<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
/X/ Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
/ / Transition Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For Fiscal Year Ended: December 31, 1995 Commission File Number: 0-17119
------------------ --------
ATHENA Medical Corporation
----------------------------------------------
(Name of small business issuer in its charter)
Nevada 33-0202574
------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
10180 SW Nimbus Ave., Suite J5
Portland, OR 97223
----------------------------------------
(Address of principal executive offices)
(503) 968-8800
---------------------------
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act: NONE
------
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.01 per share
---------------------------------------
(Title of 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. [ ]
Issuer's revenues for the fiscal year ended December 31, 1995: $51,076
---------
As of December 29, 1995, the aggregate market value of the voting stock
held by non-affiliates of the issuer was:
Common Stock, $.01 par value: $13,160,244
------------
As of December 29, 1995, the issuer had outstanding 8,948,243 shares of
its $.01 par value Common Stock.
1
<PAGE>
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.
ATHENA MEDICAL CORPORATION
By: S/ WILLIAM H. FLEMING
-----------------------
William H. Fleming
President, Chief Operating Officer,
Secretary and Director
Date: April 1, 1996
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 and on
the dates indicated:
Signature Title Date
- -------------------- --------------------------------------- --------------
S/ DAVID S. PORTER Vice President and Chief Financial April 1, 1996
- -------------------- Officer
David S. Porter
S/JOHN F. PERRY Chairman, Chief Executive Officer April 1, 1996
- -------------------- and Director
John F. Perry
S/WILLIAM H. FLEMING President, Chief Operating Officer, April 1, 1996
- -------------------- Secretary and Director
William H. Fleming
S/JAMES E. REINMUTH Director and Treasurer April 1, 1996
- --------------------
James E. Reinmuth
19
<PAGE>
ATHENA MEDICAL CORPORATION
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995 AND 1994
TOGETHER WITH AUDITORS' REPORT
<PAGE>
Report of Independent Public Accountants
To the Board of Directors and Stockholders of
ATHENA Medical Corporation:
We have audited the accompanying balance sheets of ATHENA Medical Corporation
(a Nevada corporation) as of December 31, 1995 and 1994, and the related
statements of operations, changes in stockholders' equity and cash flows for
the years then ended. 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 in accordance with generally accepted auditing
standards. Those standards 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 basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ATHENA Medical Corporation as
of December 31, 1995 and 1994, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon
March 20, 1996 (except with respect to the matters discussed in Note 9, as
to which the date is May 31, 1996)
F-1
<PAGE>
ATHENA MEDICAL CORPORATION
BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1994
ASSETS
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,464,041 $ 3,918,586
Accounts receivable 2,065 --
Stock subscriptions receivable -- 100,000
Equity securities, available for sale 93 90,505
Inventories 159,620 44,088
Prepaid expenses and other 258,396 25,388
Deferred financing fee -- 200,000
------------ ------------
Total current assets 2,884,215 4,378,567
EQUIPMENT AND FURNITURE 544,279 173,059
Less- Accumulated depreciation (95,726) (12,691)
------------ ------------
448,553 160,368
PATENTS AND LICENSES, net 19,529 25,138
LOANS RECEIVABLE- Officers and directors 116,760 120,000
------------ ------------
Total assets $ 3,469,057 $ 4,684,073
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 196,547 184,444
Accrued expenses 70,000 --
Accrued salaries and wages 15,720 46,058
Convertible debentures and notes -- 2,003,300
------------ ------------
Total current liabilities 282,267 2,233,802
COMMITMENTS AND CONTINGENCIES (Notes 2 and 7)
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value; authorized 33,000,000
shares; issued 8,948,243 shares and 6,914,743 shares
at December 31, 1995 and 1994, respectively 89,482 69,147
Additional paid-in capital 8,499,708 3,587,415
Accumulated deficit (5,402,400) (1,206,291)
------------ ------------
3,186,790 2,450,271
------------ ------------
Total liabilities and stockholders' equity $ 3,469,057 $ 4,684,073
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-2
<PAGE>
ATHENA MEDICAL CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
REVENUES:
Sales $ 51,076 $ --
------------ ------------
Net sales 51,076 --
COST OF SALES:
Cost of goods sold 40,520 --
------------ ------------
-- --
Cost of goods sold 40,520 --
------------ ------------
Gross margin 10,556 --
GENERAL AND ADMINISTRATIVE EXPENSES (4,122,464) (1,045,618)
------------ ------------
Operating loss (4,111,908) (1,045,618)
------------ ------------
OTHER INCOME (EXPENSE):
Interest income 182,266 1,154
Interest expense (266,467) (806)
------------ ------------
(84,201) 348
------------ ------------
Net loss $ (4,196,109) $ (1,045,270)
------------ ------------
------------ ------------
NET LOSS PER SHARE $ (.52) $ (.21)
------------ ------------
------------ ------------
WEIGHTED AVERAGE SHARES OUTSTANDING 8,012,632 4,949,798
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
ATHENA MEDICAL CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
Common Stock Additional Total
------------------ Paid-In Accumulated Stockholders'
Shares Amount Capital Deficit Equity
--------- ------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993 3,836,141 $38,361 $ 527,139 $ (161,021) $ 404,479
Common Stock issued in exchange for notes 30,865 309 12,191 -- 12,500
Common Stock issued for cash, $1.25 per share 261,667 2,616 103,384 -- 106,000
Common Stock issued for cash, $1.50 per share 73,667 737 109,763 -- 110,500
Common Stock issued for cash, $1.64 per share 18,288 183 29,809 -- 29,992
Common Stock issued for cash, $2.00 per share,
net of financing costs 1,154,285 11,543 2,272,027 -- 2,283,570
Common Stock issued for cash and stock
subscriptions receivable, $2.50 per share 86,800 868 216,132 -- 217,000
Common Stock issued in exchange for services 120,000 1,200 38,800 -- 40,000
Common Stock outstanding of former Xtramedics,
Inc. 1,333,030 13,330 (13,330) -- --
Options and warrants issued in exchange for
services -- -- 291,500 -- 291,500
Net loss -- -- -- (1,045,270) (1,045,270)
--------- ------- ------------ ----------- -------------
BALANCE, December 31, 1994 6,914,743 69,147 3,587,415 (1,206,291) 2,450,271
Common Stock issued on options exercised for
cash, $0.12 per share 20,000 200 2,200 -- 2,400
Common Stock issued on options exercised for
cash, $1.75 per share 13,500 135 23,490 -- 23,625
Common Stock issued on conversion of debentures,
$2.00 per share 2,000,000 20,000 3,980,000 -- 4,000,000
Options and warrants issued in exchange for
services -- -- 906,603 -- 731,603
Net loss -- -- -- (4,196,109) (4,196,109)
--------- ------- ------------ ----------- -------------
BALANCE, December 31, 1995 8,948,243 $89,482 $ 8,499,708 $(5,402,400) $ 3,011,790
--------- ------- ------------ ----------- -------------
--------- ------- ------------ ----------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
ATHENA MEDICAL CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,196,109) $ (1,045,270)
Adjustments to reconcile net loss to net cash flows
used in operating activities-
Depreciation and amortization 90,885 15,892
Amortization of deferred financing fee 200,000 --
Loss on disposal of assets 9,300 --
Net loss (gain) on sales of securities 27,563 (33,277)
Equity in loss of Xtramedics, Inc. -- 54,751
Services received for options and warrants issued 906,603 131,500
Changes in operating assets and liabilities:
Accounts receivable (2,065) --
Inventories (115,532) (33,588)
Prepaid expenses and other (233,008) (22,020)
Accounts payable 12,103 156,324
Accrued salaries and wages (30,338) 10,453
Accrued expenses 70,000 --
------------ ------------
Net cash used in operating activities (3,260,598) (765,235)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and furniture (382,761) (85,647)
Acquisition of Xtramedics, Inc., net of cash acquired -- (130,540)
Proceeds from sale of equity securities 62,849 287,772
------------ ------------
Net cash (used in) provided by investing
activities (319,912) 71,585
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible debentures and notes 1,996,700 2,003,300
Payments on (loans to) officers and directors 3,240 (120,000)
Net proceeds from sale of Common Stock and receipt of
payment on stock subscriptions receivable 126,025 2,703,062
------------ ------------
Net cash provided by financing activities 2,125,965 4,586,362
------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,454,545) 3,892,712
CASH AND CASH EQUIVALENTS, beginning of period 3,918,586 25,874
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 2,464,041 $ 3,918,586
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of Common Stock for stock subscriptions
receivable $ -- $ 100,000
Notes payable exchanged for Common Stock -- 12,500
Issuance of Common Stock and warrants in exchange
for services -- 200,000
Issuance of Common Stock on conversion of debentures 4,000,000 --
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
ATHENA MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
1. ORGANIZATION OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
ATHENA Medical Corporation (the Company) manufactures the Fresh `n Fit Padette
(the Padette), a female health care product. The Company anticipates that this
product will be ready for sale in the domestic retail market and for bulk
distribution in foreign markets in 1996. The Company is also engaged in the
research, development and commercialization of other female health care
products.
During 1994, the Company entered into a Share Exchange Agreement (the Agreement)
with ATHENA ProFem, Inc., a Nevada corporation (ATHENA) (see Note 5), to provide
additional resources to the Company. As a result of the Agreement, ATHENA
(dissolved prior to December 31, 1994) became a wholly owned subsidiary of the
Company, its stockholders exchanged their shares for shares of the Company, and
the Company changed its name to ATHENA Medical Corporation (see Note 5).
In addition, during 1994, the Company entered into an agreement with a private
investor for the sale of units comprised of the Company's Common Stock and
convertible debentures totaling $6 million. As of December 31, 1994, the
Company had received $4 million as a result of this transaction. The balance
of $2 million was received in April 1995 (see Note 8).
The Company reported net losses of $4,196,109 and $1,045,270 for the years
ended December 31, 1995 and 1994, respectively, and has an accumulated deficit
of $5,402,400 at December 31, 1995. The ultimate profitability of the Company
is dependent upon greater market acceptance of its products and establishing a
level of revenue adequate to support the costs of operations. In the meantime,
the Company's continued existence is dependent upon obtaining adequate
financing. See Note 9.
EQUITY SECURITIES
The Company's investments in equity securities are classified as available
for sale and are reported at approximate fair value. Unrealized holding gains
or losses on equity securities were not material at December 31, 1995 and 1994.
INVENTORIES
Inventories are valued at the lower of cost or market with cost determined on
a first-in, first-out basis and market based on the lower of replacement cost
or estimated realizable value.
F-6
<PAGE>
EQUIPMENT AND FURNITURE
Equipment and furniture are recorded at cost, except for assets acquired in
the acquisition noted above which are recorded at estimated fair value, and
depreciated on a straight-line basis over useful lives ranging from 3 to 10
years. Maintenance and repair costs are expensed as incurred; renewals and
betterments are capitalized.
PATENTS AND LICENSES
Patents and licenses are recorded at cost, except for patents and licenses
acquired in the acquisition noted above which are recorded at estimated fair
value, net of amortization. Costs are amortized over the remaining useful lives
ranging from 1 to 13 years.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). Under
SFAS 109, deferred tax assets and liabilities are recorded based on the tax
effected difference between the tax bases of assets and liabilities and their
carrying amount for financial reporting purposes, referred to as "temporary
differences," using enacted marginal income tax rates.
PER SHARE DATA
Net loss per share is based on the weighted average shares outstanding during
each period, adjusted retroactively for a 3.0857-for-one stock split effective
in June 1994. Stock options, warrants and convertible debentures have not been
used in the calculation of weighted average shares outstanding because their
effect would be antidilutive. All common stock and per share data included in
the financial statements have been retroactively adjusted to reflect the stock
split.
CASH AND CASH EQUIVALENTS
The Company considers all instruments with maturities of three months or less
when purchased, to be cash equivalents.
USE OF ESTIMATES
The preparation of these financial statements required the use of certain
estimates by management in determining the recorded amounts of the Company's
assets, liabilities, revenues and expenses. Actual results may differ from
these estimates.
RECLASSIFICATION
Certain reclassifications have been made to prior year amounts to conform to the
current year presentation.
2. RELATED PARTY TRANSACTIONS:
Under terms of a licensing agreement, the Company assumed an obligation to pay
royalties to an investor (who is a noncontrolling stockholder) based on varying
percentages of up to 5 percent of net sales of certain products through 1997.
The Company has rights to the licensing agreement for another two years at
December 31, 1995.
F-7
<PAGE>
On July 1, 1994, the Company entered into a three-year agreement with Sovereign
Ventures, LLC (Sovereign), an Oregon limited liability corporation which is
owned by two persons who were directors of the Company at the date of the
agreement. Both individuals voluntarily resigned from the Board of Directors
during 1995. The agreement called for Sovereign to provide assistance with
strategic and operational planning, market development, financing arrangements
and other consulting services. Under terms of the agreement, compensation for
those services totaled $352,000. The costs of services provided under the
agreement were expensed as the services were provided. Expenses incurred under
the agreement totaled $252,000 and $100,000 during 1995 and 1994, respectively.
The Company has no further obligations under the agreement.
3. INVENTORIES:
Inventories consisted of the following components at December 31:
1995 1994
-------- --------
Raw materials $134,741 $ 44,088
Work-in-process 7,781 --
Finished goods 17,098 --
-------- --------
$159,620 $ 44,088
-------- --------
-------- --------
4. COMMON STOCK OPTIONS AND WARRANTS:
During 1994, the Company adopted the 1994 Incentive and Non-Qualified Stock
Option Plan (the Incentive Plan), under which 5,300,000 shares of Common Stock
are reserved for issuance under qualified options, nonqualified options, stock
appreciation rights and other awards as set forth in the Incentive Plan. The
Incentive Plan provides for administration by a Committee comprised of not less
than two members of the Company's Board of Directors. Such Committee (or the
Board of Directors in its absence) determines the number of shares, option
price, duration and other terms of the options granted under the Incentive Plan.
Qualified options are available for issuance to employees of the Company.
Nonqualified options are available for issuance to consultants, advisors and
others having a relationship with the Company, on terms determined by the
Committee.
COMMON STOCK OPTIONS
Weighted Average
Shares Subject Exercise Price
to Options Per Share
------------- ---------------
Balance at December 31, 1993 1,234,280 $ .12
Options granted 749,750 3.27
Options exercised -- --
Options canceled -- --
-------------
Balance at December 31, 1994 1,984,030 1.32
Options granted 306,000 3.08
Options exercised (33,500) 0.78
Options canceled (120,000) 1.75
-------------
Balance at December 31, 1995 2,136,530 $1.67
------------- ---------------
------------- ---------------
F-8
<PAGE>
Of the outstanding options at December 31, 1995 and 1994, 1,973,780 and
1,861,280, respectively, were qualified stock options and 162,750 and 122,750,
respectively, were nonqualified stock options. The options are exercisable for
shares of the Company's Common Stock. Outstanding options and rights expire on
various dates through December 2005. The number of shares available for grant
under the Incentive Plan was 3,163,470 at December 31, 1995.
Qualified Stock Options
Weighted Average
Shares Exercise Price
Under Option Per Share
------------ ----------------
Number exercisable at December 31, 1995 1,542,030 $ .87
Number exercisable thereafter 431,750 $3.46
Nonqualified Stock Options
Weighted Average
Shares Exercise Price
Under Option Per Share
------------ ----------------
Number exercisable at December 31, 1995 27,750 $2.99
Number exercisable thereafter 135,000 $3.13
During 1995 and 1994, compensation expense in the amount of $28,800 and
$45,500, respectively, was recorded related to options granted for which the
exercise price was less than the fair market value of the stock at the date
of grant.
During 1994, the Company entered into the Agreement with ATHENA (see Note 5).
Under terms of the Agreement, the Company caused to be surrendered and canceled
all outstanding options to acquire shares of its Common Stock and Class B Common
Stock. The Company also adopted the Incentive Plan, which adopted in its
entirety, the 1993 Stock Incentive Plan of ATHENA.
COMMON STOCK WARRANTS
As of December 31, 1995, warrants for a total of 3,297,900 shares of Common
Stock had been awarded. The warrants may be exercised for shares of the
Company's Common Stock. No warrants were exercised or canceled during 1995 or
1994. The following summarizes outstanding warrants for shares of the Company's
Common Stock:
Shares Weighted Average
Subject to Exercise Price
Warrants Per Share
------------ ----------------
Balance at December 31, 1993 -- $ --
Warrants granted 2,305,750 1.34
------------
Balance at December 31, 1994 2,305,750 1.34
Warrants granted 992,150 2.37
------------
Balance at December 31, 1995 3,297,900 $1.65
------------ ------------
------------ ------------
Number exercisable at December 31, 1995 3,011,165 $1.59
Number exercisable thereafter 286,735 2.28
F-9
<PAGE>
The Company recorded expense in the amount of $877,803 and $86,000 during 1995
and 1994, respectively, related to warrants issued for services rendered for
which the exercise price was less than the fair market value of the stock at the
date of grant.
Subsequent to December 31, 1995, the Company granted warrants for 55,000 shares
of Common Stock for services rendered or to be rendered in the future. The
warrants are exercisable at prices ranging from $1.50 to $3.00 per share and
expire in December 2004.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation" which establishes a fair value approach to measuring compensation
expense related to employee stock plans and to other stock-based compensation
awards. In 1996, the Company must either account for awards granted under
employee stock plans and stock-based grants to nonemployees after January 1,
1995 under the provisions of SFAS 123, or provide detailed disclosures in lieu
of adoption. The Company plans to only adopt the disclosure provisions of
SFAS 123.
5. AGREEMENT WITH ATHENA:
During February 1994, the Company entered into the Share Exchange Agreement
with ATHENA. In conjunction with the Agreement and to facilitate the share
exchange, the Company effected a 1-for-10 reverse stock split and ATHENA
effected a 3.0857-for-one stock split. After giving effect to these splits,
the Company's stockholders exchanged 1,893,631 shares of its Common Stock with
the ATHENA stockholders for 1,893,631 shares of ATHENA's common voting stock
(the initial share exchange). Also, in accordance with terms of the Agreement,
the Company's directors resigned and the directors of ATHENA were appointed to
the Board of the Company, the Company converted its Class B Common Stock to
Common Stock and changed its name to ATHENA Medical Corporation.
During June 1994, an additional 2,204,181 shares of the Company's Common Stock
were issued to the ATHENA stockholders in exchange for the remaining issued
shares of ATHENA (the second share exchange). As a result, the ATHENA
stockholders owned, as a group, 75.45 percent of the outstanding shares of the
Company. The remaining 24.55 percent of the outstanding shares of the former
Company's (Xtramedics, Inc.) Common Stock, 1,333,030 shares, represented shares
held by shareholders who were not parties to the Agreement. Accordingly, those
shares were treated as issued and outstanding in the Company's statements of
changes in stockholders' equity and in the computation of weighted average
shares outstanding.
The Agreement also provided for holders of ATHENA options the right to exchange
those options for options to purchase shares in the Company under the Incentive
Plan (see Note 4). Outstanding options would have increased the group's
ownership to 80 percent if exercised.
F-10
<PAGE>
The transaction discussed above was accounted for as a reverse acquisition.
Accordingly, the accompanying financial statements present the financial
position and results of operations of ATHENA and its 58.69 percent equity in
the results of the Company from the date of the initial share exchange to the
date of the second share exchange, and the combined financial position at
December 31, 1994 and the combined results of operations and cash flows of the
two companies for the period from the date of the second share exchange through
December 31, 1994. ATHENA was dissolved as of December 31, 1994. The purchase
price paid, including liabilities assumed, was allocated to the fair value of
assets acquired and liabilities assumed as follows:
Inventories $ 10,500
Prepaid expenses 700
Patents and licenses 29,500
Equipment and furniture 125,605
Accrued salaries and wages (10,765)
--------
$155,540
--------
--------
No value was attributed to the shares exchanged as a result of the Agreement.
The unaudited loss on a pro forma basis as though the acquisition had occurred
as of the beginning of the year ended December 31, 1994 is as follows:
General and administrative expenses $(1,083,805)
-----------
Net loss $(1,083,805)
-----------
-----------
Net loss per share $ (.20)
-----------
-----------
Weighted average shares outstanding 5,512,737
-----------
-----------
6. INCOME TAXES:
As of December 31, 1995, the Company had federal net operating loss (NOL)
carryforwards of approximately $1.3 million. If not applied against future
taxable income, the federal NOL carryforwards will expire in the years 2001
through 2010. Changes in the Company's ownership have caused an annual
limitation on the amount of carryforwards that can be utilized and start-up
costs that can be amortized. As of December 31, 1995, the Company had net
deferred tax assets of approximately $3.4 million primarily resulting from
deferred start-up costs and NOL carryforwards. In accordance with SFAS 109,
a valuation allowance was recorded to reduce net deferred tax assets to zero.
As of December 31, 1994, the Company had federal NOL carryforwards and deferred
tax assets of approximately $.9 million and $1.8 million, respectively,
resulting primarily from the deferred start-up costs and NOL carryforwards.
A valuation allowance was recorded to reduce net deferred tax assets to zero.
The change in the valuation reserve during 1995 was approximately $1.6 million.
7. COMMITMENTS AND CONTINGENCIES:
The Company has employment contracts with its Chief Executive Officer and its
President, both of whom are directors of the Company. Under terms of the
contracts, the Company committed to pay annual salaries for the five-year period
commencing June 15, 1993. As of December 31, 1995, salaries related to these
contracts totaled $260,000 per year and, under terms of the contracts, may be
increased in the future.
F-11
<PAGE>
The Company leases its office and manufacturing facilities. Other leases have
terms of one year or less. Future minimum lease payments for office and
manufacturing facilities at December 31, 1995 totaled $115,327 and are payable
as follows:
1996 $95,754
1997 19,573
Rent expense was $96,250 and $28,547 for the years ended December 31, 1995 and
1994, respectively.
As of March 1996, the Company relocated its corporate office and product
development facilities to 7,100 square feet of leased space within the same
business park as its former office. The new lease, with monthly payments of
$6,635, commences April 1, 1996 and expires February 28, 1999.
Subsequent to December 31, 1995, the Company entered into capital lease
arrangements for equipment to be used in expanding production lines and also in
research and development activities. The aggregate amount of these capital
lease obligations is approximately $300,000. The leases commence in February
1996 and expire at various dates through March 1999.
During 1995, the Company was named as a defendant in a civil action brought in
the Circuit Court of Oregon for Washington County by Kassia International
Incorporated (the Plaintiff). The complaint alleges that the Company breached
its obligations to complete the purchase of the Plaintiff in the spring of 1995
and seeks damages of up to $6 million under various theories. Although the
Company intends to vigorously defend against such lawsuit, the Company cannot
predict the outcome of the lawsuit. An award of damages or the expenditure of
significant sums even in the successful defense of the case could have a
material adverse effect on the Company's financial condition and results of
operations.
8. FINANCING TRANSACTION:
During December 1994, the Company entered into a $6 million debt and equity
financing agreement with a group of private investors. Under terms of the
agreement, the Company issued 1 million units priced at $6 per unit. Each unit
was comprised of one share of the Company's Common Stock and $4 of convertible
debenture.
At December 31, 1994, all of the stock and half of the convertible debentures
had been issued in exchange for $4 million. The remaining debentures were
issued for $2 million in April 1995.
Terms and conditions of the debentures required monthly interest payments at
the rate of 5 percent per annum. Cash paid for interest was $66,467 and $806
in the years ended December 31, 1995 and 1994, respectively.
In accordance with the financing agreement, as amended in March 1995 and June
1995, the debentures automatically converted at the rate of one share for each
$2.00 of debentures, into shares of the Company's Common Stock in June 1995.
In connection with the financing, the Company issued 120,000 shares of its
Common Stock to one of the investors, whose president was subsequently
appointedto the Company's Board of Directors, and 480,000 warrants to certain
other parties, all for services provided in facilitating the transaction. The
investor's president resigned from the Board effective in December 1995. The
shares and warrants were valued consistent with shares issued in the
transaction. A portion of this value was attributed to the issuance of the
debentures. Accordingly, a portion of the value of the shares and warrants was
deferred as a financing fee and amortized over the term of the debentures.
9. SUBSEQUENT EVENTS:
FINANCING COMMITMENT
During May 1996, the Company received a commitment from a group of private
investors for $1 million in cash in exchange for 520,833 shares of the Company's
Common Stock. The Company is to receive $500,000 upon closing and may draw the
additional $500,000 until October 15, 1996 in the event satisfactory financing
is not completed by August 29, 1996. The financing is intended to assist in
meeting the Company's operating needs while it pursues additional sources of
financing.
In addition, the Company received a commitment for $225,000 in cash from the
same group of investors in exchange for 114,796 shares of the Company's Common
Stock. The financing is intended to allow the Company to meet its obligation
for the expected salary and related benefits associated with the hiring of a
Director of International Sales and Marketing. Under terms of the financing,
the proceeds will be held in escrow and drawn periodically as required over a
two-year period.
ISSUANCE OF OPTIONS AND WARRANTS
During May 1996, the Company granted qualified stock options to certain
employees for a total of 125,000 shares of the Company's Common Stock at an
exercise price of $4.69 per share. The options expire in May 2006.
Also during May 1996, the Company granted warrants for 260,000 shares of the
Company's Common Stock to a certain director and to certain consultants of the
Company. The warrants are exercisable at prices from $4.69 to $5.00 per share
and expire in May 2001 and June 2001.
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