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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
/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
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ATHENA Medical Corporation
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(Name of small business issuer in its charter)
Nevada 33-0202574
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
10180 SW Nimbus Ave., Suite J5
Portland, OR 97223
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(Address of principal executive offices)
(503) 968-8800
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(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act: NONE
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.01 per share
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(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
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As of March 15, 1996, the aggregate market value of the voting stock
held by non-affiliates of the issuer was:
Common Stock, $.01 par value: $31,318,850
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As of March 15, 1996, the issuer had outstanding 8,948,243 shares of its
$.01 par value Common Stock.
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PART I
Item 1. Description of Business
(a) GENERAL NATURE AND DEVELOPMENT OF BUSINESS
ATHENA Medical Corporation (the "Company" or "Registrant") was incorporated
under the laws of the State of Nevada on December 9, 1986 as Xtramedics, Inc.
The Company has adopted July 1, 1993 as its date of inception as a result of
a share exchange agreement (the "Share Exchange Agreement") discussed below.
The Company is engaged in the development of female health care products, and
has, as its initial revenue-producing product, the Fresh 'n Fit-Registered
Trademark- interlabial pad (the "Padette") which was designed to provide a
safe, comfortable and convenient alternative to existing feminine protection
products. The Company received Food and Drug Administration (FDA) clearance
to market the Padette in 1989 under a 510(k) application. The Company holds
an exclusive worldwide license to the initial U.S. and foreign patents
covering the Padette and has an additional patent of its own and has applied
for another patent. The Company anticipates applying for additional patents
during 1996. (See "Narrative Description of Business-Products")
In July 1988, the Company completed a public offering of shares of common
stock of the Company, $0.01 par value ("Common Stock") and Redeemable Class A
Common Stock Purchase Warrants, all of which have expired. The net proceeds
of the offering, after expenses, were $3,096,610, all of which was
subsequently consumed by operations.
From June 1989 until August 1991 the Company test marketed the Padette in
Tallahassee, Florida under the trade name Fresh 'n Fit-Registered Trademark-.
In mid-1990, the Company recognized that it did not have the resources to
expand the distribution of its Fresh 'n Fit-Registered Trademark- Padettes
beyond its test market in Tallahassee.
On February 17, 1994, the Company entered into the Share Exchange Agreement
with ATHENA ProFem, Inc., a closely-held Nevada corporation, which had merged
with ATHENA Medical Corporation, an Oregon corporation ("ATHENA"), effective
February 9, 1994. Under the terms of the Share Exchange Agreement, the
Company initially issued 18,936,308 shares (before a subsequent 10 for 1
reverse stock split) of its Common Stock to the ATHENA stockholders in
exchange for 613,679 shares of ATHENA's common voting stock (the "First
Exchange"). ATHENA had no other class of voting securities.
Effective June 7, 1994, 2,204,181 additional shares of the Company's Common
Stock were issued to the ATHENA stockholders solely in exchange for the
remaining issued voting stock of ATHENA (the "Second Exchange"). As a
result, the ATHENA stockholders owned, as a group, 75.45% of all outstanding
voting securities of the Company and, if options to acquire additional shares
of the Company were exercised, 80% of all outstanding voting securities, at
the date of the Second Exchange. The remaining 24.55 percent of the
outstanding shares of the former company's (Xtramedics, Inc.) Common Stock,
1,333,030 shares, represent outstanding shares whose shareholders were not
parties to the Share Exchange Agreement.
Pursuant to the Share Exchange Agreement, ATHENA paid to Xtramedics, Inc. the
sum of $100,000 during 1993 and 1994 which was used to pay liabilities of
Xtramedics, Inc. due to various creditors, including former employees for
accrued compensation.
The Share Exchange Agreement also provided for, and there has occurred, the
voluntary resignations of the former officers and Directors of the Company,
and the corresponding appointment by the Board of Directors of John F. Perry
as Chairman and Chief Executive Officer, and William H. Fleming as President,
Chief Operating Officer and Secretary of the Company. Mr. Perry was the
President and CEO of the Company between 1986 and 1990. He was not an
officer or director of the Company from 1990 until the Share Exchange
Agreement in February 1994. Pursuant to the Share Exchange Agreement, the
Company has assumed and agreed to employment contracts with Mr. Perry and Mr.
Fleming on the same terms and
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conditions as applicable to their former employment with ATHENA. In
addition, the Share Exchange Agreement provided for the appointment by the
Board of Directors of Mr. Perry and Mr. Fleming as members of the Board.
Shortly after the Second Exchange, the Board of Directors appointed Denis R.
Burger and Michael C. Hubbard to fill vacancies on the Board. In February
1995, Dr. Burger and Mr. Hubbard each voluntarily, and without disagreement,
resigned from the Company's Board of Directors, and Mr. Hubbard voluntarily
resigned as Treasurer, in February 1995.
Pursuant to the Share Exchange Agreement, and with the approval of the
holders of a majority of the voting power of the Common Stock and of the
Class B Common Stock of the Company, the Company amended its Articles of
Incorporation to (a) effect a 1-for-10 reverse stock split; (b) eliminate its
Class B Common Stock (and provide for automatic conversion of issued Class B
Common Stock to Common Stock); (c) eliminate cumulative voting rights; (d)
eliminate (to the extent not already provided in the Company's Articles)
preemptive rights; and (e) change the name of the Company from Xtramedics,
Inc. to "ATHENA Medical Corporation."
The transactions described above resulted in ownership by the Company of 100%
of the outstanding voting stock of ATHENA. ATHENA Medical Corporation was
incorporated in Oregon in 1991 but was dormant until July 1, 1993, which it
considers its date of inception. It was merged, effective February 9, 1994,
into a newly formed Nevada corporation, ATHENA ProFem, Inc., which was
dissolved after completion of the Share Exchange Agreement and prior to
December 31, 1994.
The transaction discussed above has been accounted for as a reverse
acquisition since the ATHENA stockholders owned a controlling majority of the
Company's stock following the Second Exchange. The purchase price paid,
including liabilities assumed, has been allocated to the fair market value of
assets acquired and liabilities assumed.
During December 1994, the Company entered into a $6,000,000 debt and equity
financing agreement with a group of private investors (the "December 1994
Financing"). Under terms of the agreement, as amended in March 1995, the
Company issued one million units priced at $6 per unit. Each unit was
comprised of one share of the Company's common stock and $4 of convertible
debentures. The debentures automatically converted, at the rate of one share
for each $2.00 of debentures, into shares of the Company's Common Stock on
June 28, 1995. The Company received $4,000,000 in December 1994 pursuant to
the agreement ($2,000,000 for stock and $2,000,000 for convertible
debentures). The balance of the financing ($2,000,000 for convertible
debentures) was received during April 1995. As of March 15, 1996, the
Company had approximately $1,293,000 of cash and cash equivalents. Under
terms of the agreement, one of the investors, Capital Consultants, Inc., is
entitled to elect one member to the Company's Board of Directors as their
representative. Mr. Grayson voluntarily, and without disagreement, resigned
from the Company's Board of Directors in December 1995.
(b) DESCRIPTION OF BUSINESS
GENERAL
The Company was organized to develop, manufacture and market products for the
feminine health care field. Until the Share Exchange Agreement with ATHENA,
the Company devoted its major efforts and resources toward developing its
feminine protection product, the Padette interlabial pad. The merger with
ATHENA and the subsequent December 1994 Financing have provided the Company
with the resources necessary to introduce the Padette to the US, Chinese and
other international markets during 1996. There have been no significant
revenues from sales of the Padette to date. As a result of the Share
Exchange Agreement, the Company acquired rights to and has a menstrual
collection kit in development which contains the Tampette for the collection
of exfoliated (shed) cells and other specimen material of interest in the
menstrual fluid. The Tampette is designed to allow early detection of
uterine (cervical and endometrial) cancer as well as viral and bacterial
infections in women. The Tampette has not generated revenues to date.
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The Company anticipates developing both rapid (Over-the-Counter "OTC") and
laboratory diagnostics for pregnancy, cancer diagnostics and other women's
healthcare concerns. The Company anticipates its cancer diagnostics will be
based on antisense or "probe" technology. The Company anticipates its
diagnostic kits will provide rapid, accurate and affordable early detection.
PRODUCTS:
FRESH 'N FIT-REGISTERED TRADEMARK- PADETTE
The Company acquired an exclusive worldwide license to six U.S. patents (one
of which has since expired), and additional foreign patents in the United
Kingdom, Germany, Canada and Japan, covering the Padette. Additionally, the
Company was assigned a 1991 patent used in manufacturing the Padette and has
filed additional applications of its own. The Company received FDA clearance
to market the Padette interlabial pad for the feminine protection market
under a 510(k) application. The Padette is made of sanitary, absorbent
material and is about the size and shape of one's little finger. It is
designed to provide a safe, comfortable and convenient alternative to
existing feminine protection products.
The Padette consists of a polypropylene or polyethylene covering over a rayon
fiber material which is folded into a 2" by 1/2" tube and electronically
stitched into a teardrop (cross-section) shape. By virtue of its shape, the
Padette is comfortably held between the lips of the vagina and generally
cannot be felt by the wearer. On light days of a woman's menstrual cycle,
the Company believes the Padette is more comfortable and safer than either a
tampon or pantyliner.
The principal uses of the Padette are:
- on light menstrual flow days instead of a tampon, pad or
panty liner, to help prevent spotting or staining;
- on heavy menstrual flow days with a tampon, pad or panty
liner for extra protection; and
- on other days to absorb vaginal discharge caused by minor
infections, intercourse, mid-cycle spotting or minor urine loss.
The Padette may also be used by both men and women who suffer from
hemorrhoids to absorb leakage or discharge, thus minimizing the odor or
staining that would otherwise result.
The Padette is also designed to address slight urine loss in women, a
condition which is estimated to affect millions of American women. Estimates
are that women are twice as likely as men to suffer from urine loss and one
in ten women under the age of 65 occasionally suffers slight urine loss.
Women in their 20's and 30's are nearly as vulnerable as those in their 40's
and 50's to suffer from some urine loss.
OVER-THE-COUNTER DIAGNOSTICS
ATHENA's OTC products include the AFFIRM-Trademark- over-the-counter
pregnancy test and AWARE-Trademark- semi-quantitative diagnostics for
pregnancy and other indications relevant to improving female healthcare.
These products are expected to successfully compete with existing products in
the market as well as expand the current market. Market introduction is
expected in late 1996.
The pregnancy test market is divided into two segments - home testing (OTC)
and professional testing. The US market is expected to continue to grow at a
rate of 9.4% per year through the year 2000, with sales topping $362 million
or 74 million units. No forecasting has been completed for the Company's
current international markets, however, the Company believes it can
successfully compete with existing products in those markets. Market growth
in the OTC segment is expected to exceed four times the expected professional
testing market growth.
THE TAMPETTE
The Tampette is designed to collect cells from the cervix and the endometrium
(lining of the uterus) that are exfoliated (shed) and appear in the menstrual
blood flow. The kit will allow the
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patient to collect the sample in the privacy of her home. While in place,
the Tampette collects blood along with millions of cells, vaginal mucous and
discharge flushed out by menstrual flow. The Tampette is then removed,
placed in a vial containing a fixative and mailed in a pre-addressed mailer
to a laboratory where the sample can be stained in a manner similar to the
conventional Pap staining procedure, or processed by other methods suitable
for desired diagnostic tests. The results of the analysis will be forwarded
to the patient's physician and can be available at the time of the patient's
office visit. Rights to the Tampette collection kit were assigned to ATHENA
in July 1993 by two of its founders, John F. Perry and Denis R. Burger, Ph.D.
The Tampette collection kit, unlike the current collection methodology, is
designed to provide sufficient material to allow routine cost-effective
testing for viral and bacterial diseases. The Company believes the kit will
also provide enough remaining sample to allow laboratories to freeze and
retain tested samples for future retesting should a liability question arise,
or a confirmation be required.
The Tampette is expected to offer a number of important advantages over
conventional specimen collection procedures:
- First, the Tampette is a simpler, private, more comfortable
and convenient method of collecting cells for testing than the
conventional Pap scraping, endometrial biopsy or blood draw.
- Second, the Tampette can collect a larger and more
representative sample of exfoliated cells from the cervix
than conventional Pap procedures from scraping a single
site. Poor sample collection is thought to be responsible
for nearly half of the false negative results from current
Pap testing.
- Third, the Tampette produces samples to provide information
about the status of cells in the uterus, ectocervix,
endocervix and vagina that would otherwise only be collected
by invasive techniques, such as endometrial biopsy.
- Fourth, by arranging to have the cells collected by the
Tampette analyzed in advance, the physician will have
diagnostic results available before the patient's office
visit. Appropriate procedures (coloscopy, endometrial
biopsy or surgery) can thus be scheduled at the office
visit, leading to earlier detection and treatment.
- Fifth, post-menopausal women who are on estrogen-progestin
therapy need to be monitored. (There is evidence that the
incidence of endometrial cancer increases with age and after
estrogen administration.) The Tampette has the potential to
provide convenient and cost-effective monitoring.
ANTISENSE (PROBE) DIAGNOSTICS
Antisense or probe technology has the potential to provide rapid, accurate
and cost-effective identification of pathogens and genetic tumor markers
found in the sample provided by the Tampette or other blood sample. This new
approach uses polymeric agents designed to bind selected genetic sequences
and thereby identify the disease. This technology may allow the Company to
provide affordable diagnostic kits that offer the required sensitivity,
specificity and speed. Antisense agents are currently available from various
suppliers and the Company has yet to determine the optimal supplier for its
kits.
MARKETS AND COMPETITION:
Generally, the Company's competitors have greater capital, financial
strength, market share and personnel resources than the Company.
THE SANITARY PROTECTION MARKET AND COMPETITION FOR THE PADETTE
The United States market for sanitary protection products is estimated by
industry sources to exceed $2 billion per year in the United States, and is
dominated by a small number of large companies, each of whose worldwide sales
of sanitary protection and other products exceed $1 billion annually. The
market currently consists of two segments: internal products or tampons,
which represent approximately one third of the total market, and external
products, such as napkins, mini/maxi pads and panty liners, which represent
the balance of the market. The
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Padette represents a new product, which management expects to compete with
existing products as well as expand the market.
INTERNATIONAL MARKETS FOR THE PADETTE
The international markets vary by culture and competition. Many products and
manufacturers exist abroad that do not exist in the domestic market. Many of
these manufacturers are of similar size to the Company, but have a local
presence which would provide certain advantages in that market. However,
management believes countries with the largest populations -- India and China
- -- may find the Fresh 'n Fit-Registered Trademark- Padette to be particularly
culturally appealing and unique in those markets.
THE PAP TEST MARKET AND COMPETITION FOR THE TAMPETTE
The Company believes there are three principal markets for the Tampette
collection device: the cervical cancer test market presently served by the
conventional Pap test; a new market for routine testing for endometrial
cancer in women; and a new market for routine blood-based diagnostic testing.
The Company plans to target the current United States Pap test market,
initially offering the Tampette as a supplement to the existing Pap test, and
to develop the endometrial cancer screening market which is largely untapped.
Current industry figures indicate that there are over 30 million Pap tests
performed annually in the United States.
Although there is a recognized need for significant improvements in the Pap
test procedure, the Pap test has, over the last 50 years, become a common and
accepted testing procedure and the standard, routine test for cervical
cancer. Accordingly, the Company plans initially to market the Tampette as a
supplement to, rather than as a replacement for, the collection method used
with the conventional Pap test, to address the well-recognized inadequacies
of that procedure and its false-negative error rate and thereby improve
overall cervical cancer-screening reporting and results. As physicians and
patients become familiar and comfortable with the Tampette, it is expected to
be marketed as a replacement for, and will compete with, the Pap scraping
procedure. The Tampette is also intended to be marketed as a device to
collect cells to detect endometrial cancer and as such will compete with the
whirling spray suction device or biopsy.
THE DIAGNOSTICS MARKET AND COMPETITION FOR ANTISENSE DIAGNOSTICS
The pregnancy test market is divided into two segments - home testing (OTC)
and professional testing. the US market is expected to continue to grow at a
rate of 9.4% per year through the year 2000, with sales topping $362 million
or 74 million units. No forecasting has been completed for the Company's
current international markets, however, the Company believes it can
successfully compete with existing products in those markets. Market growth
in the OTC segment is expected to exceed four times the expected professional
testing market growth.
Antisense diagnostics can be closely compared to direct DNA probe technology.
The growth predicted for the DNA probe market continues to be hampered by
the lack of automated systems and/or less complex techniques. Direct probe
DNA assays are too labor intensive and expensive to be performed routinely in
clinical labs, and amplified systems are subject to severe contamination
problems as are complex assay systems. High volume infectious disease
diagnostics (such as for sexually transmitted diseases) and tests for
pathogens that are difficult to culture by conventional methods (such as
bacterial vaginosis) are expected to account for most of the market's
projected growth.
SOURCES OF MATERIALS AND PRINCIPAL SUPPLIERS
Raw materials used for production of the Fresh 'n Fit-Registered Trademark-
Padette and the Company's diagnostics are made and supplied in the United
States. The Company's current manufacturing needs are being met, although an
uninterrupted flow of raw materials cannot be guaranteed. The Company
currently purchases certain raw materials from one supplier. Although the
Company does not believe it would be difficult to replace this supplier, the
Company has not approved other suppliers for the sale of certain raw
materials to the Company.
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REGULATORY REQUIREMENTS
The Padette has received clearance, as a class II device, for
over-the-counter marketing in the United States under a 510(k) pre-market
notification submission to the FDA. The Company has also received export
clearance to market overseas. No further FDA requirements for clinical
evaluation are expected. Requests for regulatory approval for marketing have
been made in several foreign countries and completed in China. However, the
Company is unable to predict when, if ever, other approvals may be received.
The Tampette and diagnostic products are still under development and the
Company has yet to complete clinical studies. Submission of data to the FDA
for the Tampette and the over-the-counter pregnancy diagnostics is expected
in 1996.
MANUFACTURING
The manufacturing line is capable of producing approximately 60 million
Padettes per year. The Company is planning to expand its production capacity
to approximately 200 million per year during 1996. These production levels
are expected to meet the current anticipated growth through 1996.
PATENTS
The currently issued United States patents owned, assigned or licensed to the
Company, are as follows:
Date of
Number Issue Title
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4,095,542 6/20/78 Method of Making Feminine Protection Pads
4,142,476(1) 3/6/79 Method of Making Feminine Protection Pads
4,175,561(2) 11/29/79 Feminine Protection Pads with Improved Absorption
4,196,562 4/8/80 Method of Making Feminine Protection Pads
4,995,150 2/26/91 Method and Apparatus for Making Feminine Protection Pads
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(1) Also issued in Canada, Japan and the United Kingdom
(2) Also issued in Canada
The term for patents issuing on applications filed on or after June 8, 1995
is 20 years from the date of application or, if the application contains a
specific reference to an earlier filed application under 35 U.S.C. sections
120, 121 or 365(c), 20 years from the date on which the earliest such
application was filed.
EMPLOYEES
As of March 15, 1996, the Company had fifteen full-time employees as well as
several paid consultants including Karen K. Anderegg, marketing consultant;
David M. Pitassi, sales, marketing, product development and manufacturing
consultant; Pete Loftis, trade relations, sales and marketing consultant;
Roland W. Gerstenberger, manufacturing consultant; and David S. Porter,
Financial Consultant who is also Vice President and Chief Financial Officer.
The Company intends to contract with or hire appropriate personnel as
business demands require.
Item 2. DESCRIPTION OF PROPERTY
In 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 Portland, Oregon facility is
significantly larger than its former facility. The Company also leases 7,300
square feet of manufacturing and warehouse space in proximity to its
corporate office.
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The Company also rents approximately 600 square feet of space in Ponte Vedra,
Florida for its marketing and sales requirements. The Company's base
expenditures for its leases are approximately $10,741 per month. Management
believes the Company's properties are in good condition and adequately
insured.
Item 3. LEGAL PROCEEDINGS
The Company has been named as a defendant in a civil action brought in the
Circuit Court of Oregon for Washington County in December 1995 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.
The Company has received notice from another company claiming that such other
company has the prior right to use the "Athena" name. The Company is
currently in discussions with such company. The Company may in the future be
required to refrain from using the "Athena" name. To date, the Company has
not prominently featured the "Athena" name on its products and therefore the
Company believes that refraining from the use on products in the future will
not have a material adverse effect on the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of 1995.
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Trading of the Common Stock is being reported in the Pink Sheets of the
National Quotation Bureau. The following table sets forth the range of
completed sales prices for the Common Stock as reported in the Pink Sheets
for the period indicated.
High Low
1st Quarter 1994 $0.20 $0.01
2nd Quarter 1994 3.25 0.81
3rd Quarter 1994 5.12 1.88
4th Quarter 1994 9.38 5.12
1st Quarter 1995 7.75 3.88
2nd Quarter 1995 4.25 2.50
3rd Quarter 1995 5.25 3.00
4th Quarter 1995 4.25 2.75
1st Quarter 1996
(through March 25, 1996) 3.94 2.94
The foregoing prices reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not represent actual transactions.
(b) On March 15, 1996, there were approximately 316 holders of record of the
Company's Common Stock.
(c) The Company has paid no dividends and does not expect to pay any
dividends in the foreseeable future, as the Company intends to retain
earnings, if any, to finance growth of
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its operations. The Company is not under any contractual restriction as to
its present or future ability to pay dividends.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Since its inception, the Company has been primarily engaged in the research,
development, testing and commercialization of the Padette and, to a lesser
degree, other products. The Company has performed test marketing of the
Padette and accordingly is no longer in the development stage. The Company
had no significant sales of products or other revenues from operations in
either 1995 or 1994.
The Company's manufacturing facility is complete and capable of supplying
anticipated demand through 1996. The Company is reviewing plans to increase
capacity to meet the anticipated increase in international demand.
At December 31, 1995, the Company had cash and cash equivalents of $2,464,041
and working capital of $2,461,774. During December 1994, the Company entered
into a $6,000,000 debt and equity financing agreement with a group of private
investors (the "December 1994 Financing"). Under terms of the agreement, as
amended in March 1995, the Company agreed to issue one million units priced
at $6 per unit. Each unit is 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. Under the terms of the agreement, as
amended in March 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.
The December 1994 Financing provided the Company with sufficient funds to
introduce the Padette to a limited market during 1995 and 1996. In addition,
management intends to pursue additional sources of debt and equity funding
and strategic partner relationships in order to continue its focus on
becoming a leader in female health care products. Management allocated
approximately $4 million of the funds provided by the December 1994 Financing
to production and marketing of the Padette.
In January 1996 the Company received a lease line of credit (the
"Commitment") from First Portland Leasing Corporation ("FPLC"). FPLC has
agreed to lease up to an aggregate of $300,000 of equipment. Lease terms will
be either 36 months or 24 months. At the maturity of each lease term, the
Company will have the option to purchase the equipment at its fair market
value, renew the lease annually at the fair rental value at such time, or
return the equipment to FPLC. Payment under the leases will be secured by
other equipment owned by the Company. The Commitment requires that all
equipment must be delivered and accepted by the Company by July 31, 1996.
PLANS FOR THE PADETTE - 1996
In February 1995 the Company completed the construction of its 3,700 square
foot manufacturing facility, including installation of equipment, in
proximity to the Company's headquarters in Portland, Oregon. The facility
houses two manufacturing lines, including proprietary equipment, and one
packaging line. The facility includes space to add a third manufacturing
line, should sales demand warrant such an addition. As presently configured,
management believes the manufacturing facility has the capacity to produce
approximately 60 million Padettes per year. The facility's existing capacity
meets the Company's estimated sales for 1996. The Company is also examining
other ways of enhancing its capacity, including the addition of personnel and
re-designed, higher capacity production equipment.
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During the first quarter of 1995, the Company resumed manufacturing of the
Padette. Initial production was used to fill an order from a distributor in
the People's Republic of China and to meet the needs for samples and sales
orders for the Company's direct marketing efforts. The distributor in China
only partially fulfilled its payment obligation for the initial shipment of
Padettes. Accordingly, the Company terminated its distribution agreement
with the distributor. The parties agreed their prior agreements are
terminated and the Company agreed to pay the distributor one-quarter of one
U.S. cent for each Padette sold by the Company within China for three years
provided, however, such payments shall not exceed $100,000 in any 12-month
period.
As of March 15, 1996, the Company has shipped an additional order for 3.2
million Padettes to another Chinese distributor secured by a letter of
credit. The Company expects sales demand in China to grow in 1996.
Additional efforts to introduce the Padette into other countries are under
way. The Company expects this international effort to provide a major
portion of its 1996 revenues. There can be no assurances, however, that the
Company's international marketing efforts will be successful.
The Company's sales and marketing strategy includes a regional United States
rollout of the Padette, which began during the first quarter of 1996 in the
southeast region of the United States. Management is also considering a
rollout in the northwest region during 1996.
Management is utilizing a direct marketing approach in its regional rollouts
of the Padette. A similar marketing approach was utilized when the Padette
was first introduced by Xtramedics, Inc. in 1989.
John Perry, the Company's Chairman and Chief Executive Officer, is
responsible for the rollout of the Padette. He served in a similar capacity
during the successful test marketing of the Padette by Xtramedics, Inc. In
addition, the Company has engaged Pete Loftis as a sales and marketing
consultant. Mr. Loftis has successfully managed the sales of other consumer
products in the United States and has expertise in mass merchant
distribution. With the assistance of Karen Anderegg, consultant to the
Company and former President of Clinique Laboratories USA, the Company has
updated and enhanced its packaging and marketing material for the Padette.
PLANS FOR OTHER PRODUCTS - 1996
During 1995 the Company began clinical studies of the Tampette. The Company
is considering the pre-production tooling and the necessary validation for
FDA submission for the Tampette by December 1996. The remaining development
costs are not expected to exceed $25,000 in 1996. Costs for initial
diagnostic products available for field testing by year end, and associated
development costs, are not expected to exceed $75,000 in 1996. Marketing
efforts and revenues are not expected for either product line in 1996. The
Company believes the December 1994 Financing has provided sufficient funds to
fulfill its current research and development goals.
STAFFING PLAN - 1996
The Company has fifteen full-time employees as of March 15, 1996 and will
pursue employment of a small number of additional employees and consultants
as necessary. The Company intends to contract with or hire appropriate
personnel as business demands require.
Item 7. FINANCIAL STATEMENTS
Financial Statements are listed under Item 13 of this Annual Report and begin
on page F-1.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
10
<PAGE>
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The Company's executive officers, directors, and consultants are:
Name Age Position
- ---- ---- --------
John F. Perry 49 Chairman, Chief Executive Officer and Director
William H. Fleming 49 President, Chief Operating Officer, Secretary,
and Director
James E. Reinmuth 55 Director and Treasurer
Carol A. Scott, Ph.D. 46 Director
RoseAnna Sevcik 32 Director
Robert L. Buck, Ph.D. 44 Vice President of Technical Operations
David S. Porter 42 Vice President and Chief Financial Officer,
Consultant in Accounting
Peter Loftis 40 Consultant in Sales and Marketing
Jeffrey Grayson and Karen Anderegg resigned as a Directors of the Company in
December 1995 and February 1996, respectively. There were no disagreements
between the Company and either Mr. Grayson or Ms. Anderegg. In May 1995 the
Company's Board of Directors elected James E. Reinmuth and RoseAnna Sevcik as
new members of the Board to fill vacancies. Mr. Reinmuth was elected
Treasurer of the Company at the same meeting. Directors hold office until
the next annual meeting of stockholders and until their successors are duly
elected and qualified; officers hold office at the discretion of the Board.
At the May 1995 meeting of the Board, the Company established an Audit
Committee comprised of John F. Perry, James E. Reinmuth and Carol A. Scott,
Ph.D. The Audit Committee oversees actions taken by the Company's
independent auditors.
JOHN F. PERRY has served as Chairman and Chief Executive Officer of the
Company since February 1994. He was Chief Executive Officer and a director of
ATHENA ProFem from its inception in July 1993 to its dissolution in December
1994. From 1986 to 1990 he was President and Chief Executive Officer of
Xtramedics, Inc. (the Company). He served as Vice President of Curatek
Pharmaceuticals, Inc., a company engaged in developing pharmaceutical
products, in 1986; Director of Corporate Development of LyphoMed, Inc., a
publicly held manufacturer of injectable pharmaceuticals, from 1985 to 1986;
Group Marketing Manager of Abbott Diagnostics/Abbott Laboratories from 1984
to 1985; and Group Director of Marketing, Director of Medical Products,
Director of Gynecological Products, Manager of Business Development, and in
other capacities at Searle Laboratories from 1976 to 1984.
WILLIAM H. FLEMING has served as the President, Chief Operating Officer and
Secretary of the Company since February 1994. He was President, Chief
Operating Officer and a director of ATHENA ProFem from July 1993 until its
dissolution in December 1994. He was an associate in Sovereign Ventures, a
health care consulting firm, during 1993. He was the Director of Corporate
Development of AntiVirals, Inc., a biotechnology company involved in
antisense
11
<PAGE>
technology from April 1992 until July 1993. From 1987 to 1992, Mr. Fleming
was Director of Marketing, New Business and Director of Manufacturing for
Epitope, Inc., an Oregon-based biotechnology company. Mr. Fleming was
President, CEO and founder of Life Science Instrumentation, Inc., a developer
and manufacturer of cardiovascular devices, from 1980 to 1987.
JAMES E. REINMUTH has served as a director and as treasurer of the Company
since May 1995. Since July 1994, Mr. Reinmuth has served as the Charles H.
Lundquist Distinguished Professor of Business at the University of Oregon.
Mr. Reinmuth also serves as President and Chief Executive Officer of Fuji
Advanced Filtration, an industrial filter manufacturer. From 1976 until July
1994, Mr. Reinmuth served as Dean of the College of Business at the
University of Oregon. Mr. Reinmuth has also served in several administrative
positions within the University of Oregon from 1988 until the present. Mr.
Reinmuth is a director of Antivirals, Inc. a pharmaceutical company, W.E.
Simon and Sons Asia Ltd., a merchant bank in Hong Kong, Asia Capital Ltd., an
investment bank in Sri Lanka, and Capital Consultants, Inc., an investment
firm.
ROSEANNA SEVCIK has served as a director of the Company since May 1995.
Since February 1993, Ms. Sevcik has served as Vice President-Senior Portfolio
Manager of the Life Insurance Company of the Southwest. From February 1990
to February 1993, Ms. Sevcik served as Senior Portfolio Manager-Securities
Analyst at Securities Management and Research, an investment management
services company.
CAROL A. SCOTT, PH.D. has served as a director of the Company since February
1995. Dr. Scott has served as Chairman of the Faculty, Department (School)
of Management, University of California - Los Angeles since 1990 and has been
a professor at the University since 1977. Dr. Scott is a frequent author and
lecturer and has served on the Editorial Board of the JOURNAL OF CONSUMER
RESEARCH since 1980.
ROBERT L. BUCK, PH.D. has served as Vice President of Technical Operations of
the Company since June 1994. Dr. Buck is a Captain in the U.S. Army Reserves
and serves as a Company Commander in the 104th Training Division. Prior to
joining the Company, Dr. Buck was Vice President of Research and Development
for CELx, a subsidiary of IMRE Corporation, from 1992 to 1994, Director of
Research and Development for International BioClinical from 1986 to 1992 and
Vice President of Research and Development for Modern Diagnostics from 1984
to 1986. Dr. Buck has been involved in the development over 40 diagnostic
products which were introduced into the market, and has published several
manuscripts in medical and scientific journals.
DAVID S. PORTER joined ATHENA as a consultant in finance in December 1993,
and presently serves the Company in the same capacity and as its Vice
President and Chief Financial Officer. Mr. Porter is a certified public
accountant and in July 1993 formed Financial Management Consulting Group as a
partner. From 1991 to 1993, Mr. Porter served as Vice President and
Controller for VTech Computers, Inc., a manufacturer and distributor of
personal computers. Prior to joining VTech, Mr. Porter was a senior manager
with Ernst & Young, certified public accountants, where he served in various
capacities for a period of fifteen years.
PETER LOFTIS, has served as a consultant to the Company in the areas of
trade, sales and marketing since November 1995. Mr. Loftis has extensive
experience in sales and marketing of consumer products. He served as a
national accounts manager and area manager for Coca-Cola Company from 1988 to
1995 and previously worked in sales. Mr. Loftis worked in the sales and
marketing areas with The Dr. Pepper Company and The Procter & Gamble
Distributing Co. prior to joining Coca-Cola.
Certain Directors have received options in the past to purchase shares of the
Company's common stock in consideration for their services. Directors are
reimbursed for their expenses incurred to attend meetings of the Board of
Directors.
12
<PAGE>
During 1995 William H. Fleming, President, Chief Operating Officer, Secretary
and Director of the Company failed to report in a timely manner his exercise
of 20,000 options for shares of the Company's common stock, in September
1995, to the Securities and Exchange Commission pursuant to section 16(a) of
Securities Exchange Act of 1934, as amended. Mr. Fleming has subsequently
filed the required report pursuant to that Act.
Item 10. EXECUTIVE COMPENSATION
The following table summarizes the total compensation of the Chief Executive
Officer and other corporate officers receiving in excess of $100,000 in
compensation for 1995 and the two previous years. The Company is not
obligated to report on any other individual's compensation under the
Securities and Exchange Commission disclosure rules relating to executive
compensation.
<TABLE>
<CAPTION>
Name and Principal Other Annual Securities underlying
Position Year Salary($) Compensation($) options/SARs (#)
- ----------------------- -------- ------------- ---------------- -----------------------
<S> <C> <C> <C> <C>
John F. Perry, Chairman, 1995 $145,000 $10,000 --
Chief Executive Officer 1994 119,983 3,000 150,000
and Director 1993 51,750 1,847 617,140
William H. Fleming, 1995 $115,000 $ 1,667 --
President, COO, Secretary 1994 102,775 5,904 150,000
and Director 1993 30,930 20,954 617,140
</TABLE>
OPTION EXERCISES AND HOLDINGS
The following table sets forth information, with respect to the named
executive officers, concerning options exercised during fiscal year 1995 and
held as of December 31, 1995.
<TABLE>
<CAPTION>
Value of Unexercised
No. of Unexercised Options In-the-Money Options
at FY-End (#) at FY-End ($)
Name Shares Acquired Value Realized ($) Exercisable/ Exercisable/
on Exercise (#) Unexercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John F. Perry 0 0 692,140/75,000 $1,660,107/$0
William H. Fleming 20,000 $73,800 672,140/75,000 $1,606,307/$0
</TABLE>
The Company has employment contracts with its Chief Executive Officer and its
President, both of whom are directors of the Company. Under the 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, annual salaries
related to these contracts were $145,000 for John Perry and $115,000 for
William H. Fleming and, under terms of the contracts, may be increased in the
future.
During 1994, the Company entered into an agreement with Sovereign Ventures,
LLC to provide consulting services including operational and strategic
guidance and assistance in financing matters. Sovereign Ventures, LLC is an
Oregon limited liability company which is owned 50% by Denis R. Burger and
50% by Michael C. Hubbard, both of whom were directors of the Company until
February 1995. Terms of the agreement with Sovereign include compensation in
the amount of $352,620 of which $100,000 was paid during 1994, with the
remainder paid in 1995.
13
<PAGE>
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth the name and address of each beneficial owner
of more than 5% of each class of the Company's voting stock known to the
Company, the number of shares beneficially owned, and the percent of total
shares outstanding so owned. Each person named in the table has sole
investment and voting power with respect to the shares set forth opposite his
name, except as otherwise noted. All beneficial ownership is direct or of
shares held for the stockholder in street name, unless otherwise indicated.
The table reflects such beneficial ownership of the Company as of March 15,
1996.
<TABLE>
<CAPTION>
Amount and Nature of Percent of Class
Title of Class Name and Address of Beneficial Owner Beneficial Ownership(1) Outstanding
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock, Capital Consultants, Inc. 3,120,000 stock(2) 35.2%
$0.01 par value 2300 SW First Avenue, Suite 200 50,000 warrants
Portland, OR 97201 ---------
3,170,000
Cort MacKenzie Securities, Inc. 129,585 stock(3) 13.3%
5335 SW Meadows Road, Suite 270 1,224,750 warrants
Lake Oswego, OR 97035 ---------
1,354,335
William H. Fleming 135,455 stock(4) 8.3%
10180 SW Nimbus Ave., Suite J5 672,140 options
Portland, OR 97223 -------
807,595
John F. Perry 268,570 stock 10.0%
4 Sawgrass Village, Suite 220B 692,140 options
Ponte Vedra, FL 32082 -------
963,210
Sovereign Ventures L.L.C. 897,135 stock(5) 10.0%
One SW Columbia, Suite 1105
Portland, OR 97258
</TABLE>
(1) Individual listings in this column of "options" and/or "warrants"
reflect shares which the respective beneficial owner has the right to acquire
within 60 days.
(2) Includes all shares owned by Capital Consultants, Inc. and shares for
which they act as agent.
(3) Includes 308,750 shares beneficially owned by Cort MacKenzie & Thomas
and 270,000 shares beneficially owned by Thomas Stewart.
(4) Includes 5,170 shares owned by William H. Fleming's wife, the beneficial
ownership of which Mr. Fleming disclaims.
(5) Sovereign Ventures, L.L.C. is an Oregon limited liability company.
Denis R. Burger and Michael C. Hubbard, who were both directors of the
Company until February 1995, each owns a 50% interest in Sovereign. Mr.
Hubbard beneficially owns an additional 150,000 shares. Yamhill Valley
Vineyards, which is owned by Mr. Burger and his wife, beneficially owns an
additional 75,000 shares.
(b) SECURITY OWNERSHIP OF MANAGEMENT
The following table represents amounts of beneficial ownership of the Company
by the directors, the named executive officers and the directors and officers
as a group as of March 15, 1996.
<TABLE>
<CAPTION>
Amount and Nature of Percent of Class
Title of Class Name and Address of Beneficial Owner Beneficial Ownership(1) Outstanding
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock William H. Fleming 135,455 stock 8.3%
$0.01 par value 10180 SW Nimbus Ave., Suite J5 672,140 options
Portland, OR 97223 -------
807,595
John F. Perry 268,570 stock 10.0%
4 Sawgrass Village, Suite 220B 692,140 options
Ponte Vedra, FL 32082 -------
960,170
</TABLE>
14
<PAGE>
<TABLE>
<S> <C> <C> <C>
James E. Reinmuth 47,000 stock 2.4%
5171 Solar Heights Drive 12,500 options
Eugene, OR 97405 160,000 warrants
-------
219,500
Carol A. Scott 0 0%
1834 Park Blvd.
Palo Alto, CA 94306
RoseAnna Sevcik 12,500 options 0%
1300 W. Mockingbird Lane
Dallas, TX 75247-4921
All directors and officers as a group 451,025 stock 20.5%
(7 persons) 1,539,280 options
210,000 warrants
---------
2,200,305
</TABLE>
(1) Individual listings in this column of "options" and/or "warrants"
reflect shares which the respective beneficial owner has the right to acquire
within 60 days.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Under a license agreement for the Company's Padette, the Company is obligated
to pay a royalty of 3% to 5% to Dr. Hirschman, a stockholder of the Company,
on sales of the Padette, until the expiration of his patents, at various
dates through 1997, unless renewed. The royalty percentage decreases as
sales increase. All royalty fees payable will be calculated as a component of
the cost of manufacture of the Padette pads and thus reflected in the
product's pricing.
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
3(i) Articles of Incorporation of Xtramedics, Inc. filed December
9, 1986. Certificate of Amendment filed October 9, 1987 and
Certificate of Amendment filed June 7, 1994. Incorporated by
reference to Exhibit 3(i) to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1994 ("1994 10-KSB").
3(ii) Bylaws of ATHENA Medical Corporation adopted June 24, 1994.
Incorporated by reference to Exhibit 3(ii) to the 1994 10-KSB.
10.1 License Agreement dated April 30, 1986 between Shalom Z.
Hirschman, M.D., and Marvin P. Loeb & Company. Incorporated by
reference to Exhibit 10.1 to Registrant's Form S-2, SEC File No.
33-88230 (the "S-2").
10.2 Limited License & Option Agreement between Marvin Loeb &
Company and the Company dated December 30, 1986. Incorporated by
reference to Exhibit 10.2 to the S-2.
*10.3 Consulting Agreement between Shalom Hirschman, M.D.,
and The Company dated June 23, 1987. Incorporated by reference to
Exhibit 10.3 to the S-2.
*10.4 Consulting Agreement between the Company and Roland
Gerstenberger dated January 31, 1996. Incorporated by reference
to Exhibit 10.4 to the S-2.
15
<PAGE>
*10.5 Consulting Agreement between the Company and Karen K.
Anderegg dated January 5, 1995. Incorporated by reference to
Exhibit 10.28 to the Company's 1994 10-KSB.
*10.6 Consulting Agreement between the Company and Peter
Loftis dated November 6, 1995. Incorporated by reference to
Exhibit 10.6 to the Registrant's Form S-2, filed with the SEC on
March 29, 1996 (the "Second S-2").
*10.7 Consulting Agreement between the Company and David M.
Pitassi dated as of February, 1995. Incorporated by reference
to Exhibit 10.7 to the Second S-2.
10.8 Share Exchange Agreement among Xtramedics, Inc., ATHENA
Profem, Inc., and ATHENA shareholders dated February 17, 1994.
Incorporated by reference to Exhibit 1 to the Company's Quarterly
Report on Form, 10-QSB/A for the period ended March 31, 1994 (the
"March 31, 1994 10-QSB/A").
*10.9 Assumption of Employment Agreement between the Company
and John F. Perry dated February 17, 1994. Incorporated by
reference to Exhibit 2 to the March 31, 1994 10-QSB/A.
*10.10 Employment Agreement between Athena Medical Corporation
(an Oregon corporation) and John F. Perry dated as of July 1,
1993. Incorporated by reference to Exhibit 2 to the March 31,
1994 10-QSB/A.
*10.11 Assumption of Employment Agreement between the Company
and William H. Fleming dated February 17, 1994. Incorporated by
reference to Exhibit 2 to the March 31, 1994 10-QSB/A.
*10.12 Employment Agreement between Athena Medical Corporation
(an Oregon corporation) and William H. Fleming dated as of July
1, 1993. Incorporated by reference to Exhibit 2 to the March 31,
1994 10-QSB/A.
10.13 Business Park Lease between the Company, Petula
Associates, Ltd. and Koll Portland Associates dated March 1, 1996.
Incorporated by reference to Exhibit 10.13 to the Second S-2.
10.14 Agreement dated July 1, 1994 between Sovereign Ventures
and Athena Medical Corporation. Incorporated by reference to
Exhibit 10.10 to the S-2.
10.15 Registration Rights Agreement between Athena Medical
Corporation and Capital Consultants, Inc., dated December 29,
1994. Incorporated by reference to Exhibit 10.13 to the S-2.
10.16 Form of Registration Rights Agreement used for Mr.
Waller, Esler, Stephens& Buckley and Lane Powell Spears Lubersky.
Incorporated by reference to Exhibit 10.16 to the Second S-2.
*10.17 ATHENA Medical Corporation's 1994 Incentive and Non-
Qualified Stock Option Plan dated as of June 7, 1994.
Incorporated by reference to Exhibit 10.14 to the S-2.
10.18 Purchase Warrant issued to Richard Schroeder for
100,000 shares of common stock dated May 3, 1994. Incorporated
by reference to Exhibit 10.16 to the S-2.
16
<PAGE>
10.19 Purchase Warrant issued to Cort MacKenzie for 346,000
shares of common stock dated March 1996. Incorporated by
reference to Exhibit 10.19 to the Second S-2.
10.20 Purchase warrant issued to Alexander V. Sharp for
35,000 shares of common stock dated October 3, 1995.
Incorporated by reference to Exhibit 10.20 to the Second S-2.
10.21 Purchase warrant issued to Cort MacKenzie for 300,000
shares of common stock dated July 11, 1994. Incorporated by
reference to Exhibit 10.17 to the S-2.
10.22 Purchase Warrant issued to Charles E. Finegan, Jr. for
up to 90,000 shares of common stock dated October 2, 1994.
Incorporated by reference to Exhibit 10.18 to the S-2.
10.23 Purchase Warrant issued to Alfred E. Thurber, Jr. for
up to 90,000 shares of common stock dated October 2, 1994.
Incorporated by reference to Exhibit 10.19 to the S-2.
10.24 Purchase Warrant issued to Financial Management
Consulting Group for up to 50,000 shares of common stock dated
October 28, 1994. Incorporated by reference to Exhibit 10.22 to
the S-2.
10.25 Purchase Warrant issued to Cort MacKenzie & Thomas,
Inc. for 308,750 shares of common stock dated November 18, 1994.
Incorporated by reference to Exhibit 10.25 to the Second S-2.
10.26 Purchase Warrant issued to James E. Reinmuth for
160,000 shares of common stock dated April 28, 1995.
Incorporated by reference to Exhibit 10.26 to the Second S-2.
10.27 Purchase Warrant issued to Richard T. Schroeder for
160,000 shares of common stock dated April 28, 1995.
Incorporated by reference to Exhibit 10.27 to the Second S-2.
10.28 Purchase Warrant issued to James R. Wilson for 160,000
shares of common stock dated April 28, 1995. Incorporated by
reference to Exhibit 10.28 to the Second S-2.
10.29 Purchase Warrant issued to Karen K. Anderegg for
100,000 shares of common stock dated May 18, 1995. Incorporated
by reference to Exhibit 10.29 to the Second S-2.
10.30 Purchase Warrant issued to Charles E. Finegan, Jr. for
70,000 shares of common stock dated May 18, 1995. Incorporated
by reference to Exhibit 10.30 to the Second S-2.
10.31 Purchase Warrant issued to Alfred E. Thurber, Jr. for
70,000 shares of common stock dated May 18, 1995. Incorporated
by reference to Exhibit 10.31 to the Second S-2.
10.32 Purchase Warrant issued to Mark T. Waller for up to
500,000 shares of common stock dated September 29, 1995.
Incorporated by reference to Exhibit 10.32 to the Second S-2.
17
<PAGE>
10.33 Purchase Warrant issued to Esler Stephens & Buckley for
up to 100,000 shares of common stock dated September 29, 1995.
Incorporated by reference to Exhibit 10.33 to the Second S-2.
10.34 Purchase Warrant issued to Capital Consultants, Inc.
for 50,000 shares of common stock dated October 5, 1995.
Incorporated by Reference to Exhibit 10.34 to the Second S-2.
10.35 Purchase Warrant issued to David M. Pitassi for 100,000
shares of common stock dated December 29, 1995. Incorporated by
Reference to Exhibit 10.35 to the Second S-2.
10.36 Purchase Warrant issued to Peter Loftis for 100,000
shares of common stock dated December 29, 1995. Incorporated
by Reference to Exhibit 10.36 to the Second S-2.
10.37 Distributor's Agreement Between the Company and OSSCA
International, Inc. dated July 30, 1995. Incorporated by
Reference to Exhibit 10.37 to the Second S-2.
10.38 Commission Agreement between the Company and OSSCA
International, Inc. dated July 30, 1995. Incorporated by
Reference to Exhibit 10.38 to the Second S-2.
10.39 Distribution Agreement between the Company and Meix
Corporation dba Chinese Business Services, dated December 30, 1995.
Incorporated by Reference to Exhibit 10.39 to the Second S-2.
10.40 Commitment Letter between First Portland Leasing Corp.
and the Company dated January 9, 1996. Incorporated by Reference
to Exhibit 10.40 to the Second S-2.
10.41 Amendment of Agreement between the Company and Beijing Kang Mei
Biological Products. Ltd. ( a joint venture comprised of Cort
MacKenzie & Thomas Inc., and Fang-Hai Science and Technology).
Incorporated by Reference to Exhibit 10.41 to the Second S-2.
10.42 Purchase Warrant issued to Thomas O. Stewart for 270,000 shares of
common stock dated December 29, 1995. Incorporated by Reference to
Exhibit 10.42 to the Second S-2.
10.43 Purchase Warrant issued to Michael Stewart for 35,000 shares of
common stock dated March 27, 1996. Incorporated by Reference to
Exhibit 10.43 to the Second S-2.
* - Indicates management contract or compensation plan.
(b) REPORTS ON FORM 8-K FILED DURING LAST QUARTER OF FISCAL YEAR
None
18
<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.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has experienced recurring losses from
operations and has not generated significant revenues from product sales.
These factors raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans in regard to these matters are also
described in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
ARTHUR ANDERSEN LLP
Portland, Oregon
March 20, 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 has experienced significant operating losses during the years
ended December 31, 1995 and 1994 and has continued to incur losses into the
first quarter of 1996. Further, the Company has not generated significant
revenues from product sales, nor is there any assurance of future significant
revenues. The Company contemplates significant ongoing expenditures will be
necessary to successfully implement its business plan, including developing,
manufacturing and marketing its proprietary products. These circumstances
raise substantial doubt about the Company's ability to continue as a going
concern. Execution of the Company's plans and its ability to continue as a
going concern depend upon its acquiring substantial additional financing.
Management's plans include efforts to obtain additional capital and to
evaluate potential partnering opportunities. The Company has demonstrated
the ability to raise operating funds in the past by securing investment in
its Common Stock of approximately $7.4 million through December 31, 1995;
however, there can be no assurance that the Company's efforts to raise
additional funding or enter into a business alliance will be successful. If
the Company is unable to obtain adequate additional financing, enter into
such business alliance or generate sufficient profitable sales revenues,
management may be required to curtail the Company's product development,
marketing activities and other operations.
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
appointed to 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.
F-12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 2,464,041
<SECURITIES> 93
<RECEIVABLES> 2,065
<ALLOWANCES> 0
<INVENTORY> 159,620
<CURRENT-ASSETS> 2,884,215
<PP&E> 544,279
<DEPRECIATION> 95,726
<TOTAL-ASSETS> 3,469,057
<CURRENT-LIABILITIES> 282,267
<BONDS> 0
0
0
<COMMON> 89,482
<OTHER-SE> 3,097,308
<TOTAL-LIABILITY-AND-EQUITY> 3,469,057
<SALES> (51,076)
<TOTAL-REVENUES> (51,076)
<CGS> 40,520
<TOTAL-COSTS> 40,520
<OTHER-EXPENSES> 4,122,464
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 84,201
<INCOME-PRETAX> (4,196,109)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,196,109)
<EPS-PRIMARY> (0.52)
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 3,918,586
<SECURITIES> 90,505
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 44,088
<CURRENT-ASSETS> 4,378,567
<PP&E> 173,059
<DEPRECIATION> 12,691
<TOTAL-ASSETS> 4,684,073
<CURRENT-LIABILITIES> 2,233,802
<BONDS> 0
0
0
<COMMON> 69,147
<OTHER-SE> 2,381,124
<TOTAL-LIABILITY-AND-EQUITY> 4,684,073
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,045,618
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (348)
<INCOME-PRETAX> (1,045,270)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,045,270)
<EPS-PRIMARY> (0.21)
<EPS-DILUTED> 0
</TABLE>