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 March 31, 1997
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 [ ]
The number of shares of common stock outstanding as of April 30, 1997 was
2,866,938.
1
WHITEWING LABS, INC.
FORM 10-QSB FOR QUARTER ENDED MARCH 31, 1997
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Balance Sheets at December 31, 1996 and March 31, 1997...........3
Statements of Operations for the Three Months Ended
March 31, 1996 and 1997......................................5
Statements of Cash Flows for the Three Months Ended
March 31, 1996 and 1997......................................6
Notes to the Financial Statements................................8
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition.........................12
PART II. OTHER INFORMATION.................................................17
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE PAGE..............................................................18
2
<TABLE>
Whitewing Labs, Inc.
Balance Sheets
December 31, 1996 and March 31, 1997
<CAPTION>
ASSETS
December 31, March 31,
1996 1997
------------ -----------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,524,391 $ 1,678,100
Inventories 143,519 158,842
Prepaid advertising 379,095 364,269
Other prepaid expenses 38,906 52,310
Other receivables 46,604 30,347
----------- -----------
Total current assets 3,132,515 2,283,868
----------- -----------
EQUIPMENT:
Furniture and fixtures 119,443 119,443
Less--accumulated depreciation (39,108) (44,880)
----------- -----------
80,335 74,563
----------- -----------
OTHER ASSETS:
Deferred advertising 182,061 129,141
Investment in related-party
partnership, at cost 100,000 100,000
Deferred taxes 220,000 200,000
Other 5,345 5,529
----------- -----------
507,406 434,670
----------- -----------
TOTAL ASSETS $ 3,720,256 $ 2,793,101
=========== ===========
</TABLE>
See accompanying notes
3
<TABLE>
Whitewing Labs, Inc.
Balance Sheets
December 31, 1996 and March 31, 1997
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31, March 31,
1996 1997
------------ -----------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 295,393 $ 81,378
Accounts payable to shareholder 22,190 -
Accrued liabilities 23,459 7,786
Deferred taxes 220,000 200,000
------------- ----------
Total current liabilities 561,042 289,164
------------- ----------
COMMITMENTS AND CONTINGENCIES:
SHAREHOLDERS' EQUITY:
Common stock, $.001 par value:
Authorized, 10,000,000 shares
Issued and outstanding,
2,891,388 shares at December 31,
1996, and 2,851,938 shares
at March 31, 1997 2,891 2,891
Paid-in capital 6,318,977 6,318,977
Accumulated deficit (3,117,235) (3,742,525)
Less--
Treasury stock, at cost
17,600 shares at December 31,
1996 and 39,450 shares at
March 31, 1997 (45,419) (75,406)
------------ -----------
Shareholders' equity 3,159,214 2,503,937
------------ ------------
$ 3,720,256 $ 2,793,101
============ ============
</TABLE>
See accompanying notes
4
<TABLE>
Whitewing Labs, Inc.
Statements of Operations
For the Three Months Ended March 31, 1996 and 1997
(Unaudited)
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
NET SALES $ 996,028 $ 658,518
COST OF GOODS SOLD 130,164 84,206
---------- ----------
Gross profit 865,864 574,312
OPERATING EXPENSES
Advertising 550,312 521,770
Selling 222,139 494,836
General and administrative 233,818 206,546
---------- -----------
1,006,269 1,223,152
---------- -----------
Loss from operations (140,405) (648,840)
OTHER INCOME 23,775 23,550
INTEREST EXPENSE 4,259 -
---------- -----------
Loss before provision
for income taxes (120,889) (625,290)
PROVISION FOR INCOME TAXES 3,605 -
---------- -----------
NET LOSS (124,494) (625,290)
PREFERRED STOCK DIVIDENDS
EARNED AND ACCRUED $ 10,073 -
---------- -----------
Net loss attributable
to common stockholders $ (134,567) (625,290)
========== ===========
LOSS PER COMMON SHARE $ (0.06) $ (0.22)
========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,070,878 2,864,310
========== ===========
</TABLE>
See accompanying notes
5
<TABLE>
Whitewing Labs, Inc.
Statements of Cash Flows
For the Three Months Ended March 31, 1996 and 1997
(Unaudited)
<CAPTION>
1996 1997
--------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(124,494) $ (625,290)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 4,002 5,772
Changes in assets and liabilities:
Inventories (57,256) (15,323)
Prepaid advertising (24,019) 14,826
Other prepaid expenses (43,308) (13,404)
Other receivables 1,503 16,257
Deferred advertising (39,549) 52,920
Other deposits (5,243) (184)
Accounts payable (48,745) (236,205)
Accrued liabilities (17,502) (15,673)
Accrued interest payable (43,051) -
---------- ----------
Net cash used in operating activities (397,662) (816,304)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture and fixtures (5,150) -
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred offering costs 174,261 -
Payments to shareholder (114,247) -
Net proceeds from issuance of common stock 4,107,849 -
Net proceeds from issuance of common stock warrants 180,090 -
Net proceeds from issuance of common
stock upon exercise of options 135,063 -
Repurchase of common stock - (29,987)
Payment of cash dividends (32,761) -
---------- ----------
Net cash provided by financing activities 4,450,255 (29,987)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,047,443 (846,291)
CASH AND CASH EQUIVALENTS, beginning of year 423,622 2,524,391
--------- ----------
CASH AND CASH EQUIVALENTS, end of period $4,471,065 $1,678,100
========== ==========
See accompanying notes
6
1996 1997
---------- ----------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for income taxes $ 3,605 $ -
========== ==========
Cash paid for interest $ 4,259 $ -
========== ==========
SUPPLEMENTAL DISCLOSURES OF
NON CASH FINANCING ACTIVITIES:
Cumulative convertible preferred stock
converted to common stock $ 732,149 $ -
========== ==========
</TABLE>
See accompanying notes
7
WHITEWING LABS, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1997
(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, 1996.
b. Prepaid and 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.
Magazines, newspapers, weekly publications, and direct mailings
including postcard inserts, tear sheets, holiday special mailers and
the Journal of Natural Health "TM" comprise the main components of the
Company's direct-response marketing efforts and its primary purpose
is to elicit sales to customers. Payments to vendors in advance of the
run date are included in prepaid advertising. Respondents are logged
into a customer base which indicates the source of each customer's
response to the specific advertisement.
The Company's accounting policy for amortizing the costs of prepaid and
deferred advertising placements and mailings is based upon management's
estimates over the periods in which the related direct responses are
received. The Company evaluates the realizability of its direct-
response advertising by comparing the carrying amount of prepaid and
deferred advertising at each balance sheet date on a cost-pool-by-cost-
pool basis to the probable remaining future net revenues expected to
result from such advertising. Any excess carrying amount over probable
remaining future revenues is reported as advertising expense in the
current period. Newspaper and weekly publications are expensed 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 cost over three
8
months with 60 to 80 percent of the costs amortized over two months and
such costs are included in other assets as deferred advertising.
Substantially all of the deferred advertising costs will be fully
amortized within four months of December 31, 1996. For the three months
ended March 31, 1996 and 1997 respectively, advertising expense was
$550,312 and $521,770 respectively.
Prepaid advertising includes approximately $254,000 of costs related to
the development of electronic in-home delivery of product advertising
which the Company began test airing in February 1997. Additional
unpaid costs of electronic delivery advertising of $27,450 are due
and payable in 1997. The Company is obligated to pay related talent
costs of 3 percent of gross profits from sales generated in 1997 after
the test airing is completed. It is management's intention to expense
the costs related to the electronic in-home delivery of product
advertising beginning in 1997 and over a period not to exceed
the lesser of the revenue earning stream directly related to the
electronic in-home delivery of product advertising or one year, which
ever comes first.
c. Reclassifications
Certain reclassifications have been made to the accompanying condensed
financial statements to conform them with the current period presentation.
d. Estimates Used by Management
The preparation of financial statements in conformity with generally
accepted accounting principles 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 reported period. Actual results could differ
from those estimates.
e. Concentration of Risk
Production, order taking and order fulfillment are outsourced to an
outside company and two independent contractors, respectively, which
potentially subjects the Company to a concentration of supplier risk.
In addition, substantially all printing is handled by an outside
company and substantially all advertising placement, including purchase
of mailing lists for direct mail programs, is handled by an outside
service agency. Although these services are currently concentrated
with a few key suppliers, management believes that other suppliers
could provide similar services and comparable terms. A change in
suppliers however could cause delay in manufacturing, shipping,
advertising placements and implementation of direct mail programs and a
possible loss of sales which could affect operating results adversely.
9
2. Summary of Operations
a. Reincorporation in Delaware
On February 9, 1996, the Company merged with Whitewing Labs, Inc., a
Delaware corporation, which recently was formed as a wholly-owned
subsidiary of the Company and reincorporated in the State of Delaware
(the "Reincorporation"). As a result of the Reincorporation, each holder
of outstanding common stock of the Company, and each holder of the
outstanding preferred stock, received three shares of the Delaware
corporation's common stock for every two shares of the Company's common
stock or preferred stock held of record on the Effective Date of the
Reincorporation.
b. Proceeds from Completion of Initial Public Offering
On February 20, 1996, the Company completed its initial public offering
and issued 900,000 shares of common stock and 1,035,000 common stock
purchase warrants. On March 18, 1996, the Company issued an additional
135,000 shares of common stock which reflected shares of common stock
set aside to cover any over-allotments related to the public offering.
Total proceeds related to the issuance of the 1,035,000 shares of
common stock and common stock purchase warrants were approximately
$4,270,000 which is net of $412,092 in offering costs and $699,660 in
broker discounts.
3. Loss per Common Share
For the three month periods ended March 31, 1996 and 1997 respectively,
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 $20,000 and $5,000 at December 31, 1996 and
March 31, 1997, respectively.
5. Stock Repurchase
During the three months ended March 31, 1997, the Company acquired 21,850
shares of its common stock for approximately $29,900 in connection with a
stock repurchase program 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.
6. Litigation
The Company was notified by letter dated January 12, 1996, that the
Federal Trade Commission (FTC) was conducting a preliminary, non-public
investigation regarding the advertising and sale of Prostsafe "R", which
represented 79% of total Company sales during the year ended December 31,
1996. The Company did not believe that this advertisement made any false
or unsubstantiated claims and had submitted a formal written response to
the FTC inquiry. On March 26, 1997, the Company was notified by its legal
counsel that the FTC had concluded its investigation and closed its file
without taking any action.
10
On August 16, 1996, a former director of the Company and her husband,
filed a legal action against the Company and Acacia Research Corporation
its largest shareholder, in the United States District Court in Los
Angeles, entitled Christopher D. Hodges and Ann P. Hodges v. Acacia Research
Corporation and Whitewing Labs, Inc., Case No 96-5551R (Ex). The suit
alleged, 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. Legal
counsel was jointly retained by the Company and Acacia, the co-defendant,
and Acacia assumed primary defense thereof, as well as assuming sole
responsibility for all litigation costs incurred in connection with such
joint representation. On May 7, 1997, the lawsuit was settled with no
associated costs due from the Company.
7. Advertising
The Company has commitments for magazine placements of $67,178 at
March 31, 1997.
8. Earnings per Share and Capital Structure
In March 1997, the FASB issued SFAS No. 128, "Earnings per Share"
(SFAS 128) and SFAS 129 "Disclosure of Information about Capital
Structure" (SFAS 129). SFAS 128 revises and simplifies the computation
for earnings per share and requires certain additional disclosures. SFAS
129 requires additional disclosures regarding the Company's capital
structure. Both standards will be adopted in fiscal 1997. Management
does not expect the adoption of these standards to have a material effect
on the Company's financial position or the results of operations.
9. Subsequent Events
Subsequent to March 31, 1997, the Company has repurchased 2,000 shares
of common stock for $1,500 and may or may not make future repurchases.
11
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
General. The Company 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. 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 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.
The Company's stated strategy for the development of its business is to stress
growth of the customer base over short-term profits; management believes
that, in the long run, potential net earnings will be driven by continued
growth of the customer base. During the first quarter of 1997, utilizing
a portion of the net proceeds from its February 1996 public offering, the
Company continued its efforts to expand the customer base by investing
approximately $1,100,000 in a combination of marketing and selling activities,
including magazine advertising placements, direct mail which both tests new
mailing lists and identifies new names on lists used in the past, and testing
of electronic in-home delivery of product advertising. While losses were
anticipated in building the customer base, they have been greater than
expected. This was in part due to steadily increasing competition over the
last year for the flagship product, Prostsafe"R". The Company has made several
substantial investments by both expanding its product line to 27 products and
increasing the customer base from 59,000 in March of 1996 to over 89,000
currently. In view of the expanded customer base, the Company has now modified
its marketing strategy for the short term by significantly reducing advertising
and certain selling expenditures related to attracting additional customers, as
it focuses on efforts to generate additional revenue from existing customers.
As of March 31, 1997, the Company had an accumulated deficit of $3,742,525.
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.
12
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 over
the last three years have been approximately 3% of sales, which is substantially
less than the national average of 6%, there can be no assurance that actual
levels of returns will not significantly exceed amounts which have occurred in
the past.
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.
In March 1997, the FASB issued SFAS No. 128, "Earnings per Share"
(SFAS 128) and SFAS 129 "Disclosure of Information about Capital Structure"
(SFAS 129). SFAS 128 revises and simplifies the computation for earnings per
share and requires certain additional disclosures. SFAS 129 requires
additional disclosures regarding the Company's capital structure. Both
standards will be adopted in fiscal 1997. Management does not expect the
adoption of these standards to have a material effect on the Company's
financial position or the results of operations.
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.
13
Results of Operations.
Net Sales. The Company's net sales during the quarter ended March 31, 1997
were $658,518, a decrease of approximately 33.9% over net sales of $996,028
during the quarter ended March 31, 1996. At March 31, 1997, the Company's
customer base had grown to approximately 89,000, up from approximately 59,000
at March 31, 1996. Sales, particularly of the Company's flagship product,
Prostsafe "R", did not increase to the levels anticipated, relative to the
substantial increase in selling costs.
The average orders from new and existing customers were approximately
$61 and $76 respectively, for the quarter March 31, 1997, compared
to average orders of approximately $55 from new customers and $82 from
existing customers respectively for the first quarter of the prior year.
Sales of the Company's Prostsafe "R" accounted for 68.2% of the Company's
sales for the quarter ended March 31, 1997, and for approximately 81.3% of
net sales for the quarter ended March 31, 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,
as quantities sold of the Company's other products increase. 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 in 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
adversely affect the Company's product marketshare.
Gross Profit. Cost of goods sold for the Company's products represented
12.8% and 13.0% of net sales for the three months ended March 31, 1997 and
1996 respectively. During the quarters ended March 31, 1997 and 1996,
the Company recognized gross profits of $574,312 and $865,864, or 87.2% and
87.0% of net sales, respectively.
Advertising Expense. During the three months ended March 31, 1997,
advertising expense decreased to $521,770, compared to $550,312 for
the same period last year. The decrease reflects fewer magazine placements
made in the first quarter of 1997. While advertising decreased in absolute
dollars during the quarter ended March 31, 1997, it increased as a percentage
of net sales to 79.2% compared to 55.3% of net sales for the same period last
year.
14
Selling Expense. During the three months ended March 31, 1997, selling
expenses increased to $494,836, compared to $222,139 for the same period in
1996, and increased as a percentage of net sales to 75.1%, compared to 22.3%
of net sales for the three months ended March 31, 1996. The increase
is primarily due to a more aggressive direct mail program in the first quarter
of 1997 compared to 1996 and costs incurred to test electronic in-home delivery
of product advertising. The Company expects to benefit in future periods from
the conversion of leads obtained from electronic in-home delivery of product
advertising to customers.
General and Administrative Expense. General and administrative expenses
decreased in absolute dollars to $206,546 for the first three months of 1997,
from $233,818 for the first three months of 1996, primarily due to a decrease
in legal costs, which were incurred on a one-time only basis in the first
quarter of 1996. For the quarter ended March 31, 1997, general and
administrative expenses represented 31.4% of net sales, increasing as a
percentage of net sales from 23.5% for the three months ended March 31, 1996.
Loss From Operations. The Company incurred losses from operations for the
three months ended March 31, 1997 of $648,840, compared to losses from
operations of $140,405 during the three months ended March 31, 1996. Losses
during the first quarter of 1997 and 1996 were mainly attributable to increases
in advertising and selling costs as the Company sought to aggressively expand
its customer base. Anticipated revenues for the first quarter of 1997 from
mailings to existing customers, magazine placements and the testing of
electronic in-home delivery of product advertising, did not materialize
resulting in a substantial loss for the first quarter of 1997.
Interest Expense. There was no interest expense for the three months ended
March 31, 1997. 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 during the first quarter of
1996. For the three months ended March 31, 1996, interest expense represented
0.4% of sales.
Liquidity and Capital Resources
In its initial public offering in February 1996, the Company raised net
proceeds, after deduction of underwriting discounts and other expenses of the
offering amounting to $1,111,752, of approximately $4,270,000. The Company's
public offering was to generate adequate funds to allow for growth of the
Company's sales and database than might be achieved if the Company relied
only upon revenues generated from sales. A large portion of the net proceeds
to the Company, was earmarked to finance expanded advertising, marketing and
sales activities, with the balance available for use for other general
corporate purposes to support the Company's ongoing operations, including
general administrative costs and expenses.
At March 31, 1996, the Company had cash on hand of $4,471,065. A portion
of these proceeds was used to pay the principal balance of $114,247, plus
accrued interest of $47,310 owing to Acacia in respect of loans previously made
to the Company by Acacia, the Company's largest shareholder. A portion of
the proceeds was also used to build inventories and finance magazine and direct
mail advertising.
15
At March 31, 1997, the Company had cash on hand of $1,678,100 down
$846,291 from the December 31, 1996 amount of $2,524,391. The decrease
was primarily the result of a $236,205 decrease in accounts payable relating
mainly to expenditures for magazine advertising and for development and testing
of electronic in-home delivery of product advertising.
The Company initiated an open market stock repurchase program 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 Company acquired 21,850
shares of its common stock for approximately $29,900 during the first three
months of 1997 bringing the total shares acquired to date to 39,450. The
Company has authorized a repurchase of up to an additional 10,150 shares and
may or may not make future repurchases.
The Company believes that expected cash flow plus the remaining proceeds
from 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.
16
PART II OTHER INFORMATION
Item 1. Legal proceedings
The Company was notified by letter dated January 12, 1996, that the
Federal Trade Commission (FTC) was conducting a preliminary, non-public
investigation regarding the advertising and sale of Prostsafe "R". The
Company did not believe that this advertisement made any false or
unsubstantiated claims and had submitted a formal written response to
the FTC inquiry. On March 26, 1997, the Company was notified by its legal
counsel that the FTC had concluded its investigation and closed its file
without taking any action.
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
Christopher D. Hodges and Ann P. Hodges v. Acacia Research Corporation
and Whitewing Labs, Inc., Case No 96-5551R (Ex). The suit alleged,
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.
Legal counsel was jointly retained by the Company and Acacia, the
co-defendant, and Acacia assumed primary defense thereof, as well as
assuming sole responsibility for all litigation costs incurred in
connection with such joint representation. On May 7, 1997, the lawsuit
was settled with no associated costs due from the Company.
Item 6. Exhibits and reports on Form 8-K
Exhibit 27, Financial Data Schedule Page 19
17
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: May 13, 1997 /s/ Cynthia Kolke
---------------------------
Cynthia Kolke,
President, Assistant Secretary
and Director
/s/ Elizabeth M. Meisler
---------------------------
Elizabeth M. Meisler,
Chief Financial Officer
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Financial Data Schedule
This schedule contains summary financial information extracted from the
Company's unaudited financial statements at March 31, 1996 and 1997, and is
qualified in its entirety by reference to such financial statements.
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-END> MAR-31-1996 MAR-31-1997
<CASH> 4,471,065 1,678,100
<SECURITIES> 0 0
<RECEIVABLES> 15,612 30,347
<ALLOWANCES> 0 0
<INVENTORY> 250,490 158,842
<CURRENT-ASSETS> 5,202,367 2,283,868
<PP&E> 117,899 119,443
<DEPRECIATION> (22,712) (44,880)
<TOTAL-ASSETS> 5,847,815 2,793,101
<CURRENT-LIABILITIES> 315,419 289,164
<BONDS> 0 0
0 0
0 0
<COMMON> 2,828 2,891
<OTHER-SE> 6,353,309 6,243,571
<TOTAL-LIABILITY-AND-EQUITY> 5,847,815 2,793,101
<SALES> 996,028 658,518
<TOTAL-REVENUES> 1,019,803 682,068
<CGS> 130,164 84,206
<TOTAL-COSTS> 1,136,433 1,307,358
<OTHER-EXPENSES> 233,818 206,546
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 4,259 0
<INCOME-PRETAX> (120,889) (625,290)
<INCOME-TAX> 3,605 0
<INCOME-CONTINUING> (124,494) (625,290)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (124,494) (625,290)
<EPS-PRIMARY> (0.06) (0.22)
<EPS-DILUTED> (0.06) (0.22)
</TABLE>
