SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from___________ to __________
Commission File No._____________
WHITEWING LABS, INC.
(Exact name of small business registrant as specified in its charter)
Delaware 95-4437350
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
15455 San Fernando Mission Blvd., #105, Mission Hills, CA 91345
(Address of principal executive office) (Zip Code)
Registrant's Telephone Number: (818) 898-2167
Check whether the issuer (1) filed all reports required to be filed by
Section 12 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 [ ]
1
WHITEWING LABS, INC.
FORM 10-QSB FOR QUARTER ENDED SEPTEMBER 30, 1996
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Balance Sheets at December 31, 1995 and September 30, 1996.........3
Statements of Operations for the Quarters and Nine Months
Ended September 30, 1995 and 1996..............................5
Statements of Cash Flows for the Nine Months Ended
September 30, 1995 and 1996....................................6
Notes to the Financial Statements..................................8
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition...........................11
PART II. OTHER INFORMATION...................................................15
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Stockholders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(b) Reports on Form 8-K
SIGNATURE PAGE............................................................... 17
2
<TABLE>
Whitewing Labs, Inc.
Balance Sheets
December 31, 1995 and September 30, 1996
<CAPTION>
ASSETS
Proforma
December 31, December 31, September 30,
1995 1995 1996
----------- ---------- --------------
(See Note 2) (Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 423,622 $4,323,622 $3,500,574
Accounts receivable - other 17,115 17,115 23,476
Inventories 193,234 193,234 147,373
Prepaid advertising 355,932 355,932 107,531
Prepaid legal retainer 12,369 12,369 2,259
Prepaid other expenses 18,568 18,568 28,583
Deferred taxes 11,000 11,000 11,000
---------- ---------- ----------
Total current assets 1,031,840 4,931,840 3,820,796
---------- ---------- ----------
EQUIPMENT:
Furniture and fixtures 112,748 112,748 119,443
Less - accumulated depreciation (18,848) (18,848) (33,519)
---------- ---------- ----------
93,900 93,900 85,924
---------- ---------- ----------
OTHER ASSETS:
Deferred advertising 190,396 190,396 215,361
Deferred offering costs 152,071 0 0
Investment in related-party
partnership, at cost 100,000 100,000 100,000
Organization costs, net of
accumulated amortization 1,435 1,435 1,019
Deferred taxes 209,000 209,000 119,000
Deposits 4,777 4,777 6,965
---------- ---------- ----------
657,679 505,608 442,345
---------- ---------- ----------
TOTAL ASSETS $1,783,419 $5,531,348 $4,349,065
========== ========== ==========
</TABLE>
See accompanying notes
3
<TABLE>
Whitewing Labs, Inc.
Balance Sheets
December 31, 1995 and September 30, 1996
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
Proforma
December 31, December 31, September 30,
1995 1995 1996
---------- ---------- --------------
(See Note 2) (Unaudited)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 97,134 $ 97,134 $ 141,870
Accrued liabilities 64,531 64,531 8,038
Dividends payable 22,688 22,688 0
Accrued interest payable 43,051 43,051 0
Deferred taxes 220,000 220,000 130,000
Due to shareholder 114,247 114,247 0
---------- ---------- ----------
Total current liabilities 561,651 561,651 279,908
---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES:
SHAREHOLDERS' EQUITY:
Cumulative convertible preferred
stock, $.001 par value:
Authorized, 500,000 shares
Issued and outstanding, 272,500
at December 31, 1995 and none
at Proforma December 31, 1995
and September 30, 1996 732,149 0 0
Common stock, $.001 par value:
Authorized, 10,000,000 shares
Issued and outstanding, 1,125,000
shares at December 31, 1995,
2,606,876 at Proforma December
31, 1995 and 2,883,890 shares
at September 30, 1996 1,434 2,607 2,883
Paid-in capital 1,177,358 5,656,263 6,345,511
Deficit (689,173) (689,173) (2,235,818)
Less--
Treasury stock, at cost
16,600 shares 0 0 (43,419)
---------- ---------- ----------
Shareholders' equity 1,221,768 4,969,697 4,069,157
---------- ---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $1,783,419 $5,531,348 $4,349,065
========== ========== ==========
</TABLE>
See accompanying notes
4
<TABLE>
Whitewing Labs, Inc.
Statements of Operations
(Unaudited)
<CAPTION>
Quarter ended Nine months ended
September 30, September 30,
1995 1996 1995 1996
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
NET SALES $1,046,646 $ 812,843 $2,268,045 $2,736,285
COST OF GOODS SOLD 138,397 134,693 299,881 375,945
---------- ----------- ---------- -----------
Gross profit 908,249 678,150 1,968,164 2,360,340
OPERATING EXPENSES
Advertising 370,412 540,920 735,428 1,766,119
Selling 314,381 384,613 727,186 1,518,908
General and administrative 175,911 216,933 467,477 714,946
-------- ----------- --------- ------------
860,704 1,142,466 1,930,091 3,999,973
-------- ----------- --------- ------------
Income (loss) from operations 47,545 (464,316) 38,073 (1,639,633)
OTHER INCOME 6,677 41,138 24,788 110,981
INTEREST EXPENSE 2,304 0 17,814 4,259
-------- ----------- --------- -----------
Income (loss) before
provision for income taxes 51,918 (423,178) 45,047 (1,532,911)
PROVISION FOR INCOME TAXES 0 0 5,000 3,605
-------- ---------- --------- -----------
NET INCOME (LOSS) 51,918 (423,178) 40,047 (1,536,516)
PREFERRED STOCK DIVIDENDS
EARNED AND ACCRUED $ 22,688 $ 0 $ 69,615 $ 10,073
-------- ---------- --------- -----------
Net loss attributable
to common stockholders $ 29,230 $ (423,178) (29,568) $(1,546,589)
======== ========== ========= ===========
PROFORMA INCOME
PER COMMON SHARE $ 0.03 $ 0.02
========= =========
LOSS PER COMMON SHARE $ (0.16) $ (0.58)
========= ===========
PROFORMA WEIGHTED AVERAGE
NUMBER OF COMMON SHARES
OUTSTANDING 1,726,856 1,635,575
========= =========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,649,287 2,647,288
========= ==========
</TABLE>
See accompanying notes
5
<TABLE>
Whitewing Labs, Inc.
Statements of Cash Flows
For the Nine Months Ended September 30, 1995 and 1996
(Unaudited)
<CAPTION>
1995 1996
--------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 40,047 $(1,536,516)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 9,370 14,671
Changes in assets and liabilities:
Accounts receivable - other (45,720) (6,361)
Inventories (56,299) 45,861
Prepaid advertising (152,527) 248,401
Prepaid legal retainers (34,082) 10,110
Other prepaid expenses (41,215) (9,599)
Deferred advertising (179,192) (24,965)
Deposits 373 (2,188)
Accounts payable 71,821 44,736
Accrued liabilities 1,914 (56,493)
Accrued interest payable 11,844 (43,051)
Unearned revenue 51,000 0
---------- ----------
Net cash used in operating activities (322,666) (1,315,394)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture and fixtures (87,954) (6,695)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Investment in related-party partnership (100,000) 0
Deferred offering costs (75,001) 152,071
Net proceeds from issuance of common stock 878,792 4,117,350
Net proceeds from issuance of common stock warrants 0 180,090
Net proceeds from issuance of common
stock upon exercise of options 0 140,013
Repurchase of common stock 0 (43,419)
Payments to shareholder (200,000) (114,247)
Payment of cash dividends (67,561) (32,817)
---------- ----------
Net cash provided by financing activities 436,230 4,399,041
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 25,610 3,076,952
CASH AND CASH EQUIVALENTS, beginning of year 639,369 423,622
--------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 664,979 $3,500,574
========== ==========
See accompanying notes
6
1995 1996
---------- ----------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for income taxes $ 5,000 $ 3,605
========== ==========
Cash paid for interest $ 0 $ 47,310
========== ==========
SUPPLEMENTAL DISCLOSURES OF
NON CASH FINANCING ACTIVITIES:
Preferred dividends declared $ 22,688 $ 0
========== ==========
Cumulative convertible preferred stock
converted to common stock $ 0 $ 732,149
========== ==========
Common stock issued in lieu of stock issuance
commission $ 2,500 $ 0
========== ==========
Note payable converted to common stock $ 200,000 $ 0
========== ==========
</TABLE>
See accompanying notes
7
WHITEWING LABS, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1996
(Unaudited)
1. Summary of Significant Accounting Policies
a. Basis of presentation
In the opinion of management and subject to year-end audit, the
accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments considered necessary for a fair presentation
have been included. The results of operations for the periods presented
are not necessarily indicative of the results to be expected for the
full year. These condensed financial statements should be read in
conjunction with the financial statements and footnotes thereto contained in
the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1995.
b. Deferred Advertising
In December 1993, the American Institute of Certified Public Accountants
issued Statement of Position 93-7 (SOP 93-7) entitled "Reporting on
Advertising Costs". The Company adopted SOP 93-7 effective January 1,
1995. From 1995 forward, magazines, weekly publications, and newspaper
placements became an increasing component of the Company's
direct-response marketing efforts. The Company defers the cost of such
placements as their primary purpose is to elicit sales to customers.
Respondents are logged into a customer database which indicates the
source of each customer's response to the specific advertisement.
The costs of advertising placements are amortized, based upon
management's estimates, over the periods in which the related direct
responses are received. Newspaper and weekly publications are amortized
in the month of issue. Magazines and direct mailings which are available
prior to the middle of the month preceding the issue date are amortized
over a three month period. Magazines which are available subsequent to
the middle of the month preceding the issue date are amortized over a
four month period. The magazine amortization percentages used by the
Company amortize 90 to 100 percent of the deferred costs over three months
with 60 to 80 percent of the costs amortized over two months. Substantially
all of the deferred advertising costs will be fully amortized within four
months of December 31, 1995 and September 30, 1996.
c. Reclassifications
Certain reclassifications have been made to the accompanying condensed
financial statements to conform them with the current period presentation.
8
2. Reincorporation in Delaware
On February 9, 1996, Whitewing Labs, which had been incorporated under the
laws of California, merged with and into Whitewing Labs, Inc., its
wholly-owned subsidiary in order to reincorporate the Company in the State
of Delaware (the "Reincorporation"). Following the Reincorporation, the
business and operations of the Company have been conducted by the Company
as a Delaware corporation rather than as a California corporation. The
accompanying condensed financial statements give retroactive effect to the
Reincorporation.
On February 20, 1996, the Company completed its initial public offering
and received approximately $4,100,000. Cash and cash equivalents in
the accompanying proforma balance sheet as of December 31, 1995 reflect
the receipt of these proceeds net of approximately $200,000 in
offering costs.
3. Income (Loss) per Common Share
Proforma income per common share for the quarter and nine month period ended
September 30, 1995, is based upon the proforma weighted average number of
common shares outstanding assuming the public offering of shares of the
Company's common stock in February, 1996, had been completed as of
January 1, 1995. For the quarter and nine month period ended September 30,
1996, loss per common share is based on the historical weighted average
number of shares outstanding.
4. Product Return Reserve
An accrual for estimated sales returns is included in accrued liabilities
in the amounts of $17,000 and $5,000 at December 31, 1995 and
September 30, 1996, respectively.
5. Stock Repurchase
During the third quarter of 1996, the Company acquired 16,600 shares of its
common stock for approximately $43,000. The repurchase of these shares was
in connection with a stock repurchase program announced in July 1996 in
which up to 200,000 shares or 7% of outstanding shares of the Company's
common stock may be acquired in the open market. The purpose of the
stock repurchase program is to enhance shareholder value.
6. Litigation
The Company was notified by letter dated January 12, 1996, that the
Federal Trade Commission (FTC) is conducting a preliminary, non-public
investigation regarding the advertising and sale of Prostsafe, which
represents 77% of total Company sales. The Company does not believe
that this advertisement makes any false or unsubstantiated claims and
has submitted a formal written response to the FTC inquiry. If the
FTC is satisfied with the substantiation provided, it is anticipated
that the investigation will be closed without further action.
Otherwise the Company could be required to modify and discontinue
certain of its advertising. The FTC also has the power to seek
financial restitution in cases where the FTC believes that the
advertising was materially false. The Company could contest any
adverse determination it believes is inappropriate before an
administrative law judge or in federal court.
9
On August 16, 1996, a former director of the Company and her husband,
filed a legal action against the Company and its principal shareholder
in the United States District Court in Los Angeles, entitled
Christoper D. Hodges and Ann P. Hodges v. Acacia Research Corporation
and Whitewing Labs, Inc., Case No 96-5551R (Ex). The suit alleges,
among other things, that the Company improperly refused to permit the
exercise of an option to purchase 15,000 shares of the Company's
common stock and seeks $106,000 in damages from the Company. The
co-defendant in the lawsuit has assumed primary defense thereof, and
has accepted sole responsibility for all litigation costs incurred by
or on behalf of the Company in connection with the legal defense of
the action. Although the ultimate outcome of this litigation cannot
be predicted with certainty, the Company's management does not believe
that this matter will have a material effect on the Company's results
of operations or financial position.
10
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
General. The Company continued its plan of expanding its customer database
during the first three quarters of 1996 by increasing its magazine advertisement
placements and developing a direct mail campaign which both tests new mailing
lists and identifies new names on lists used in the past.
The Company's recent public offering was to generate adequate funds to allow
for growth of the Company's sales and database than would be achieved
if the Company relied only on internally generated funds. Payments for
advertising increased by approximately $1,030,000 for the first nine months of
1996 compared to the same period last year. Advertising expense for the nine
months ended September 30, 1995 was $735,428, or 32.4%, of net sales, while
for the nine months ended September 30, 1996 it increased to $1,766,119, or
64.5%, of net sales.
Orders from magazine advertisements and direct mailings are received over a
period of time after the magazines containing the advertisements go on sale
or the direct mail pieces are delivered to the Post Office. The Company's
business plans continue to stress growth of the customer database over
short-term profits; the Company's management believes net earnings will be
driven by continued growth of the customer database.
As of September 30, 1996, the Company had an accumulated deficit of
$2,235,818. It can be expected that future operating results will continue to be
subject to many of the problems, expenses, delays and risks inherent in the
establishment of a new business enterprise, many of which the Company cannot
control. There can be no assurance, therefore, that the Company will be able
to achieve or sustain profitability. Even if the Company's operations prove
to be marginally profitable, the value of the Company's common stock, and the
potential return to investors, could be substantially diminished.
Consequently, an investment in the Company is highly speculative and no
assurance can be given that purchasers of the shares of common stock will
realize any return on their investment or that purchasers will not lose their
entire investment.
The Company has formulated its business plans and strategies based on
certain assumptions of the Company's management regarding the size of the
market for nutritional supplements, the products which the Company will be
able to offer to the over age forty market, the Company's anticipated share of
the market, and the estimated prices for and acceptance of the Company's
products. The Company continues to believe its business plans and the
assumptions upon which they are based are valid. Although these plans and
assumptions are based on the best estimates of management, there can be no
assurance that these assessments will prove to be correct. No independent
marketing studies have been conducted on behalf of or otherwise obtained by
the Company, nor are any such studies planned. Any future success that the
11
Company might enjoy will depend upon many factors, including factors which may
be beyond the control of the Company or which cannot be predicted at this
time. These factors may include product obsolescence, increased levels of
competition, including the entry of additional competitors and increased
success by existing competitors, changes in general economic conditions,
increases in operating costs including costs of supplies, personnel and
equipment, reduced margins caused by competitive pressures and other factors,
and changes in governmental regulation imposed under federal, state or local
laws.
Like other distributors of consumer products, the Company encounters the
risk of product returns from its customers. The Company's products are sold
with an unconditional, money-back guarantee. Any customer who is not
satisfied with a Company product for any reason may return it or any unused
portion for a full refund of the purchase price. Although product returns to
date have been approximately 3% of sales, which is substantially less than the
national average of 5%, there can be no assurance that actual levels of
returns will not significantly exceed amounts anticipated by the Company.
The Company's operating results may vary significantly due to a variety of
factors including changing customer profiles, the availability and cost of raw
materials, the introduction of new products by the Company or its competitors,
the timing of the Company's advertising and promotional campaigns, pricing
pressures, general economic and industry conditions that affect customer
demand, and other factors.
Statements contained herein that are not purely historical are forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934, including but not
limited to statements regarding the Company's expectations, hopes, beliefs,
intentions or strategies regarding the future. Actual results could differ
materially from those projected in any forward-looking statements as a result of
a number of factors, including those detailed in this Management's Discussion
and Analysis of Results of Operations and Financial Condition, as well as
those set forth elsewhere herein. The forward-looking statements are made as of
the date of these financial statements and the Company assumes no obligation
to update the forward-looking statements, or to update the reasons why actual
results could differ materially from those projected in the forward-looking
statements.
Results of Operations.
Net Sales. The Company realized net sales during the nine months ended
September 30, 1996 of $2,736,285, an increase of approximately 20.7% over net
sales of $2,268,045 generated during the nine months ended September 30, 1995.
At September 30, 1996, the Company's customer base had grown to approximately
66,000, up from approximately 35,500 customers at September 30, 1995.
The average orders from new and existing customers were approximately
$58 and $71 respectively, for the nine months ended September 30, 1996, compared
to average orders of approximately $57 from new customers and $76 from
existing customers respectively for the first nine months of the prior year.
Sales of the Company's Prostsafe[R] accounted for 88% of the Company's sales
for the nine months ended September 30, 1995, and for approximately 77% of
net sales for the nine months ended September 30, 1996. The Company anticipates
that sales of Prostsafe [R] will continue to contribute a substantial but
continually decreasing percentage of total revenues to subsequent periods.
12
A decline in the demand for this product, whether as a result of competition
or other factors, could have a material adverse effect on the Company's results
of operations and financial condition. The markets for the Company's products
are characterized by changing customer demand, short product life cycles, and
frequent new product introductions. The performance of the Company will depend
on the ability of the Company to develop and market new products that will gain
customer acceptance and loyalty, as well as its ability to adapt its product
offering to meet changing pricing considerations and other market factors. The
Company's operating performance would be adversely affected if the Company were
to incur delays I
n developing new products or if such products did not gain
market acceptance. Therefore, there can be no assurance that the Company's
existing or future products will be sufficiently successful to enable the
Company to effectively compete in its prospective markets or, should the
Company's product offerings meet with significant customer acceptance, that
one or more current or future competitors will not introduce products which
render the Company's products noncompetitive.
Gross Profit. Cost of goods sold for the Company's products represents a
small percentage of net sales. During the nine months ended September 30, 1995
and 1996, the Company recognized gross profits of $1,968,164 and $2,360,340, or
86.8% and 86.3%, respectively.
Advertising Expense. During the nine months ended September 30, 1996,
advertising expense increased to $1,766,119, compared to $735,428 for the
same period last year. The increase includes the cost of advertising three
new products and increasing the number of advertisements placed for existing
products. Not only did advertising increase in absolute dollars during the
nine months ended September 30, 1996, it increased as a percentage of net
sales to 64.5% compared to 32.4% of net sales for the same period last year.
The Company's management believes its commitment to aggressively expanding its
advertising budget will result in more rapid growth and profitability than if
advertising expenses were maintained at approximately the same percentage of net
sales as in the past. For the year ended December 31, 1995, advertising expense
was 37.5% of net sales.
Selling Expense. During the nine months ended September 30, 1996, selling
expenses increased to $1,518,908, compared to $727,186 for the same period in
1995, and increased as a percentage of net sales to 55.5%, compared to 32.0%
of net sales for the nine months ended September 30, 1995. The increase
reflects the increased costs of marketing to an expanded customer base and
the Company's marketing of Prostsafe via direct mail.
General and Administrative Expense. General and administrative expenses have
increased as a function of the increasing volume of sales, as the Company has
been required to expand its office facilities, purchase additional computers
and other office equipment, and pay for increased postage and supplies. In
August, 1995, The Company developed a Customer Service Department which is
staffed with the Company's own employees located in its offices. This
function did not exist during the first half of 1995. Also included in
general and administrative expenses are legal expenses relating to trademark
research on new products and review of all advertising copy. For the nine
13
months ended September 30, 1995, general and administrative expenses represented
20.6% of net sales, increasing as a percentage of net sales to 26.1% for the
nine months ended September 30, 1996.
Loss From Operations. The Company's income from operations for the
nine months ended September 30, 1995 was $38,073, compared to losses from
operations of $1,639,633 during the nine months ended September 30, 1996.
Losses during the first three quarters of 1996 were mainly attributable
to increases in advertising and selling costs.
Interest Expense. For the nine months ended September 30, 1995, interest
expense of $17,814, representing 0.8% of sales, was related to loans from Acacia
Research Corporation, a principal investor in the Company, and a convertible
note payable.
The amounts remaining due and payable to Acacia Research Corporation,
including interest expense of $4,259, were paid out of the net proceeds to
the Company from the public offering. For the nine months ended
September 30, 1996, interest expense represented 0.2% of sales.
Liquidity and Capital Resources
During the first nine months of 1995, the Company privately sold an
aggregate of 249,626 shares of its Common Stock to a total of eight "accredited
investors" (as the term is defined in the rules and regulations of the
Securities and Exchange Commission under the Securities Act of 1933, as
amended), raising gross proceeds totaling $1,029,000.
On September 30, 1995, the Company had cash on hand of $664,979.
However, from inception through September 30, 1995, the Company had operated
at a loss, as its efforts had been focused on the development of a customer
base. Management anticipated that additional capital would be required by
the end of the year to finance the Company's operations at an increased level.
On February 20 and March 18, 1996, the Company closed its stock offering of
1,035,000 shares of common stock, raising net proceeds of approximately
$4,129,000. Additional net proceeds of approximately $180,000 were also raised
from the sale of stock warrants during this offering. The proceeds are being
used to finance accelerated marketing, advertising and promotional
activities, and the increased levels of inventories necessary to fulfill
orders generated by the increased promotional activity.
At September 30, 1996, the Company had cash on hand of $3,500,574.
The loan balance of $114,247 due to a major stockholder of the Company was
repaid with accrued interest of approximately $47,310 on February 21, 1996,
from proceeds of the offering. The balance was used primarily for magazine and
direct mail advertising The Company believes that expected cash flow plus the
proceeds of the offering will finance the Company's operations at currently
anticipated levels for a period of at least 12 months. However, there can be
no assurance that the Company will not encounter unforeseen difficulties that
may deplete its capital resources more rapidly than anticipated.
14
PART II OTHER INFORMATION
Item 1. Legal proceedings
The Company was notified by letter dated January 12, 1996, that the
Federal Trade Commission (FTC) is conducting a preliminary, non-public
investigation regarding the advertising and sale of Prostsafe. The
Company does not believe that this advertisement makes any false or
unsubstantiated claims and has submitted a formal written response to
the FTC inquiry. If the FTC is satisfied with the substantiation
provided, it is anticipated that the investigation will be closed
without further action. Otherwise the Company could be required to
modify and discontinue certain of its advertising. The FTC also has
the power to seek financial restitution in cases where the FTC believes
that the advertising was materially false. The Company could contest
any adverse determination it believes is inappropriate before an
administrative law judge or in federal court.
On August 16, 1996, a former director of the Company and her husband,
filed a legal action against the Company and its principal shareholder
in the United States District Court in Los Angeles, entitled
Christoper D. Hodges and Ann P. Hodges v. Acacia Research Corporation
and Whitewing Labs, Inc., Case No 96-5551R (Ex). The suit alleges,
among other things, that the Company improperly refused to permit the
exercise of an option to purchase 15,000 shares of the Company's
common stock and seeks $106,000 in damages from the Company. The
co-defendant in the lawsuit has assumed primary defense thereof, and
has accepted sole responsibility for all litigation costs incurred by
or on behalf of the Company in connection with the legal defense of
the action. Although the ultimate outcome of this litigation cannot
be predicted with certainty, the Company's management does not believe
that this matter will have a material
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of matters to a vote of security holders
The Company held its 1996 Annual Meeting of Stockholders on July 19,
1996 in Los Angeles, California. One item was submitted to a vote of
the stockholders:
The election of four directors to hold office for one year terms and until
their respective successors are elected and have qualified. All four
nominees were recommended by the Board of Directors, and all were elected.
Set forth below are the results of the voting, for each director.
15
For Withheld
--- --------
Cynthia A. Kolke 2,350,283 8,800
R. Bruce Stewart 2,350,283 8,800
Fred DeBoom 2,350,283 8,800
William D. Fox 2,350,283 8,800
Item 5. Other information
None
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
Exhibit 27, Financial Data Schedule Page 18
(b) Reports on Form 8-K
None
16
SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized
WHITEWING LABS, INC.
Date: October 23, 1996 /s/ Cynthia Kolke
---------------------------
Cynthia Kolke,
President
/s/ Elizabeth M. Meisler
---------------------------
Elizabeth M. Meisler,
Chief Financial Officer
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Financial Data Schedule
This schedule contains summary financial information extracted from the
Company's unaudited financial statements at September 30, 1995 and 1996, and is
qualified in its entirety by reference to such financial statements.
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-END> SEP-30-1995 SEP-30-1996
<CASH> 664,979 3,500,574
<SECURITIES> 0 0
<RECEIVABLES> 58,792 23,476
<ALLOWANCES> 0 0
<INVENTORY> 84,596 147,373
<CURRENT-ASSETS> 1,143,440 3,820,796
<PP&E> 109,818 119,443
<DEPRECIATION> 13,723 33,519
<TOTAL-ASSETS> 1,603,236 4,349,065
<CURRENT-LIABILITIES> 339,428 279,908
<BONDS> 0 0
0 0
0 0
<COMMON> 1,434 2,883
<OTHER-SE> 1,909,507 6,302,092
<TOTAL-LIABILITY-AND-EQUITY> 1,603,236 4,349,065
<SALES> 2,268,045 2,736,285
<TOTAL-REVENUES> 2,292,833 2,847,266
<CGS> 299,881 375,945
<TOTAL-COSTS> 2,229,972 4,375,918
<OTHER-EXPENSES> 467,477 714,946
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 17,814 4,259
<INCOME-PRETAX> 45,047 (1,532,911)
<INCOME-TAX> 5,000 3,605
<INCOME-CONTINUING> 40,047 (1,536,516)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 40,047 (1,536,516)
<EPS-PRIMARY> 0.02 (0.58)
<EPS-DILUTED> 0.02 (0.58)
</TABLE>
