<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------
FORM 10-KSB/A
AMENDMENT NO. 1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO __________
COMMISSION FILE NUMBER 0-17119
----------------------------------
ATHENA MEDICAL CORPORATION
DBA A-FEM MEDICAL CORPORATION
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
NEVADA 33-0202574
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
----------------------------------
10180 SW NIMBUS AVE., SUITE J-5
PORTLAND, OREGON 97223
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Issuer's telephone number, including area code: (503) 968-8800
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT:
(TITLE OF EACH CLASS) (NAME OF EACH EXCHANGE ON WHICH REGISTERED)
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT:
(TITLE OF CLASS)
Common Stock, par value $0.01 per share
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 pursuant to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of the 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. /X/
Issuer's revenues for the fiscal year ended December 31, 1996: $192,682.
---------
As of March 14, 1997, the aggregate market value of the voting stock held
by non-affiliates of the issuer was common stock, $0.01 par value: $23,976,148.
As of March 14, 1997, the issuer had outstanding 10,667,414 shares of the
Common Stock.
Transitional Small Business Disclosure Format: Yes No X
--- ---
<PAGE>
EXPLANATORY NOTE
ATHENA Medical Corporation, dba A-FEM Medical Corporation (the
"Company") hereby amends its Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1996, as set forth below. The Report of Independent Public
Accountants on page F-1 has been revised to remove the last paragraph. The
paragraph entitled "Organization" under Note 1 to the Financial Statements on
page F-6 has been revised to reflect the change to the Report of Independent
Public Accountants. In addition, on May 16, 1997, the Company signed an
agreement with The Procter & Gamble Company ("P&G") effective as of April 28,
1997 (the "Agreement"), pursuant to which the Company has granted P&G the right
to certain technology and trademarks. The paragraph entitled "Licensing
Agreement" has been added to Note 10 to the Financial Statements on page F-13 to
describe the Agreement. Although the only changes made to the Financial
Statements are those set forth herein, the complete text of the Financial
Statements is set forth pursuant to Regulation 240.12b-15.
ITEM 7. FINANCIAL STATEMENTS
The Company's Financial Statements are attached hereto and begin on
page F-1.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be filed on its behalf by
the undersigned thereunto duly authorized.
ATHENA MEDICAL CORPORATION
Date: May 27, 1997 By: /s/ William H. Fleming
---------------------------------
William H. Fleming
President, Chief Operating Officer
and Secretary
<PAGE>
ATHENA MEDICAL CORPORATION
(dba AFEM MEDICAL CORPORATION)
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1995
TOGETHER WITH AUDITORS' REPORT
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
ATHENA Medical Corporation (dba AFEM Medical Corporation):
We have audited the accompanying balance sheets of ATHENA Medical Corporation
(dba AFEM Medical Corporation) (a Nevada corporation) as of December 31, 1996
and 1995, 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 (dba
AFEM Medical Corporation) as of December 31, 1996 and 1995, and the results of
its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
Portland, Oregon
March 3, 1997 (except with respect to the
matter discussed in Notes 1 and 11,
as to which the date is April 28, 1997)
F-1
<PAGE>
ATHENA MEDICAL CORPORATION
(dba AFEM Medical Corporation)
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS
1996 1995
----------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 671,495 $2,464,041
Restricted cash (Note 1) 159,375 -
Accounts receivable 30,772 2,065
Inventories (Note 3) 190,818 159,620
Prepaid expenses and other 155,941 258,489
----------- ----------
Total current assets 1,208,401 2,884,215
EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS(Note 4) 857,159 544,279
Less- Accumulated depreciation and amortization (236,937) (95,726)
----------- ----------
620,222 448,553
PATENTS AND LICENSES, net 28,891 19,529
LOANS RECEIVABLE - Officers and directors 124,093 116,760
----------- ----------
Total assets $ 1,981,607 $3,469,057
----------- ----------
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 249,472 $ 196,547
Current portion - capital lease obligations (Note 5) 178,433 -
Accrued expenses 56,221 70,000
Accrued salaries and wages 292,493 15,720
Accrued settlement for litigation (Note 8) 240,000 -
----------- ----------
Total current liabilities 1,016,619 282,267
LONG-TERM PORTION - CAPITAL LEASE OBLIGATIONS (Note 5) 195,612 -
----------- ----------
Total liabilities 1,212,231 282,267
COMMITMENTS AND CONTINGENCIES (Notes 2 and 8)
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value; authorized 33,000,000
shares; issued 10,127,914 shares and 8,948,243
shares at December 31, 1996 and 1995, respectively 101,279 89,482
Additional paid-in capital 10,403,611 8,499,708
Accumulated deficit (9,735,514) (5,402,400)
----------- ----------
F-2
<PAGE>
Total stockholders' equity 769,376 3,186,790
----------- ----------
Total liabilities and stockholders' equity $ 1,981,607 $3,469,057
----------- ----------
----------- ----------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
ATHENA MEDICAL CORPORATION
(dba AFEM Medical Corporation)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
----------- -----------
REVENUES:
Sales, net of discounts $ 192,682 $ 51,076
----------- -----------
Net sales 192,682 51,076
COST OF SALES:
Cost of goods sold 72,480 40,520
----------- -----------
Cost of goods sold 72,480 40,520
----------- -----------
Gross margin 120,202 10,556
GENERAL AND ADMINISTRATIVE EXPENSES (4,464,604) (4,145,840)
----------- -----------
Operating loss (4,344,402) (4,135,284)
----------- -----------
OTHER INCOME (EXPENSE):
Interest income 47,595 182,266
Interest expense (38,893) (266,467)
Miscellaneous income 2,586 23,376
----------- -----------
11,288 (60,825)
----------- -----------
Net loss $(4,333,114) $(4,196,109)
----------- -----------
----------- -----------
NET LOSS PER SHARE $ (.47) $ (.52)
----------- -----------
----------- -----------
WEIGHTED AVERAGE SHARES OUTSTANDING 9,183,085 8,012,632
----------- -----------
----------- -----------
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
ATHENA MEDICAL CORPORATION
(dba AFEM Medical Corporation)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Common Stock Additional Total
-------------------------- Paid-In Accumulated Stockholders'
Shares Amount Capital Deficit Equity
---------- ---------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
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 - 906,603
Net loss - - - (4,196,109) (4,196,109)
---------- -------- ----------- ----------- -----------
BALANCE, December 31, 1995 8,948,243 89,482 8,499,708 (5,402,400) 3,186,790
Common stock issued on options exercised for cash,
$0.12 per share 40,000 400 4,400 - 4,800
Common stock issued on warrants exercised for cash,
$1.00 per share 256,650 2,567 254,083 - 256,650
Common stock issued on warrants exercised for cash,
$1.25 per share 10,000 100 12,400 - 12,500
Common stock issued for cash, $1.92 per share,
net of financing costs 638,021 6,380 1,202,719 - 1,209,099
Common stock issued for cash, $2.00 per share,
net of financing costs 235,000 2,350 430,301 - 432,651
Net loss - - - (4,333,114) (4,333,114)
---------- -------- ----------- ----------- -----------
BALANCE, December 31, 1996 10,127,914 $101,279 $10,403,611 $(9,735,514) $ 769,376
========== ======== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
ATHENA MEDICAL CORPORATION
(dba AFEM Medical Corporation)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,333,114) $(4,196,109)
Adjustments to reconcile net loss to net cash flows
used in operating activities-
Depreciation and amortization 146,351 90,885
Amortization of deferred financing fee - 200,000
Loss on disposal of assets - 9,300
Net loss on sales of securities - 27,563
Services received for options and warrants issued - 906,603
Changes in operating assets and liabilities:
Restricted cash (159,375) -
Accounts receivable (28,707) (2,065)
Inventories (31,198) (115,532)
Prepaid expenses and other 102,548 (233,008)
Accounts payable 52,925 12,103
Accrued salaries and wages 276,773 (30,338)
Accrued expenses (13,779) 70,000
Accrued settlement for litigation 240,000 -
----------- -----------
Net cash used in operating activities (3,747,576) (3,260,598)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment, furniture and leasehold
improvements (312,880) (382,761)
Other assets (14,502) 62,849
----------- -----------
Net cash used in investing activities (327,382) (319,912)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible debentures and notes - 1,996,700
Additions to notes receivable, net of repayments (7,333) 3,240
Net proceeds from sale of Common Stock 1,915,700 126,025
Net proceeds from capital lease obligations, net of
repayments 374,045 -
----------- -----------
Net cash provided by financing activities 2,282,412 2,125,965
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,792,546) (1,454,545)
CASH AND CASH EQUIVALENTS, beginning of period 2,464,041 3,918,586
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 671,495 $2,464,041
----------- -----------
----------- -----------
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
ATHENA MEDICAL CORPORATION
(dba AFEM Medical Corporation)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. ORGANIZATION OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
ATHENA Medical Corporation (dba AFEM Medical Corporation) (the Company) is
engaged in the development of health care products for women and has, as its
initial revenue-producing product, the PadetteTM interlabial pad (the PadetteTM)
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 PadetteTM in 1989 under a 510(k)
application. The Company holds an exclusive worldwide license to the initial
U.S. and foreign patents covering the PadetteTM and has additional patents of
its own on the PadetteTM. The Company introduced a second revenue-generating
product in 1996, the Affirm, a rapid One-Step Pregnancy Test. This product is
available domestically and internationally for over-the-counter and professional
markets. Concurrently, the Company is engaged in expanding its diagnostic
research and development activities aimed at the commercialization of other
health care products for women.
During 1994, the Company entered into an agreement with a group of private
investors 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 (Note 9).
The Company has experienced significant operating losses during the years ended
December 31, 1996 and 1995 and has continued to incur losses into the first
quarter of 1997. Further, the Company has not generated significant revenues
from product sales, nor is there any assurance of future significant revenues.
The Company contemplates that significant ongoing expenditures will be necessary
to successfully implement its business plan, including developing, manufacturing
and marketing its proprietary products. Subsequent to year-end, the Company
entered into a licensing agreement (Note 10) that provides for an immediate
payment of $2 million and an additional $2 million as certain milestones are
achieved. It is management's opinion that the Company's cash reserves are, as
of April 28, 1997, adequate to fund operations through December 31, 1997.
FAIR VALUE
The carrying value of financial instruments approximates fair value, unless
otherwise disclosed.
CASH AND CASH EQUIVALENTS
F-7
<PAGE>
The Company considers all instruments with maturities of three months or less
when purchased to be cash equivalents.
F-8
<PAGE>
RESTRICTED CASH
Restricted cash represents cash required to satisfy the Company's contractual
obligation for salary and related benefits associated with the hiring of the
Director of Sales and Marketing.
CONCENTRATION OF RISK
The Company currently purchases certain raw materials from a single supplier.
Management believes that other suppliers could supply these products, but there
is no assurance that such a change in suppliers would not adversely impact the
terms currently received by the Company.
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.
PROPERTY, EQUIPMENT AND FURNITURE
Property, 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. Leasehold improvements are amortized over the lives of the related
leases. Maintenance and repair costs are expensed as incurred; renewals and
betterments are capitalized.
PATENTS AND LICENSES
Patent costs are capitalized and amortized by the straight-line method over a
17-year period beginning with the date the patent is granted. Costs are
amortized over the remaining useful lives ranging from 1 to 11 years. Licenses
are recorded at cost.
RESEARCH AND DEVELOPMENT COSTS
Included in general and administration expenses are $249,612 and $228,435 of
research and development expenses in 1996 and 1995, respectively.
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. Stock options, warrants and convertible debentures have not been
included in the calculation of weighted average shares outstanding because their
effect would be antidilutive.
SUPPLEMENTAL CASH FLOW DISCLOSURE
F-9
<PAGE>
Total cash paid for interest costs was $38,761 and $66,467 for the years ended
December 31, 1996 and 1995, respectively.
As described in Note 9, in June 1995, $4 million of convertible debentures were
converted to common stock.
F-10
<PAGE>
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 the Padette-TM- through February
1998.
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 during 1995. The Company has no further
obligations under the agreement.
3. INVENTORIES:
Inventories consisted of the following components at December 31:
1996 1995
-------- --------
Raw materials $ 46,422 $134,741
Work-in-process 118,271 7,781
Finished goods 26,125 17,098
-------- --------
$190,818 $159,620
-------- --------
-------- --------
4. EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS:
1996 1995
--------- --------
Equipment $ 722,916 $452,363
Furniture and fixtures 30,469 18,705
Leasehold improvements 103,774 73,211
--------- --------
857,159 544,279
Less- Accumulated depreciation and amortization (236,937) (95,726)
--------- --------
Net equipment, furniture and leasehold improvements $ 620,222 $448,553
--------- --------
--------- --------
Included in the above table are amounts relating to assets utilized under
capital leases which had a net book value of $452,420 at December 31, 1996.
F-11
<PAGE>
F-12
<PAGE>
5. OBLIGATIONS UNDER CAPITAL LEASES:
Certain collateralized equipment is leased by the Company, which obligations are
reflected by the secured leases as noted below. These leases are used for the
research and development of new products and for the manufacturing and
production of the Padette-TM-.
Capital lease obligations consist of the following at December 31, 1996:
Secured lease at 13.33%, due 1998 $ 62,880
Secured lease at 9.75%, due 1998 9,058
Secured lease at 13.57%, due 1999 107,197
Secured lease at 14.73%, due 1999 42,566
Secured lease at 18.09%, due 1999 152,344
---------
374,045
Less- Current maturities (178,433)
---------
Total capital lease obligations $ 195,612
---------
---------
Principal payment requirements on capital lease obligations for the years ended
December 31, are as follows:
1997 $178,433
1998 142,009
1999 53,603
--------
$374,045
--------
--------
6. COMMON STOCK OPTIONS AND WARRANTS:
During 1994, the Company adopted the 1994 Incentive and Non-Qualified Stock
Option Plan (the Incentive Plan), under which 3,300,000 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 as determined by the
Committee.
COMMON STOCK OPTIONS
Weighted Average
Shares Subject Exercise Price
to Options Per Share
-------------- -----------------
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-13
<PAGE>
Options granted 175,000 3.96
Options exercised (40,000) .12
Options canceled (28,500) 2.48
--------- -----
Balance at December 31, 1996 2,243,030 $1.77
--------- -----
--------- -----
F-14
<PAGE>
Of the outstanding options at December 31, 1996 and 1995, 2,030,280 and
1,973,780, respectively, were qualified stock options and 212,750 and 162,750,
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 November 2006. The number of shares available for grant
under the Incentive Plan was 983,470 at December 31, 1996.
Qualified Stock Options
Weighted Average
Shares Exercise Price
Under Option Per Share
------------ ----------------
Number exercisable at December 31, 1996 1,712,280 $1.25
Number exercisable thereafter 318,000 $3.84
Nonqualified Stock Options
Weighted Average
Shares Exercise Price
Under Option Per Share
------------ ----------------
Number exercisable at December 31, 1996 75,250 $2.91
Number exercisable thereafter 137,500 $2.86
During 1995, compensation expense in the amount of $28,800 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.
COMMON STOCK WARRANTS
As of December 31, 1996, warrants for a total of 3,351,250 shares of Common
Stock had been awarded. The warrants may be exercised for shares of the
Company's Common Stock. During 1996, 266,650 warrants were exercised and 5,000
warrants were canceled. No warrants were exercised or canceled during 1995.
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, 1994 2,305,750 $1.34
Warrants granted 992,150 2.37
--------- -----
Balance at December 31, 1995 3,297,900 1.65
Warrants granted 325,000 4.45
Warrants exercised (266,650) 1.01
Warrants canceled (5,000) 4.00
--------- -----
Balance at December 31, 1996 3,351,250 $1.96
--------- -----
--------- -----
Number exercisable at December 31, 1996 3,307,916 $1.96
F-15
<PAGE>
Number exercisable thereafter 43,334 2.91
The Company recorded expense in the amount of $877,803 during 1995 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.
F-16
<PAGE>
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
During 1995, the Financial Accounting Standards Board issued SFAS 123 which
defines a fair value based method of accounting for an employee stock option and
similar equity instruments and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. However, it also
allows an entity to continue to measure compensation cost for those plans using
the method of accounting prescribed by APB 25. Entities electing to remain with
the accounting in APB 25 must make pro forma disclosures of net income and, if
presented, earnings per share, as if the fair value based method of accounting
defined in SFAS 123 had been adopted.
The Company has elected to account for its stock-based compensation plan under
APB 25; however, the Company has computed, for pro forma disclosure purposes,
the value of all options granted during 1996 and 1995 using the Black-Scholes
option pricing model as prescribed by SFAS 123 using the following weighted
average assumptions for grants:
For the Year Ended
December 31,
-----------------------
1996 1995
---- -----
Average risk-free interest rate 6.37% 6.07%
Expected dividend yield - -
Expected lives 6 years 6 years
Expected volatility 93.67% 95.91%
Using the Black-Scholes methodology, the total value of options granted during
1996 and 1995 was $550,750 and $718,300, respectively, which would be amortized
on a pro forma basis over the vesting period of the options (typically four
years). The weighted average fair value of options granted during 1996 and 1995
was $3.96 per share and $3.08 per share, respectively. If the Company had
accounted for its stock-based compensation plan in accordance with SFAS 123, the
Company's net loss and net loss per share would approximate the pro forma
disclosures below:
<TABLE>
1996 1995
----------------------------------- --------------------------------
<S> <C> <C> <C> <C>
As Reported Pro Forma As Reported Pro Forma
----------- ------------ ----------- ------------
Net loss $(4,333,114) $(4,594,232) $(4,196,109) $(4,375,684)
Net loss per share (.47) (.50) (.52) (.55)
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not indicative
of future amounts SFAS 123 does not apply to awards prior to January 1, 1995 and
additional awards are anticipated in future years.
7. INCOME TAXES:
As of December 31, 1996, the Company had federal net operating loss (NOL)
carryforwards of approximately $7.8 million. If not applied against future
taxable income, the federal NOL carryforwards will expire in the years 2001
through 2011. 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, 1996 and 1995, the Company had
net deferred tax assets of approximately $2.9 million and $1.4 million,
respectively, primarily resulting from deferred start-up costs and NOL
carryforwards. In accordance with SFAS 109, at December 31,
F-17
<PAGE>
1996 and 1995 a valuation allowance was recorded to reduce net deferred tax
assets to zero.
F-18
<PAGE>
8. COMMITMENTS AND CONTINGENCIES:
EMPLOYMENT CONTRACT
The Company has an employment contract with its President and COO, who is also a
director of the Company. Under terms of the contract as amended, the Company
committed to pay an annual salary for the five-year period ending June 30, 1998.
As of December 31, 1996, salary related to this contract totaled approximately
$115,000 and, under terms of the contract, may be increased in the future.
OPERATING LEASES
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. In addition, the Company leases its
warehouse and manufacturing facilities in the same business park. Other leases
have terms of one year or less. Future minimum lease payments for office,
warehouse and manufacturing facilities at December 31, 1996 totaled $317,867 and
are payable as follows:
1997 $ 122,531
1998 122,876
1999 68,966
2000 3,494
Rent expense was $127,338 and $96,250 for the years ended December 31, 1996 and
1995, respectively.
LITIGATION
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 sought damages of up to $6 million under various theories. During 1996,
through a conference settlement, between representatives of the parties, a
tentative settlement agreement was reached. The Company agreed to pay certain
expenses of Kassia of $90,000, of which $50,000 is expected to be covered by
insurance, and to issue 100,000 shares of the Company's common stock as
consideration for certain proprietary assets of the Plaintiff. The fair market
value of the stock was $2.00 at the date of settlement.
9. 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% per annum.
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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.
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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.
10. SUBSEQUENT EVENTS:
FINANCING COMMITMENT
During the first quarter of 1997, in various transactions, the Company issued
530,000 shares of the Company's Common Stock in exchange for $1,060,000 in cash
from a group of private investors. The financing is intended to assist in
meeting the Company's operating needs while it pursues additional sources of
financing.
ISSUANCE OF WARRANTS AND TERMINATION OF OPTIONS
During February 1997, the Company granted warrants for 50,000 shares of the
Company's Common Stock to an investor in the Company. The warrants are
exercisable at a price of $2.00 per share and expire in January 2002.
Effective February 28, 1997, John F. Perry, the former Chief Executive Officer,
voluntarily and without disagreement resigned as member of the Board and his
employment with the Company was terminated. As a result of his resignation,
37,500 options held by Mr. Perry were surrendered and are available for future
grant under the 1994 Incentive and Nonqualified stock option plan.
RELOCATION OF FLORIDA OPERATIONS
Subsequent to December 31, 1996, the Company relocated the Florida operations to
Oregon. The Company has reserved related expenses for contractual obligations
associated with the Florida operations at December 31, 1996.
LICENSING AGREEMENT
On April 28, 1997, the Company entered into a license agreement with a major
manufacturer and distributor of consumer products to make, use and sell the
Company's interlabial products and to use certain of the Company's trademarks.
The Company received $2 million upon signing this agreement, with an additional
$2 million to be received over the term of the agreement if certain milestones
are achieved.
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