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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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
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A-FEM MEDICAL CORPORATION
(Name of small business issuer in its charter)
NEVADA 33-0202574
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
10180 SW NIMBUS AVE., SUITE J-5
PORTLAND, OR 97223
(Address of principal executive offices)
Issuer's telephone number, including area code: (503) 968-8800
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
(Title of each class) (Name of each exchange on which registered)
None None
SECURITIES REGISTERED UNDER 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 in response 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, 1997: $89,717
As of March 27, 1998, the aggregate market value of $.01 par value
Common Stock held by non-affiliates of the issuer was $15,205,808.
As of March 23, 1998, the issuer had outstanding 12,798,694 shares of
its $.01 par value Common Stock.
Transitional Small Business Disclosure Format: Yes [X] No [ ]
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PART I
ITEM 1: DESCRIPTION OF BUSINESS
A-Fem Medical Corporation (the "Company", "Registrant" or "A-Fem") is a
women's health care company. A-Fem has developed three core product technology
platforms, one based on its inSync(TM) miniform interlabial pad, another based
on the Rapid-Sense(TM) diagnostic products and a third based on the Padkit(TM)
collection device. The miniform is a new type of feminine hygiene product that
is worn interlabially. A-Fem's first miniform application, the inSync miniform,
has received Food and Drug Administration ("FDA") approval and was launched in a
market roll-out in Oregon and Washington in January 1998. The Company expects to
use its Rapid-Sense diagnostic technology to create rapid response, low cost,
point-of-use diagnostic tools which generate quantifiable results. The core
technology development for Rapid-Sense diagnostic products has been completed
and applications are under development. The Padkit contains a miniform to be
used during a woman's menstrual cycle to collect a sample for diagnostic
testing.
The Company's objective is to create value for its shareholders by: (i)
successfully completing a national roll-out of the inSync miniform; (ii)
developing value-added miniform line extensions, including medical applications
of the miniform as a drug delivery device and as an alternative sample
collection device for the Pap smear cervical cancer screening and other tests;
and (iii) identifying strategic partners for the marketing and distribution of
products utilizing A-Fem's Rapid-Sense diagnostic technology and developing
market-ready applications based on these relationships.
The Company was incorporated in Nevada on December 9, 1986 as
Xtramedics, Inc. In June 1994, it changed its name to ATHENA Medical
Corporation. At the annual meeting of the shareholders of the Company in July
1997, the shareholders voted to change the name of the corporation to A-Fem
Medical Corporation.
PRINCIPAL PRODUCTS
The Company's inSync miniform (formerly the Fresh 'n Fit Padette(R)) is
the first generation of a product which introduces an entirely new segment
within the feminine protection market. The miniform is a small, convenient
absorbent pad worn lengthwise between the labia where a woman's body naturally
and comfortably holds it in place. The miniform provides dependable protection
on light menstrual flow days and back up against leakage on heavy menstrual flow
days. In addition, the miniform may be used as protection for slight urine loss
(stress incontinence), vaginal discharge, mid-cycle spotting and to provide a
general feeling of freshness.
The Company began distribution of the inSync miniform in Oregon and
Washington in late 1997 with advertising support beginning in January 1998.
Oregon and Washington account for 3.4% of the U.S. population. The Company is
closely monitoring this initial market over the first half of 1998 in order to
fine-tune its marketing plan and forecasting model prior to continuing with its
national rollout. The Company plans to complete at least one additional roll-out
in 1998 and achieve national distribution in 1999. (See Factors Affecting
Forward-Looking Statements--Need for Additional Financing.) The national
roll-out may be accelerated or delayed based on
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various factors including the availability of additional financing and consumer
and retailer acceptance.
The Company is developing future generations of the miniform product
line, some of which will be marketed within the feminine protection arena and
some in the medical arena. The PadKit (formerly the Tampette(TM)) is the first
planned diagnostic application of the Company's miniform. In March 1998, a
patent was issued for the technology which is the basis of the PadKit. The
PadKit is being designed to replace the cervical scrape as a collection device
for tests which screen for cervical cancer and certain other cancers and
diseases. The PadKit will enter Phase I clinical trials in the spring of 1998 to
determine feasibility. The PadKit contains a miniform to be used as a collection
device during the normal menstrual cycle. The miniform will collect blood along
with numerous cells, vaginal mucous and discharge flushed out by the menstrual
flow. This sample may provide an alternative to the cervical scrape method of
sample collection for cervical cancer screening and/or provide a sample to test
for other conditions.
The Company expects that its Rapid-Sense point-of-use diagnostic
technology will enable consumers and healthcare providers to obtain quantifiable
test results quickly, conveniently and inexpensively. The Rapid-Sense core
technology enables visual quantification of a desired substance, such as a
disease marker, in a sample of blood or urine. In 1997, A-Fem's research and
development team demonstrated the feasibility of the Rapid-Sense core technology
and developed working prototypes for monitoring osteoporosis therapy. The
Company expects to seek strategic partners to assist in the marketing and
distribution of specific applications of Rapid-Sense. Additional potential
Rapid-Sense applications include pregnancy tests that estimate the time since
conception, tests that measure hormone levels for women, and tests that screen
for infectious diseases and cancers. The Rapid-Sense technology is in the
development stage and has not yet entered clinical trials, which are a precursor
to submission to the FDA for approval.
The Affirm one-step pregnancy test is a rapid, visual test for the
qualitative detection of human Chorionic Gonadotropin in urine. In September
1996, the Company received FDA clearance to market its Affirm one-step home
pregnancy test for over-the-counter and professional sales. The Company has not
generated any significant revenues from sales of the Affirm product to date and
does not expect any significant revenues from the product in the future. Its
primary strategic benefit is the establishment of a relationship with the FDA's
diagnostic team.
MARKETING AND DISTRIBUTION
The Company has received Food and Drug Administration ("FDA") clearance
to market the miniform under a 501(k) application. The initial regional roll-out
of the inSync miniform began in January 1998. As of December 31, 1997, the
product had been shipped to the three largest grocery chains and two drug store
chains in Oregon and Washington. Repeat orders and orders from additional store
chains have been received during the first quarter of 1998.
Based upon analysts' reports, the United States market for feminine
protection products is estimated to exceed $1.7 billion per year. The market
currently consists of two segments: internal products, such as tampons, which
represent approximately 35 percent of the total market, and external products,
such as napkins, mini/maxi pads and pantiliners, which represent approximately
65 percent of the market. The inSync miniform represents a new category of
products that the Company expects will both compete with and complement existing
products.
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Outside the United States, analysts' reports estimate the feminine
protection market to be $5.7 billion per year, with external products accounting
for over 85 percent of sales. In most of Asia, and in Latin America, internal
products are not acceptable to many women for cultural or religious reasons.
Bulky pads offer a poor substitute due to the hot climate in these areas and the
high activity level of many women. The inSync miniform offers these women a
comfortable, convenient and externally worn alternative. Although the Company
has made a number of contacts with foreign distributors and has explored certain
foreign markets, it is not currently shipping products to any foreign country
nor does it have any present plans to do so.
The Company's first diagnostic application of the miniform, the PadKit,
is currently entering Phase I clinical trials as a potential alternative to the
cervical scrape as a sample collection device for the Pap test for cervical
cancer. Over 30 million Pap tests are performed annually to test for cervical
cancer. Although significant improvements have been made in the area of Pap test
sample reading and sample preparation, no improved sample collection method has
been developed. The Company believes the PadKit may provide a superior cell
sample as well as a simpler, more comfortable and convenient procedure for
collecting the cells.
In order to focus on product development and increase the speed to
market for its products, the Company is pursuing a strategy of forming alliances
with large strategic partners. For Rapid-Sense, the Company will seek marketing
partners with proven experience in diagnostics marketing. The Company has no
such alliance at present.
COMPETITION
The U.S. feminine protection market is dominated currently by four major
consumer products companies: the Procter & Gamble Company ("P&G"), Johnson &
Johnson, Kimberly-Clark and Playtex. In 1996, the marketplace was expanded by
the introduction of Ultrafem's INSTEAD(TM), an internally worn menstrual
collection cup. The inSync miniform represents an entirely new segment of the
feminine protection market and provides benefits not offered by competitive
products. Features of the inSync miniform which distinguish it competitively are
its versatility, convenience, comfort and safety.
In the diagnostics arena, A-Fem's proprietary Rapid-Sense technology
has not yet received demonstrated market acceptance. The Company believes that
its Rapid- Sense technology will allow the Company to address market needs that
prior technology could not meet, provide significant end-user cost savings over
older technology, move various laboratory tests to the point-of-use markets to
increase early intervention and improve women's healthcare in general.
The Company's current products and products under development will
compete with products from other companies that have an established market, more
employees and substantially greater research, financial and marketing resources
than A-Fem. The Company's only current diagnostic product, the Affirm pregnancy
test, has not generated significant revenue and the Company does not expect it
to do so.
MATERIALS AND MANUFACTURING
The Company's current miniform manufacturing facility in Portland,
Oregon was initially completed in 1996, and upgraded in 1997. The present
operation requires very little overhead or
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direct labor, and is capable of producing more than $1,000,000 wholesale value
of the product monthly, enough capacity to meet the Company's forecast demand
through market penetration of the Western U.S, which represents approximately
1/4 of the geographic area of the U.S. The Company can double its miniform
production capacity with a capital expenditure of approximately $800,000 and a
construction lead-time of approximately six months. This would provide enough
capacity to meet the additional demand forecast through market penetration of
an additional 1/4 of the geographic area of the U.S. The facility encompasses
7,300 square feet and has been inspected by the U.S. FDA and found to be without
reportable deficiencies. The Company has begun a $300,000 automation of its
packaging process which will be completed during the first quarter of 1998. The
Company will need additional space to manufacture sufficient quantities of the
miniform to support a national rollout.
Raw materials used for production of the inSync miniform and the
Company's diagnostic products are made and supplied in the United States. Its
suppliers are meeting the Company's current manufacturing needs, although an
uninterrupted flow of raw materials cannot be guaranteed. The Company currently
purchases certain raw materials from a single supplier. Although the Company
does not believe it would be difficult to replace this supplier, the Company has
not approved other suppliers for such raw materials.
The Company's current Rapid-Sense manufacturing facility is limited to
producing prototypes and is located within the Company's research and
development facilities. This prototyping operation is capable of producing
sufficient products to meet the expected needs of the Company's planned
clinical trials. The Company plans to manufacture Rapid-Sense products
in-house to better protect its technology.
PATENTS AND TRADEMARKS
The Company has rights to or owns two U.S. patents and additional
foreign patents in Canada and Japan relating to the miniform. These patents
cover manufacturing apparatus and methods for making both the current miniform
and a 100 percent biodegradable absorbent miniform. The Company and P&G have
entered into a license agreement which grants to P&G the right to use the
Company's miniform technology. See "Factors Affecting Forward-Looking
Statements--Competition." Recently, the Company was issued a patent for the
technology which is the basis for the PadKit collection device. Additionally,
the Company has patents pending for its Rapid-Sense technology. The Company
expects to file additional patent applications on its miniform, Rapid-Sense and
Padkit technologies.
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The issued United States patents currently owned, assigned or licensed
to the Company and the pending patent applications are as follows:
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US PATENT OR DATE OF
SERIAL NUMBER ISSUE OR FILING TITLE
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4,995,150 02/26/91 Method and Apparatus for Making
Feminine Protection Pads
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5,575,047(1) 11/19/96 Method for Making Biodegradable
Absorbent Pads
- --------------------------------------------------------------------------------
5,725,481 03/10/98 Method and Apparatus for Collecting
Vaginal Fluid and Exfoliated Vaginal
Cells for Diagnostic Purposes
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60/048,902(2) 06/05/97 Rapid-Sense Technology
- --------------------------------------------------------------------------------
08/670,137(3) 06/25/96 Biodegradable Absorbent Pads
- --------------------------------------------------------------------------------
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1 Also applied for in Germany, Japan, England, France, Italy, Sweden, and
Canada.
2 Patent pending.
3 Reapplication pending.
The term for patents issued on applications filed on or after June 8,
1995 is 20 years from the date of the application or, if the application
contains a specific reference to an earlier filed application under 35 USC
Sections 120, 121 or 365(c), 20 years from the date on which the earliest
such application was filed. The term for patents issued on applications filed
before June 8, 1995, is the greater of the 20-year term described above or 17
years from grant, depending on the amount of time between application and
issuance.
The Company has applications for U.S. trademarks for PadKit,
Rapid-Sense, Chromostat, Quanti-Flow and for inSync and its related design. In
addition to these applications, the Company has also applied for international
trademarks on Rapid-Sense and inSync and its related design. The Company relies
on trade secrets and other unpatented proprietary information in its development
activities.
REGULATORY REQUIREMENTS
The production and marketing of the Company's products are subject to
rigorous FDA regulation. Before a medical product may be marketed for use by
humans, months of laboratory and clinical trials must be performed to validate
the safety and effectiveness of the product. The Company has assembled a team to
obtain marketing approval from the FDA for its planned products. This team
includes senior management, personnel with regulatory expertise, personnel with
scientific skills for clinical field trials and a Medical Advisory Board,
consisting of scientific PhDs and MDs, to contribute to the scientific and
medical validity of its clinical trials.
To date this team has successfully obtained FDA marketing approval for
three of the Company's products: the inSync miniform, the Affirm over the
counter Pregnancy Test, and the Affirm Professional Pregnancy Test.
In April of 1997, the Company was notified by the FDA that the inSync
miniform was reclassified as a Class I device. This reclassification removes the
miniform from the category of
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internally worn products, such as tampons, and confirms that the miniform, like
a pad, does not create significant risk of toxic shock syndrome. Requests for
regulatory approval for marketing have been made in several foreign countries
and completed in China. The Company cannot predict when, or if, other regulatory
approvals may be received.
RESEARCH AND DEVELOPMENT
The Company spent approximately $666,000 on research and development in
the year ended December 31, 1997, primarily with respect to development of the
Rapid-Sense diagnostic technology, preparing the PadKit for clinical trials and
applying for patents. The Company spent approximately $250,000 on research and
development in the year ended December 31, 1996.
EMPLOYEES
As of March 23, 1998, the Company had 15 full-time employees, as well as
several part-time employees. The Company believes that its relations with its
employees are good.
ITEM 2: DESCRIPTION OF PROPERTY
The Company's corporate office and product development facilities are
located in 7,100 square feet of leased space in Portland, Oregon. The Company
also leases 7,300 square feet of manufacturing and warehouse space in proximity
to its corporate office.
ITEM 3: LEGAL PROCEEDINGS
None.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held a special meeting of the stockholders on December 12,
1997 at which an amendment to the Articles of Incorporation to authorize a class
of preferred stock to be designated by the Board of Directors was approved by
the Company's stockholders. The holders of 10,082,797 shares of Common Stock
voted in favor of the amendment, the holders of 131,717 shares of Common Stock
voted against it or withheld in opposition and the holders of 10,760 shares
abstained.
PART II
ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Trading of the Common Stock is being reported in the OTC Bulletin Board.
The following table sets forth the range of completed sales prices for
the Common Stock as reported in the OTC Bulletin Board for the period
indicated.
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<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1st Quarter 1996 $3.94 $2.94
2nd Quarter 1996 5.32 3.63
3rd Quarter 1996 3.94 2.32
4th Quarter 1996 4.63 1.50
1st Quarter 1997 4.88 2.94
2nd Quarter 1997 4.13 2.44
3rd Quarter 1997 4.76 2.50
4th Quarter 1997 4.06 2.44
</TABLE>
The foregoing prices reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not represent actual transactions.
(b) On March 23, 1998, there were approximately 331 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 its operations. The Company is not under any
contractual restriction as to its present or future ability to pay
dividends.
RECENT SALES OF UNREGISTERED SECURITIES
1. On January 22, 1997, the Company issued a warrant to John McCormick
to purchase up to 50,000 shares of Common Stock at an exercise price of $2.00
per share in consideration of efforts by Mr. McCormick to market the Company's
products. The Company believes Mr. McCormick was an "accredited investor" within
the meaning of Rule 501 under the Securities Act. In issuing these securities,
the Company relied upon an exemption from registration pursuant to Section 4(2)
of the Securities Act.
2. On February 26, 1997, the Company issued a total of 200,000 shares of
Common Stock to five investors for aggregate cash consideration of $400,000.
Each purchaser represented that such purchaser was either (i) an "accredited
investor" within the meaning of Rule 501 (a) under the Securities Act or (ii)
represented by a purchaser representative who met the requirements of Rule
501(h) of the Securities Act, and, together with such purchaser representative,
had such knowledge and experience in financial and business matters that it was
capable of evaluating the merits and risks of the investment. In issuing these
securities, the Company relied upon an exemption from registration pursuant to
Rule 506 and Section 4(2) of the Securities Act.
3. On February 28, 1997, the Company issued 250,000 shares of Common
Stock to two investors for aggregate cash consideration of $500,000.
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Each of these investors represented that it was an "accredited investor" within
the meaning of Rule 501 under the Securities Act. In issuing these securities,
the Company relied upon an exemption from registration pursuant to Rule 506
and Section 4(2) of the Securities Act.
4. On March 12, 1997, the Company issued a total of 80,000 shares of
Common Stock to five investors for an aggregate cash consideration of $160,000.
Each purchaser represented that it was either (i) an "accredited investor"
within the meaning of Rule 501 (a) under the Securities Act or (ii) represented
by a purchaser representative who met the requirements of Rule 501(h) of the
Securities Act, and together with such purchaser representative had such
knowledge and experience in financial and business matters that it was capable
of evaluating the merits and risks of the investment. In issuing these
securities, the Company relied upon an exemption from registration pursuant to
Rule 506 and Section 4(2) of the Securities Act.
5. On May 7, 1997, the Company issued to J. Peter Burke, an officer of
the Company, an option to purchase 200,000 shares of Common Stock at an exercise
price of $3.00 per share in consideration of his services to the Company, issued
to each of William H. Fleming, a director and officer of the Company, and James
E. Reinmuth, a director and officer of the Company, an option to purchase 80,000
shares of Common Stock at an exercise price of $3.00 per share in consideration
of their services to the Company, and issued to James R. Wilson, an officer and
director of the Company, an option to purchase up to 140,000 shares of Common
Stock at an exercise price of $3.00 per share, in consideration of his services
to the Company. The Company believes each of Mr. Burke, Mr. Fleming, Mr.
Reinmuth and Mr. Wilson was an "accredited investor" within the meaning of Rule
501 under the Securities Act. In issuing these securities, the Company relied
upon an exemption from registration pursuant to Section 4(2) of the Securities
Act.
6. On May 16, 1997, the Company issued options to ten employees to
purchase 138,134 shares of Common Stock at an exercise price of $3.50 per share
pursuant to an employee option plan. In issuing these securities, the Company
relied upon an exemption from registration pursuant to Rule 701 under Section
3(b) of the Securities Act.
7. On May 27, 1997, the Company issued 617,140 shares of Common Stock to
John F. Perry pursuant to the exercise of an option for aggregate cash
consideration of $74,057. In issuing these securities, the Company relied
upon an exemption from registration pursuant to Rule 701 under Section 3(b) of
the Securities Act.
8. On June 5, 1997, the Company issued 128,000 shares of Common Stock to
Richard T. Schroeder pursuant to the exercise of a warrant for aggregate cash
consideration of $52,480 in reliance on an exemption from registration under
Rule 506 and Section 4(2) of the Securities Act.
9. On June 30, 1997, the Company issued 128,000 shares of Common Stock
to James R. Wilson pursuant to the exercise of a warrant for aggregate cash
consideration of $52,480 in reliance on an exemption from registration pursuant
to Rule 701 under Section 3(b) of the Securities Act.
10. On September 22, 1997, the Company issued 100,000 shares of Common
Stock to Kassia International, Inc., pursuant to a settlement agreement in a
civil action in exchange for
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certain proprietary assets of the Plaintiff as consideration. The issuance of
these shares was exempt from registration pursuant to Rule 506 and Section 4(2)
of the Securities Act.
11. On July 1, 1997, the Company issued an option to Huiying Wang to
purchase 32,728 shares of Common Stock at an exercise price of $2.75 per share
pursuant to an employee option plan in consideration of services to the Company.
The issuance of the options is exempt from registration under Rule 701 under
Section 3(b) of the Securities Act.
12. On July 7, 1997, the Company issued 557,140 shares of Common Stock
to William H. Fleming pursuant to the exercise of an option for aggregate cash
consideration of $66,857. In issuing these securities the Company relied upon
an exemption from registration pursuant to Rule 701 under Section 3(b) of the
Securities Act.
13. On October 10, 1997, the Company issued 160,000 shares of Common
Stock to James E. Reinmuth pursuant to the exercise of a warrant for aggregate
cash consideration of $65,600. In issuing these securities the Company relied
upon an exemption from registration pursuant to Rule 701 under Section 3(b) of
the Securities Act.
14. On January 30, 1998, the Company issued 390,625 shares of Common
Stock to Capital Consultants, Inc. in exchange for aggregate cash consideration
of $750,000. In issuing these securities, the Company relied upon Rule 506 and
Section 4(2) of the Securities Act.
15. On February 9, 1998, the Company issued 104,166 shares of Common
Stock to Gerald Bashaw in exchange for aggregate cash consideration of $200,000.
In issuing these securities, the Company relied upon an exemption for
registration pursuant to Rule 506 and Section 4(2) of the Securities Act.
16. On March 4, 1998, the Company issued 26,042 shares of Common Stock
and a warrant to purchase an additional 6,510 shares of Common Stock at an
exercise price of $1.92 per share to Dr. Paul N. Temple in exchange for
aggregate cash consideration of $50,000. In issuing these securities, the
Company relied upon an exemption for registration pursuant to Rule 506 and
Section 4(2) of the Securities Act.
ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
OVERVIEW
The Company has experienced significant operating losses during the
years ended December 31, 1997 and 1996 and has continued to incur losses into
the first quarter of 1998. Further, the Company has not generated significant
revenues. The Company expects that significant ongoing expenditures will be
necessary to successfully implement its business plan and develop, manufacture
and market its 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 of at least $6 million in 1998. Management's
plans include efforts to obtain additional capital and to evaluate potential
partnering opportunities. The Company has raised operating funds in the past by
selling shares of its Common Stock for consideration totaling approximately $1.8
million during 1997, $1.9 million in 1996 and $1.0 million through March 15,
1998.
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There can be no assurance that the Company's efforts to raise additional
funding or enter into a strategic alliance will be successful. If the Company is
unable to obtain adequate additional financing, enter into such strategic
alliance or generate sufficient sales revenues, management may be required to
curtail the Company's product development, marketing activities and other
operations, and the Company may be forced to cease operations.
During the second half of 1996 and early 1997, the Company underwent a
management restructuring. James E. Reinmuth was appointed Chairman and Chief
Executive Officer and J. Peter Burke was appointed President, Chief Operating
Officer and Chief Financial Officer. Under their guidance the Company has
focused its business strategy, brought its inSync miniform product to market and
made significant advances in the development of the Company's diagnostic
technology.
In April 1997, the Company established a strategic relationship with
P&G. Under the agreement, A-Fem agreed to license certain technical and
marketing rights with respect to the miniform technology to P&G. As a result of
this agreement, A-Fem received $2,000,000 from P&G. See "Factors Affecting
Forward-Looking Statements--Competition."
The Company is in the process of assessing the impact of Year 2000
related issues on its business. Management does not expect any Year 2000
modifications to materially impact the Company.
RESULTS OF OPERATIONS
For the year ended December 31, 1997, the Company generated net sales of
approximately $90,000 as compared to net sales of approximately $193,000 for the
year ended December 31, 1996. This decrease in net sales was primarily the
result of the termination of the Florida test markets and the Company's
concentration on preparing for the initial roll-out of the inSync miniform in
Oregon and Washington.
The Company's operating loss for the year ended December 31, 1997 was
approximatley $4.0 million, compared to an operating loss of approximatley $4.3
million for the previous year. The reduction in operating loss was primarily
the result of a reduction in selling, general and administrative expenses. The
Company's operating loss was primarily attributed to marketing and selling
expenses related to the roll-out of the inSync miniform in Oregon and
Washington. Such expenses primarily consisted of marketing and selling
expenses of approximately $1,817,000, research and development expenses of
approximately $666,000 and general and administrative expenses of approximately
$1,080,000.
Marketing and selling expenses accounted for the greatest share of all
expenses in 1997. This is primarily the result of efforts to prepare and support
the launch of the Company's inSync miniform in Oregon and Washington. The
roll-out generated expenses for media, advertising production, packaging design,
selling materials and marketing and sales consultants. The Company began to ship
inSync miniforms to Oregon and Washington in November 1997. Similarly, marketing
and selling expenses accounted for the greatest share of all expenses in 1996.
This was primarily the result of test marketing for the Company's miniform
product.
The Company's net loss for the year ended December 31, 1997 decreased
approximately $2,339,000 to $1,994,000 from $4,333,000 for the year ended
December 31, 1996. This decrease is primarily the result of the receipt of a
payment of $2,000,000 from P&G pursuant to the Company's licensing agreement
with P&G.
Research and development expenses for the year ended December 31, 1997
were approximately $666,000. Research and development expenses for the year
ended December 31,
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1996 totaled approximately $250,000. The increase in these expenses is primarily
attributable to development costs of the Rapid-Sense diagnostic technology,
preparations for the PadKit clinical work and patent work.
General and administrative expenses for the year ended December 31, 1997
totaled approximately $1,080,000 and are attributed primarily to payroll, legal
and administrative costs associated with the operations of the Company. The
Company has taken significant measures during 1997 to reduce these costs.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had cash and cash equivalents of
approximately $526,000 as compared to approximately $671,000 at December 31,
1996. To date, the Company has financed its growth and operations through
private placements of Common Stock and capital leases. During 1997, the
Company raised over $1.8 million dollars from private investors in exchange for
2,670,780 shares of the Company's Common Stock. In 1996 the Company raised over
$1.9 million from private investors in exchange for 1,179,671 shares of the
Company's Common Stock. Of the $1.9 million dollars raised in 1996, the Company
agreed to put into escrow an allocated amount of the proceeds in order for the
Company to meet its obligation for certain salaries and related benefits. Under
terms of the financing, the proceeds will be held in escrow and drawn upon
periodically as required over a two-year period ending May 1998.
Subsequent to December 31, 1997, the Company has received $950,000, in
exchange for 494,791 shares of the Company's Common Stock and $50,000 has been
received in exchange for 26,042 shares of the Company's Common Stock and a
warrant to purchase an additional 6,510 shares.
The Company will have to raise additional capital in order to meet costs
associated with marketing, research and development and related administrative
activities. If the Company is unable to obtain such financing, it may be
required to curtail its activities and may have to cease operations.
The Company expects to continue to incur losses through 1998 and into
1999, as the cost of marketing, research and development will continue to exceed
income from product sales. Exclusive of marketing costs the Company has
approximately $200,000 per month of operating expenses. In order to carry out
its marketing plan for the inSync miniform and its development plans for
Rapid-Sense and the PadKit, the Company estimates it will need to raise
approximately $6 million in financing over the next six months and $20 million
thereafter. The Company does not expect significant amounts of debt financing
to be available to it in the near term and that it will have to issue
additional equity. The Company cannot predict on what terms any such financing
might be available, but any such financing could involve issuances of equity
below current market prices and result in significant dilution of existing
stockholders.
During 1997, the Company received an additional approximately $289,000
lease line-of-credit (the "Commitment") from First Corp. (First Portland
Corporation) used for the purchases of capital equipment. The lease terms are
for either 24 months or 36 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 First Corp. The Company also received other smaller
individual leasing commitments from other leasing
12
<PAGE> 13
companies during 1997. Throughout 1997, the Company entered into various capital
lease obligations totaling approximatley $310,000 for new equipment used in
the production of the inSync miniform and for research and development. The
leased equipment collateralizes the underlying capital leases, with interest
rates ranging from 6.24 percent per annum to 18.44 percent per annum and with
various maturities ending in 2001. During 1998, the Company plans to lease
additional production equipment for the miniform.
FACTORS AFFECTING FORWARD-LOOKING STATEMENTS
The statements contained in this report that are not statements of
historical fact may include forward-looking statements (as defined in Section
27A of the Securities Act of 1933, as amended) that involve a number of risks
and uncertainties. Moreover, from time to time the Company may issue other
forward-looking statements. The following factors are among the factors that
could cause actual results to differ materially from the forward-looking
statements and should be considered in evaluating any forward-looking
statements.
Need for Additional Financing. During the fiscal year ended December 31,
1997, the Company incurred losses of approximately $2 million. The Company
expects to incur losses each month through 1998 as the costs of marketing are
expected to exceed income from product sales. In order to carry out its
marketing plan for the inSync miniform, the Company estimates that it will need
to raise substantial capital over the next two years. In addition, the Company
expects to require additional funds for the development, manufacture and
marketing of its planned products. The Company does not expect significant
amounts of debt financing to be available to it in the near term and expects
that it will have to issue additional equity to meet its financing needs. These
funds may not be available or available on terms favorable to the Company or its
stockholders. The Company cannot predict on what terms any such financing might
be available, but any such financing could involve issuances of equity below
current market prices and result in significant dilution of existing
shareholders. The inability of the Company to obtain such financing could cause
the Company to cease operation. See "Management's Discussion and Analysis --
Liquidity and Capital Resources."
Competition. The Company's current products and products in development
will compete with products from other companies that have an established market,
more employees and substantially greater research, financial and marketing
resources than the Company. Many of these competitors also have the resources to
manufacture and market their own products, which in many cases the Company may
not be able to do. The Company has licensed to P&G the rights to its miniform
technology. The Company believes P&G has significantly greater resources than
does the Company.
Lack of Revenues from Products; Early State of Product Development. The
inSync miniform, PadKit, Affirm and Rapid-Sense products are in the early stages
of development or marketing. See "--Government Regulation". There have been no
significant revenues from the miniform and Affirm and there have been no
revenues at all from the PadKit or Rapid-Sense products. The Company does not
have a stable baseload of demand for its products and cannot estimate the
potential market for its products. Because the Company's products are in an
early stage of development or marketing, the Company may encounter problems,
delays, expenses and difficulties, many of which may be beyond the Company's
control. These include, but are not limited to, unanticipated developmental
testing, regulatory compliance, manufacturing and marketing costs and
competition. In addition, the Company's products are subject to the risks
13
<PAGE> 14
inherent in new products. These include the risk that products in development
may not be successfully developed, or that the Company's products, once
developed, may not be successfully manufactured, advertised and marketed, may
not be commercially successful or may become obsolete within a short time after
their development. Moreover, the costs of research and development and clinical
trials for new products cannot be reliably forecast and may substantially exceed
the Company's expectations and financial resources.
Manufacturing Risks. The Company currently manufactures the inSync
miniform. As a manufacturer, the Company will continually face risks regarding
the availability and costs of raw materials and labor, the potential need for
additional capital equipment, increased maintenance costs, plant and equipment
obsolescence, quality control and excess capacity. A disruption in the Company's
production or distribution could have a material adverse effect on the Company's
financial results. The Company currently purchases certain raw materials from a
single 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 such raw materials to the Company.
Uncertain Ability to Manage Growth. The Company anticipates that in
order to achieve success in its industry, the Company will be required to
increase rapidly its sales, production and employee base. The Company
anticipates these increases will place significant demands on the Company's
management, working capital and financial and management control systems. The
Company may not be able to meet the demands of future growth. Any inadequacies
in these areas could have a material adverse effect on the Company's business,
financial condition and results of operations.
Patents, Trademarks and Proprietary Information. The Company has the
right to or owns two unexpired U.S. patents covering the inSync miniform. These
patents involve manufacturing methods, improved absorption, and design of the
manufacturing apparatus. The Company has filed additional applications for the
miniform involving such areas as a 100 percent biodegradable pad and a
diagnostic collection device. In addition, the Company has the right to one
patent related to the PadKit and has filed additional patents related to
Rapid-Sense. The term for patents issued on applications filed on or after June
8, 1995 is 20 years from the date of the application or if the application
contains a specific reference to an earlier filed application under USC
Sections 120, 121 or 365(c), 20 years from the date on which the earliest
such application was filed. The term of patents issuing on applications filed
before June 8, 1995, is the greater of the 20-year term described above or 17
years from grant, depending on the amount of time between application and
issuance.
The issuance of patents to the Company or to a licensor is not
conclusive as to validity or as to the enforceable scope of claims therein. The
validity and enforceability of a patent can be challenged by litigation after
its issuance, and, if the outcome of such litigation is adverse to the owner of
the patent, the owner's rights could be diminished or withdrawn. The issuance of
patents covering any of the Company's products may be insufficient to prevent
competitors from essentially duplicating the product by designing around the
patented aspects. The patent laws of other countries may differ from those of
the United States as to the patentability of the Company's products and
processes. Moreover, the degree of protection afforded by foreign patents may be
different from that in the United States.
The technologies used by the Company may infringe upon the patents or
proprietary technology of others. The cost of enforcing the Company's patent
rights in lawsuits that the
14
<PAGE> 15
Company may bring against infringers or defending itself against infringement
charges by other patent holders may be high and could adversely affect the
Company.
Trade secrets and confidential know-how are important to the Company's
scientific and commercial success. Although the Company seeks to protect its
proprietary information through confidential agreements and appropriate
contractual provisions, others may develop independently the same or similar
information or gain access to proprietary information of the Company. The
Company has licensed certain of its technology to P&G. See "Patents and
Trademarks."
Government Regulation. Many of the Company's activities are subject to
regulation by various local, state and federal regulatory authorities in the
United States and by governmental authorities in foreign countries where its
products may be marketed. Requests for regulatory approval for marketing in
several other countries have been made and regulatory approval has been obtained
in China. The Company cannot predict when or whether approvals in other
countries will be obtained. The PadKit and RapidoSense are still in the
development stage and will require FDA approval and approval from similar
authorities in other countries. See "--Lack of Revenues from Products; Early
State of Product Development." Obtaining such approvals may be a lengthy and
expensive process and may involve extensive testing and clinical trials to
demonstrate safety, reliability and efficacy. In addition, the process of
obtaining approvals may be subject to changes in regulations resulting in
unexpected costs and uncertainty. The Company may not be able to comply with the
applicable requirements and necessary approvals may not be granted. Moreover,
the extent and impact of future governmental regulations cannot be predicted.
Failure to comply with the regulatory requirements applicable to the Company may
result in fines, injunctions, civil penalties, recall or product seizure, among
other penalties.
Dependence on Management and Consultants. The Company depends to a large
extent upon the abilities and continued participation of its current directors,
executive officers and consultants. The loss of any of these people could have a
serious adverse effect upon the Company's business. The Company may not be able
to attract and retain key personnel with the skills and expertise necessary to
manage its business. The Company does not have key-man life insurance on the
lives of any of its personnel. Competition for management and scientific staff
in the biotechnology, biomedical and health care fields is intense. The Company
may not be able to continue to employ personnel and consultants with sufficient
expertise to satisfy the Company's needs.
Product Liability. The Company could be subject to claims for personal
injuries or other damages resulting from its products. The Company carries
general liability insurance with an aggregate limit of $5,000,000. While there
have been no product liability claims against the Company, any claims for
amounts exceeding its insurance coverage that were successful or protracted
could have a material adverse effect on the Company. The Company's insurance may
not adequately protect the Company against all such liabilities. The Company's
insurance does not cover actions brought in countries other than the United
States. The Company's current product is not intended for internal use and
therefore the Company does not consider claims relating to toxic shock syndrome
to be a risk to the Company. However, the Company cannot guarantee that the
product will not be used internally by persons misusing the product. Claims
relating to toxic shock syndrome are excluded from the Company's insurance
policy.
15
<PAGE> 16
ITEM 7. FINANCIAL STATEMENTS
Financial Statements begin on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
16
<PAGE> 17
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS
The Company's executive officers and directors are:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
James E. Reinmuth, Ph.D. 57 Chairman, Chief Executive Officer and
Director
Peter Burke 53 President, Chief Operating Officer and
Chief Financial Officer
William H. Fleming, Ph.D. 51 Vice Chairman-Diagnostics, Secretary and
Director
Carol A. Scott, Ph.D. 48 Director
RoseAnna Sevcik 34 Director
James Wilson 48 Director and Treasurer
Robert L. Buck, Ph.D. 46 Vice President, Chief Technical Officer
</TABLE>
JAMES E. REINMUTH, Ph.D. has served as Chairman and Chief Executive
Officer of the Company since September 1996. Dr. Reinmuth has been a director of
the Company since May 1995. From May 1995 to September 1996, Dr. Reinmuth served
as Treasurer of the Company. From July 1994 to May 1997, Dr. Reinmuth served as
the Charles H. Lundquist Distinguished Professor of Business at the University
of Oregon. From June 1976 until July 1994, Dr. Reinmuth served as Dean of the
College of Business at the University of Oregon. Since 1988, Dr. Reinmuth has
also served in several administrative positions within the University of Oregon.
Dr. Reinmuth also serves as president and chief executive officer of
Fuji Advanced Filtration, an industrial filter manufacturer. Dr. Reinmuth serves
as a director with the following companies: 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.
PETER BURKE, has served as President and Chief Operating Officer of the
Company since August of 1997. Mr. Burke has served as Chief Financial Officer of
the Company since April 1997. Mr. Burke served as Executive Vice President of
the Company from April 1997 to August 1997, and as a financial consultant for
the Company from December 1996 to April 1997. From July 1982 to September 1996,
Mr. Burke served as chief executive officer and chief financial officer for Shaw
Surgical Company, a medical supply distribution company.
WILLIAM H. FLEMING, Ph.D., has served as Vice Chairman-Diagnostics since
August of 1997. Dr. Fleming has served as a Director and Secretary of the
Company since February 1994. From February 1994 through August 1997, Dr. Fleming
served as President and Chief Operating Officer of the Company. He was
president, chief operating officer and a director of ProFem from July 1993 until
its merger with the Company in June 1994. From April 1992 until July 1993, Dr.
Fleming served as an associate with Sovereign Ventures, a health care consulting
firm;
17
<PAGE> 18
concurrently he served as director of corporate development of Antivirals, Inc.,
a biotechnology company involved in antisense technology.
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, at UCLA since 1990 and has been a professor at UCLA
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. Dr. Scott also
serves on the Board of Directors of Baskin Robbins.
ROSEANNA SEVCIK, has served as a Director of the Company since
May 1995. Ms. Sevcik has served as a vice president/senior portfolio manager of
Penn Mutual, a life insurance company since May of 1996. From February 1993 to
March 1996, Ms. Sevcik served as vice president/senior portfolio manager and as
a director on the pension plans board 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.
JAMES R. WILSON, has served as Treasurer and a director of the Company
since September 1996. Mr. Wilson has served as general manager of Century
Building Products, Inc., a manufacturing company, since August 1995. From
January 1985 to August 1995, Mr. Wilson served as sales manager and corporate
treasurer in various divisions of Speed Cut, Inc., a manufacturing company. From
June 1982 through January 1995, Mr. Wilson served as principal for Rubicon Asset
Management Corporation., an investment analysis company. Mr.
Wilson has been a licensed real estate agent since 1982.
ROBERT L. BUCK, Ph.D., has served as Vice President - Technical
Operations of the Company since June 1994. Dr. Buck is a Major in the U.S. Army
Reserves and serves as a company commander in the 104th Training Division. From
August 1992 to January 1994, Dr. Buck served as vice president of research and
development for CELx, a subsidiary of IMRE Corporation, a cancer diagnostic
company. Dr. Buck has been involved in the development of over 40 diagnostic
products that have been introduced into the market, and has published several
manuscripts in medical and scientific journals.
Directors hold office until the next annual meeting of stockholders or
until their successors are duly elected and qualified; officers hold office at
the discretion of the Board. Directors are reimbursed for expenses incurred in
attending meetings of the Board of Directors. In the past, certain directors
have received options or warrants to purchase shares of the Company's Common
Stock in consideration for their services.
In March 1997, the Company formed a Medical Advisory Panel. This panel
currently consists of six members, two of whom are employees of the Company. The
outside members are all prominent Ph.D.s and M.D.s specializing in public and/or
women's health. The Medical Advisory Board is expected to provide guidance to
the Company on clinical validations for its planned products.
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<PAGE> 19
ITEM 10: EXECUTIVE COMPENSATION
COMPENSATION SUMMARY
The following table sets forth certain information regarding the
compensation paid to the Chief Executive Officer and any other corporate
officers who received in excess of $100,000 in compensation (the "Named
Executive Officers") for each of the fiscal years ended December 31, 1997, 1996
and 1995.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------ --------------------
OTHER ANNUAL SECURITIES
NAME AND PRINCIPAL SALARY COMPENSATION UNDERLYING
POSITION YEAR ($) ($) OPTIONS/WARRANTS (#)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
James E. Reinmuth (1) 1997 40,000 - 53,334
Chief Executive Officer 1996 7,500 - 250,000
and Chairman 1995 - - 50,000
J. Peter Burke (2) 1997 85,432 - 166,667
President, Chief Operating
Officer and Chief Financial
Officer
William H. Fleming 1997 115,000 - 53,334
Vice Chairman-Diagnostics, 1996 115,000 - -
Secretary and Director 1995 115,000 - -
James R. Wilson (3) . 1997 50,000 - 93,334
Treasurer and Director
John F. Perry (4) 1997 157,083 - -
1996 145,000 - -
1995 145,000 10,000 -
</TABLE>
(1) James E. Reinmuth has served as Chief Executive Officer of the Company
since September 1996.
(2) J. Peter Burke began his employment with the Company in April 1997.
(3) James R. Wilson performed consulting services for the Company and then
became an employee in May 1997.
(4) John F. Perry ceased employment with the Company on February 28, 1997.
Mr. Perry voluntarily resigned as Chief Executive Officer of the Company
in September 1996. Mr. Perry served as Chief Executive Officer from
February 1994 to September 1996. See "Employment Agreements."
OPTION GRANTS
The following table sets forth certain information regarding options
granted to Named Executive Officers were granted options during the fiscal year
ended December 31, 1997.
19
<PAGE> 20
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
-------------------------------------------------------------
PERCENT OF
TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES EXERCISE
OPTIONS IN PRICE EXPIRATION
NAME GRANTED FISCAL YEAR ($/SHARE) DATE
- ----------------------------- ----------- ----------- --------- ------------
<S> <C> <C> <C> <C>
John F. Perry -- -- --
Chief Executive Officer
James E. Reinmuth 80,000 (1) 11.9% $3.00 May 7, 2007
Chief Executive Officer
J. Peter Burke 200,000 (2) 29.8% $3.00 May 7, 2007
President, Chief Operating
Officer and Chief Financial
Officer
William H. Fleming 80,000 (1) 11.9% $3.00 May 7, 2007
Vice Chairman-Diagnostics,
Secretary and Director
James R. Wilson 140,000 (3) 20.9% $3.00 May 7, 2007
Treasurer and Director
</TABLE>
(1) This option is subject to performance-based conditions to exercisability
pursuant to which options to purchase 26,666 shares of Common Stock
failed to vest and were canceled.
(2) This option is subject to performance-based conditions to exercisability
pursuant to which options to purchase 33,333 shares of Common Stock
failed to vest and were canceled.
(3) This option is subject to performance-based conditions to exercisability
pursuant to which options to purchase 46,666 shares of Common Stock
failed to vest and were canceled.
EXERCISE OF STOCK OPTIONS AND YEAR-END OPTION/WARRANT VALUES
The following table sets forth certain information regarding options and
warrants of the named executive officers as of December 31, 1997.
AGGREGATED OPTION EXERCISES IN 1997
AND YEAR-END OPTIONS/WARRANT VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS/WARRANTS AT OPTIONS/WARRANTS AT
ACQUIRED ON VALUE DECEMBER 31, 1997 DECEMBER 31, 1997 (5)
SHARES REALIZED ------------------------------------------------------------
NAME EXERCISE (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------ ----------- ------------- ------------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
John F. Perry 617,140 $2,008,791(1) 0 0 0 0
James E. Reinmuth 160,000 $ 534,400(2) 287,500 65,834 0 0
J. Peter Burke -- -- 25,000 141,667 0 0
William H. Fleming 557,140 $1,500,099(3) 150,000 53,334 0 0
James R. Wilson 160,000 $ 364,400(4) 25,000 118,334 7,688 7,688
</TABLE>
20
<PAGE> 21
(1) Calculated based on the difference between the option exercise price and
the closing price of the Common Stock on May 27, 1997 ($3.375 per
share).
(2) Calculated based on the difference between the option exercise price and
the closing price of the Common Stock on October 10, 1997 ($3.75 per
share).
(3) Calculated based on the difference between the option exercise price and
the closing price of the Common Stock on July 7, 1997 ($2.8125 per
share).
(4) Calculated based on the difference between the option exercise price and
the closing price of the Common Stock on June 30, 1997 ($2.6875 per
share).
(5) The fair market value of the Company Common Stock was $2.4375 per share
at December 31, 1997.
COMPENSATION OF DIRECTORS
Directors of the Company who are also employed by the Company do not
receive additional compensation for their services as directors. Non-employee
directors of the Company receive compensation in the form of options to purchase
the Company's Common Stock. Directors who serve on the committee which
administers the Company's 1994 Incentive and Non-Qualified Stock Option Plan
("Plan") receive options pursuant to paragraph 13 of the Plan.
EMPLOYMENT AGREEMENTS
The Company's predecessor entered into an employment agreement with
William H. Fleming on July 5, 1993, as amended December 31, 1996 (the "Fleming
Employment Agreement"). The Fleming Employment Agreement expires June 30, 1998.
The Company may terminate Mr. Fleming's employment with or without cause. In the
event of termination of employment by the Company, pursuant to the terms of the
Fleming Employment Agreement, Mr. Fleming will be entitled to receive his annual
base salary until the Fleming Employment Agreement's expiration date. Mr.
Fleming may terminate employment with the Company upon one month's written
notice.
The Company's predecessor entered into an employment agreement with John
F. Perry on July 5, 1993, as amended September 6, 1996 (the "Perry Employment
Agreement"). The terms of the Perry Employment Agreement are substantially
identical to the Fleming Employment Agreement, except for the starting base
salary. Mr. Perry's employment was terminated February 28, 1997. Pursuant to the
terms of the Perry Employment Agreement, Mr. Perry will continue to receive his
annual base salary until June 30, 1998.
The Company entered into an employment agreement with James E. Reinmuth
dated effective September 6, 1996 (the "Reinmuth Employment Agreement") with
respect to Mr. Reinmuth's services as Chairman of the Board and Chief Executive
Officer. The Reinmuth Employment Agreement provides for a salary of $2,500 per
month from September 1996 through June 1997 and $4,000 per month starting July
1, 1998. The Reinmuth Employment agreement may be terminated on 30 days prior
notice by either party.
The Company entered into an employment agreement with J. Peter Burke
dated effective April 28, 1997 (the "Burke Employment Agreement") with respect
to Mr. Burke's services as the Company's President, Chief Operating Officer and
Chief Financial Officer. The Burke Employment Agreement provides for an annual
salary of $125,000. The Burke Employment agreement may be terminated on 30 days
prior notice by either party.
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<PAGE> 22
The Company entered into an employment agreement with James R. Wilson
dated effective May 1, 1997 (the "Wilson Employment Agreement") with respect to
Mr. Wilson's services as the Company's Treasurer. The Wilson Employment
Agreement provides for a salary of $5,000 per month. The Wilson Employment
agreement may be terminated on 30 days prior notice by either party.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires that the Company's officers, directors and persons who
own more than 10 percent of the Common Stock file with the Securities and
Exchange Commission (the "SEC") initial reports of beneficial ownership on Form
3 and reports of changes in beneficial ownership of Common Stock and other
equity securities of the Company on Form 4. Officers, directors and greater than
10 percent stockholders of the Company are required by SEC regulations to
furnish to the Company copies of all Section 16(a) reports that they file. To
the Company's knowledge, based solely on reviews of such reports furnished to
the Company and written representations that no other reports are required, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10 percent beneficial owners were complied with during the fiscal
year ended December 31, 1997.
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership as of March 23, 1998 of the Company's Common Stock by $0.01
par value (i) each beneficial owner of more than 5 percent of the Common Stock,
(ii) the named executive officers, (iii) each director and director nominee of
the Company and (iv) all directors and executive officers as a group. Each
person named in the table has sole investment and voting power with respect to
the shares set forth opposite his name or her name, except as otherwise noted.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF CLASS
BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) OUTSTANDING
- ------------------------------------- ------------------------ -----------------
<S> <C> <C>
William H. Fleming 853,092(2) 6.6%
10180 SW Nimbus Ave.,
Suite J-5
Portland, OR 97223
Vice-Chairman, Secretary and Director
James E. Reinmuth 545,337(3) 4.2%
5171 Solar Heights Drive
Eugene, OR 97405
Chairman and Chief Executive Officer
J. Peter Burke 88,333(4) *
10180 SW Nimbus Ave.,
Suite J-5
Portland, OR 97223
President, Chief Operating
Officer and Chief Financial Officer
</TABLE>
22
<PAGE> 23
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF CLASS
BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) OUTSTANDING
- ------------------------------------- ------------------------ -----------------
<S> <C> <C>
Carol A. Scott 20,000(5) *
1834 Park Blvd.
Palo Alto, CA 94306
Director
RoseAnna Sevcik 37,500(6) *
1736 Aidenn Lair
Dresher, PA 19025
Director
James R. Wilson 406,765(7) 3.2%
3198 Powder River Drive
Eugene, OR 97408
Treasurer and Director
Capital Consultants, Inc. 3,792,419(9)
2300 SW First Avenue, Suite 200
Portland, OR 97201
Cort MacKenzie Securities, Inc. 1,303,585(10) 9.3%
5335 SW Meadows Road, Suite 270
Lake Oswego, OR 97035
John F. Perry 735,710 5.8%
2451 S. Ponte Vedra Blvd.
Ponte Vedra, FL 32082
All directors and officers 2,704,240(11) 20.3%
As a group (7 persons)
</TABLE>
- ----------
* Less than 1%.
(1) "Beneficial Ownership" is defined pursuant to Rule 13d-3 of the Exchange
Act, and generally means any person who directly or indirectly has or
shares voting or investment power with respect to a security. A person
shall be deemed to be the beneficial owner of a security if that person
has the right to acquire beneficial ownership of such security within 60
days, including, but not limited to, any right to acquire such security
through the exercise of any option or warrant or through the conversion
of a security. Any securities not outstanding that are subject to such
options or warrants shall be deemed to be outstanding for the purpose of
computing the percentage of outstanding securities of the class owned by
such person, but shall not be deemed to be outstanding for the purpose
of computing the percentage of the class owned by any other person.
(2) Includes 176,667 shares issuable upon exercise of options to purchase
Common Stock and shares beneficially owned by various members of William
H. Fleming's family including 10,000 owned by his son, 10,000 owned by
his daughter and 1,000 owned by his father. Mr. Fleming disclaims the
beneficial ownership of the shares held by his son, daughter and father.
(3) Includes 23,000 shares of Common Stock held by the Reinmuth Family
Trust, 8,000 shares held by Kazumitsu Shiomi, 23,000 shares held by
Terry A. Reinmuth, 4,000 shares held by Hilary J. Reinmuth, 4,000
shares held by Jennifer C. Reinmuth, 250,000 shares issuable upon
exercise of a warrant to purchase Common Stock and 76,667 shares
issuable upon exercise of options to purchase Common Stock.
(4) Includes 83,333 shares issuable upon the exercise of options to purchase
Common Stock.
23
<PAGE> 24
(5) Includes 20,000 shares issuable upon the exercise of options to purchase
Common Stock.
(6) Includes 37,500 shares issuable upon the exercise of options to purchase
Common Stock.
(7) Includes 160,000 shares of Common Stock held jointly with Mr. Wilson's
spouse and 96,667 shares issuable upon the exercise of options to
purchase Common Stock.
(8) Includes 25,000 shares issuable upon the exercise of options to purchase
Common Stock.
(9) Includes 50,000 shares issuable upon exercise of a warrant to purchase
Common Stock and all shares with respect to which Capital Consultants,
Inc. acts as an agent. Capital Consultants, Inc. is an investment
advisor registered under Section 203 of the Investment Advisors Act of
1940 and has on behalf of certain of its clients sole voting power and
sole investment power with respect to these shares.
(10) Includes 15,000 shares of Common Stock held by Cort Mackenzie & Thomas,
Inc. and 642,250, 308,750 and 270,000 shares issuable upon exercise of
warrants to purchase Common Stock held by Cort Mackenzie & Company, Cort
Mackenzie & Thomas and Thomas C. Stewart, respectively.
(11) Includes 255,834 shares issuable upon the exercise of options to
purchase Common Stock and 250,000 shares issuable upon exercises of
warrants to purchase Common Stock.
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There were no related transactions during the year ended December 31,
1997.
ITEM 13: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index.
(b) Reports on Form 8-K filed during Last Quarter of Fiscal Year.
None.
24
<PAGE> 25
A-FEM MEDICAL CORPORATION
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1996
TOGETHER WITH AUDITORS' REPORT
<PAGE> 26
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
A-Fem Medical Corporation:
We have audited the accompanying balance sheets of A-Fem Medical Corporation (a
Nevada corporation) as of December 31, 1997 and 1996, and the related statements
of operations, changes in stockholders' equity and cash flows for each of the
two years in the period ended December 31, 1997. 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 A-Fem Medical Corporation as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 1997, 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 suffered recurring losses from operations
and has limited net capital that raises substantial doubt about its 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 relating to the recoverability and classification of asset carrying
amounts or the amount and classification of liabilities that might result should
the Company be unable to continue as a going concern.
Portland, Oregon
March 2, 1998
F-1
<PAGE> 27
A-FEM MEDICAL CORPORATION
BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS
------
1997 1996
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 525,767 $ 671,495
Restricted cash (Note 1) 52,500 159,375
Accounts receivable 58,508 30,772
Inventories (Note 2) 172,963 190,818
Prepaid expenses and other 213,402 155,941
------------ ------------
Total current assets 1,023,140 1,208,401
EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS
(Note 3) 1,194,449 857,159
Less- Accumulated depreciation and amortization (371,401) (236,937)
------------ ------------
823,048 620,222
PATENTS AND LICENSES, net 60,971 28,891
LOANS RECEIVABLE - Officers and directors 58,710 124,093
------------ ------------
Total assets $ 1,965,869 $ 1,981,607
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 529,588 $ 249,472
Current portion - capital lease obligations (Note 4) 262,772 178,433
Accrued expenses 59,368 56,221
Accrued salaries and benefits 162,174 292,493
Accrued settlement for litigation (Note 7) - 240,000
------------ ------------
Total current liabilities 1,013,902 1,016,619
LONG-TERM PORTION - CAPITAL LEASE OBLIGATIONS (Note 4) 221,357 195,612
------------ ------------
Total liabilities 1,235,259 1,212,231
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value; authorized 33,000,000
shares; issued 12,798,694 shares and 10,127,914
shares at December 31, 1997 and 1996, respectively 127,987 101,279
Additional paid-in capital 12,331,811 10,403,611
Accumulated deficit (11,729,188) (9,735,514)
------------ ------------
Total stockholders' equity 730,610 769,376
------------ ------------
Total liabilities and stockholders' equity $ 1,965,869 $ 1,981,607
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-2
<PAGE> 28
A-FEM MEDICAL CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
REVENUES:
Sales, net of discounts $ 89,717 $ 192,682
----------- -----------
Net sales 89,717 192,682
COST OF SALES:
Cost of goods sold 158,130 72,480
----------- -----------
Gross margin (68,413) 120,202
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (3,286,213) (4,214,992)
RESEARCH AND DEVELOPMENT EXPENSES (665,740) (249,612)
----------- -----------
Operating loss (4,020,366) (4,344,402)
----------- -----------
OTHER INCOME (EXPENSE):
Interest income 94,273 47,595
Interest expense (70,199) (38,893)
Licensing income 2,000,000 -
Miscellaneous income 2,618 2,586
----------- -----------
2,026,692 11,288
----------- -----------
Net loss $(1,993,674) $(4,333,114)
=========== ===========
NET LOSS PER SHARE, basic and diluted $ (.17) $ (.47)
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 11,682,687 9,183,085
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 29
A-FEM MEDICAL CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
Common Stock Additional
------------------------ Paid-In
Shares Amount Capital
--------- -------- ----------
<S> <C> <C> <C>
BALANCE, December 31, 1995 8,948,243 $ 89,482 $ 8,499,708
Common stock issued on options exercised for cash, $0.12 per share 40,000 400 4,400
Common stock issued on warrants exercised for cash, $1.00 per share 256,650 2,567 254,083
Common stock issued on warrants exercised for cash, $1.25 per share 10,000 100 12,400
Common stock issued for cash, $1.92 per share, net of financing costs 638,021 6,380 1,202,719
Common stock issued for cash, $2.00 per share, net of financing costs 235,000 2,350 430,301
Net loss - - -
---------- -------- -----------
BALANCE, December 31, 1996 10,127,914 101,279 10,403,611
Common stock issued on options exercised for cash, $0.12 per share, net
of financing costs 1,174,280 11,743 128,841
Common stock issued on warrants exercised for cash, $0.41 per share 480,000 4,800 192,000
Common stock issued on warrants exercised for cash, $1.00 per share, net
of financing costs 343,500 3,435 338,128
Common stock issued on warrants exercised for cash, $1.50 per share 33,000 330 49,170
Common stock issued on warrants exercised for cash, $1.64 per share 10,000 100 16,300
Common stock issued for cash, $2.00 per share, net of financing costs 530,000 5,300 1,004,761
Common stock issued for proprietary assets, $2.00 per share 100,000 1,000 199,000
Net loss - - -
---------- -------- -----------
BALANCE, December 31, 1997 12,798,694 $127,987 $12,331,811
========== ======== ===========
</TABLE>
<TABLE>
<CAPTION>
Total
Accumulated Stockholders'
Deficit Equity
----------- --------------
<S> <C> <C>
BALANCE, December 31, 1995 $ (5,402,400) $ 3,186,790
Common stock issued on options exercised for cash, $0.12 per share - 4,800
Common stock issued on warrants exercised for cash, $1.00 per share - 256,650
Common stock issued on warrants exercised for cash, $1.25 per share - 12,500
Common stock issued for cash, $1.92 per share, net of financing costs - 1,209,099
Common stock issued for cash, $2.00 per share, net of financing costs - 432,651
Net loss (4,333,114) (4,333,114)
------------ -----------
BALANCE, December 31, 1996 (9,735,514) 769,376
Common stock issued on options exercised for cash, $0.12 per share, net
of financing costs - 140,584
Common stock issued on warrants exercised for cash, $0.41 per share - 196,800
Common stock issued on warrants exercised for cash, $1.00 per share, net
of financing costs - 341,563
Common stock issued on warrants exercised for cash, $1.50 per share - 49,500
Common stock issued on warrants exercised for cash, $1.64 per share - 16,400
Common stock issued for cash, $2.00 per share, net of financing costs - 1,010,061
Common stock issued for proprietary assets, $2.00 per share - 200,000
Net loss (1,993,674) (1,993,674)
------------ -----------
BALANCE, December 31, 1997 $(11,729,188) $ 730,610
============ ===========
</TABLE>
The accompanying notes are an integral
part of these statements.
F-4
<PAGE> 30
A-FEM MEDICAL CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,993,674) $(4,333,114)
Adjustments to reconcile net loss to net cash flows
used in operating activities-
Depreciation and amortization 150,812 146,351
Loss on disposal of assets 5,459 -
Changes in operating assets and liabilities:
Restricted cash 106,875 (159,375)
Accounts receivable (27,736) (28,707)
Inventories 17,855 (31,198)
Prepaid expenses and other (57,461) 102,548
Accounts payable 280,116 52,925
Accrued salaries and benefits (130,319) 276,773
Accrued expenses 3,147 (13,779)
Accrued settlement for litigation (40,000) 240,000
----------- -----------
Net cash used in operating activities (1,684,926) (3,747,576)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment, furniture and leasehold
improvements (48,192) (101,980)
Net proceeds from sale of equipment 1,650 -
Other assets (34,621) (14,502)
----------- -----------
Net cash used in investing activities (81,163) (116,482)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to (repayments of) loans receivable, net 65,383 (7,333)
Net proceeds from sale of Common Stock 1,754,908 1,915,700
Proceeds from borrowings for capital lease
obligations, net of repayments (199,930) 163,145
----------- -----------
Net cash provided by financing activities 1,620,361 2,071,512
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (145,728) (1,792,546)
CASH AND CASH EQUIVALENTS, beginning of period 671,495 2,464,041
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 525,767 $ 671,495
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Issuance of common stock as settlement for litigation $ 200,000 $ -
Equipment acquired under capital leases 310,014 210,900
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 31
A-FEM MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. ORGANIZATION OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES:
Organization
A-Fem Medical Corporation (the Company or A-Fem) is a women's health care
company. A-Fem has developed three core product technology platforms, one based
on its inSync(TM) miniform interlabial pad, another based on the Rapid-Sense(TM)
diagnostic products and a third based on the Padkit(TM) collection device. The
miniform is a new type of feminine hygiene product that is worn interlabially.
A-Fem's first miniform application, the inSync(TM) miniform, has received Food
and Drug Administration (FDA) approval and was launched in a market roll-out in
Oregon and Washington in January 1998. The Company expects to use its
Rapid-Sense diagnostic technology to create rapid response, low cost,
point-of-use diagnostic tools which generate quantifiable results. The core
technology development for Rapid-Sense(TM) diagnostic products has been
completed and applications are under development. The Padkit(TM) contains a
miniform to be used during a woman's menstrual cycle to collect a sample for
diagnostic testing.
The Company has experienced significant operating losses during the years ended
December 31, 1997 and 1996 and has continued to incur losses into the first
quarter of 1998. Further, the Company has not generated significant revenues.
The Company expects that significant ongoing expenditures will be necessary to
successfully implement its business plan and develop, manufacture and market its
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 commitments in its common stock of approximately $1.8 million during
1997 and raising over $1.9 million in equity financing from various groups of
private investors during 1996; however, there can be no assurance that the
Company's efforts to raise additional funding or enter into a strategic alliance
will be successful. If the company is unable to obtain adequate additional
financing, enter into such strategic alliance or generate sufficient profitable
sales revenues, management may be required to curtail the Company's product
development, marketing activities and other operations and the Company may be
forced to cease operations.
Fair Value
The carrying value of financial instruments approximates fair value, unless
otherwise disclosed.
Cash and Cash Equivalents
The Company considers all instruments with maturities of three months or less
when purchased to be cash equivalents.
F-6
<PAGE> 32
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
Patent costs are capitalized and amortized by the straight-line method over a
17-year period beginning with the date the patent is granted.
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.
F-7
<PAGE> 33
Net Loss per Share
Beginning December 31, 1997, basic earnings per share (EPS) and diluted EPS are
required to be computed using the methods prescribed by Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (SFAS 128). Basic EPS is
calculated using the weighted average number of common shares outstanding for
the period and diluted EPS is computed using the weighted average number of
common shares and dilutive common equivalent shares outstanding. Prior period
amounts have been restated to conform with the presentation requirements of SFAS
128. Following is a reconciliation of basic EPS and diluted EPS for the years
ended December 31:
<TABLE>
<CAPTION>
1997 1996
---------------------------------------- ---------------------------------------
Per Per
Share Share
Income Shares Amount Income Shares Amount
----------- ----------- ------- ------------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Income available to
Common Shareholders $(1,993,674) 11,682,687 $(.17) $(4,333,114) 9,183,085 $(.47)
Effect of dilutive
securities:
Stock options - - - - - -
----------- ----------- ---- ----------- ----------- ----
Diluted EPS:
Income available to
Common Shareholders $(1,993,674) 11,682,687 $(.17) $(4,333,114) 9,183,085 $(.47)
=========== =========== ==== =========== =========== ====
</TABLE>
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
Total cash paid for interest was $70,199 and $38,761 for the years ended
December 31, 1997 and 1996, respectively.
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. INVENTORIES:
Inventories consisted of the following components at December 31:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Raw materials $ 79,695 $ 46,422
Work-in-process 6,054 118,271
Finished goods 87,214 26,125
-------- --------
$172,963 $190,818
======== ========
</TABLE>
F-8
<PAGE> 34
3. EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Equipment $ 1,040,073 $ 722,916
Furniture and fixtures 37,225 30,469
Leasehold improvements 117,151 103,774
----------- -----------
1,194,449 857,159
Less- Accumulated depreciation and amortization (371,401) (236,937)
----------- -----------
Net equipment, furniture and leasehold improvements $ 823,048 $ 620,222
=========== ===========
</TABLE>
Included in the above table are amounts relating to assets utilized under
capital leases which had a net book value of $711,048 at December 31, 1997.
4. OBLIGATIONS UNDER CAPITAL LEASES:
Certain collateralized equipment is leased by the Company, which obligations are
reflected by the secured leases as noted below. This equipment is used for the
research and development of new products and for the manufacturing and
production of the miniform.
Future minimum lease payments under capital leases as of December 31 are as
follows:
<TABLE>
<S> <C>
1998 $ 318,465
1999 200,403
2000 37,253
2001 4,777
---------
Total minimum lease payments 560,898
Less- Amount representing interest (at rates ranging from
6.24% to 18.44%) (76,769)
---------
Present value of minimum lease payments 484,129
Less- Current portion (262,772)
---------
$ 221,357
=========
</TABLE>
5. STOCKHOLDERS' EQUITY:
Common Stock Options
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. Under the Incentive Plan, the exercise price of a qualified option
cannot be less than the fair market value on the date of grant and the exercise
price of a nonqualified option is determined by the Committee on the date of
grant. Options granted under the Incentive Plan generally vest three to five
years from the date of grant and generally expire ten years from the date of
grant.
F-9
<PAGE> 35
Activity under the Incentive Plan is summarized as follows:
<TABLE>
<CAPTION>
Weighted Average
Shares Subject Exercise Price
to Options Per Share
-------------- ----------------
<S> <C> <C>
Balance at December 31, 1995 2,136,530 $1.67
Options granted 175,000 3.96
Options exercised (40,000) 0.12
Options canceled (28,500) 2.48
---------- -----
Balance at December 31, 1996 2,243,030 1.77
Options granted 730,076 3.12
Options exercised (1,174,280) 0.12
Options canceled (433,831) 3.36
---------- -----
Balance at December 31, 1997 1,364,995 $3.17
========== =====
</TABLE>
Of the outstanding options at December 31, 1997 and 1996, 1,152,245 and
2,030,280, respectively, were qualified stock options and 212,750 and 212,750,
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 June 2007. The number of shares available for grant under
the Incentive Plan was 687,225 at December 31, 1997.
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- -------------------------
Weighted Number of
Number Average Weighted Shares Weighted
Range of Outstanding at Remaining Average Exercisable at Average
Exercise December 31, Contractual Exercise December 31, Exercise
Prices 1997 Life - Years Price 1997 Price
- ---------- -------------- ------------ -------- ------------- --------
<S> <C> <C> <C> <C> <C>
$1.75-2.88 390,978 7.0 $2.04 321,307 $1.93
3.00-4.69 824,017 9.2 3.35 259,462 3.55
5.13 150,000 6.8 5.13 150,000 1.93
---------- --------- --- ----- ------- -----
$1.75-5.13 1,364,995 8.8 $3.17 730,769 $3.16
========== ========= === ===== ======= =====
</TABLE>
At December 31, 1996, 1,787,530 options were exercisable at a weighted average
exercise price of $1.32 per share.
F-10
<PAGE> 36
Common Stock Warrants
As of December 31, 1997, warrants for a total of 2,486,416 shares of Common
Stock had been awarded. The warrants may be exercised for shares of the
Company's Common Stock. The following summarizes outstanding warrants for shares
of the Company's Common Stock:
<TABLE>
<CAPTION>
Shares Weighted Average
Subject to Exercise Price
Warrants Per Share
---------- ----------------
<S> <C> <C>
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
Warrants granted 50,000 2.00
Warrants exercised (866,500) 0.70
Warrants canceled (48,334) 3.02
--------- -----
Balance at December 31, 1997 2,486,416 $2.39
========= =====
Number exercisable at December 31, 1997 2,486,416 $2.39
</TABLE>
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.
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 1997 and 1996 using the Black-Scholes
option pricing model as prescribed by SFAS 123 using the following weighted
average assumptions for grants:
<TABLE>
<CAPTION>
For the Year Ended
December 31,
----------------------
1997 1996
---------- ---------
<S> <C> <C>
Average risk-free interest rate 6.00% 6.37%
Expected dividend yield - -
Expected lives 6 years 6 years
Expected volatility 83.30% 93.67%
</TABLE>
F-11
<PAGE> 37
Using the Black-Scholes methodology, the total value of options granted during
1997 and 1996 was $1,399,835 and $550,750, 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 1997 and
1996 was $2.35 per share and $3.15 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>
<CAPTION>
1997 1996
-------------------------- --------------------------
As Reported Pro Forma As Reported Pro Forma
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net loss $(1,993,674) $(2,660,895) $(4,333,114) $(4,650,377)
Net loss per share (.17) (.23) (.47) (.51)
</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.
6. INCOME TAXES:
As of December 31, 1997, the Company had federal net operating loss (NOL)
carryforwards of approximately $9,804,957. 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, 1997 and 1996, the Company had net deferred tax
assets of approximately $3.7 million and $2.9 million, respectively, primarily
resulting from deferred start-up costs and NOL carryforwards. In accordance with
SFAS 109, at December 31, 1997 and 1996 a valuation allowance was recorded to
reduce net deferred tax assets to zero.
7. COMMITMENTS AND CONTINGENCIES:
Employment Contract
The Company has an employment contract with an officer, 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, 1997, 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, 1997 totaled $241,931 and
are payable as follows:
<TABLE>
<S> <C> <C>
1998 $153,497
1999 71,380
2000 12,975
2001 4,079
</TABLE>
Rent expense was $119,421 and $127,338 for the years ended December 31, 1997 and
1996, respectively.
F-12
<PAGE> 38
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 alleged 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, a
settlement agreement was reached. The Company paid certain expenses of Kassia of
$90,000, of which $50,000 was covered by insurance, and issued 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.
8. 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.
9. SUBSEQUENT EVENT:
Financing Commitment
During the first quarter of 1998, in various transactions, the Company issued
520,833 shares of the Company's Common Stock in exchange for $1,000,000 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.
F-13
<PAGE> 39
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.
A-FEM MEDICAL CORPORATION
By: /s/J. Peter Burke
-------------------------------------------
J. Peter Burke
President, Chief Operating Officer and
Chief Financial Officer
Date: March 31, 1998
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:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/J. Peter Burke President, Chief Operating March 31, 1998
- ------------------------------------- Officer and Chief Financial
J. Peter Burke Officer (principal financial
officer and principal
accounting officer)
/s/James E. Reinmuth Chairman, Chief Executive Officer March 31, 1998
- ------------------------------------- and Director (principal executive
James E. Reinmuth officer)
/s/William H. Fleming Vice Chair-Diagnostics, March 31, 1998
- ------------------------------------- Secretary and Director
William H. Fleming
/s/James R. Wilson Treasurer and Director March 31, 1998
- -------------------------------------
James R. Wilson
/s/ Carol A. Scott Director March 31, 1998
- -------------------------------------
Carol A. Scott
/s/ RoseAnna Sevcik Director March 31, 1998
- -------------------------------------
RoseAnna Sevcik
</TABLE>
<PAGE> 40
EXHIBIT INDEX
FOR
A-FEM MEDICAL CORPORATION
FORM 10-KSB
FOR THE FISCAL YEAR ENDED
DECEMBER 31,1997
3.1(1) Articles of Incorporation, as amended.
3.2(1) Bylaws, as amended.
10.1(2) License Agreement dated April 30, 1986 between Shalom Z. Hirschman,
M.D., and Marvin P. Loeb & Company.
10.2(2) Limited License & Option Agreement between Marvin Loeb & Company and
the Company dated December 30, 1986.
*10.3(3) Share Exchange Agreement among Xtramedics, Inc., ATHENA Profem, Inc.,
and ATHENA stockholders dated February 17, 1994.
*10.4(3) Assumption of Employment Agreement between the Company and John F.
Perry dated February 17, 1994.
*10.5(3) Employment Agreement between Athena Medical Corporation (an Oregon
corporation) and John F. Perry dated as of July 1, 1993.
*10.6(3) Assumption of Employment Agreement between the Company and William H.
Fleming dated February 17, 1994.
*10.7(3) Employment Agreement between Athena Medical Corporation (an Oregon
corporation) and William H. Fleming dated as of July 1, 1993.
10.8(4) Amendment of Employment Contract between the Company and John F.
Perry dated September 6, 1996.
*10.9(4) Amendment of Employment Contract between the Company and William H.
Fleming dated December 31, 1996.
*10.10(5) Business Park Lease between the Company, Petula Associates, Ltd. and
Koll Portland Associates dated March 1, 1996.
*10.11(2) 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.
*10.12(6) Registration Rights Agreement used for Mr. Waller, Esler, Stephens &
Buckley and Lane, Powell, Spears and Lubersky.
10.13(4) Form of Registration Rights Agreement.
*10.14(4) A-Fem Medical Corporation's 1994 Incentive and Non-Qualified Stock
Option Plan dated as of June 7, 1994.
*10.15(4) Form of Incentive Stock Option Agreement.
<PAGE> 41
*10.16(4) Form of Non-Statutory Stock Option Agreement.
10.17(4) Form of Purchase Warrant Certificate.
10.18(5) 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).
*10.19(4) Employment Agreement between the Company and Sarah P. Van Dyck dated
May 28, 1996.
*10.20(4) Employment Agreement between the Company and James E. Reinmuth dated
as of September 6, 1996.
*10.21(4) Employment Agreement between the Company and James R. Wilson dated as
of May 1, 1996.
*10.22(4) Employment Agreement between the Company and Paul Mueggler dated as
of February 27, 1997.
*10.23(1) Employment Agreement between the Company and J. Peter Burke dated as
of April 28, 1997.
10.24 Form of Capital Lease between the Company and First Portland Leasing
Corp.
27.1 Financial Data Schedule.
- -----------
(1) Incorporated by reference from the exhibit filing to the Company's
Quarterly Report on Form 10-QSB for the quarter ended June 30, 1997.
(2) Incorporated by reference from the exhibit filing to the Company's
Registration Statement on Form S-2 (file no. 33-88230), filed with the
SEC on January 5, 1995.
(3) Incorporated by reference from the exhibit filing to the Company's
10-QSB/A for the period ended March 31, 1994.
(4) Incorporated by reference from the exhibit filing to the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1996.
(5) Incorporated by reference from the exhibit filing to the Company's
Registration Statement on Form S-2 (file no. 333-2053), filed with the
SEC on March 29, 1996.
* Indicates management contract or compensation plan.
<PAGE> 1
EXHIBIT 10.24
A-Fem Medical Corporation
Terms of Outstanding Capital Leases with First Portland Corporation
As of 12/31/97
<TABLE>
<CAPTION>
Secured or Equipment Lease Monthly
Lessor Unsecured Description Term Dates Rate Payment
- ------------------------------ ---------- ----------- ---- ----------------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
1 Hyster Sales Company Secured Forklift 36 MO 03/04/96-01/04/99 9.75% 401.86
2 Colonia Pacific - 126I024001 Secured HPLD 36 MO 04/15/96-02/15/99 14.73% 1,922.23
3 Firstcorp - 91105601 Secured Pro Equip 36 MO 02/09/96-01/25/99 13.57% 5,040.00
4 Firstcorp - 91105602 Secured Pro Equip 24 MO 02/14/96-02/25/98 18.44% 5,363.00
5 Firstcorp - 91105603 Secured Beleck 36 MO 10/11/96-10/24/99 17.03% 5,969.00
6 Firstcorp - 91105604 Secured Minolta 24 MO 04/21/97-06/25/99 14.62% 630.00
7 Firstcorp - 91105605 Secured Cartoner 1 36 MO 05/27/97-06/27/00 15.19% 4,097.00
8 Firstcorp - 91105606 Secured Bio Dot 36 MO 06/25/97-07/25/00 15.19% 1,733.00
9 Firstcorp - 91105607 Secured Cartoner 2 24 MO 11/20/97-12/20/99 17.12% 5,321.00
10 CIT Group Secured Shrink Wrap 46 MO 11/19/97-10/19/01 6.24% 530.82
Type of
Lessor Lease 1998 1999 2000 2001 Total
- ------------------------------ ------- --------- --------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
1 Hyster Sales Company Capital 4,540.14 398.34 4,938.48
2 Colonia Pacific - 126I024001 Capital 20,812.97 3,774.83 24,587.80
3 Firstcorp - 91105601 Capital 55,967.58 2,324.74 58,292.32
4 Firstcorp - 91105602 Capital 10,483.70 10,483.70
5 Firstcorp - 91105603 Capital 57,262.95 52,521.14 109,784.09
6 Firstcorp - 91105604 Capital 6,674.18 2,364.10 9,038.28
7 Firstcorp - 91105605 Capital 36,618.42 42,583.69 19,729.59 98,931.70
8 Firstcorp - 91105606 Capital 15,295.61 17,787.39 9,952.53 43,035.53
9 Firstcorp - 91105607 Capital 49,889.22 53,814.67 103,703.89
10 CIT Group Capital 5,227.48 5,551.23 5,895.02 4,659.66 21,333.39
---------- ---------- --------- -------- ----------
Total 262,772.25 181,120.13 35,577.14 4,659.66 484,129.18
========== ========== ========= ======== ==========
</TABLE>
<PAGE> 2
[FIRSTCORP LOGO]
First Portland Corporation
7145 SW Varns Street Portland, OR 97223-8057
503.684.3417 800.247.3722 FAX 503.620.7677
MASTER LEASE AGREEMENT
NUMBER 911056
LESSEE NAME AND ADDRESS
ATHENA MEDICAL CORPORATION
10180 SOUTHWEST NIMBUS AVENUE, SUITE J-5
PORTLAND, OR 97223
TERMS AND CONDITIONS
- PLEASE REQUEST ANY CHANGES DESIRED -
1. LEASE. LESSOR and LESSEE agree that the terms of this Master Lease
Agreement shall apply to and be incorporated by reference in one or more Lease
Schedules in substantially the form of Exhibit A hereto (which reference(s) the
Master Lease Agreement Number indicated above). The word "LEASE" shall mean any
one of the individual Lease Schedules executed hereunder, each of which shall
incorporate the terms and conditions of this Master Lease Agreement and shall be
evidenced by the original Lease Schedule and an attached copy of its Master
Lease Agreement. The word "EQUIPMENT" shall mean the equipment which is the
subject of any one of the LEASES. Each Lease Schedule will include an EQUIPMENT
description, the EQUIPMENT location, the minimum lease term and payment and
security deposit information. Each LEASE shall be enforceable upon execution by
LESSEE and subsequent counter-signature by LESSOR indicating acceptance.
2. RENTAL PAYMENTS. With the exception of advance rentals, if any, each
payment of rent shall be due on a date of the month agreed to by LESSOR and
LESSEE as the billing date. If LESSOR and LESSEE fail to agree, LESSOR shall
assign a billing date. LESSOR shall invoice LESSEE for and LESSEE shall pay a
pro-rata periodic rental from the date of acceptance of the EQUIPMENT until the
first billing date, together with applicable taxes, as interim rent. When
advance rental payments are receipted for and, unless otherwise agreed to in
writing, the first payment of rent shall be due on the acceptance of the
EQUIPMENT by LESSEE. LESSEE agrees to pay rent for the minimum lease term
following the interim rent period and until the EQUIPMENT is returned to LESSOR
pursuant to Section 11. Each periodic rental installment shall be the sum set
forth on the Lease Schedule plus any applicable sales and/or use taxes, and
shall, at LESSOR's option, include a pro-rata portion of that year's personal
property tax. Payments shall be made by LESSEE at LESSOR's address set forth on
the Lease Schedule or as otherwise directed by LESSOR. LESSEE shall not abate,
set off, deduct any amount or reduce any payment for any reason without the
prior written consent of LESSOR. Payments are delinquent if not in LESSOR's
possession by the due date.
3. COMMENCEMENT AND TERMINATION. The LEASE term shall commence on acceptance
of the EQUIPMENT by LESSEE. The LEASE shall terminate on the expiration of its
minimum term in months as set forth in the Lease Schedule and the fulfillment of
all obligations of LESSEE thereunder or upon notice by LESSOR in the case of
LESSEE default. In the event LESSEE retains part or all of the EQUIPMENT beyond
the term of the LEASE, then the terms of the LEASE shall stay in effect during
such hold-over period, subject to LESSOR's right on default to terminate the
LEASE.
Page 1 of 6
<PAGE> 3
4. NO WARRANTIES BY LESSOR. LESSOR MAKES NO WARRANTY, EXPRESS, IMPLIED OR
STATUTORY, AS TO ANY MATTER WHATSOEVER, INCLUDING THE CONDITION OF THE
EQUIPMENT, ITS MERCHANTABILITY OR ITS FITNESS FOR ANY PARTICULAR PURPOSE, AND AS
TO LESSOR, LESSEE LEASES THE EQUIPMENT "AS IS".
5. CHOICE OF LAW, VENUE AND JURISDICTION. THE LEASE SHALL BE DEEMED TO HAVE
BEEN MADE AND SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
OREGON OR BREACH OF THE LEASE MUST BE INSTITUTED AND MAINTAINED IN MULTNOMAH
COUNTY, STATE OF OREGON, AND LESSEE EXPRESSLY AGREES TO SUBMIT TO PERSONAL
JURISDICTION IN SUCH VENUE.
6. ASSIGNMENT. WITHOUT LESSOR'S PRIOR WRITTEN CONSENT, LESSEE SHALL NOT
ASSIGN, TRANSFER, PLEDGE, HYPOTHECATE OR OTHERWISE DISPOSE OF THE LEASE, ANY
INTEREST THEREIN, or sublease or loan the EQUIPMENT or permit it to be used by
anyone other than LESSEE or LESSEE's qualified employees. LESSOR may assign the
LEASE and/or grant a security interest in the EQUIPMENT, in whole or in part, to
one or more assignees, without notice to LESSEE. LESSOR's assignee(s) and/or the
secured party(ies) may reassign the LEASE, and/or such security interest without
notice to LESSEE. Each such assignee and/or such secured party shall have all
rights of LESSOR under the LEASE, but no such assignee or secured party shall be
bound to perform any obligation of LESSOR. LESSEE shall recognize each such
assignment and shall not assert against any assignee and/or secured party any
defense, counterclaim or setoff it may have against LESSOR. LESSEE acknowledges
that any assignment or transfer by LESSOR shall not materially change LESSEE's
duties or obligations under the LEASE nor materially increase the burdens or
risks imposed on LESSEE. LESSEE agrees that such an assignment is permitted even
if it is deemed to materially affect LESSEE's interest in the LEASE or the
EQUIPMENT.
7. SELECTION AND ACCEPTANCE OF EQUIPMENT. LESSEE has selected both the
EQUIPMENT and the supplier(s) from whom LESSOR is to purchase the EQUIPMENT.
LESSEE shall arrange for transportation, delivery and installation of the
EQUIPMENT at LESSEE's expense. LESSEE acknowledges that it has examined the
EQUIPMENT as fully as it desires. If the EQUIPMENT is not properly installed,
its delivery is delayed, it does not operate as represented by the supplier(s)
or it is unsatisfactory for any reason, LESSEE shall make no claim on account
thereof against LESSOR. LESSEE authorizes LESSOR to insert in the LEASE or other
documents the serial numbers and other identification information for the
EQUIPMENT as determined by LESSOR.
8. SUPPLIER/BROKER NOT AGENT OF LESSOR. LESSEE understands and agrees that
neither the supplier(s), nor any salesperson or agent of the supplier(s), is an
agent of LESSOR. LESSEE further agrees that if any transaction hereunder is
presented to LESSOR by a lease broker, that such broker is acting as an agent of
LESSEE and is not an agent of LESSOR. No salesperson or agent of the supplier(s)
or broker(s) is authorized to waive or alter any term or condition of the LEASE,
and no representation as to the EQUIPMENT or any matter by the supplier(s) or
broker(s) shall in any way affect LESSEE's duty to pay rent and perform its
other obligations set forth in the LEASE.
9. SECURITY DEPOSIT. Security deposits received by LESSOR are to guarantee
prompt and full payment of rent and the faithful and timely performance of all
provisions of the LEASE by LESSEE. Security deposits secure all obligations of
LESSEE to LESSOR under the LEASE or otherwise. No interest shall accrue on the
security deposit to the account of LESSEE. If LESSEE is not in default under any
agreement with LESSOR, the security deposit shall be returned to LESSEE at the
end of the LEASE term. In the event LESSEE defaults on any of its obligations to
LESSOR, LESSOR shall have the right, but shall not be obligated, to apply the
security deposit to cure such default. LESSEE shall, within ten (10) days,
restore the security deposit to the full amount held by LESSOR prior to its
application to cure such default.
10. CANCELLATION FOR NON-DELIVERY. If, within 30 days after the LEASE is
signed by LESSEE, the EQUIPMENT has not been delivered to and accepted by LESSEE
and if LESSOR has accepted the LEASE by signing, LESSOR, by written notice to
LESSEE, shall have the option at any time thereafter to terminate LESSOR's
obligation, if any, to lease the subject EQUIPMENT to LESSEE.
11. RETURN OF EQUIPMENT. On the expiration or earlier termination of the
LEASE, or on LESSEE default if LESSOR chooses, LESSEE, at its expense, freight
prepaid with full original value declared and insured, shall immediately return
the EQUIPMENT unencumbered to LESSOR in good repair, condition and working
order, ordinary wear and tear resulting from proper use thereof alone excepted,
by properly packing it for shipment and delivering it to any place designated by
LESSOR.
12. OWNERSHIP. The EQUIPMENT shall at all times remain the personal property
of LESSOR. LESSEE will at all times protect and defend, at its own cost and
expense, the ownership of LESSOR against all claims, liens and legal processes
of creditors of LESSEE and other persons, and keep the EQUIPMENT free and clear
from all such claims, liens and processes. If the LEASE is deemed at any time to
be one intended as security or should LESSOR agree at any time to sell the
Page 2 of 6
<PAGE> 4
EQUIPMENT to LESSEE, LESSEE agrees that the EQUIPMENT shall secure, in addition
to the indebtedness set forth in the LEASE, indebtedness at any time owing by
LESSEE to LESSOR. Notwithstanding any other terms and conditions of the LEASE,
in the event that the EQUIPMENT includes computer software, LESSEE agrees that
LESSOR has not had, does not have, nor shall have any title to such computer
software. LESSEE may have executed or may execute a separate software license
agreement(s) and LESSEE agrees that LESSOR is not a party to nor responsible for
any performance with regard to such license agreement(s).
13. LOCATION AND RIGHT OF INSPECTION. The EQUIPMENT shall be kept at the
location specified on the Lease Schedule or, if none is specified, at LESSEE's
address as set forth therein, and shall not be removed therefrom without
LESSOR's prior written consent. LESSOR shall have the right at any time during
normal business hours and upon reasonable notice to inspect the EQUIPMENT and
for that purpose have access to the location of the EQUIPMENT.
14. USE AND OPERATION. LESSEE shall use the EQUIPMENT in a careful manner and
shall comply with all laws relating to its possession, use and maintenance.
LESSEE represents that the EQUIPMENT shall be used in its business or commercial
concern and that no item of EQUIPMENT will be used for personal, family or
household purposes.
15. REPAIRS AND ALTERATIONS. LESSEE shall at its own expense maintain the
EQUIPMENT in good repair, appearance and functional order. LESSEE agrees to
comply with all maintenance schedules and procedures recommended by the
manufacturer of the EQUIPMENT and, if available, purchase or otherwise enter
into and adhere to dealer maintenance contracts. LESSEE shall not make any
alterations, additions or improvements to the EQUIPMENT without LESSOR's prior
written consent. All alterations, additions or improvements made to the
EQUIPMENT shall belong to LESSOR.
16. LOSS AND DAMAGE. LESSEE shall bear the entire risk of loss, theft, damage
or destruction of the EQUIPMENT from any cause whatsoever and, as between LESSOR
and LESSEE, unless otherwise agreed between the parties, LESSEE shall bear that
risk of loss during transportation and delivery, and LESSEE shall arrange and
pay for transportation and delivery. No loss, theft, damage or destruction of
the EQUIPMENT shall relieve LESSEE of the obligation to pay rent or to comply
with any other obligation under the LEASE. In the event of damage to any item of
EQUIPMENT, LESSEE shall immediately place the same in good repair at LESSEE's
expense. If LESSOR determines that any item of EQUIPMENT is lost, stolen,
destroyed or damaged beyond repair, LESSEE shall, at LESSEE's option: (a)
replace the same with like equipment in good repair, acceptable to LESSOR; or
(b) pay LESSOR a sum equal to (i) all amounts due by LESSEE to LESSOR under the
LEASE up to the date of the loss, (ii) the unpaid balance of the total rent for
the remaining term under the LEASE which is attributable to said item of
EQUIPMENT, and (iii) an amount equal to eighteen percent (18%) of the original
cost of said item of EQUIPMENT, which the parties agree shall represent the fair
market value of LESSOR's residual interest in said item of EQUIPMENT. The
amounts in (ii) and (iii) shall be discounted to present value at a discount
rate of six percent (6%) per annum.
17. INSURANCE. LESSEE shall provide and maintain primary insurance against
loss, theft, damage or destruction of the EQUIPMENT in an amount not less than
the full replacement value of the EQUIPMENT, with loss payable to LESSOR. At
LESSOR's request, LESSEE also shall provide and maintain primary comprehensive
general all risk liability insurance. Such insurance shall include, but shall
not be limited to, product liability coverage, insuring LESSOR and LESSEE, with
a severability of interest endorsement or its equivalent, against any and all
loss or liability for all damages, either to persons, property or otherwise,
which might result from or happen in connection with the condition, use or
operation of the EQUIPMENT, with such limits and with an insurer satisfactory to
LESSOR. Each policy shall expressly provide that the insurance as to LESSOR
shall not be invalidated by any act, omission or neglect of LESSEE and cannot be
canceled without ten (10) days written notice to LESSOR. As to each policy,
LESSEE shall furnish to LESSOR a certificate of insurance from the insurer
evidencing the insurance coverage required by this Section. If LESSEE fails to
procure or maintain such insurance, LESSOR shall have the right, but shall not
be obligated, to obtain such insurance as to LESSOR's and/or LESSEE's interests.
In that event, LESSEE shall repay to LESSOR the cost thereof with the next
payment of rent, together with late charges as set forth in Section 23. LESSEE
irrevocably appoints LESSOR as LESSEE's attorney-in-fact to make claim for,
receive payment of, and execute and endorse all documents, checks or drafts
received in payment for loss or damage under such insurance policy(ies). All
obligations of this Section shall extend throughout the term of the LEASE and
until the EQUIPMENT is returned to LESSOR.
18. LIENS AND TAXES. LESSEE shall keep the EQUIPMENT free and clear of all
levies, liens and encumbrances. LESSEE shall pay LESSOR, on or before the due
date, all charges and taxes, local, state or federal, which may now or hereafter
be imposed upon the ownership, leasing, rental, sale, purchase, possession or
use of the EQUIPMENT, excluding, however, all taxes on LESSOR's income. If
LESSEE fails to pay said charges or taxes to LESSOR when due, LESSOR shall have
the right, but shall not be obligated, to pay said charges or taxes, and add the
same to the next payment of rent, together
Page 3 of 6
<PAGE> 5
with late charges as set out in Section 23. LESSEE agrees to pay a reasonable
fee to LESSOR for the processing of property tax payments.
19. INDEMNITY. LESSEE shall indemnify LESSOR against, and hold LESSOR
harmless from, any and all claims, actions, proceedings, expenses, damages and
liabilities, including attorney fees, arising in connection with the EQUIPMENT,
including, without limitation, its manufacture, selection, purchase, delivery,
possession, use, operation or return and the recovery of claims under insurance
policies thereon. This indemnity provision shall survive termination,
cancellation or breach of the LEASE.
20. MISCELLANEOUS REPRESENTATIONS OF LESSEE. LESSEE and any guarantor of the
LEASE shall provide LESSOR with such corporate resolutions, financial statements
and all other documents regarding the financial or credit condition of LESSEE or
any guarantor which LESSOR may request from time to time. LESSEE represents and
warrants that all credit and financial information submitted to LESSOR in
connection with the LEASE is true and correct in all respects. LESSEE agrees
that LESSOR and/or its assigns may at any time investigate the credit-worthiness
of LESSEE using all available means.
21. UNIFORM PERSONAL PROPERTY LEASING ACT. To the extent permitted by
applicable law, and to the extent the LEASE is governed by the law of a
jurisdiction which has adopted a version of the Uniform Personal Property
Leasing Act (also known as "Uniform Commercial Code - Leases"), the parties
hereto agree that: (1) the provisions thereof conferring remedies upon a LESSEE
or imposing obligations upon a LESSOR shall not apply to the LEASE, its
interpretation, or its enforcement; and (2) the LEASE is a Finance Lease as
defined by Uniform Commercial Code Section 2A-103(g). LESSEE acknowledges that
LESSEE has reviewed and approved any written Supply Contract(s) covering the
EQUIPMENT purchased from the Supplier(s) for lease to LESSEE. LESSEE further
acknowledges that LESSOR has informed or advised LESSEE, in writing, either
previously or in the LEASE, of the following: (a) the identity of the
Supplier(s); (b) that the LESSEE may have rights under the Supply Contract(s);
and (c) that the LESSEE may contact the Supplier(s) for a description of any
such rights LESSEE may have under the Supply Contract(s).
22. FINANCING STATEMENTS. At the request of LESSOR, LESSEE will join LESSOR
in executing financing statements pursuant to the Uniform Commercial Code.
Lessee hereby authorizes Lessor or its agents or assigns to execute financing
statements on LESSEE's behalf, and to file such financing statements in all
jurisdictions where such execution and filing is permitted. It is agreed that a
carbon or photocopy of any financing statement may be filed in place of the
original and that a copy hereof may be filed as a financing statement.
23. LATE CHARGES AND INTEREST. If LESSEE fails to pay LESSOR any amount when
due or, in the case of an amount due to one other than LESSOR, if LESSOR pays an
amount on LESSEE's behalf, then LESSEE shall pay LESSOR a late charge of $29,
plus five percent (5%) of such amount or $5, whichever is greater, for each
calendar month or part thereof for which rent or other sum shall be delinquent
or shall have been paid by LESSOR on LESSEE's behalf. If LESSEE fails to pay or
fails to perform other LEASE obligations, LESSEE agrees to pay LESSOR $19 for
each contact necessitated because of such failure. LESSEE also agrees to pay
LESSOR the sum of $29 for each check of LESSEE's returned uncollectable by
LESSEE's bank. The amount of any charges assessed hereunder shall be added to
and become part of the next rental payment or shall be separately invoiced, at
LESSOR's option. Interest shall accrue on any unpaid or unreimbursed amounts at
the maximum rate allowable by law or eighteen percent (18%), whichever is less,
from the due date until paid by LESSEE.
24. TIME OF THE ESSENCE. Time is of the essence of the LEASE. This provision
shall not be waived by the acceptance on occasion of late or defective
performance.
25. DEFAULT. LESSEE shall be in default if (a) LESSEE shall fail to pay rent
or any other amount provided for under the LEASE within ten (10) days after the
same becomes due and payable; or (b) LESSEE fails to observe, keep or perform
any other provision of the LEASE or of any other agreement with LESSOR, and such
failure shall continue for a period of ten (10) days; or (c) LESSEE shall
abandon the EQUIPMENT; or (d) except as inconsistent with Federal Bankruptcy
Law, any proceeding in bankruptcy, receivership or insolvency shall be commenced
against LESSEE or its property or any guarantor or such guarantor's property,
LESSEE or any guarantor files voluntarily for bankruptcy or reorganization, or
LESSEE or any guarantor makes an assignment for the benefit of its creditors; or
(e) LESSEE or any guarantor makes any misrepresentation or false statement as to
its credit or financial standing in connection with the execution or the further
performance of the LEASE; or (f) any attachment or execution be levied on any of
LESSEE's property; or (g) LESSEE permits any other entity or person to use the
EQUIPMENT without the prior written consent of LESSOR; or (h) in the business
and affairs of LESSEE or any guarantor there occurs a material change which
shall impair the security of the EQUIPMENT or increase LESSOR's credit risk
involved in the LEASE.
26. REMEDIES. In the event of LESSEE default, LESSOR shall have the right and
option, but shall not be obligated, to exercise any one or more of the following
Page 4 of 6
<PAGE> 6
remedies, which remedies or any of them may be exercised by LESSOR without
notice to LESSEE and without any election of remedies by LESSOR and, if the
obligations of LESSEE are guaranteed by a guarantor or guarantors, LESSOR shall
not be obligated to proceed against any such guarantor or guarantors before
resorting to its remedies against LESSEE under the LEASE: (a) to the extent
permitted under applicable law, LESSOR and/or its agents may, without notice or
legal process, enter onto any premises of or under control of LESSEE or any
agent of LESSEE where the EQUIPMENT may be or is believed to be located and
repossess the EQUIPMENT, disconnecting and separating all thereof from any other
property, using all means necessary or permitted by law, LESSEE hereby expressly
waiving any right of action of any kind whatsoever against LESSOR arising out of
such access to or removal, repossession or retention of the EQUIPMENT; (b)
LESSOR may declare all sums due and to become due under the LEASE immediately
due and payable and institute litigation to collect the same; (c) LESSOR may
institute litigation to collect all rents and other amounts due as of the date
of such default together with any sums that may accrue up to the date of trial;
(d) LESSOR may institute litigation to specifically enforce the terms of the
LEASE; (e) LESSOR may terminate the LEASE; (f) LESSOR may require LESSEE to
return the EQUIPMENT pursuant to Section 11; and/or (g) LESSOR may pursue any
other remedy now, or hereafter, existing in law or equity. However, damages for
any future rentals and/or LESSOR's residual value in the EQUIPMENT shall be
discounted to present value at a discount rate equal to six percent (6%) per
annum. In the event of any default by LESSEE under the LEASE, LESSOR may at its
sole discretion, although it shall not be obligated to do so, sell the EQUIPMENT
at a private or public, cash or credit sale, or may re-let the EQUIPMENT for a
term and a rental which may be equal to, greater than, or less than provided in
the LEASE. Any proceeds of sale or any rental payments received under the new
lease - less LESSOR's expenses of taking possession, reasonable attorney fees
and/or collection fees, storage and/or reconditioning costs, the costs of sale
or re-letting, and less LESSOR's fair market residual value in the EQUIPMENT -
shall be applied to LESSEE's obligations under the LEASE, and LESSEE shall
remain liable for the balance. LESSEE's liability shall not be reduced by reason
of any failure of LESSOR to sell or re-let.
27. EXPENSES OF ENFORCEMENT, ATTORNEY FEES. In the event of any default,
LESSEE shall pay LESSOR a sum equal to all expenses, including attorney fees, if
any, incurred by LESSOR in connection with the enforcement of any of LESSOR's
remedies and all expenses of repossessing, storing, repairing, and selling or
re-letting the EQUIPMENT together with interest on such amount at the maximum
rate allowable by law or eighteen percent (18%), whichever is less, from the
date such amount is paid by LESSOR. In the event litigation is instituted to
enforce any of the terms of the LEASE, the prevailing party shall be entitled to
recover from the other party such sum as the court may judge reasonable as
attorney fees at trial and upon appeal, in addition to all other sums provided
for by law.
28. SUCCESSOR INTERESTS. Subject to any prohibition against assignment
contained herein, the LEASE shall be binding upon and inure to the benefit of
the heirs, successors and assigns of the parties. As used in the LEASE, the term
"LESSOR" shall include any assignee or secured party of LESSOR where
appropriate.
29. MULTIPLE LESSEES. If more than one LESSEE is named herein, the reference
to LESSEE refers to each and the liability of each shall be joint and several.
30. NOTICES. Any written notice or demand under the LEASE may be given to a
party by mail at its address set forth on the Lease Schedule or at such address
as the party may provide in writing from time to time. Notice and demand so made
shall be effective when deposited in the United States mail duly addressed with
postage prepaid.
31. WAIVER. Failure of LESSOR at any time to require performance of any
provision of the LEASE shall not limit any right of LESSOR to enforce that
provision, nor shall any waiver by LESSOR of any breach of any provision be a
waiver of any succeeding breach of that provision or a waiver of that provision
itself or any other provision.
32. NUMBER AND CAPTIONS. As used herein, the singular shall include the
plural, and the plural the singular. All captions used herein are intended
solely for convenience of reference and shall in no way limit or explain any of
the provisions of the LEASE.
33. DUPLICATE ENFORCEABLE AS ORIGINAL. LESSEE hereby consents to the use of
the original Lease Schedule, along with a photocopy of the fully executed Master
Lease Agreement, for all purposes including, but not limited to, evidence in
litigation or any other judicial proceeding.
34. SEVERABILITY. If any provision of the LEASE is held invalid, such
invalidity shall not affect other provisions which can be given effect without
the invalid provision.
35. ENTIRE AGREEMENT. This Master Lease Agreement and the Lease Schedule,
represent the entire, final and complete agreement of the parties pertaining to
the lease of the EQUIPMENT and supersede or replace all written and oral
agreements heretofore made or existing by and between the parties of their
representatives insofar as the lease of the EQUIPMENT is concerned, and no
modification or addition to the LEASE shall be binding
Page 5 of 6
<PAGE> 7
unless agreed by a corporate officer, against whom enforcement is sought.
- -------------------------------------------------------------------------------
LESSEE ACKNOWLEDGES THAT IT HAS READ AND UNDERSTANDS ALL OF THE TERMS AND
CONDITIONS CONTAINED IN THIS MASTER LEASE AGREEMENT AND THAT THESE TERMS AND
CONDITIONS SHALL GOVERN EACH LEASE ENTERED INTO BY THE PARTIES.
- -------------------------------------------------------------------------------
LESSOR Date LESSEE Date
----------------- -----------------
[FIRSTCORP LOGO] ATHENA MEDICAL CORPORATION
- ------------------------------------ -------------------------------------
Full Legal Name Of Lessee
BY: BY: PRESIDENT/CEO
---------------------------- -----------------------------------
PETER BURKE (TITLE)
THIS MASTER LEASE AGREEMENT WILL NOT
BIND LESSOR OR BECOME EFFECTIVE BY:
UNTIL AND UNLESS LESSOR ACCEPTS IT -----------------------------------
BY SIGNING ABOVE (TITLE)
BY:
-----------------------------------
(TITLE)
-----------------------------------
Witness
- -------------------------------------------------------------------------------
Page 6 of 6
<PAGE> 8
[FIRSTCORP LOGO]
First Portland Corporation
7145 SW Varns Street Portland, OR 97223-8057
503.684.3417 800.247.3722 FAX 503.620.7677
MASTER LEASE AGREEMENT NUMBER 911056
CORPORATE RESOLUTION AUTHORIZING LEASES
Resolution of the Board of Directors of ATHENA MEDICAL CORPORATION (the
"Corporation").
Recitals
WHEREAS, the jurisdiction of the Corporation's incorporation empowers
corporations to lease real and personal property; and
WHEREAS, the jurisdiction of the Corporation's incorporation expressly provides
that the powers of the Corporation are to be exercised by its Board of
Directors, subject to certain limitations; and
WHEREAS, the Board of Directors of the Corporation deems it to be in the best
interests of the Corporation and its shareholders to enter into a Master Lease
Agreement and one or more Lease Schedules thereunder with LESSOR, whether now or
hereafter, for the lease of certain personal property described in each such
Lease Schedule.
Resolutions
NOW THEREFORE, IT IS RESOLVED, that the Corporation enter into the Master Lease
Agreement and one or more Lease Schedules thereunder, for the lease of certain
personal property described in the Lease Schedules on the terms and conditions
set forth in the Master Lease Agreement and the Lease Schedules, and that the
Corporation consents to the use of original Lease Schedules, along with a
photocopy of the fully executed Master Lease Agreement, and photocopies of the
related documents (including this Corporate Resolution Authorizing Leases),
for all purposes including, but not limited to, evidence in litigation or any
other judicial proceeding; and it is further
RESOLVED, that PETER BURKE, who is the PRESIDENT/CEO of this Corporation, is
authorized and directed to execute and deliver the Master Lease Agreement, the
Lease Schedules, and any other related documents; and it is further
RESOLVED, that PETER BURKE, who is the PRESIDENT/CEO of this Corporation, is
authorized to appoint an alternative employee or agent of the Corporation, via
telephonic or other communication with LESSOR, to provide verbal verification of
delivery and acceptance of equipment under the Master Lease Agreement and Lease
Schedules. Such appointment and subsequent verification and acceptance shall be
binding upon the Corporation.
CERTIFICATE
I, WILLIAM FLEMING, certify:
That I am the duly elected and acting Secretary of ATHENA MEDICAL CORPORATION ,
a corporation;
That the foregoing Corporate Resolution Authorizing Leases was duly adopted by
the Board of Directors in conformity with the Articles of Incorporation and
Bylaws of the Corporation; and
That the resolution has been neither modified nor rescinded and is, as of the
date of this Certificate, in full force and effect, and will remain in full
force and effect until such time as the Board of Directors terminates the
resolution and notifies LESSOR of such termination in writing. Such termination
shall not affect the Master Lease Agreement and Lease Schedules executed prior
to LESSOR's receipt of the notice of termination.
IN WITNESS WHEREOF, I set my hand this ____ day of ____________, 19___.
--------------------------------------
CORPORATE SECRETARY
WILLIAM FLEMING
--------------------------------------
<PAGE> 9
LEASE SCHEDULE 91105607
TO MASTER LEASE AGREEMENT NUMBER 911056
[FIRSTCORP LOGO]
First Portland Corporation
7145 SW Varns Street Portland, OR 97223-8057
503.684.3417 800.247.3722 FAX 503.620.7677
LESSEE NAME AND ADDRESS SUPPLIER OF EQUIPMENT AND ADDRESS
- ------------------------------------------- ----------------------------------
ATHENA MEDICAL CORPORATION FORT JAMES CORPORATION
10180 SOUTHWEST NIMBUS AVENUE, STE J-5 ONE BETTER WAY ROAD
PORTLAND, OR 97223 MILFORD, OH 45150
- ------------------------------------------- ----------------------------------
LESSEE MAY HAVE RIGHTS UNDER THE SUPPLY CONTRACT WITH THE SUPPLIER OF THE
EQUIPMENT AND MAY CONTACT THE SUPPLIER FOR A DESCRIPTION OF SUCH
RIGHTS.
- -------------------------------------------------------------------------------
QUANTITY EQUIPMENT DESCRIPTION AND IDENTIFICATION
- -------------------------------------------------------------------------------
SEE SCHEDULE 'A' ATTACHED HERETO AND MADE A PART HEREOF
- -------------------------------------------------------------------------------
Location of Street Address: 10180 SW NIMBUS AVENUE, SUITE J-5
Equipment:
City:Portland County:MULTNOMAH State and Zip: OR 97223
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADVANCE RENTALS
PERIODIC RENTAL PAYMENTS MINIMUM RECEIPTED FOR APPLY TO
(Subject to Applicable Taxes) LEASE TERM FIRST AND LAST SECURITY
IN MONTHS 1 PAYMENTS DEPOSIT
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 5,321.00 24 $ 10,642.00 $18,810.93
- ---------------------------------------------------------------------------------------------------
</TABLE>
LESSEE HEREBY LEASES FROM LESSOR THE EQUIPMENT DESCRIBED ABOVE OR IN AN
ATTACHMENT HERETO. THIS SCHEDULE INCORPORATES AND IS SUBJECT TO ALL OF THE TERMS
AND CONDITIONS OF THE MASTER LEASE RENTAL AGREEMENT REFERENCED ABOVE, WHICH
LESSEE ACKNOWLEDGES IT HAS READ AND UNDERSTANDS IN ITS ENTIRETY.
- -------------------------------------------------------------------------------
LESSOR Date LESSEE Date
-------------- -------------
[FIRSTCORP LOGO] ATHENA MEDICAL CORPORATION
- ------------------------------------ ---------------------------------------
Full Legal Name Of Lessee
BY: BY: PRESIDENT/CEO
------------------------------- ---------------------------------------
(TITLE) PETER BURKE (TITLE)
This LEASE will not bind LESSOR or BY:
become effective until and ------------------------------------
unless LESSOR accepts it by signing in (TITLE)
the State of Oregon.
BY:
-----------------------------------
(TITLE)
------------------------------------
WITNESS
<PAGE> 10
------------------------------------
THIS SPACE FOR OFFICE USE ONLY
- -------------------------------------------------------------------------------
SCHEDULE 'A'
SCHEDULE FORMING PART OF AGREEMENT #: 91105607 BETWEEN [FIRSTCORP LOGO]
LESSOR AND ATHENA MEDICAL CORPORATION , LESSEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
DESCRIPTION OF LEASE EQUIPMENT
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Quantity N/U Description
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
VENDOR: FORT JAMES CORPORATION
1 N ADCO MODEL AF-50-2 FORMER
1 N ADCO MODEL SPECIAL CLOSER
1 N ADCO MODEL PRODUCT LOADER
1 N DIGITAL READOUT
1 N GOUP 60B
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
ACCEPTED: LESSEE:
[FIRSTCORP LOGO]
ATHENA MEDICAL CORPORATION
------------------------------ ------------------------------------
By: By:
---------------------------- -----------------------------------
PETER BURKE
Title: Title: PRESIDENT/CEO
---------------------------- ------------------------------------
Date: Date:
-------------------------- ------------------------------------
PAGE 1 OF 1 PAGES OF THIS SCHEDULE
--- ---
- -------------------------------------------------------------------------------
<PAGE> 11
MASTER LEASE AGREEMENT NUMBER 911056 AND
LEASE SCHEDULE NUMBER: 91105607
CROSS-COLLATERALIZATION AGREEMENT
(EQUIPMENT)
The Leases referred to herein and modified hereby are the Lease Rental
Agreement(s) executed between [FIRSTCORP LOGO] ("Lessor") and ATHENA MEDICAL
CORPORATION ("Lessee"), as identified in the attached Schedule of Leases.
WHEREAS, Lessee wishes to enter into a new Master Lease Agreement and
Lease Schedule with Lessor, identified as Lease Schedule Number
91105607 (the "New Lease"); and
WHEREAS, Lessor will not enter into the New Lease without the Lessee's agreement
to cross-collateralize certain equipment; NOW THEREFORE,
For good and valuable consideration the parties hereby agree as follows:
(1) Notwithstanding any other language in the Leases, the Leases shall be
modified to provide that in the event any equipment which is the
subject of the Leases is at any time purchased by Lessee from Lessor,
such equipment shall be, and hereby is, pledged by Lessee to Lessor to
secure performance of any and all of Lessee's obligations under each of
the Leases, the New Lease, and any future Leases.
(2) Notwithstanding any other language in the New Lease, the New Lease
shall be modified to provide that in the event any equipment which is
the subject of the New Lease is at any time purchased by Lessee from
Lessor, such equipment shall be, and hereby is, pledged by Lessee to
Lessor to secure performance of any and all Lessee's obligations under
the Leases and under any future Lease Rental Agreements.
(3) Except as expressly provided herein, the Leases, the New Lease, and any
existing written modifications to the Leases and New Lease shall remain
in full force and effect in exact accordance with their original terms
and conditions.
LESSOR: LESSEE:
[FIRSTCORP LOGO] ATHENA MEDICAL CORPORATION
- ------------------------------------- -------------------------------------
By: By:
----------------------------------- ----------------------------------
PETER BURKE
Title: Title: PRESIDENT/CEO
-------------------------------- -------------------------------
Date: Date:
-------------------------------- -------------------------------
<PAGE> 12
[FIRSTCORP LOGO]
First Portland Corporation
7145 SW Varns Street Portland, OR 97223-8057
503.684.3417 800.247.3722 FAX 503.620.7677
MASTER LEASE AGREEMENT NUMBER 911056
LEASE SCHEDULE 91105607
ACCEPTANCE NOTICE
LESSEE NAME AND ADDRESS SUPPLIER OF EQUIPMENT AND ADDRESS
---------------------------------- ---------------------------------------
ATHENA MEDICAL CORPORATION FORT JAMES CORPORATION
10180 SW NIMBUS AVENUE, STE J-5 ONE BETTER WAY ROAD
PORTLAND, OR 97223 MILFORD, OH 45150
---------------------------------- ---------------------------------------
LESSEE acknowledges that it has read all the terms of the above-numbered Lease
Schedule (the "Lease"), as well as the Master Lease Agreement referenced above
and fully incorporated into the Lease, and fully understands those paragraphs
captioned "SELECTION AND ACCEPTANCE OF EQUIPMENT", "USE AND OPERATION", "REPAIRS
AND ALTERATIONS", "LOSS AND DAMAGE", "CHOICE OF LAW, VENUE AND JURISDICTION",
and "ENTIRE AGREEMENT".
LESSEE FURTHER ACKNOWLEDGES THAT LESSOR HAS MADE NO WARRANTY OR REPRESENTATION,
EXPRESS OR IMPLIED, OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE,
DESIGN, CONDITION, WORKMANSHIP OR OTHERWISE WITH REGARD TO THE EQUIPMENT, AND AS
TO LESSOR, LESSEE LEASES THE EQUIPMENT "AS-IS" AND "WITH ALL FAULTS".
LESSEE acknowledges that it shall use the Equipment properly, shall perform
necessary maintenance, and shall bear the entire risk of loss or damage to the
Equipment. Moreover, LESSEE acknowledges that LESSOR is not responsible for the
service, maintenance or repair of the Equipment nor the performance of any
third-party service contracts or maintenance agreements, and that failure of the
Equipment to perform properly or failure of the supplier, service personnel, or
installer of the Equipment to render proper service, installation or repairs
shall not relieve nor lessen LESSEE's obligations to pay rent or to perform any
term or condition of the Lease. LESSEE further acknowledges that it shall make
no claim against LESSOR and shall make claim solely against supplier or
supplier's vendors and shall indemnify LESSOR for any claim relating to the
Equipment.
To the extent that the Lease is governed by a jurisdiction that has adopted a
version of Uniform Commercial Code-Leases ("UCC-Leases"), LESSEE acknowledges
that the Lease is a finance lease as defined in UCC-Leases Section 2A-103(g).
LESSEE acknowledges that (i) LESSOR acquired the Equipment or right to
possession and use of the Equipment for the LESSEE in connection with the Lease;
(ii) LESSEE has reviewed and approved any written supply contract covering the
Equipment purchased from the supplier for lease to LESSEE; and (iii) LESSOR has
informed or advised LESSEE in writing (a) as to the identity of the supplier, if
necessary, (b) that LESSEE may have rights under the supply contract, and (c)
that LESSEE may contact the supplier for a description of any rights LESSEE may
have under the supply contract. LESSEE represents that Equipment shall be used
in its commercial or business concern and that the Equipment shall not be used
for personal, family or household purposes.
LESSEE UNDERSTANDS AND AGREES THAT THE LEASE WAS MADE IN THE STATE OF OREGON AND
THAT IT SHALL BE CONSTRUED BY THE LAWS OF OREGON. LESSEE FURTHER UNDERSTANDS AND
AGREES THAT ALL ACTIONS AND SUITS TO ENFORCE THE LEASE OR FOR ITS BREACH MUST BE
MAINTAINED IN MULTNOMAH COUNTY, STATE OF OREGON. LESSEE EXPRESSLY AGREES TO
SUBMIT TO PERSONAL JURISDICTION IN OREGON.
NO OTHER AGREEMENTS, WRITTEN OR ORAL, EXIST BETWEEN LESSEE AND LESSOR WITH
RESPECT TO THE LEASE OF THE EQUIPMENT EXCEPT AS EXPRESSLY INCORPORATED IN THE
LEASE.
LESSEE ACKNOWLEDGES THAT IT HAS READ AND UNDERSTANDS THIS ACCEPTANCE NOTICE.
- -------------------------------------------------------------------------------
LESSEE Date
---------------
ATHENA MEDICAL CORPORATION
------------------------------------
Full Legal Name Of Lessee
BY: PRESIDENT/CEO
------------------------------------
PETER BURKE (TITLE)
BY:
------------------------------------
(TITLE)
BY:
------------------------------------
(TITLE)
------------------------------------
WITNESS
<PAGE> 13
LEASE RENTAL AGREEMENT/LEASE SCHEDULE NUMBER 91105607
SECURITY DEPOSIT RECEIPT AND ADDENDUM
[FIRST CORP LOGO] ("Lessor") hereby acknowledges its receipt of EIGHTEEN
THOUSAND EIGHT HUNDRED TEN AND 93/100 ($18,810.93) from the undersigned Lessee
pursuant to the terms and conditions of the above-referenced Lease Rental
Agreement or Lease Schedule (the "Lease"). Lessor shall hold this sum subject to
the provision of the Lease entitled Security Deposit, except as otherwise
provided herein.
So long as Lessee fully and timely performs as required under the Lease and any
other obligations with Lessor, and submits its financial statements to Lessor on
a regular basis with such financial statements being acceptable to Lessor in
Lessor's own discretion, then the security deposit amount shall accrue interest
at the rate of SIX percent (6%) per annum on the balance of the security deposit
amount held by Lessor.
If, at the end of the Lease term, all of the lease rental payments have been
made on time and Lessee has not otherwise been in default under the Lease or any
other obligation of Lessee to Lessor during the Lease term, Lessor will release
the then-remaining balance of the security deposit amount, along with any
accrued interest thereon.
In the event Lessee does not fully and timely perform as required under the
Lease and any other obligations to Lessor, and/or Lessee fails to submit its
financial statements as required or such financial statements are not acceptable
to Lessor, interest shall cease to accrue in relation to the security deposit
amount. In such event, Lessor shall not release the security deposit amount
until such time, if ever, as all terms and conditions of the Lease and any other
obligations with Lessor have been satisfied in full, and upon such release no
interest on the security deposit amount shall be due to Lessee.
In the event the security deposit is in the form of a Certificate of Deposit,
Lessor shall not be liable to Lessee for any interest reduction or other
penalties associated with early redemption. Lessee agrees to reimburse Lessor
for any costs (including penalties in excess of earned interest) incurred by
Lessor in relation to such redemption.
Except as otherwise expressly provided herein, the terms and conditions of the
Lease, and specifically the provisions regarding the security deposit, shall
remain in full force and effect.
WHEREFORE, Lessor and Lessee hereby execute this Security Deposit Receipt and
Addendum on the dates indicated below.
LESSOR: LESSEE:
[FIRSTCORP LOGO] ATHENA MEDICAL CORPORATION
- -------------------------------- ----------------------------------------
By: By:
---------------------------- -------------------------------------
PETER BURKE
Title: Title: PRESIDENT/CEO
---------------------------- ---------------------------------
Date: Date:
---------------------------- -------------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 578,267
<SECURITIES> 0
<RECEIVABLES> 58,508
<ALLOWANCES> 0
<INVENTORY> 172,963
<CURRENT-ASSETS> 1,023,140
<PP&E> 1,194,449
<DEPRECIATION> 371,401
<TOTAL-ASSETS> 1,965,869
<CURRENT-LIABILITIES> 1,013,902
<BONDS> 0
0
0
<COMMON> 127,987
<OTHER-SE> 602,623
<TOTAL-LIABILITY-AND-EQUITY> 1,965,869
<SALES> 89,717
<TOTAL-REVENUES> 89,717
<CGS> 158,130
<TOTAL-COSTS> 158,130
<OTHER-EXPENSES> 3,951,953
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 70,199
<INCOME-PRETAX> (1,993,674)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,993,674)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,993,674)
<EPS-PRIMARY> (0.17)
<EPS-DILUTED> 0
</TABLE>
