Justice Statistics ("BOJ"), as of
December 31, 2002, there were 2.03 million inmates in State or Federal prisons
and local jails. Through 2002, approximately 54.7% of inmates in federal prisons
were sentenced as drug offenders according to the Federal Bureau of Prisons. The
BOJ also reported that as of December 31, 2002, over 4.7 million adult men and
women were under Federal, State, or local probation or parole jurisdiction;
approximately 3,995,200 on probation and 753,100 on parole. Almost all persons
(99%) on parole or probation have one or more conditions to their sentence
required by the court or probation agency including periodic drug testing and
substance abuse treatment. Our products are aimed at this and other similar
markets.
REHABILITATION CENTERS
We utilize our direct sales team and our network of distributors to sell
our products in this market. This market for our products includes people in
treatment for substance abuse. There is a high frequency of testing in this
market. For example, in many residence programs, patients are tested each time
they leave the facility and each time they return. In outpatient programs,
patients are generally tested on a weekly basis.
INTERNATIONAL MARKETS
We sell our products primarily through distributors in this market. We
have entered into distribution agreements with companies in several countries
and are pursuing a course of multinational distribution of our products through
both clinical and non-clinical distribution companies. As of February 2004, we
had 18 distributors or customers representing 30 countries outside the United
States.
CLINICS, PHYSICIANS, AND HOSPITALS
This market includes emergency rooms, physician offices, hospitals and
clinics and rehabilitation facilities associated with hospitals. In July 2003,
the Drug Abuse Warning Network ("DAWN") estimated that in 2002 there were
670,307 episodes, with an average of 1.8 drugs per episode, in emergency
departments in the United States in which drugs were
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mentioned. Our Rapid Drug Screen nine panel test is used in this market as it
provides fast and accurate results when time is critical. We are continuing to
negotiate an exclusive distribution agreement with a multi-national diagnostics
company focused on the clinical point of collection market.
CONSUMER/OVER-THE-COUNTER
Our drugs of abuse screening products are not currently available for sale
in this market, as we have not yet received the necessary marketing clearance
from FDA. In December 2003, FDA issued a revised draft guidance for
manufacturers of drug abuse screening tests that updated two previous draft
guidances published in 2000 thereby clarifying current FDA thinking for both
laboratory and non-laboratory (workplace, sports, insurance, and home) tests.
The Company is currently evaluating these new guidelines to determine if we will
obtain the required marketing clearance to sell in this market in the future.
EDUCATIONAL MARKET
According to the 2003 University of Michigan Monitoring the Future study,
9.7% of 8th graders, 19.5% of 10th graders and 24.1% of 12th graders had used an
illicit drug within the prior 30 days of being interviewed for the study.
Furthermore, over half (51%) of young people have tried an illicit drug by the
time they finish high school. We believe our products could be an integral part
of helping schools test due to their ease of use and immediate, accurate
results.
In June 2002, the Supreme Court, ruled by a 5-4 vote that public middle
and high schools can require drug tests for students in extracurricular
activities including band, choir, and other activities without violating their
privacy rights. Drug tests can be required without any suspicion of drug use,
and applies to students in grades 7 through 12 who sign up for activities such
as cheerleading, band, academic teams, and other extracurricular activities.
Students can be tested at the start of the school year and then randomly
throughout the year. It is our opinion that, with this decision, schools will be
more likely to implement a drug-testing program. However, because the decision
came after many schools' annual district budgeting was complete for the
following year, any increased in our sales to the educational market will not be
realized until fiscal year ending December 31, 2004.
ADDITIONAL MARKETS
We believe that the Department of Transportation ("DOT") and the federally
regulated markets could be a future market for our products. Presently, the DOT
market is not available to any point of collection drug of abuse testing device.
Federal law requires that anyone with a commercial driving license be randomly
tested for use of drugs of abuse and that certified laboratories be used in
these testing situations. We believe that there is potential for growth in this
market as the regulatory agencies are considering implementing new guidelines
that will permit the use of point of collection drug testing devices.
PRODUCT DISTRIBUTION
We have a two-pronged distribution strategy that focuses both on growing
business through our direct sales team and with valued third party distribution
partners. We sell our products primarily through a staff of highly experienced
and well-trained sales professionals with drugs of abuse testing experience. In
addition we also sell through third party distribution channels.
Our direct sales force consists of a Vice President of Sales & Marketing
and 6 regional sales managers, in addition to a staff of inside sales
representatives. They call on non-clinical accounts directly and support our
worldwide distribution network. We also employ a marketing manager and an
international marketing manager. We intend to promote our products through
direct mail campaigns, selected advertising, participation at
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high profile trade shows, use of key point of collection advocate consultants
and other marketing activities.
We have entered into national and international non-exclusive,
non-clinical market distribution agreements with a number of distributors. These
agreements permit our distributors to sell non-competitive products of other
manufacturers and permit us to sell our test kits to other distributors within
and outside the territory of each distributor. The agreements are cancelable by
either us or the distributor upon 30 days written notice.
We will continue to recruit and utilize third party distribution partners
for select markets, including corporate/workplace, government/corrections/law
enforcement, international and education, in addition to selling directly in
these markets and to key customers. We intend to enter into a distribution
agreement with a multi-national diagnostics company for sales to the clinical
market.
COMPETITION
Competition to our point of collection urine-based products comes from
point of collection tests developed by companies including, but not limited to,
Varian Inc., Medtox Scientific, Inc. and Biosite Diagnostics.
These and other competitors have longer operating histories than we do and
significantly greater financial, technical and marketing resources than us.
Currently the pricing of our products are cost competitive, however, these
competitors can devote substantially more resources than we can to business
development and may adopt more aggressive pricing policies.
We compete on the following factors:
o effectiveness of pricing;
o quality of product;
o ease and user-friendliness of services; and
o timeliness of product delivery.
Competitors' point of collection urine tests generally use a collection or
delivery method different than our point of collection urine tests. Our products
do not require pipetting of the specimen, adding or mixing of reagents or other
manipulation of the device by the user. Also, many of our competitors have
products, which combine the testing mechanism with the collection device, which
increases the potential of tampering with the testing mechanism by the person
being tested. With our products, the testing mechanism is not given to the
person being tested, but is held by the test administrator.
Aside from point of collection urine tests offering immediate results,
some of our competitors offer traditional laboratory testing, where a urine
sample is sent to a laboratory for analysis, and hair testing where a hair
sample is sent to a laboratory for analysis. These forms of drug testing are
more expensive and take longer to produce results than our products.
Other competitors to our point of collection urine tests are point of
collection tests with platforms utilizing saliva instead of urine. Saliva-based
drug tests have limitations relative to detection time, generally detecting
traces of drugs of abuse in a 3 to 18 hour window compared to one to three days
for urine-based testing. However, this shorter window of detection can be useful
in some market segments, such as post-accident testing in the workplace. We
market and sell a point of collection saliva-based test for drugs of abuse (the
OralStat). Some of our competitors in the saliva-based testing market have been
7
promoting their products longer and therefore, have more experience in marketing
saliva-based products to the appropriate segment(s).
MANUFACTURING
We own a 30,000 square foot facility in Kinderhook, New York, which houses
assembly and packaging of our products in addition to administration. We
continue to contract-out the printing and manufacture of specimen cup components
of the Rapid Drug Screen. We do not manufacture the OralStat product. In
addition to manufacturing all of our own individual test strips, we manufacture
the test strips in the Rapid Tec Cup product, as well as manufacturing test
strips for HIV and Tuberculosis for third parties.
We lease a 9,000 square foot R&D and production facility in Logan
Township, New Jersey that houses research and development and bulk strip
manufacturing.
Our present manufacturing equipment is sufficient to produce 200,000 drug
test kits per month, assuming one shift per day, five days per week. In the
fiscal year ending December 31, 2003, we sold approximately 2,878,000 test kits.
Our facilities in Kinderhook, New York and Logan Township, New Jersey would
allow us to increase our production capacity if additional personnel are hired
and more equipment is installed. We could further increase capacity with
additional shifts. We expect to add additional assembly/packaging personnel
and/or equipment as production needs increase. (See Item 2. Description of
Property on page 16).
We currently have approximately fifty suppliers who provide us with the
raw materials necessary to manufacture our drug testing strips and our drugs of
abuse screening products. (See Risk Factors beginning on page10.)
PATENTS AND TRADEMARKS/LICENSES
To date, we have been granted twenty patents related to the Rapid Drug
Screen and/or Rapid One product lines, including four U.S. design patents and
four utility patents. We currently have an additional seven United States patent
applications, and five foreign patent applications pending.
We have registered "ABM" and its logo in the United States, Canada, Chile,
Mexico and Europe. We have registered the "Rapid Drug Screen" trademark in the
United States, Puerto Rico, Mexico, Canada, Europe and Russia. We have also
registered Rapid One and its logo, Rapid Tec and its logo, RDS and OralStat in
the United States. We have additional trademark applications pending in the
United States and 3 other foreign countries. There can be no assurance that the
additional patents and/or trademarks will be granted or that, if granted, they
will withstand challenge. (See "Risk Factors - Intellectual Property Rights" on
page 13).
In connection with the settlement of a patent infringement suit we filed
against numerous parties in April 2001, we have a licensing and royalty
agreement with Phamatech, Inc., under which we were paid a licensing fee and
will continue to be paid a percentage of revenues on versions of the Phamatech
product that infringe on our Rapid Drug Screen patent. As of the date of this
report, Phamatech no longer sells the versions of their product that infringe on
our Rapid Drug Screen patent.
RESEARCH AND DEVELOPMENT
We currently manufacture all of our individual drug testing strips. Our
Research and Development, or R&D, efforts have been focused on enhancing and/or
maintaining the performance and reliability of our drug testing strips. In
addition, this fiscal year, our R&D team developed additional versions of the
Rapid Tec, and continued the development process on contract manufacturing
projects. The R&D team continues to consider the potential of a "CLUB-DRUG"
panel that could be a useful tool against the latest drugs of choice, such as
8
Rohypnol, Ecstasy, Ketamine, Ritalin, GHB, Methamphetamines and Methaqualone.
Our R&D expenditures were $639,000 for the fiscal year ending December 31, 2003
and $297,000 for the fiscal year ending December 31, 2002.
GOVERNMENT REGULATIONS
The development, testing, manufacture and sale of our drugs of abuse
screening products and possible additional biomedical products are subject to
regulation by the United States and foreign regulatory agencies. Pursuant to the
Federal Food, Drug, and Cosmetic Act, and the regulations promulgated
thereunder, the FDA regulates the pre-clinical and clinical testing,
manufacture, labeling, distribution and promotion of medical devices. If the
Company fails to comply with applicable requirements it may be subject to fines,
injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production, failure of the government to grant pre-market
clearance or pre-market approval for devices, withdrawal of marketing clearances
or approvals and criminal prosecution.
Our products fall under the category of 510(k) submissions to FDA. A
510(k) is a premarketing submission made to FDA to demonstrate that the device
to be marketed is as safe and effective, that is, substantially equivalent, to a
legally marketed device that is not subject to premarket approval (PMA).
Applicants must compare their 510(k) device to one or more similar devices
currently on the U.S. market and make and support their substantial equivalency
claims. A legally marketed device is a device that was legally marketed prior to
May 28, 1976 (preamendments device), or a device that has been reclassified from
Class III to Class II or I, or a device which has been found to be substantially
equivalent to such a device through the 510(k) process, or one established
through Evaluation of Automatic Class III Definition. The legally marketed
device(s) to which equivalence is drawn is known as the "predicate" device(s).
Applicants must submit descriptive data and, when necessary, performance data to
establish that their device is substantially equivalent to a predicate device.
Although FDA clearance is not required for non-clinical markets (such as
industry and corrections), it is required for clinical markets (such as
hospitals and physicians). The Company continues to explore a relationship with
a multi-national diagnostics company to distribute our products in this market.
When such a relationship is established, we believe that clinical markets could
become a major marketplace for our drug screening products. We have received
510(k) clearance for our nine panel test. With this approval, we can offer a
variety of combinations to meet customer requirements, both with our multiple
panel tests and our individual Rapid One tests. In May 2003, we received 510(k)
clearance to market the Rapid One Propoxyphene Test, which can also be used in
our Rapid Drug Screen Nine panel test. The OralStat has not yet received 510(k)
clearance from FDA and is currently available for "forensic use only".
Furthermore, in order to sell our products in Canada after November 2003,
the Company must comply with ISO13485, the International Standards
Organization's Directive for Quality Systems for Medical Devices (MDD or Medical
Device Directive), and in order to sell our products in the European Union after
November 2003, the Company must obtain CE marking for our products (in the
European Union, a "CE" mark is affixed to the product for easy identification of
quality products). Collectively, these standards are similar to the U.S. Federal
Regulations enforced by FDA, and are a reasonable assurance to the customer that
the manufacturing of our products is conducted in a consistent manner to help
ensure that quality, defect-free goods are produced. We received approval and
the right to bear the CE mark on all our products on January 6, 2004, meaning
that our products comply with the essential requirements of the In Vitro
Diagnostic Directive 98/79/EC and may be legally marketed within the European
Union and display the CE Mark. In order to prove compliance to ISO13485, the
Company will be audited and its technical documentation reviewed by a Registrar
approved by Canada. This audit process is expected to be completed in the first
half of 2004.
9
EMPLOYEES
Currently, we have approximately 104 employees, of which 98 are full-time
and 6 are part-time. None of our employees are covered by collective bargaining
agreements, and we believe our relations with our employees are good.
RISK FACTORS
WE HAVE A LIMITED OPERATING HISTORY, WHICH MAY MAKE IT DIFFICULT TO ACCURATELY
FORECAST OUR FUTURE REVENUES AND OTHER OPERATING RESULTS.
We began selling our drugs of abuse screening products in 1996 and began
providing contract manufacturing services for other companies in late 2001. As a
result, we have only a limited operating history upon which you may evaluate our
business and prospects. Our limited operating history may make it difficult or
impossible for analysts or investors to accurately forecast regarding our future
revenues and other operating results and the price of our securities could
decline substantially.
WE HAVE A HISTORY OF INCURRING NET LOSSES SINCE WE WERE FORMED.
Since inception in 1992 through the transition period ended December 31,
2001, we incurred net losses. In the year ended December 31, 2003, we earned net
income of $1,031,000. As of December 31, 2003, we have an accumulated deficit of
$13.4 million. We expect to continue to make substantial expenditures for sales
and marketing, product development and other purposes. Our ability to maintain
profitability in the future will primarily depend on our ability to increase
sales of our products, reduce production and other costs and successfully
introduce new products and enhanced versions of our existing products into the
marketplace. We cannot assure you that we will be able to increase our revenues
at a rate that equals or exceeds expenditures. Our failure to do so will result
in our incurring additional losses.
OUR PRODUCTS ARE SOLD IN LIMITED MARKETS AND THE FAILURE OF ANY ONE OF THEM TO
ACHIEVE WIDESPREAD MARKET ACCEPTANCE WOULD SIGNIFICANTLY HARM OUR RESULTS OF
OPERATION.
We offer a number of drugs of abuse screening products that are sold in
limited markets, and we currently derive most of our revenues from sales of our
drugs of abuse screening product line. To attain break-even results of
operations, given current levels of expenses, we must achieve approximately $3
million in quarterly revenues from our products. If our products do not achieve
and maintain this level of revenue, our results of operations would be
significantly harmed.
In addition, we only began selling our drugs of abuse product line in
1996, and cannot yet predict whether they will gain further widespread market
acceptance. Achieving market acceptance for our drug tests will require
substantial marketing efforts and expenditure of significant funds to inform
potential distributors and customers of the distinctive characteristics,
benefits and advantages of our test kits. The OralStat was introduced into the
forensic markets in October 2001, the Rapid Tec into the non-clinical markets in
March 2002, the Rapid Tec Cup into the non-clinical markets in December 2002 and
the Rapid Reader into the non-clinical markets in early 2004. We have no history
upon which to base market or customer acceptance of these products. Introduction
of the OralStat, Rapid Tec, Rapid Tec Cup and Rapid Reader have required, and
may continue to require substantial marketing efforts and expenditure of funds.
Due to the variety and complexity of the environments in which our
customers operate, our products may not operate as expected. This could result
in cancelled orders, delays and increased expenses. In addition, the success of
competing products and technologies, pricing pressures or manufacturing
difficulties could further reduce our profitability and the price of our
securities.
10
IF WE FAIL TO KEEP UP WITH TECHNOLOGICAL FACTORS AND FAIL TO DEVELOP OUR
PRODUCTS, WE MAY BE AT A COMPETITIVE DISADVANTAGE.
The point of collection drug testing market is highly competitive. Several
companies produce drug tests that compete directly with our drugs of abuse
product line, including Varian, Inc., Biosite Diagnostics and Medtox Scientific,
Inc. As new technologies become introduced into the point of collection testing
market, we may be required to commit considerable additional efforts, time and
resources to enhance our current product portfolio or develop new products. Our
success will depend upon new products meeting targeted product costs and
performance, in addition to timely introduction into the marketplace. We are
subject to all of the risks inherent in product development, which could cause
material delays in manufacturing.
WE RELY ON THIRD PARTIES FOR RAW MATERIALS USED IN OUR DRUGS OF ABUSE PRODUCTS
AND IN OUR CONTRACT MANUFACTURING PROCESSES.
We currently have approximately fifty suppliers who provide us with the
raw materials necessary to manufacture our drug testing strips and our drugs of
abuse screening products. The loss of one or more of these suppliers, the
non-performance of one or more of their materials or the lack of availability of
raw materials could suspend our manufacturing process related to our drugs of
abuse products. This interruption of the manufacturing process could impair our
ability to fill customers' orders as they are placed, which would put us at a
competitive disadvantage.
Furthermore, we rely on a number of third-parties for supply of the raw
materials necessary to manufacture the test components we supply to other
diagnostic companies under contract manufacturing agreements. The loss of one or
more of these suppliers could suspend the strip manufacturing process and this
interruption could impair our ability to perform contract manufacturing
services.
WE DEPEND ON OUR RESEARCH & DEVELOPMENT ("R&D") TEAM FOR PRODUCT DEVELOPMENT
AND/OR PRODUCT ENHANCEMENT.
Product development and/or enhancement are performed by our R&D team.
There can be no assurance that our R&D team can successfully develop and/or
complete the enhancement of our current products and/or complete the development
of new products. Furthermore, the loss of one or more members of our R&D team
could result in the interruption or termination of new product development
and/or current product enhancement, affecting our ability to provide new or
improved products to the marketplace, which would put us at a competitive
disadvantage.
OUR PRODUCTS MUST BE COST COMPETITIVE AND PERFORM TO THE SATISFACTION OF OUR
CUSTOMERS.
Cost competitiveness and satisfactory product performance are essential
for success in the point of collection drug testing market. There can be no
assurance that new products we may develop will meet projected price or
performance objectives. Moreover, there can be no assurance that unanticipated
problems will not arise with respect to technologies incorporated into our test
kits or that product defects, affecting product performance, will not become
apparent after commercial introduction of our additional test kits. In the event
that we are required to remedy defects in any of our products after commercial
introduction, the costs to us could be significant, which could have a material
adverse effect on our revenues or earnings.
WE FACE SIGNIFICANT COMPETITION IN THE DRUG TESTING MARKET AND POTENTIAL
TECHNOLOGICAL OBSOLESCENCE.
We face competition from other manufacturers of drugs of abuse screening
products such as Varian, Inc., Medtox Scientific, Inc. and Biosite Diagnostics.
These competitors are
11
more well known and have far greater financial resources than us. The markets
for drugs of abuse screening products and related products are highly
competitive. There can be no assurance that other companies will not attempt to
develop or market products directly competitive with our drugs of abuse product
line. We expect other companies to develop technologies or products which will
compete with our products.
POSSIBLE INABILITY TO HIRE AND RETAIN QUALIFIED PERSONNEL.
We will need additional skilled, sales and marketing, technical and
production personnel to grow the business. If we fail to retain our present
staff or hire additional qualified personnel our business could suffer.
WE DEPEND ON KEY PERSONNEL TO MANAGE OUR BUSINESS EFFECTIVELY.
We are dependent on the expertise and experience of our senior management
such as Keith E. Palmer, Chief Financial Officer, Martin Gould, Chief Scientific
Officer and Todd Bailey, Vice President, Sales & Marketing for our future
success. The loss of Messrs. Palmer, Gould and/or Bailey could negatively impact
our business and results of operations. We do not maintain key man insurance for
any of our management employees. Our Chief Scientific Officer and other
scientific personnel are not bound by employment or non-competition agreements.
FAILURE TO EFFECTIVELY MANAGE OUR GROWTH AND EXPANSION COULD ADVERSELY AFFECT
OUR BUSINESS AND OPERATING RESULTS.
We anticipate expansion of our operations in the coming year. Any failure
to manage our growth effectively will result in less efficient operations, which
could adversely affect our operating and financial results.
To effectively manage our growth, we must, among other things:
o accurately estimate the number of employees we will require
and the areas in which they will be required;
o upgrade and expand our office infrastructure so that it is
appropriate for our level of activity;
o manage expansion into additional geographic areas; and
o improve and refine our operating and financial systems.
We expect to devote considerable resources and management time to
improving our operating and financial systems to manage our growth. Failure to
accomplish any of these objectives would impede our ability to deliver products
and services in a timely fashion, fulfill existing customer orders and attract
and retain new customers, which impediment would have a material adverse effect
on our financial condition, results of operations and cash flows.
ANY ADVERSE CHANGES IN OUR REGULATORY FRAMEWORK COULD NEGATIVELY IMPACT OUR
BUSINESS.
Approval from FDA is not currently required for the sale of our products
in non-clinical markets, but is required in the clinical and over-the-counter
markets. Although our drugs of abuse products have met FDA requirements for
professional use, we have not obtained OTC clearance from FDA. The workplace
market is one of our primary markets and if any additional FDA clearance(s)
is/are required to sell in this market, this additional cost may cause us to
raise the price of our products making it difficult to compete with other point
of collection products or laboratory based testing, thereby negatively impacting
our revenues. Furthermore, there can be no assurance that if, and when, we are
required to apply for additional FDA clearances they will be granted. If such
clearance(s) is/are not granted, we would be unable to sell our products in the
workplace market and our revenues would be negatively impacted. Although we are
currently unaware of any changes in regulatory standards related to the clinical
and OTC markets, if regulatory standards were
12
to change in the future, there can be no assurance that FDA will grant us the
approvals, if and when we apply for them, required to comply with the changes.
WE RELY ON INTELLECTUAL PROPERTY RIGHTS, AND WE MAY NOT BE ABLE TO OBTAIN PATENT
OR OTHER PROTECTION FOR OUR TECHNOLOGY, PRODUCTS OR SERVICES.
We rely on a combination of patent, copyright, trademark and trade secret
laws, confidentiality procedures and contractual provisions to protect our
proprietary technology, products and services. We also believe that factors such
as the technological and creative skills of our personnel, new product
developments, frequent product enhancements and name recognition are essential
to establishing and maintaining our technology leadership position. Our Chief
Scientific Officer and other Scientific personnel are not bound by employment or
non-competition agreements. Some personnel are bound by non-disclosure
agreements. If personnel leave our employment, in some cases we would be
required to protect our intellectual property rights pursuant to common law
theories which may be less protective than provision of employment,
non-competition or non-disclosure agreements.
We seek to protect our proprietary products under trade secret and
copyright laws, which afford only limited protection. We currently have a total
of twenty U.S. and foreign patents relating to the Rapid Drug Screen and/or
Rapid One product line. We have additional patent applications pending in the
United States, and other foreign countries, related to our drugs of abuse
products. We have trademark applications pending in the United States. Certain
trademarks have been registered in the United States and in other foreign
countries.
Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy aspects of our products or to obtain information
that we regard as proprietary. For example, our sales were adversely affected in
fiscal 2000 and fiscal 2001 (year ending April 30, 2001) as a result of sales of
products similar to ours. In April of 1999, we filed suit in a federal court
against Phamatech, Inc. of California, a former supplier of ours, and numerous
other parties to stop these sales. We incurred significant legal fees of $1.6
million attempting to enforce our patents. In April 2001, we settled with
Phamatech and all other defendants in this lawsuit. The settlement agreement
established a license and royalty arrangement under which we were paid a
licensing fee and will continue to be paid a percentage of revenues of the
infringing product. Under the terms of the settlement, each party has agreed not
to disclose to any third parties the terms and conditions of this agreement.
We may be required to incur significant costs to protect our intellectual
property rights. In addition, the laws of some foreign countries do not ensure
that our means of protecting our proprietary rights in the United States or
abroad will be adequate. Policing and enforcement against the unauthorized use
of our intellectual property rights could entail significant expenses and could
prove difficult or impossible. Additionally, there is no assurance that the
additional patents will be granted or that additional trademarks will be
registered.
POTENTIAL ISSUANCE AND EXERCISE OF NEW WARRANTS AND EXERCISE OF OUTSTANDING
WARRANTS COULD ADVERSELY AFFECT THE VALUE OF OUR SECURITIES.
In connection with our sale of 1,408,450 common shares for $2,000,000
($1.42 per share) in a private placement to Seaside Partners, L.P. ("Seaside")
on April 28, 2000, we issued a 5-year warrant to Seaside to purchase 953,283
common shares of our stock at an exercise price of $1.17 per share. To settle a
penalty owed to Seaside because of a late effective registration statement, we
adjusted the exercise price of the 953,283 warrant shares from $1.17 to $0.95 in
February 2001.
In May 2001, we issued a 5-year warrant to purchase 200,000 common shares
of our stock at an exercise price of $1.50 per share to Brean Murray & Co., Inc.
("Brean Murray") as compensation for their services as a financial advisor.
On August 22, 2001, we issued warrants ("Private Placement Warrants"),
exercisable during a 54 month period beginning February 22, 2002, to purchase
1,274,500 common shares of our stock at an exercise price of $1.05 per share in
connection with the private
13
placement of 2,549,000 shares of common stock (the 1,274,500 warrants issued in
connection with the August 2001 private placement trade on the NASDAQ SmallCap
Market). We also issued, on August 22, 2001, warrants, exercisable during a 54
month period beginning February 22, 2002, to purchase a total of 203,920 common
shares of our stock at an exercise price of $1.20 per share, of which warrants
to purchase 152,940 common shares were issued to Brean Murray & Co., Inc. as
compensation for their services as placement agent and warrants to purchase
12,745 common shares were issued to Axiom Capital Management, Inc., warrants to
purchase 5,735 common shares were issued to Jeffrey Goldberg, warrants to
purchase 16,250 common shares were issued to Barry Zelin, and warrants to
purchase 16,250 common shares were issued to David L. Jordon, each for their
services as sub-agents of Brean Murray & Co., Inc.
On November 15, 2001, we issued a warrant to purchase 20,000 common shares
at an exercise price of $1.00 to Hudson River Bank & Trust Company ("HRBT") in
connection with the purchase of our facility in Kinderhook, New York.
On December 2, 2003, we issued a warrant, exercisable during a 5 year
period beginning December 2, 2003, to purchase 300,000 common shares of our
stock at an exercise price of $1.15 per share to Brean Murray & Co., Inc ("Brean
Murray") as compensation as our financial advisor.
If the Seaside warrant, the Brean Murray Warrants, the Private Placement
Warrants and the HRBT warrants are exercised, the common shares issued will be
freely tradable, increasing the total number of common shares issued and
outstanding. If these shares are offered for sale in the public market, the
sales could adversely affect the prevailing market price by lowering the bid
price of our securities. The exercise of any of these warrants could also
materially impair our ability to raise capital through the future sale of equity
securities because issuance of the common shares underlying the warrants would
cause further dilution of our securities. The warrants are subject to or contain
certain anti-dilution protection that may result in the issuance of additional
shares under some circumstances including, but not limited to, paying of a
dividend, subdivision of our outstanding shares into a greater number of shares,
combination of our outstanding shares into a smaller number of shares, an
issuance of shares of common stock by reclassification or in the case of the
Brean Murray and Seaside warrants, a sale of our common shares, or a security
convertible into common shares, for consideration per share less than the
exercise price of the warrants.
POTENTIAL ISSUANCE AND EXERCISE OF NEW OPTIONS AND EXERCISE OF OUTSTANDING
OPTIONS COULD ADVERSELY AFFECT THE VALUE OF OUR SECURITIES.
The Board of Directors of the Company has adopted four (4) Nonstatutory
Stock Option Plans providing for the granting of options to employees,
directors, and consultants (see Note H[2]). As of December 31, 2003, there were
4,722,084 options issued and outstanding under all four plans combined, of which
3,072,780 were exercisable. As of December 31, 2003, there were 19,000 options
available for issuance under the Fiscal 2000 Plan and 1,493,500 options
available for issuance under the Fiscal 2001 Plan. There are no options
available for issuance under either the Fiscal 1997 Plan or the Fiscal 1998
Plan. As options expire or are cancelled under these latter two plans, they are
not re-issued.
If these options are exercised, the common shares issued will be freely
tradable, increasing the total number of common shares issued and outstanding.
If these shares are offered for sale in the public market, the sales could
adversely affect the prevailing market price by lowering the bid price of our
securities. The exercise of any of these options could also materially impair
our ability to raise capital through the future sale of equity securities
because issuance of the common shares underlying the options would cause further
dilution of our securities. The options are subject to or contain certain
anti-dilution protection that may result in the issuance of additional shares
under some circumstances including, but not limited to, paying of a dividend in
common shares, a declaration of a dividend payable in a form other than common
shares in an amount that has a material effect on the price of
14
common shares, a combination or consolidation of the outstanding common shares
(by reclassification or otherwise) into a lesser number of common shares, a
recapitalization, a spin-off or a similar occurrence.
SUBSTANTIAL RESALE OF RESTRICTED SECURITIES MAY DEPRESS THE MARKET PRICE OF OUR
SECURITIES.
There are 4,293,155 common shares presently issued and outstanding as of
the date hereof that 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 that a
person holding restricted securities for a period of one year or more may, in
any three month period, sell those securities in unsolicited brokerage
transactions or in transactions with a market maker, in an amount equal to the
greater of one percent of our outstanding common shares or the average weekly
trading volume for the prior four weeks. 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. Investors should be
aware that sales under Rule 144 or 144(k), or pursuant to a registration
statement filed under the Act, may depress the market price of our Company's
securities in any market that may develop for such shares.
WE MAY NEED ADDITIONAL FUNDING FOR OUR EXISTING AND FUTURE OPERATIONS.
The Company believes that its current cash balances, and cash generated
from operations will be sufficient to fund operations for the next twelve months
however, this estimate is based on certain assumptions and there can be no
assurance that unanticipated costs will not be incurred. Future events,
including the problems, delays, expenses and difficulties which may be
encountered in establishing and maintaining a substantial market for our
products, could make cash on hand insufficient to fund operations. 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 will be available or
that the Company will be able to complete financing on satisfactory terms, if at
all. Any financing may result in further dilution to existing shareholders.
OUR ABILITY TO RETAIN AND ATTRACT MARKET MAKERS IS IMPORTANT TO THE CONTINUED
TRADING OF OUR SECURITIES.
Our common shares trade on the NASDAQ SmallCap Market under the symbol
"ABMC", and our common stock purchase warrants trade on the NASDAQ SmallCap
Market under the symbol "ABMCW". In the event that the market makers cease to
function as such, public trading in our securities will be adversely affected or
may cease entirely.
IF WE FAIL TO MEET THE CONTINUED LISTING REQUIREMENTS OF THE NASDAQ SMALLCAP
MARKET, OUR SECURITIES COULD BE DELISTED.
Our securities are listed on the NASDAQ SmallCap Market. The NASDAQ Stock
Market's Marketplace Rules impose requirements for companies listed on the
NASDAQ SmallCap Market to maintain their listing status, including minimum
common share bid price of $1.00, and $2,500,000 in shareholders' equity or
$500,000 in net income in the last fiscal year. Although as of the date of this
report our common shares are trading at, or higher than, levels of the minimum
bid requirement, our common shares have traded at levels lower than the minimum
bid requirement within the last twelve months.
Delisting could reduce the ability of investors to purchase or sell our
securities as quickly and as inexpensively as they have done historically and
could subject transactions in our securities to the penny stock rules.
Furthermore, failure to obtain listing on another
15
market or exchange may make it more difficult for traders to sell our
securities. Broker-dealers may be less willing or able to sell or make a market
in our securities because of the penny stock disclosure rules. Not maintaining a
listing on a major stock market may result in a decrease in the trading price of
our securities due to a decrease in liquidity and less interest by institutions
and individuals in investing in our securities. Delisting from the NASDAQ Stock
Market would also make it more difficult for us to raise capital in the future.
ITEM 2. DESCRIPTION OF PROPERTY
In November 2001, we purchased our Kinderhook, New York facility and the
surrounding 107 acres. We obtained a mortgage from Hudson River Bank & Trust
Company ("HRBT") in the amount of $360,000, a loan in the amount of $240,000
from the New York State Business Development Corporation and a loan from the
Columbia Economic Development Corporation in the amount of $120,000. On March
31, 2003 the Company sold approximately 85 acres of land at its Kinderhook
headquarters for $150,000.
On August 20, 2002, we combined a lease for 3,900 square feet of space and
a lease for 5,200 square feet of space into one lease for our New Jersey
facility. The total average monthly cost of the combined spaces is $5,300, which
includes a base rental of $4,317 along with taxes and additional occupant costs.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
Our common shares trade on the National Association of Securities Dealers
Automated Quotation System Small Cap Market (NASDAQ SmallCap) under the symbol
ABMC and our common stock purchase warrants ("warrants") trade on the NASDAQ
SmallCap under the symbol ABMCW. The following table sets forth the high and low
sale prices of our securities as reported by the NASDAQ SmallCap Market for the
periods indicated.
COMMON SHARES
-------------
FISCAL YEAR ENDING DECEMBER 31, 2003 HIGH LOW
------------------------------------ ---- ---
Quarter ending December 31, 2003 $1.66 $1.06
Quarter ending September 30, 2003 $1.40 $1.01
Quarter ending June 30, 2003 $1.29 $0.82
Quarter ending March 31, 2003 $1.28 $0.95
FISCAL YEAR ENDING DECEMBER 31, 2002 HIGH LOW
------------------------------------ ---- ---
Quarter ending December 31, 2002 $1.48 $0.86
Quarter ending September 30, 2002 $1.45 $0.89
Quarter ending June 30, 2002 $1.69 $0.82
Quarter ending March 31, 2002 $1.09 $0.77
16
WARRANTS
--------
FISCAL YEAR ENDING DECEMBER 31, 2003 HIGH LOW
------------------------------------ ---- ---
Quarter ending December 31, 2003 $0.90 $0.39
Quarter ending September 30, 2003 $0.53 $0.50
Quarter ending June 30, 2003 $0.63 $0.60
Quarter ending March 31, 2003 $0.68 $0.63
FISCAL YEAR ENDING DECEMBER 31, 2002 HIGH LOW
------------------------------------ ---- ---
Quarter ending December 31, 2002 $0.74 $0.46
Quarter ending September 30, 2002 $0.94 $0.00
Quarter ending June 30, 2002* $0.00 $0.00
* Our warrants began trading on the NASDAQ SmallCap Market on June 17,
2002; however, there was no trading activity on this security until July 18,
2002.
As of May 4, 2004, there were approximately 4,500 holders of our
securities. As of May 4, 2004 there were outstanding 21,282,268 common shares
and 1,272,000 warrants. The Company has not declared any dividends on our common
shares and does not expect to do so in the foreseeable future.
On May 4, 2004, the last reported sale price for our common shares as
reported on the NASDAQ SmallCap Market was $0.98 per share and the last reported
sale price of our warrants was $0.36per warrant. Average daily trading volume on
our common shares and warrants during the three-month period from February 4,
2004 to May 4, 2004 was approximately 133,010common shares and 14,485 warrants
respectively.
RECENT SALES OF UNREGISTERED SECURITIES
None
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. In order to comply with the terms of the
safe harbor, the Company notes that except for the description of historical
facts contained herein, this Form 10-KSB contains certain forward-looking
statements that involve risks and uncertainties as detailed herein and from time
to time in the Company's filings with the Securities and Exchange Commission and
elsewhere. Such statements are based on Management's current expectations and
are subject to a number of factors and uncertainties which could cause actual
results to differ materially from those described in the forward-looking
statements. These factors include, among others: (a) the Company's fluctuations
in sales and operating results, risks associated with international operations
and regulatory, competitive and contractual risks and product development; (b)
the ability to achieve strategic initiatives, including but not limited to the
ability to achieve sales growth across the business segments through a
combination of enhanced sales force, new products, and customer service; and (c)
acquisitions.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
American Bio Medica Corporation's ("ABMC's") discussion and analysis of
its financial condition and results of operations are based upon ABMC's
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation
of these financial statements requires ABMC to make estimates and judgments that
affect the reported amounts of assets, liabilities,
17
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, ABMC evaluates its estimates, including those
related to customer programs and incentives, product returns, bad debts,
inventories, income taxes, financing operations, warranty obligations, and
contingencies and litigation. ABMC bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
ABMC believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its financial
statements. ABMC records estimated reductions to revenue for customer returns
and allowances based on historical experience. If market conditions were to
decline, ABMC may take actions to increase customer incentive offerings possibly
resulting in an incremental reduction of gross margins. ABMC recognizes revenue
upon shipment to customers. ABMC maintains allowances for doubtful accounts for
estimated losses resulting from the inability of its customers to make required
payments. If the financial condition of ABMC's customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required. ABMC writes down its inventory for estimated
obsolescence or unmarketable inventory equal to the difference between the cost
of inventory and the estimated fair value based upon assumptions about future
demand and market conditions. If actual market conditions are less favorable
than those projected by management, additional inventory write-downs may be
required. ABMC records a valuation allowance to reduce its deferred tax assets
to the amount that is more likely than not to be realized. While ABMC has
considered future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for the valuation allowance, in the event ABMC
were to determine that it would be able to realize its deferred tax assets in
the future in excess of its net recorded amount, an adjustment to the deferred
tax asset would increase income in the period such determination was made.
RESULTS OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2003 AS COMPARED
TO THE TWELVE MONTHS ENDED DECEMBER 31, 2002
Net sales were $12.5 million for the twelve months ended December 31, 2003
as compared to $10.3 million for the twelve months ended December 31, 2002,
representing an increase of $2.2 million or 21%. The Company's stated strategy
of focusing its resources in direct sales efforts continued in 2003. Direct
sales efforts grew steadily representing 59% of revenues in 2003 compared to 54%
in 2002. Continued growth in direct, telemarketing and international sales more
than offset the decline in distributor sales for the year. During the twelve
months ended December 31, 2003, the Company continued its program to market and
distribute its primary product, the Rapid Drug Screen, together with its saliva
test (OralStat) and its Rapid Tec series.
The Company continued its focus on its core business, the sale of the
Rapid Drug Screen and other drugs of abuse test kits, and continued research and
development of diagnostic tests or components using immunoassay technology to
diversify its product line into the areas of veterinary medicine, mycotoxin
detection, tuberculosis and HIV testing.
Cost of goods sold for the twelve months ended December 31, 2003 was $5.5
million or 44% of net sales as compared to $4.5 million or 43% of net sales for
the twelve months ended December 31, 2002. Costs of raw materials, labor and
overhead associated with manufacturing have increased moderately during the
twelve months ended December 31, 2003 but pricing has remained relatively
consistent to allow the Company to be competitive in the marketplace.
While revenues increased 21% in the twelve months ended December 31, 2003,
research and development costs more than doubled to $639,000 compared to
$297,000 in 2002 or a 115% increase, selling and marketing expenses increased
$427,000 or 18%, and general and administrative costs increased $272,000 or 11%.
Total operating expenses were
18
$6.1 million or 49% of net sales for the twelve months ended December 31, 2003
compared to $5.1 million or 49% of net sales for the twelve months ended
December 31, 2002.
Other income was comprised of an insurance settlement received relating to
damage to an HVAC unit at the Kinderhook facility and the reversal of a royalty
accrual resulting from an agreement reached with a manufacturing partner. Both
amounts are non-recurring.
RESEARCH AND DEVELOPMENT
Research and development ("R&D") expenses for the twelve months ended
December 31, 2003 were $639,000 or 5% of net sales compared to $297,000 or 3% of
net sales for the twelve months ended December 31, 2002. The increase in expense
and associated percentage of net sales is due primarily to salaries and wages
and related costs resulting from the addition of a senior director of R&D and an
R&D Technician hired in early 2003 for the purpose of focusing on several new
product developments.
SELLING AND MARKETING
Selling and marketing expense was $2.8 million for 2003 compared to $2.4
million in 2002 representing an increase of $400,000. This is primarily due to
increased commissions resulting from the 21% increase in sales in 2003 as well
as increases in travel and entertainment, marketing and promotion and trade show
expenses.
GENERAL AND ADMINISTRATIVE
General and administrative expense increased $272,000 to $2.7 million in
the twelve months of 2003 compared to the same period in 2002. Driving this
increase in expense were increases in costs for all types of insurance,
accounting fees, outside service fees relating to information technology and
technical support, non-cash compensation stemming from two transactions with a
current employee and a former employee, quality assurance increases due to
additional personnel, and an increase in bad debt expense. Offsetting these
increases were savings in legal fees, consulting fees, and telephone expense.
Management believes that the amount of research and development, selling
and marketing costs and general and administrative costs may increase as the
Company creates the necessary infrastructure to promote the achievement of the
Company's worldwide drug test marketing and sales goals, furthers its
penetration of the direct sales market and leverages new product initiatives.
LIQUIDITY AND CAPITAL RESOURCES AS OF DECEMBER 31, 2003
The Company's cash requirements depend on numerous factors, including
product development activities, penetration of the direct sales market, market
acceptance of its new products, and effective management of inventory levels in
response to sales forecasts. The Company expects to devote capital resources to
continue its product development, expand manufacturing capacity and continue
research and development activities. The Company will examine other growth
opportunities including strategic alliances and expects such activities will be
funded from existing cash and cash equivalents, issuance of additional equity or
additional borrowings, subject to market and other conditions. The Company
believes that its current cash balances, and cash generated from future
operations will be sufficient to fund operations for the next twelve months. If
cash generated from operations is not sufficient to satisfy the Company's
working capital and capital expenditure requirements, the Company may be
required to sell additional equity or obtain additional credit facilities. There
is no assurance that such financing will be available or that the Company will
be able to complete financing on satisfactory terms, if at all.
The Company has working capital of $4.0 million at December 31, 2003, as
compared to $2.6 million at December 31, 2002. The Company has historically
satisfied its net
19
working capital requirements through cash with proceeds from private placements
of equity securities with institutional investors. In 2003, the Company
generated $684,000 from operations compared to net cash used in operations of
$400,000 in 2002. The Company has never paid any dividends on its common shares
and anticipates that all future earnings, if any, will be retained for use in
the Company's business.
At December 31, 2003 and 2002, the Company had cash and cash equivalents
of $942,000 and $231,000, respectively. In addition the Company has a $350,000
revolving line of credit bearing an interest rate of prime plus 1.75% secured by
its accounts receivable. At December 31, 2003, the Company had no outstanding
balance on this line of credit.
The following table lists the future payments required on debt and any
other contractual obligations of the Company:
---------------------------------------------------------------
FUTURE DEBT PAYMENTS
-------------------------------- ------------------------------
<1 year 180,000
-------------------------------- ------------------------------
1-3 years 249,000
-------------------------------- ------------------------------
4-5 years 180,000
-------------------------------- ------------------------------
> 5 years 799,000
-------------------------------- ------------------------------
The Company received proceeds totaling $279,000 from the sale of 225,000
shares of treasury stock during the twelve months ended December 31, 2003. There
are no shares held in treasury stock as of December 31, 2003.
During the year ended December 31, 2003, the Company sold approximately 85
acres of land at its Kinderhook facility for $150,000 to a third party,
recognizing a gain on the sale of $30,000.
The Company's primary expected short-term capital and working capital
needs are: to make improvements to its manufacturing and production
capabilities, maintenance of adequate inventory levels to support expected
sales, continued support of its research and development programs, seeking new
distribution opportunities and focusing sales efforts on high potential sectors
of the drugs of abuse testing market.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities". In December 2003, the FASB issued
a revision to FIN 46 to clarify some of the provisions of FIN 46, and to exempt
certain entities from its requirements. FIN 46 gives guidance that determines
whether consolidation of a Variable Interest Equity is required. FIN 46 is
effective now for certain Special Purpose Entity relationships and for all other
entity relationships after March 15, 2004. The Company does not expect the
adoption of FIN 46 to have a material effect on its financial statements.
ITEM 7. FINANCIAL STATEMENTS
The Company's Financial Statements are set forth beginning on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
20
ITEM 8A. CONTROLS AND PROCEDURES
On February 27, 2004, American Bio Medica Corporation carried out an
evaluation, under the supervision and with the participation of the Chief
Financial Officer and the President, to evaluate the effectiveness of the
disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934, as amended ("Exchange Act")). Based on that
evaluation, the Chief Financial Officer and the President have concluded that
American Bio Medica Corporation's disclosure controls and procedures as of
December 31, 2003, are effective for recording, processing, summarizing, and
reporting information that is required to be disclosed in their reports under
the Exchange Act, as amended, within the time periods specified in the
Securities and Exchange Commission's ("SEC") rules and forms.
There were no changes in American Bio Medica Corporation's internal
controls over financial reporting during the fourth quarter that have materially
affected, or are reasonably likely to materially affect, American Bio Medica
Corporation's internal control over financial reporting. However, due to the
small size of the accounting department there is an absence of appropriate
segregation of duties at December 31, 2003. During the first quarter of 2004,
the Company hired a controller.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table sets forth the names, ages, positions/offices held,
the term of the positions/offices held of our directors, executive officers, and
senior management.
NAME AGE POSITION/OFFICE SERVED SINCE
---- --- --------------- ------------
Stan Cipkowski(1) 55 Director 1986
Edmund Jaskiewicz(1),(2) 80 President/Director 1992
Martin R. Gould(3) 52 CSO, Exec Vice Pres., Technology 1998
Donal V. Carroll 56 Director 2003
Keith E. Palmer 43 CFO, Exec. Vice Pres. Finance, Treasurer 2000
Richard P. Koskey(1) 64 Director 2003
Daniel W. Kollin(1)(4) 62 Director 2004
Anthony Costantino(1)(5) 44 Director Nominated
Todd Bailey(6) 33 Vice President, Sales & Marketing 2001
Dr. Henry J. Wells, Ph.D. 73 Vice President, Product Development 1998
(1) Nominee for election to the Board of Directors.
(2) Mr. Jaskiewicz was appointed President on September 5, 2003.
(3) Mr. Gould was appointed Executive Vice President on October 23,
2003.
(4) Mr. Kollin previously served on the Board of Directors from February
2003 until September 2003 and was reappointed in January 2004.
(5) Dr. Costantino previously served on the Company's Science Advisory
Board from April 1998 until November 2003.
(6) Mr. Bailey was appointed Vice President, Sales & Marketing on
September 29, 2003.
STAN CIPKOWSKI founded our predecessor in 1982. He has been a member of
our Board of Directors since our incorporation in April 1986 and was one of our
executive officers until July 2003, and is currently an employee of the Company.
He reorganized the Company as American Bio Medica Corporation in 1992 and is the
inventor of the Rapid Drug Screen(R). From 1982 to 1986, he was sole proprietor
of American Micro Media, our 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
21
of educational software and was a principal shareholder and Chief Financial
Officer of Southeast Communications Group, Inc., a publisher of direct response
media. In 1982, he was a consultant to Dialogue Systems, Inc., a New York-based
developer of training and communications materials, where he served as
Vice-President of Sales and Marketing. From 1977 to 1982, Mr. Cipkowski 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.
Mr. Cipkowski attended Mater Christi Seminary and St. Louis University from 1965
to 1969. Mr. Cipkowski is currently a member of the Board of Directors of
Premier Mortgage Resources, Inc. (OTCPK: PMRS.PK)
EDMUND JASKIEWICZ has been one of our directors since 1992 and was
appointed President in September 2003. Mr. Jaskiewicz is a lawyer-engineer. He
has practiced international patent and corporate law as a sole practitioner
since 1963, and served as our Chairman of the Board of Directors from 1992 until
1999. From 1953 to 1963, Mr. Jaskiewicz was associated with Toulmin and Toulmin,
Attorneys-at-Law, Washington, D.C. From 1960 to 1962, he resided in Frankfurt,
Germany managing that firm's local office. From 1952 to 1953 he was with the
Patent Section of the Bureau of Ordinance of the Department of the Navy working
on patent infringement and licensing matters. He received his J.D. in 1952 from
George Washington University Law School and his B.S. in Engineering from the
University of Connecticut in 1947.
MARTIN GOULD joined us in 1998. He was appointed our Executive Vice
President, Technology in 2003 and currently also services as our Chief Science
Officer (he was promoted to Chief Scientific Officer in 2002). Prior to becoming
our CSO, he was our Vice President of Technology. Mr. Gould is a biomedical
scientist with more than 30 years of experience in the diagnostic and chemical
fields. He has an extensive background in research and development,
manufacturing, quality control/assurance, as well as business development and
sales and marketing. His experience is in the areas of clinical chemistry,
serology, immunology, hematology, dyes and stains, chromatography, reagent
chemical and food diagnostics, specifically rapid microbiological testing. From
1973 to 1987, Mr. Gould worked for E. Merck, Inc. in various positions of
increasing responsibilities within the product management, research and
development, and quality assurance/control departments. In 1987, he founded
Ampcor Diagnostics, Inc., which he grew until 1994 when it was acquired by
Neogen Corp. (NASDAQ:NEOG). Mr. Gould continued to serve as Vice President and
General Manager of Neogen Corp. until 1997. Mr. Gould was an independent
consultant after leaving Neogen Corp. in 1997 until joining us in 1998. Mr.
Gould is an accomplished researcher with numerous publications in a variety of
fields, including rapid immunoassay tests to detect food pathogens such as
e-coli, salmonella, listeria, shigella, and campylobacter. Mr. Gould established
a patent in composition for stabilization of diagnostics reagents, three
separate patents for immunoassay diagnostics kits, as well as a patent
concerning a growth media that resuscitates injured bacteria, such as
salmonella, that was recently issued. Mr. Gould received a Masters in Biomedical
Science and Biomedical Engineering from Drexel University in 1982, and a BS
degree from Delaware Valley College in 1973.
DONAL V. CARROLL was appointed to our Board of Directors in June 2003 will
serve as a member of the Board until June 2004. He was appointed CEO in October
2003 and subsequently removed from the office in January 2004. Mr. Carroll has
founded and developed several finance and wholesale merchandising companies
during the past 30 years. Mr. Carroll graduated from University College of
Dublin with a degree in law.
KEITH E. PALMER joined us in October 2000 as our Vice President, Finance,
Chief Financial Officer and Treasurer and will serve as a member of our Board of
Directors from October 2003 until June 2004. He is a Certified Public Accountant
with over 20 years experience in accounting, finance, strategic planning, and
merger and acquisitions. From 1998 until joining us, Mr. Palmer was Director of
Finance and Controller of Matthew Bender, a division of Lexis Publishing, a
legal publisher. At Matthew Bender he was responsible for management of
financial reporting and analysis, accounting and control,
22
strategic planning and numerous Finance and Operational integration efforts.
From 1993 until 1998, he was the Director of Finance & Controller for Matthew
Bender & Company, Inc., a wholly owned subsidiary of the Times Mirror Corp.
During that time he spearheaded the acquisition and/or integration, and assumed
responsibility for financial reporting and analysis, of four businesses,
including Shepard's, a legal citations publisher in Colorado Springs, Co.,
Capsoft, an electronic legal forms software firm in Provo, Utah, Mosby Medical
Publishing in St. Louis, Missouri, and Michie, a legal publisher in
Charlottesville, VA. In addition to integrating financial and operational
functions, Mr. Palmer assisted on the integration and implementations of several
financial, manufacturing and fulfillment systems, during this time. Prior to
joining Matthew Bender, he was a Vice President of Marine Midland Bank, a
commercial bank, and from 1983 until 1987, he was an auditor and senior
consultant at the public accounting firm of Ernst & Whinney. Palmer received his
MBA in Finance from Sage Colleges in 1995 and his BBA in Accounting from Siena
College in 1983.
RICHARD P. KOSKEY was appointed to our Board of Directors in October 2003.
Mr. Koskey brings over 30 years of financial experience as a Certified Public
Accountant. Since, 1975, he has been a managing principal of Pattison, Koskey,
Howe & Bucci, P.C., a regional accounting firm. Mr. Koskey received his B.A.
from Duke University in 1963. He also serves on the Board of Directors of Hudson
River Bank & Trust (NASDAQ:HRBT).
DANIEL W. KOLLIN was re-appointed to our Board of Directors in January
2004. He previously served on our Board of Directors from February 2003 until he
resigned in September 2003. Since 1990, Mr. Kollin has been Managing Director of
BioMed Capital Group, Ltd. He has over 20 years experience in investment
banking, venture capital and corporate management. Prior to joining BioMed
Capital Group, Mr. Kollin was Vice President, Health Care Group for
Prudential-Bache Capital Funding from 1987 to 1990. Prior to 1987, Mr. Kollin
was a partner of Whale Securities Corp. He received his MBA from The Wharton
School of The University of Pennsylvania. He currently serves on the Board of
Directors of IsoTis Orthobiologics (TORONTO:ISO).
ANTHONY G. COSTANTINO, PH.D. Dr. Costantino is a nominee for our Board if
Directors. Since September 2002, he has served as Vice President, Laboratory
Operations for National Medical Services, Inc. From September 1991 until August
2002, he held various positions within American Medical Laboratories, Inc., with
the most recent being Sr. Vice President and Director until August 2002. Dr.
Costantino received his Ph.D., in Forensic Toxicology from the University of
Maryland, School of Medicine in 1991, his M.S. in Pharmacology/Toxicology, from
Duquesne University in 1984 and his B.S. in Pharmacy from Duquesne University in
1983. Dr. Costantino sits on the Board of Directors of the Society of Forensic
Toxicology. He has authored and co-authored a number of publications, abstracts
and presentations in the clinical chemistry and toxicology fields since 1986
through the present.
TODD BAILEY joined us in April 2001 as a Director of Business Development
and subsequently promoted to Director of National Accounts. In September 2003,
he was appointed Vice President of Sales & Marketing. Prior to joining us, Mr.
Bailey was Substance Abuse Account Manager for Roche Diagnostics Corporation
where he was responsible for territory sales of point-of-collection tests for
drugs of abuse to Fortune 500 manufacturers and state agencies. From March 1994
through July 1999, he held various sales and management positions with Paxar,
Hunt-Wesson, and Frito-Lay Inc. Mr. Bailey received a B.S. in communications
from St. Cloud University in 1994.
HENRY J. WELLS, PH.D. joined us as a contract chemist in 1995. In 1998 he
became a full-time employee as our Vice President of Product Development. From
1990 to 1998, Dr. Wells worked as a contract chemist with the title of Vice
President Science and Technology for New Horizons Diagnostics, Inc. where he
adapted 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
23
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 in 1966, his M.A. from University
of Pennsylvania in 1972 (honorary) and his B.S. in Chemistry from the University
of Pittsburgh in 1958.
AUDIT COMMITTEE/AUDIT COMMITTEE FINANCIAL EXPERT
The Company has a separately designated standing Audit Committee
established in accordance with Section 3(a)(58)(a) of the Exchange Act. The
Company's Audit Committee is presently comprised of Richard P. Koskey and Daniel
W. Kollin, both of whom are independent as defined in the applicable rules of
the Nasdaq Small Cap Market. The Board has determined that Mr. Koskey is a
financial expert as the term is defined under Item 401(e)(1) of Regulation S-B.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the 1934 Act requires the Company's executive officers
and directors, and persons who own more than ten percent of a registered class
of the Company's equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission ("SEC"). Executive
officers, directors and greater than ten percent shareholders are required by
SEC regulations to furnish the Company with copies of all Section 16(a) forms
they file.
Based solely on a review of the copies of such forms furnished to the
Company as of the date of this report, in January 2004 Donal V. Carroll, the
Company's former CEO and a current Director, failed to file a Form 4, containing
one transaction, with the SEC on a timely basis. Based solely upon the copies of
such forms furnished to the Company, as of the date of this report, Mr. Carroll
has still failed to file this report.
Based upon this same review of copies of such forms furnished to the
Company, as of the date of this report, all other executive officers, directors
and greater than ten percent beneficial holders have complied with all Section
16(a) requirements.
CODE OF ETHICS
The Company has adopted a code of ethics that applies to all employees,
including but not limited to the principal executive officer, principal
financial officer, principal financial officer or controller, or person
performing similar functions. A copy of the company's Code of Ethics can be
found on its website located at WWW.ABMC.COM, under the section title
"Corporate", "Governance".
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth for fiscal years ended December 31, 2003
and December 31, 2002, the compensation paid by the Company to its Chief
Executive Officer(s) and any other executive officers who earned in excess of
$100,000 (the "Named Officers") based on salary and bonus.
24
SUMMARY COMPENSATION TABLE
--------------------------
Long Term Compensation
Annual Compensation Awards
Other Annual Securities Underlying
Name and Principal Position Year Salary ($) Bonus ($) Compensation ($) Options/SARs (#)
------------------------------------------------------------------------------------------------------------------------------------
Keith E. Palmer 12/31/03 $135,000(1) $10,000 $ 0 50,000
Chief Financial Officer 12/31/02 $124,615(2) $ 0 $ 3,750(3) --------
Executive Vice President Finance
------------------------------------------------------------------------------------------------------------------------------------
Douglas Casterlin(4) 12/31/03 $145,384(5) $10,000 $ 0 -------
Executive Vice-President Operations 12/31/02 $140,000 $ 0 $ 5,250(3) -------
------------------------------------------------------------------------------------------------------------------------------------
Martin R. Gould(6) 12/31/03 $109,154(7) $ 0 $ 0 150,000
Chief Science Officer
Executive Vice President Technology
------------------------------------------------------------------------------------------------------------------------------------
Stan Cipkowski(8) 12/31/03 $186,923(9) $ 0 $ 0 -------
Executive Vice President 12/31/02 $190,764 $ 0 $ 45,000(10) 300,000
------------------------------------------------------------------------------------------------------------------------------------
Donal V. Carroll(11) 12/31/03 $ 32,000(12) $ 0 $ 3,000(13) 329,000
Chief Executive Officer
------------------------------------------------------------------------------------------------------------------------------------
Gerald A. Moore(14) 12/31/03 $170,000(15) $10,000 $ 7,500(3) 75,000(16)
Chief Executive Officer 12/31/02 $165,000(17) $ 0 $ 18,000(18) 810,000(16)
------------------------------------------------------------------------------------------------------------------------------------
Robert L. Aromando(19) 12/31/02 $ 17,294(20) $ 0 -------- -------
Chief Executive Officer
------------------------------------------------------------------------------------------------------------------------------------
(1) Mr. Palmer's actual annual salary in 2003 was $130,000. The additional
amount in this figure is due to timing of pay periods within the year.
(2) In July 2002, Mr. Palmer's annual salary was increased to $130,000 from
$120,000.
(3) Car allowance.
(4) Mr. Casterlin subsequently resigned as the Company's Executive Vice
President in January 2004.
(5) Mr. Casterlin's actual annual salary in 2003 was $140,000. The additional
amount in this figure is due to timing of pay periods within the year.
(6) Mr. Gould was appointed Executive Vice President in October 2003.
(7) Mr. Gould's actual annual salary through August 2003 was $102,000. It was
increased in September 2003 to $114,000.
(8) Mr. Cipkowski resigned from his position of Executive Vice President in
July 2003.
(9) Mr. Cipkowski's actual annual salary is $180,000. The additional amount in
this figure is due to timing of pay periods within the year.
(10) Includes a car allowance of $3,000 and the forgiveness of accrued interest
on a loan provided to Mr. Cipkowski by the Company, of $42,000 (See
"Certain Relationships and Related Transactions").
(11) Mr. Carroll was appointed CEO in October 2003 and subsequently removed
from the position of CEO in January 2004.
(12) The Company has not yet paid this amount to Mr. Carroll however it has
been accrued on the books of the Company.
(13) This amount is for Mr. Carroll's attendance at meetings of the Board of
Directors as an independent board member, before he was appointed CEO.
(14) Mr. Moore resigned as the Company's Chairman, President and CEO in
September 2003 and was paid for his services through August 2003.
25
(15) Mr. Moore's actual annual salary in 2003 was $180,000. Mr. Moore was paid
through August 2003. This amount also includes $50,000 that was paid to
Mr. Moore in 2003 for a portion of his 2002 salary that was deferred.
(16) These option grants were subsequently cancelled by the company in
September 2003.
(17) Mr. Moore's actual annual salary was $180,000 in 2002. $50,000 of Mr.
Moore's salary in 2002 was deferred upon mutual agreement with the
Company. (see footnote 15), therefore actual salary payments to Mr. Moore
in 2002 were $115,000.
(18) Other compensation consists of $15,000 Mr. Moore received as compensation
for his services as interim President & CEO for the month of January 2002
and $3,000 in a car allowance.
(19) Mr. Aromando resigned as the Company's President & CEO in January 2002.
(20) Mr. Aromando was paid as the Company's President & CEO through January
2003 in connection with his severance agreement.
OPTION GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 2003
The following table sets forth information concerning the grant of stock options
to the named executive officers during the fiscal year ended December 31, 2003.
INDIVIDUAL GRANTS
POTENTIAL REALIZABLE
VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF
OPTIONS STOCK PRICE
NUMBER OF SHARES GRANTED TO EXERCISE APPRECIATION
UNDERLYING OPTIONS EMPLOYEES PRICE PER EXPIRATION FOR OPTION TERM(1)
NAME GRANTED IN YEAR(2) SHARE DATE 5% 10%
---------------------------------------------------------------------------------------------------------------------------
Gerald A. Moore(3) 75,000(4) 7.0% $ 1.04 4/23/13(5) $ 48,750 $ 124,500
Stan Cipkowski(6) 0 0% -- -- -- --
Douglas Casterlin(7) 0 0% -- -- -- --
Keith E. Palmer 50,000(8) 4.6% $ 1.04 4/23/13 $ 32,500 $ 83,000
Donal V. Carroll(9) 29,000(10) 2.7% $ 1.03 6/30/13 $ 18,850 $ 47,560
300,000(11) 27.8% $ 1.15 10/23/13 $ 216,000 $ 549,000
Martin R. Gould(12) 100,000) 9.3% $ 1.02 4/22/13 $ 64,000 $ 163,000
50,000[13] 4.6% $ 1.04 4/23/13 $ 32,500 $ 83,000
(1) Potential realizable value is based on an assumption that the price of the
common shares appreciates at the annual rate shown (compounded annually)
from the date of grant until the end of the option term. These numbers are
calculated based on the requirements of the Securities and Exchange
Commission and do not reflect the Company's estimate of future stock price
performance.
(2) The Company granted options representing 1,078,500 common shares to
employees in the year end December 31, 2003.
(3) Mr. Moore resigned as the Company's Chairman, President & CEO on September
5, 2003.
(4) Option grants vested over 4 years (i.e. 25% each year on the anniversary
of the grant date of 4/24/03).
(5) Option grant was subsequently cancelled by the Company on 9/11/03.
26
(6) Mr. Cipkowski resigned as Executive Vice President on July 1, 2003.
(7) Mr. Casterlin resigned as Executive Vice President on January 30, 2004.
(8) Option grant vests over 4 years (i.e. 25% each anniversary of 4/23/03).
(9) Mr. Carroll was removed from the office of CEO on January 21, 2004.
(10) Option granted in connection with Mr. Carroll's services as a member of
the Board of Directors. Option grant vests 100% on the 1 year anniversary
of June 30, 2003.
(11) Entire option grant was subsequently cancelled by the Company upon Mr.
Carroll's removal as CEO.
(12) Mr. Gould was appointed Executive Vice President, Technology on 10/23/03.
(13) Option grant vests over 4 years (i.e. 25% each anniversary of 4/23/03).
AGGREGATED OPTION EXERCISE IN THE FISCAL YEAR ENDED DECEMBER 31, 2003 AND FISCAL
YEAR-END OPTION VALUES
The following table sets forth information concerning the exercise of stock
options during the fiscal year ended December 31, 2003 by the named executive
officers, and their options outstanding at fiscal year end.
AGGREGATE OPTION/SAR EXERCISES IN FISCAL YEAR AND TP-END OPTION/SAR VALUES
Shares Acquired on Value Realized Number of Securities Underlying
Name Exercise (#) ($) Unexercised Options/SARs at FY-End (#)
Exercisable Unexercisable
------------------------------------------------------------------------------------------------------------
Gerald A. Moore(2) 0 $ 0 -----------(3) -----------(3)
Stan Cipkowski(4) 0 $ 0 587,500 251,000
Douglas Casterlin(4) 0 $ 0 275,000 25,000
Keith E. Palmer 0 $ 0 50,000 100,000
Donal V. Carroll(6) 0 $0 0 329,000(7)
Martin R. Gould(9) 0 $0 145,000 215,000
AGGREGATE OPTION/SAR EXERCISES IN FISCAL YEAR AND TP-END OPTION/SAR VALUES
Value of Unexercised In-the Money
Name Options/SARs at FY-End ($)(1)
Exercisable Unexercisable
-------------------------------------------------------------------
Gerald A. Moore(2) --------- ---------
Stan Cipkowski(4) $ 77,850 $ 127,150
Douglas Casterlin(4) $ 15,000 $ 15,000
Keith E. Palmer $ 30,000 $ 55,000
Donal V. Carroll(6) $ 0 $ 131,790(8)
Martin R. Gould(9) $ 14,350 $ 113,250
(1) Value of Unexercised In-The-Money Options at Fiscal Year End is
calculated by using the high sale price of the common shares on December
31, 2003, which was $1.54, less the exercise price of the in-the-money
exercisable options which is then multiplied by the number of common
shares covered under the option(s).
(2) Mr. Moore resigned as Chairman, President & CEO on September 5, 2003.
(3) Any and all options previously granted to Mr. Moore in both his role
as a Director and Chairman, President & CEO were cancelled by the Company.
(i.e. 615,000 were cancelled on 9/11/03 and 473,000 were cancelled on
12/3/03).
(4) Mr. Cipkowski resigned as Executive Vice President on July 1, 2003.
(5) Mr. Casterlin resigned as Executive Vice President on January 30, 2004
(6) Mr. Carroll was removed from the office of CEO on January 21, 2004.
(7) Of this amount, 300,000 were subsequently cancelled by the Company on
January 30, 2004 as a
result o of Mr. Carroll's removal as CEO.
(8) Of this amount, $117,000 is related to the 300,000 options that were
cancelled by the Company on January 30, 2004 as a result of Mr. Carroll's
removal as CEO.
(9) Mr. Gould was appointed Executive Vice President, Technology on
October 23, 2003.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
As of May 3, 2004, there were 21,282,268 common shares outstanding of
which 21,282,268 common shares are entitled to vote at the Annual Meeting. Each
Common Share is entitled to one vote on each of the matters to be voted on at
the Annual Meeting. The
27
following table sets forth, as of May 3, 2004, the beneficial ownership of the
Company's common shares by (i) each director, (ii) each nominee for director,
(iii) each of the executive officers named in the Summary Compensation Table;
(iv) all directors and executive officers of the Company as a group; and (v)
each shareholder, known to management of the Company, to beneficially own more
than five percent (5%) of the outstanding common shares.
The number and percentage of shares beneficially owned is determined under
the rules of the U.S. Securities and Exchange Commission, and the information is
not necessarily indicative of beneficial ownership for any other purpose. Under
such rules, beneficial ownership includes any shares as to which the individual
has sole or shared voting power or investment power and also any shares which
the individual has the right to acquire within 60 days after May 3, 2004,
through the exercise of any stock option, exchange of Exchangeable Shares or
other right. Unless otherwise indicated, each person has sole voting and
investment power (or shares such powers with his or her spouse) with respect to
the shares shown as beneficially owned.
NAME AND ADDRESS NUMBER OF SECURITIES
TITLE OF CLASS OF BENEFICIAL OWNER BENEFICIALLY OWNED* PERCENT OF CLASS
---------------------------------------------------------------------------------------------------------------------
Common Edmund Jaskiewicz
1730 M Street, NW, Suite 400
Washington, DC 20036 2,068,155(1) 9.7 %
---------------------------------------------------------------------------------------------------------------------
Common Stan Cipkowski
122 Smith Road
Kinderhook, NY 12106 2,105,500(2) 9.6 %
---------------------------------------------------------------------------------------------------------------------
Common Douglas Casterlin
122 Smith Road
Kinderhook, NY 12106 402,000(3) 1.9%
---------------------------------------------------------------------------------------------------------------------
Common Martin R. Gould
122 Smith Road
Kinderhook, NY 12106 287,500(4) 1.3%
---------------------------------------------------------------------------------------------------------------------
Common Donal V. Carroll
1 Palace Pier Court, Suite 303
Toronto, Ontario
Canada M8V 3W9 172,265(5) **
---------------------------------------------------------------------------------------------------------------------
Common Keith E. Palmer
122 Smith Road
Kinderhook, NY 12106 125,000(6) **
---------------------------------------------------------------------------------------------------------------------
Common Richard P. Koskey
502 Union Street
Hudson, NY 12534 10,000 **
---------------------------------------------------------------------------------------------------------------------
Common Daniel W. Kollin
C/O 122 Smith Road
Kinderhook, NY 12106 19,750(7) **
---------------------------------------------------------------------------------------------------------------------
Common Anthony G Costantino
C/O 122 Smith Road
Kinderhook, New York 12106 6,000(8) **
---------------------------------------------------------------------------------------------------------------------
Common Directors and Executive Officers
as a group (11 persons) 5,196,170(9) 22.8%
---------------------------------------------------------------------------------------------------------------------
------------------
* The number of shares noted for each individual is based upon information
obtained from their Section 16(a) filings with the United States
Securities and Exchange Commission.
** Less than one percent (1%).
(1) Includes 151,500 common shares subject to stock options exercisable within
60 days of May 3, 2004.
(2) Includes 612,500 common shares subject to stock options exercisable within
60 days of May 3, 2004.
(3) Includes 287,500 common shares subject to stock options exercisable within
60 days of May 3, 2004.
(4) Includes 282,500 common shares subject to stock options exercisable within
60 days of May 3, 2004.
(5) Includes 29,000 common shares subject to stock options exercisable within
60 days of May 3, 2004.
(6) Includes 87,500 common shares subject to stock options exercisable within
60 days of May 3, 2004 and 12,500 common shares subject to warrants
exercisable within 60 days of May 3, 2004.
(7) Includes 19,750 common shares subject to stock options exercisable within
60 days of May 3, 2004.
28
(8) Includes 6,000 common shares subject to stock options exercisable within
60 days of May 3, 2004.
(9) Includes an aggregate of 1,488,750 common shares subject to stock options
or warrants exercisable within 60 days of May 3, 2004.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the fiscal year ended December 31, 2003, the Company paid an
aggregate of $63,000 in fees to Edmund Jaskiewicz, the Company's President and a
member of the Board of Directors, in consideration of his services as patent and
trademark counsel to the Company.
During fiscal 1999, 2000 and the first quarter of fiscal 2001, the Company
advanced funds to Stan Cipkowski, the Company's former President and one of its
directors. Mr. Cipkowski was the Company's Chairman of the Board and Chief
Executive Officer until January 2001 and an Executive Vice President of the
Company until July 2003. These advances were partially evidenced by a note and
beared interest at the rate of 11.5% per annum. The loan was payable on demand.
Each quarter, interest accrued on the loan was added to the outstanding
principal balance of the loan. Mr. Cipkowski pledged 1,000,000 of the Company's
common shares to the Company as collateral. On November 30, 2000, the Company's
Board of Directors and Mr. Cipkowski agreed to a structured repayment of this
loan through the regular periodic redemption by the Company of common shares
owned by Mr. Cipkowski. Under the program, Mr. Cipkowski redeemed at least
25,000 common shares, after the release of financial results each quarter, with
the value determined by the closing price of the common shares on the second
business day following the release of the quarterly or annual financial results.
Mr. Cipkowski also retained the right to redeem a greater number of common
shares each quarter. In October 2002, the Board of Directors agreed to accept
200,000 shares of stock from Mr. Cipkowski in full satisfaction of the then
outstanding loan balance of $248,000. The closing stock price on the date of
surrender was $1.03 resulting in the forgiveness of accrued interest totaling
$42,000, including $30,000 in 2002 and $12,000 from prior periods. During the
fiscal 2002 the Company sold 175,000 treasury shares for $235,000. The remaining
225,000 shares surrendered were sold in fiscal 2003 for $280,000. The Company
does not intend to make any additional loans to Mr. Cipkowski.
During the fiscal year ended December 31, 2003, the Company entered into
an agreement with Altius Marketing related to marketing services. The Chief
Financial Officer of Altius Marketing is the son of the Company's former Chief
Executive Officer, Donal V. Carroll. The Company paid an aggregate of $13, 300
in the fiscal year ended December 31, 2003.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index beginning on page E-1, incorporated herein by
reference.
(b) Reports on Form 8-K
None.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
The aggregate fees billed by PricewaterhouseCoopers LLP to the Company in
the fiscal years ended December 31, 2003 and December 31, 2002, for professional
services rendered for the audit of the Company's annual financial statements and
review of financial statements included in the Company's Form 10-QSB, or
services that were normally
29
provided by PricewaterhouseCoopers LLP in connection with statutory and
regulatory filings or engagements for these fiscal years, were $94,150and
$106,550, respectively.
AUDIT RELATED FEES
There were no Audit Related Fees billed by PricewaterhouseCoopers LLP to the
Company in the fiscal years ended December 31, 2003 and December 31, 2002.
TAX FEES
The aggregate fees billed by PricewaterhouseCoopers LLP to the Company in
the fiscal years ended December 31, 2003 and December 31, 2002 for professional
services related to tax compliance, tax advice, and tax planning were $19,011
and $11,705, respectively. These fees were for services related to the
preparation and filing of the Company's tax returns.
ALL OTHER FEES
There were no Other Fees billed by PricewaterhouseCoopers LLP in the
fiscal years ended December 31, 2003 and December 31, 2002.
30
AMERICAN BIO MEDICA CORPORATION
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
AMERICAN BIO MEDICA CORPORATION
By /s/ Keith E. Palmer
----------------------------------
Keith E. Palmer
Chief Financial Officer
(Principal Accounting Officer)
Executive Vice President, Finance
DATE: May 10, 2004
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities
indicated on May 10 2004:
/S/ EDMUND JASKIEWICZ President & Director
------------------------------------ [Principal Executive Officer]
Edmund Jaskiewicz
/S/ STAN CIPKOWSKI Director
------------------------------------
Stan Cipkowski
/S/RICHARD P. KOSKEY Director
------------------------------------
Richard P. Koskey
/S/ DANIEL W. KOLLIN Director
------------------------------------
Daniel W. Kollin
/S/ KEITH E. PALMER Chief Financial Officer & Director
------------------------------------ (Principal Financial Officer)
Keith E. Palmer Executive Vice President, Finance
S-1
AMERICAN BIO MEDICA CORPORATION
INDEX
PAGE
----
FINANCIAL STATEMENTS
Report of Independent Auditors F-2
Balance sheets F-3
Statements of operations F-4
Statements of changes in stockholders' equity F-5
Statements of cash flows F-6
Notes to financial statements F-7
F-1
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors of
American Bio Medica Corporation:
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of American Bio
Medica Corporation at December 31, 2003 and 2002, and the results of its
operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditiing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test bases, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Albany, New York
May 7, 2004
F-2
AMERICAN BIO MEDICA CORPORATION
BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
2003 2002
------------ ------------
ASSETS
Current assets
Cash and cash equivalents $ 942,000 $ 231,000
Accounts receivable - net of allowance for doubtful accounts
of $105,000 at December 31, 2003 and $70,000 at 2002 1,253,000 1,075,000
Other receivables 8,000 30,000
Inventory 3,049,000 2,795,000
Prepaid expenses 78,000 53,000
------------ ------------
Total current assets 5,330,000 4,184,000
Property, plant and equipment, net 1,441,000 1,457,000
Other assets 7,000 7,000
------------ ------------
Total Assets $ 6,778,000 $ 5,648,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 737,000 $ 908,000
Accrued expenses 153,000 300,000
Wages payable 375,000 213,000
Current portion of capital lease obligations 10,000
Current portion of long term debt 25,000 174,000
Current portion of unearned grant 8,000
------------ ------------
Total current liabilities 1,298,000 1,605,000
Long-term debt 651,000 673,000
Unearned grant 67,000 50,000
------------ ------------
Total liabilities 2,016,000 2,328,000
Commitments and contingencies
Stockholders' equity:
Preferred stock; par value $.01 per share; 5,000,000 shares
authorized, none issued and outstanding
Common stock; par value $.01 per share; 50,000,000 shares
authorized; 20,664,151 shares issued and outstanding at
December 31, 2003 and
20,609,548 issued at December 31, 2002 207,000 206,000
Treasury stock, at cost, no shares at December 31, 2003 and
225,000 shares at December 31, 2002 (239,000)
Additional paid-in capital 17,959,000 17,788,000
Accumulated deficit (13,404,000) (14,435,000)
------------ ------------
Total stockholders' equity 4,762,000 3,320,000
------------ ------------
Total liabilities and stockholders' equity $ 6,778,000 $ 5,648,000
============ ============
The accompanying notes are an integral part of the financial statements
F-3
AMERICAN BIO MEDICA CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, DECEMBER 31,
2003 2002
------------------ ------------------
Net sales $ 12,484,000 $ 10,312,000
Cost of goods sold 5,477,000
4,476,000
------------ ------------
Gross profit 7,007,000 5,836,000
------------ ------------
Operating expenses (income):
Research and development 639,000 297,000
Selling and marketing 2,784,000 2,357,000
General and administrative 2,705,000 2,433,000
------------ ------------
Operating income 879,000 749,000
------------ ------------
Other income (expense):
Other income/(expense) 198,000 (6,000)
Interest income 32,000 34,000
Interest expense (78,000) (58,000)
------------ ------------
NET INCOME $ 1,031,000 $ 719,000
============ ============
BASIC AND DILUTED INCOME PER COMMON SHARE $ .05 $ .03
============ ============
Weighted average number of shares outstanding - basic 20,624,000 20,610,000
Dilutive effect of stock options and warrants 644,000 716,000
------------ ------------
Weighted average number of shares
outstanding -diluted 21,268,000 21,326,000
============ ============
The accompanying notes are an integral part of the financial statements
F-4
AMERICAN BIO MEDICA CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL
------------------------------ TREASURY PAID IN
SHARES AMOUNT STOCK CAPITAL
------------ ------------ ------------ ------------
BALANCE-DECEMBER 31, 2001 20,609,548 $ 206,000 $ (23,000) $ 17,766,000
Shares received as payment on loan (425,000)
Forgiveness of debt
Treasury shares sold 209,000 26,000
Write off receivable (5,000)
Net Income
------------ ------------ ------------ ------------
BALANCE-DECEMBER 31, 2002 20,609,548 $ 206,000 $ (239,000) $ 17,788,000
Stock Option / Warrant Exercise 54,603 1,000 61,000
Treasury shares sold 239,000 40,000
Non-cash compensation 70,000
Net Income
------------ ------------ ------------ ------------
BALANCE-DECEMBER 31, 2003 20,664,151 $ 207,000 $ 0 $ 17,959,000
============ ============ ============ ============
DUE FROM
SUBSCRIPTION OFFICER/DIRECTOR ACCUMULATED
RECEIVABLE SHAREHOLDER DEFICIT TOTAL
------------ ------------ ------------ ------------
BALANCE-DECEMBER 31, 2001 $ (5,000) $ (437,000) $(15,154,000) $ 2,353,000
Shares received as payment on loan 425,000
Forgiveness of debt 12,000 12,000
Treasury shares sold 235,000
Write off receivable 5,000 0
Net Income 719,000 719,000
------------ ------------ ------------ ------------
BALANCE-DECEMBER 31, 2002 $ 0 $ 0 $(14,435,000) $ 3,320,000
Stock Option / Warrant Exercise 62,000
Treasury shares sold 279,000
Non-cash compensation 70,000
Net Income 1,031,000 1,031,000
------------ ------------ ------------ ------------
BALANCE-DECEMBER 31, 2003 $ 0 $ 0 $(13,404,000) $ 4,762,000
============ ============ ============ ============
The accompanying notes are an integral part of the financial statements
F-5
AMERICAN BIO MEDICA CORPORATION
STATEMENTS OF CASH FLOWS
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,031,000 $ 719,000
Adjustments to reconcile net income:
Depreciation 168,000 154,000
Provision for bad debts 35,000
Compensatory stock and stock options 106,000
Gain on sale of land (30,000)
Forgiveness of shareholder debt 12,000
Changes in:
Accounts receivable (213,000) (193,000)
Other receivables 22,000 141,000
Inventory (254,000) (708,000)
Prepaid expenses (25,000) 37,000
Accounts payable (171,000) (156,000)
Accrued expenses (147,000) (262,000)
Customer advance deposits (243,000)
Wages payable 162,000 99,000
----------- -----------
Net cash provided by (used in) operating activities 684,000 (400,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted cash 106,000
Purchase of property, plant and equipment (272,000) (156,000)
Proceeds from sale of land 150,000
----------- -----------
Net cash used in investing activities (122,000) (50,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt financing 150,000
Proceeds from convertible grant 25,000 50,000
Proceeds from sale of treasury stock 279,000 235,000
Proceeds from stock option exercise 26,000
Payments on debt financing (171,000) (23,000)
Repayment of capital lease obligations (10,000) (19,000)
----------- -----------
Net cash provided by financing activities 149,000 393,000
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 711,000 (57,000)
Cash and cash equivalents - beginning of period 231,000 288,000
----------- -----------
Cash and cash equivalents - end of period $ 942,000 $ 231,000
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 78,000 $ 53,000
NONCASH ACTIVITIES:
Common stock received in repayment of loan from 425,000
officer/director/shareholder
The accompanying notes are an integral part of the financial statements
F-6
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE A - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
The Company:
American Bio Medica Corporation ("ABMC" or the "Company") was
incorporated in the State of New York on April 10, 1986 and is in the business
of manufacturing, developing and marketing biomedical technologies and products.
The Company currently owns two technologies for screening drugs of abuse, a
workplace screening test and a preliminary test for use by laboratories.
For the years ended December 31, 2003 and 2002 the Company had net
income of $1,031,000 and $719,000 respectively and had net cash provided by
operating activities of $684,000 in 2003 and net cash used in operating
activities of $400,000 in 2002. The Company increased cash balances by $711,000
during the twelve months ended December 31, 2003 as compared to a decrease of
$57,000 for the twelve months of 2002. Increases in sales and control over
expenses have enabled the Company to improve its liquidity. However, as of
December 31, 2003, the Company had an accumulated deficit of ($13,404,000).
Historically, the Company has been largely dependent on its ability to sell
additional shares of its common stock to fund its operations. The Company
continues to examine and refine its in-house strip-manufacturing program to
reduce costs and enhance profit margins.
The Company believes that its current cash balances, and cash generated
from future operations will be sufficient to fund operations for the next twelve
months. 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 obtain additional credit facilities.
There is no assurance that such financing will be available or that the Company
will be able to complete financing on satisfactory terms, if at all.
Significant Accounting Policies:
[1] CASH EQUIVALENTS:
The Company considers all highly liquid debt instruments purchased with
a maturity of three months or less to be cash equivalents.
[2] INVENTORY:
Inventory is stated at the lower of cost or market; cost is determined
by the first-in-first-out method.
[3] INCOME TAXES:
The Company accounts for income taxes in accordance with Statements of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes.
Deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities, and are measured
using the enacted laws and tax rates that will be in effect when the differences
are expected to reverse. The measurement of deferred tax assets is reduced, if
necessary, by a valuation allowance for any tax benefits that are not expected
to be realized. The effect on deferred tax assets and liabilities of a change in
tax rates are recognized in the period that such tax rate changes are enacted.
[4] DEPRECIATION:
Property, plant and equipment are depreciated on the straight-line
method over their estimated useful lives; 3-5 years for equipment and 30 years
for buildings. Leasehold improvements and capitalized lease assets are amortized
by the straight-line method over the shorter of their estimated useful lives or
the term of the lease.
[5] REVENUE RECOGNITION:
The Company recognizes revenue when title transfers upon shipment.
Sales are recorded net of discounts and returns. No obligation on the part of
ABMC exists for customer acceptance. The Company's price is fixed and
determinable at the date of sale. The buyer has paid the Company or is obligated
to pay the Company and the obligation is not contingent on the resale of the
product. The buyer's obligation would not be changed in the event of theft or
physical destruction or damage to the product. Buyers acquiring the product for
F-7
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
resale (i.e. distributor/wholesaler) have economic substance apart from that
provided by the Company and the Company does not have significant obligations
for future performance to directly bring about the resale of the product. All
distributors have economic substance apart from customers and the payment terms
are not conditional. The transactions with distributors are on terms similar to
those given to the Company's other customers. No agreements exist with the
distributors that offer a right of return.
[6] RESEARCH AND DEVELOPMENT:
Research and development ("R&D") costs are charged to operations when
incurred. These costs include salaries, benefits, travel, supplies, depreciation
of R&D equipment and other miscellaneous expenses.
[7] INCOME PER COMMON SHARE:
Basic income per common share is calculated by dividing net income by
the weighted average number of outstanding common shares during the period. For
the year ended December 31, 2003, diluted net income per share includes the
dilutive effect of 2,151,000 stock options and 2,248,000 warrants. For the year
ended December 31, 2002, diluted net income per share includes the dilutive
effect of 2,699,000 stock options and 2,452,000 warrants.
Potential common shares outstanding as of December 31, 2003 and 2002
DECEMBER 31, 2003 DECEMBER 31, 2002
----------------- -----------------
WARRANTS 2,951,703 2,651,703
OPTIONS 4,722,084 5,298,750
For the twelve months ended December 31, 2003 the number of securities
not included in the diluted EPS, because the effect would have been
anti-dilutive, were 3,274,920. For the twelve months ended December 31, 2002 the
number of securities not included in the diluted EPS, because the effect would
have been anti-dilutive, were 3,004,170. The securities would have been
anti-dilutive because the exercise price of the securities was greater than the
average market price of the Company's common shares for each of the fiscal years
ended December 31, 2003 and 2002.
[8] USE OF ESTIMATES:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
[9] IMPAIRMENT OF LONG-LIVED ASSETS:
The Company records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amounts of those assets.
[10] FINANCIAL INSTRUMENTS:
The carrying amounts of cash and cash equivalents, accounts receivable
- net, other receivables, accounts payable, accrued expenses approximate their
fair value based on the short term nature of those items.
Estimated fair value of financial instruments is determined using
available market information. In evaluating the fair value information,
considerable judgment is required to interpret the market data used to develop
the estimates. The use of different market assumptions and/or different
valuation techniques may have a material effect on the estimated fair value
amounts.
F-8
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
Accordingly, the estimates of fair value presented herein may not be
indicative of the amounts that could be realized in a current market exchange.
[11] ACCOUNTING FOR STOCK-BASED COMPENSATION:
The Company accounts for its stock-based compensation plans using the
intrinsic value method under Accounting Principles Board Opinion (APB) No. 25,
Accounting for Stock Issued to Employees and related interpretations. The
Financial Accounting Standards Board issued SFAS No. 123, Accounting for
Stock-Based Compensation, which establishes a fair value-based method of
accounting for stock-based compensation plans. The Company has adopted the
disclosure-only alternative under SFAS No. 123, as amended by SFAS No. 148,
which requires disclosure of the pro forma effects on net income per share as if
stock-based employee compensation was measured under SFAS No. 123, as well as
certain other information. The Company accounts for stock-based compensation to
non-employees using the fair value method in accordance with SFAS No. 123.
[12] CONCENTRATION OF CREDIT RISK:
The Company sells its drug testing products primarily to United States
customers and distributors. Credit is extended based on an evaluation of the
customer's financial condition. At December 31, 2003, one customer represents
11% of gross accounts receivables. The Company establishes an allowance for
doubtful accounts based on factors surrounding the credit risk of specific
customers and other information.
The Company maintains certain cash balances at a financial institution
that is federally insured and at times the balances have exceeded federally
insured limits.
[13] REPORTING COMPREHENSIVE INCOME:
The Company reports comprehensive income in accordance with the
provisions of SFAS No. 130, Reporting Comprehensive Income. The provisions of
SFAS No. 130 require the Company to report the change in the Company's equity
during the period from transactions and events other than those resulting from
investments by, and distributions to, the shareholders. For the years ended
December 31, 2003 and 2002 comprehensive income was the same as net income.
[14] RECLASSIFICATIONS:
Certain items have been reclassified from the prior years to conform
with the current year presentation.
[15] NEW ACCOUNTING PRONOUNCEMENTS:
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities". In December 2003, the FASB issued
a revision to FIN 46 to clarify some of the provisions of FIN 46, and to exempt
certain entities from its requirements. FIN 46 gives guidance that determines
whether consolidation of a Variable Interest Equity is required. FIN 46 is
effective now for certain Special Purpose Entity relationships and for all other
entity relationships after March 15, 2004. The Company does not expect the
adoption of FIN 46 to have a material effect on its financial statements.
NOTE B - INVENTORY
Inventory is comprised of the following:
December 31, 2003 December 31, 2002
----------------- -----------------
Raw Materials $ 1,680,000 $ 1,393,000
Work In Process 1,072,000 1,004,000
Finished Goods 297,000 398,000
------------ -----------
$ 3,049,000 $ 2,795,000
============ ===========
F-9
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE C - PROPERTY, PLANT AND EQUIPMENT
In December 2001, the Company purchased its previously leased facility
in Kinderhook, N.Y. for $950,000, including a building and 107 acres of land.
The Company partially financed the purchase through mortgage loans with the
Hudson River Bank and Trust Company for $360,000, the New York State Business
Development Corporation for $240,000, and the Columbia Economic Development
Corporation for $120,000. On March 31, 2003 the Company sold approximately 85
acres of land at its Kinderhook headquarters for $150,000 recognizing a gain of
$30,000.
Property, plant and equipment, at cost, are as follows:
December 31, December 31,
2003 2002
------------- ------------
Land $ 102,000 $ 222,000
Buildings and improvements 911,000 835,000
Manufacturing and warehouse equipment 751,000 597,000
Office equipment 269,000 227,000
------------- ------------
2,033,000 1,881,000
Less accumulated depreciation 592,000 424,000
------------- ------------
$1,441,000 $1,457,000
============= ============
Depreciation expense was $168,000 and $154,000 for the year ended
December 31, 2003, and the year ended December 31, 2002, respectively.
NOTE D - DUE FROM OFFICER/DIRECTOR/SHAREHOLDER
At December 31, 2001, the Company had a loan due from an
officer/director/shareholder, Stan Cipkowski, for $437,000, partially evidenced
by a note bearing interest at 11.5% per annum and payable on demand. In October
2002, the Board of Directors accepted 200,000 shares of stock from Mr. Cipkowski
in full satisfaction of the then outstanding loan balance of $248,000. The
closing stock price on the date of surrender was $1.03 resulting in the
forgiveness of accrued interest totaling $42,000, including $30,000 in 2002 and
$12,000 from prior periods. Mr. Cipkowski surrendered a total of 500,000 shares
between December 2000 and October 2002, of which 100,000 shares were cancelled.
During 2002 the Company sold 175,000 treasury shares for $235,000. The remaining
225,000 shares surrendered were sold in 2003 for $280,000.
Mr. Cipkowski had provided 1,000,000 common shares as collateral for
the loan and was surrendering, to the Company, 25,000 common shares each quarter
valued at the closing price on the second day following the earnings release, to
reduce the outstanding loan balance. During the year ended December 31, 2002, a
total of 375,000 shares were surrendered completely satisfying all amounts
outstanding on the loan to Mr. Cipkowski. Such loan had been reflected in the
Company's financial statements as a reduction of stockholder's equity.
NOTE E - LONG TERM DEBT
Long term debt at December 31, 2003 and December 31, 2002 consisted of
the following:
December 31, December 31,
2003 2002
--------- ---------
HUDSON RIVER BANK AND TRUST CO.:
Mortgage payable in equal monthly
installments of $3,209 including interest at
8.00% through January 1, 2012 with a final
lump sum payment of $255,000 at maturity,
collateralized by the building and land $ 347,000 $ 354,000
F-10
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
NEW YORK BUSINESS DEVELOPMENT CORPORATION:
Mortgage payable in equal monthly
installments of $1,996 including interest at
7.92% through January 1, 2012 with a final
lump sum payment of $164,000 at maturity,
collateralized by the building and land,
equipment, and furnitures and fixtures 230,000 234,000
COLUMBIA ECONOMIC DEVELOPMENT CORPORATION:
Mortgage payable in equal monthly
installments of $1,159 including interest at
3.00% collateralized by building and land
through January 1, 2012 99,000 109,000
--------- ---------
676,000 697,000
Less current portion (25,000) (24,000)
--------- ---------
Non-current portion $ 651,000 $ 673,000
========= =========
At December 31, 2003, the following are the maturities of long-term
debt for each of the next five years:
2004 $ 25,000
2005 27,000
2006 29,000
2007 30,000
2008 33,000
Thereafter 532,000
---------
$ 676,000
=========
The Company signed an uncollateralized note payable for $150,000 on
December 31, 2002 to Fortius Capital. In June 2003, Donal Carroll, a principal
at Fortius Capital joined the board of directors and later that year, in October
2003, Mr. Carroll was appointed Chief Executive Officer of ABMC. Mr. Carroll was
subsequently removed from the position of Chief Executive Officer and his
employment was terminated in January 2004. He remains a member of the Company's
Board of Directors. The funds were used to settle a litigation that had been
outstanding since 1999. The note was payable in equal monthly installments of
$12,996 including interest at a rate of 7.25% per annum through December 31,
2003. The note was satisfied in full during the year ended December 31, 2003.
NOTE F - INCOME TAXES
A reconciliation of the U.S. Federal statutory income tax rate to the
effective income tax rate is as follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, 2003 DECEMBER 31, 2002
--------------------------------------
Tax (benefit)/expense at federal statutory
rate 34% 34%
State tax (benefit)/expense, net of federal
tax effect 5 5
Valuation allowance (39) (39)
--------------------------------------
Effective income tax rate 0% 0%
======================================
F-11
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
Significant components of the Company's deferred tax assets are as
follows:
DECEMBER 31, 2003 DECEMBER 31, 2002
-----------------------------------------
Inventory $ 21,000 $ 21,000
Stock based compensation 461,000 477,000
Allowance for doubtful accounts 41,000 27,000
Property, plant, and equipment (132,000) (72,000)
Capital losses 73,000 73,000
Accrued expenses 94,000 34,000
Net operating loss carry-forward 3,549,000 3,964,000
-----------------------------------------
Total gross deferred tax assets 4,107,000 4,524,000
Less valuation allowance (4,107,000) (4,524,000)
-----------------------------------------
Net deferred tax assets $ -- $ --
=========================================
The valuation allowance for deferred tax assets as of December 31, 2003
and 2002 was $4,107,000 and $4,524,000, respectively. The net change in the
valuation allowance was a decrease of $417,000 for the year ended December 31,
2003.
At December 31, 2003 the Company has Federal and New York state net
operating loss carry forwards for income tax purposes of approximately
$9,099,000, which begin to expire in 2009. The Company has federal and New York
state capital losses of approximately $186,000, which begin to expire in 2005.
In assessing the realizability of deferred tax assets, management
considers whether or not it is more likely than not that some portion or all
deferred tax assets will be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the projected future taxable income and tax planning strategies in
making this assessment.
The Company's ability to utilize the operating loss carry forwards may
be subject to an annual limitation in future periods pursuant to Section 382 of
the Internal Revenue Code of 1986, as amended, if future changes in ownership
occur.
NOTE G - OTHER INCOME
Other income was comprised of an insurance settlement received relating
to damage to an HVAC unit at the Kinderhook facility and the reversal of a
royalty accrual resulting from an agreement reached with a manufacturing
partner. Both amounts are non-recurring.
NOTE H - STOCKHOLDERS' EQUITY
[1] STOCK OPTION PLANS:
The Company adopted the Fiscal 1997 Nonstatutory Stock Option Plan (the
"1997 Plan"), the Fiscal 1998 Nonstatutory Plan (the "1998 Plan"), the Fiscal
2000 Nonstatutory Stock Option Plan (the "2000 Plan"), and the 2001 Nonstatutory
Stock Option Plan (the "2001 Plan"). The 1997 Plan provides for the granting of
options to purchase up to 2,000,000 shares of common stock, the 1998 Plan and
the 2000 Plan provide for the granting of options to purchase up to 1,000,000
common shares each and the 2001 Plan provides for granting of options to
purchase up to 4,000,000 common shares. These Plans are administered by the
Option Committee of the Board of Directors, which determines the terms of
options exercised, including the exercise price, the number of shares subject to
the option and the terms and conditions of exercise. Options granted under the
1997 and 1998 Plans have lives of 5 years and vest over periods from 0 to 4
years. Options granted under the 2000 and 2001 Plans have lives of 10 years and
vest over periods from 0 to 4 years.
F-12
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
[2] STOCK OPTIONS:
During the year ended December 31, 2003, the Company issued a total of
1,217,000 options to purchase shares of common stock, of which 1,079,000 were
issued to employees and 138,000 were issued to Board members.
Stock option activity is summarized as follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2003 2002
-----------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
--------- -------- --------- --------
Options outstanding at
beginning of year 5,299,000 $1.62 4,374,000 $1.85
Granted 1,217,000 1.08 1,409,000 0.96
Exercised 96,000 0.87 0 0.00
Cancelled/expired (1,698,000) 1.33 (484,000) 1.71
--------- ---------
Options outstanding at end of year 4,722,000 1.60 5,299,000 1.62
========= =========
Options exercisable
at end of year 3,073,000 1.92 3,047,000 2.11
========= =========
The following table presents information relating to stock options
outstanding as of December 31, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF EXERCISE EXERCISE REMAINING EXERCISE
PRICE SHARES PRICE LIFE IN YEARS SHARES PRICE
------------------ ----------- --------- ------------- ------------ --------
$0.85 - $0.99 1,120,000 $0.89 7.07 644,000 $0.88
$1.00 - $1.99 1,626,000 1.14 8.35 455,000 1.28
$2.00 - $2.99 1,966,000 2.40 2.96 1,964,000 2.40
$3.00 - $3.50 10,000 3.38 6.21 10,000 3.38
----------- -----------
TOTAL 4,722,000 3,073,000
=========== ===========
As of December 31, 2003, there are no stock options available for
issuance under the 1997 or the 1998 Plan. Pursuant to the plans, as of April 30,
2000 no further options could be issued under the 1997 Plan and as of April 30,
2001, no further options could be issued under the 1998 Plan. As of December 31,
2003, under the 1997 Plan, 400,125 options have been returned to the plan and
will not be re-issued, and under the 1998 Plan, 483,250 have been returned to
the plan and will not be re-issued.
[3] WARRANTS:
In connection with our sale of 1,408,450 Common share for $2,000,000
($1.42 per share) in a private placement to Seaside Partners, L.P. ("Seaside")
on April 28, 2000 we issued a 5-year warrant to Seaside to purchase 953,282
common shares of our stock at an exercise price of $1.17 per share. To settle a
penalty owed to Seaside because of a late registration statement we adjusted the
exercise price of the 953,283 warrant shares from $1.17 to $0.95 in February
2001.
On May 2, 2001, the Company issued a 5 year warrant immediately
exercisable and non-forfeitable, to purchase 200,000 common shares of American
Bio Medica Corporation stock at an exercise price of $1.50 per share to Brean
Murray & Co., Inc. as compensation for its future services as a financial
advisor to the Company. The warrants were valued at $134,000 using the Black
Scholes pricing model and the following assumptions, dividend yield of 0%,
F-13
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
volatility of 95%, risk free interest rate 4.8% and expected life of 5 years and
has been recorded as a charge to operations in the transition period ending
December 31, 2001. The closing price of American Bio Medica Corporation's common
shares on May 2, 2001, as listed on The NASDAQ SmallCap Market, was $0.95 per
share.
On August 22, 2001, the Company issued 54-month warrants, exercisable
beginning on February 22, 2002 and non-forfeitable, to purchase 1,274,500 common
shares of American Bio Medica Corporation stock at an exercise price of $1.05
per share to a number of accredited investors who purchased common shares in the
Company's August 2001 private placement of the Company's securities and 54-month
warrants exercisable beginning February 22, 2002 and non-forfeitable, to
purchase 203,920 common shares of American Bio medics Corporation stock at or
exercise price of $1.20 per share to five firms as compensation for their
services as placement agents and sub-agents in this August 2001 private
placement. The value of these warrants was accounted for as a cost of the
financing.
On November 15, 2001, the Company issued a 4 year warrant, immediately
exercisable and non-forfeitable, to purchase 20,000 common shares of American
Bio Medica Corporation stock at an exercise price of $1.00 per share to Hudson
River Bank & Trust Company in connection with the Company's purchase of its
facility located in Kinderhook, New York. The warrants are valued at $10,000
using the Black Scholes pricing model and the following assumptions, dividend
yield of 0.0%, volatility of 90.8%, risk free interest rate of 5.1% and expected
life of 5 years. The closing price of American Bio Medica Corporation common
shares on November 15, 2001, as listed on the NASDAQ SmallCap Market, was $0.85
per share.
On December 2, 2003, we issued a 5 year warrant immediately exercisable
and non-forfeitable, to purchase 300,000 common shares at an exercise price of
$1.15 to Brean Murray & Co., Inc as compensation for its future services as a
financial advisor to the Company. The warrants were valued at $281,000 using the
Black Scholes pricing model and the following assumptions, dividend yield of
0.0%, volatility of 80.6%, risk free interest rate 5.2% and expected life of 5
years and $23,000 has been recorded as a charge to operations in the year ended
December 31, 2003. The total value of these warrants will be charged ratably
over twelve months from December 2003 through November 2004, the term of the
contract. The closing price of American Bio Medica Corporation's common shares
on December 2, 2003, as listed on The NASDAQ SmallCap Market, was $1.33 per
share
[4] STOCK-BASED COMPENSATION:
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
measurement of the fair value of stock options or warrants granted to employees
to be included in the statement of operations or, alternatively, disclosed in
the notes to consolidated financial statements. The Company accounts for
stock-based compensation of employees under the intrinsic value method of
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations and has elected the disclosure-only
alternative under SFAS No. 123. The Company has adopted the disclosure
requirements of SFAS No. 148, Accounting for Stock-Based Compensation-Transition
and Disclosure, in its discussion of stock-based employee compensation. The
alternative transition options made available by the standard are not being
implemented. The weighted average fair value of options granted during the
twelve months ended December 31, 2003 and 2002 was approximately $.91 and $0.96,
respectively. The following pro forma information gives effect to fair value of
the options on the date of grant using the Black-Scholes option-pricing model
with the following assumptions: dividend yield of 0%, volatility ranging from
82% to 85% for 2003 and 87% to 90% for 2002, risk free interest rates of ranging
from 4.35% to 5.25% for 2003 and 4.98% - 6.04% for 2002, and an expected life of
10 years for both 2003 and 2002.
F-14
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2003 2002
------------ ------------
Net Income/(loss):
As reported $1,031,000 $ 719,000
Pro forma 13,000 $ (162,000)
Basic and fully diluted income/(loss)
per share
As reported $ .05 $ .03
Pro forma $ .00 $ (.01)
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2003 2002
------------ ------------
Net Income, as reported $1,031,000 $ 719,000
Stock-based employee compensation
expense, determined under fair value
based method for all awards
$1,108,000 $ 881,000
Proforma net income/(loss) $ 13,000 $ (162,000)
During the year ended December 31, 2002, the Company granted 1,409,500
options to employees and directors/board members at exercise prices greater than
or equal to the fair market value of the underlying common shares at dates of
grant.
During the year ended December 31, 2003, the Company granted 1,216,500
options to employees and directors/board members at exercise prices greater than
or equal to the fair market value of the underlying common shares at dates of
grant.
NOTE I - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
[1] OPERATING LEASES:
The Company leases office and R&D/production facilities under operating
leases expiring through August 2007. At December 31, 2003, the future minimum
rental payments under these operating leases are $51,800 per year or $190,000.
Rent expense was $63,000 for 2003. Rent expense was $12,000 for 2002
including a recovery of $53,000 resulting from the favorable settlement of an
outstanding dispute with a former landlord of property rented from 1999 to 2000
in Boca Raton, Florida.
[2] EMPLOYMENT AGREEMENTS:
The Company has employment agreements with one officer and one
employee/director providing for aggregate annual salaries of $230,000. The
agreement with the officer expires on April 30, 2004 and provides for the
issuance of bonuses and the granting of options. The agreement with the
employee/director is at will.
F-15
AMERICAN BIO MEDICA CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
NOTE J - RELATED PARTY DISCLOSURES:
During the fiscal years ended December 31, 2003 and December 31, 2002,
the Company paid an aggregate of $63,000 and $65,000 respectively, in fees to
Edmund Jaskiewicz, the Company's President and a member of the Board of
Directors, in consideration of his services as patent and trademark counsel to
the Company.
During the fiscal year ended December 31, 2003, the Company entered
into an agreement with Altius Marketing related to marketing services. The Chief
Financial Officer of Altius Marketing is the son of the Company's former Chief
Executive Officer, Donal V. Carroll. The Company paid an aggregate of $13, 300
and $0 to Altius Marketing in the fiscal years ended December 31, 2003 and 2002
respectively.
NOTE K - GEOGRAPHIC INFORMATION
Information concerning net sales by principal geographic location is as
follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2003 2002
-------------------------------------
United States $ 11,479,000 $ 9,352,000
North America (not 832,000 647,000
domestic)
Europe 90,000 197,000
Asia/Pacific Rim 54,000 62,000
South America 29,000 54,000
-------------------------------------
$ 12,484,000 $ 10,312,000
=====================================
F-16
NUMBER DESCRIPTION OF EXHIBITS
------ -----------------------
3.5 Bylaws(1)
3.50 Amended and Restated Bylaws(5)
3.6 Fifth amendment to the Certificate of Incorporation (filed as Exhibit
3.6 to the Company's Form SB-2 filed on November 21, 1996 and
incorporated herein by reference)
3.7 Sixth amendment to the Certificate of Incorporation(5)
4.2 Investor Registration Rights Agreement, dated August 22, 2001, among
American Bio Medica Corporation and the investors(4)
4.3 Placement Agent Registration Rights Agreement, dated August 22, 2001,
among American Bio Medica Corporation and the placement agent and its
sub-agents(4)
4.4 Form of Warrant Agreement and Warrant among American Bio Medica
Corporation and the investors(4)
4.5 Form of Warrant Agreement and Warrant among American Bio Medica
Corporation and the placement agent and its sub-agents(4)
4.6 Fiscal 1997 Nonstatutory Stock Option Plan (filed as part of the
Company's Proxy Statement for its Fiscal 1997 Annual Meeting and
incorporated herein by reference) (a)
4.14 Fiscal 1998 Nonstatutory Stock Option Plan (filed as part of the
Company's Proxy Statement for its Fiscal 1998 Annual Meeting and
incorporated herein by reference) (a)
4.15 Fiscal 2000 Nonstatutory Stock Option Plan (filed as part of the
Company's Proxy Statement for its Fiscal 2000 Annual Meeting and
incorporated herein by reference) (a)
4.16 Common Stock Purchase Agreement dated April 28, 2000 by and between the
Company and Seaside Partners, L.P.(2)
4.17 Fiscal 2001 Nonstatutory Stock Option Plan (filed as part of the
Company's Proxy Statement for its Fiscal 2002 Annual Meeting and
incorporated herein by reference) (a)
10.6 Contract of Sale dated May 19, 1999/Kinderhook, New York facility(2)
10.7 Agreement of Lease dated May 13, 1999/Kinderhook, New York facility(2)
10.8 Lease dated August 1, 1999/New Jersey facility(2)
10.9 Amendment dated March 23, 2001 to Lease dated August 1, 1999/New Jersey
facility(3)
10.10 Amended Contract of Sale dated May, 2001/Kinderhook, New York
facility(3)
10.11 Financial Advisory Agreement dated May 2, 2001 by and between Brean
Murray & Co., Inc. and the Company(3)
10.12 Employment contract between the Company and Robert L. Aromando, Jr.
(a)(3)
10.13 Employment contract between the Company and Stan Cipkowski (a)(3)
10.14 Employment contract between the Company and Douglas Casterlin (a)(3)
10.15 Employment contract between the Company and Keith E. Palmer (a)(3)
10.16 Warrant Agreement dated November 15, 2001 by and between the Company
and Hudson River Bank & Trust Company(5)
10.17 Amendment No.3 dated August 20, 2002/New Jersey facility(6)
10.18 Employment contract between the Company and Gerald A. Moore (a)(6)
10.19 Financial Advisory Agreement dated December 2, 2003 by and between
Brean Murray & Co., Inc and the Company
10.20 Contract of Sale/land-Kinderhook, NY facility
10.21 Employment contract between the Company and Stan Cipkowski
32.1 Section 1350 Certification of the President
32.2 Section 1350 Certification of the Chief Financial Officer
E-1
(a) indicates an employee benefit plan, management contract or compensatory
plan or arrangement in which a named executive officer participates.
(1) Filed as the exhibit number listed to the Company's Form 10-SB filed on
November 21, 1996 and incorporated herein by reference.
(2) Filed as the exhibit number listed to the Company's Form 10-KSB filed on
August 11, 2000 and incorporated herein by reference.
(3) Filed as the exhibit number listed to the Company's Form 10-KSB filed on
August 13, 2001 and incorporated herein by reference.
(4) Filed as the exhibit number listed to the Company's Form S-3 filed on
September 26, 2001 and incorporated herein by reference.
(5) Filed as the exhibit number listed to the Company's Form 10-KSB filed on
April 15, 2002 and incorporated herein by reference.
(6) Filed as the exhibit number listed to the Company's Form 10-KSB filed on
March 31, 2003 and incorporated herein by reference.
E-2