<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------------------------
FORM 10-KSB/A
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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
-----------------------------------------------------------
A-FEM MEDICAL CORPORATION
(Name of small business issuer in its charter)
NEVADA 33-0202574
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10180 SW NIMBUS AVE., SUITE J-5
PORTLAND, 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, 1998: $418,915
As of August 13, 1999 the aggregate market value of $.01 par value
Common Stock held by non-affiliates of the issuer was $11,785,320.
As of August 13, 1999, the issuer had outstanding 9,563,558 shares of
its $.01 par value Common Stock.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
1
<PAGE> 2
This amendment to A-Fem Medical Corporation's annual report on Form
10-KSB contains amendments to Part I, Item 1, Part II, Items 5, 6 and 12, the
financial statements and related notes, and the exhibit list and exhibits as set
forth in the following pages.
PART I
ITEM 1: DESCRIPTION OF BUSINESS
A-Fem Medical Corporation is a medical technology company with multiple
product platforms targeting women's health needs. A-Fem has developed three
proprietary technology platforms: one based on its inSync(R) miniform
interlabial pad, another based on its PadKit(R) Sample Collection System and the
third based on its Rapid-Sense(TM) diagnostic tests. A-Fem currently markets the
inSync miniform as an alternative to tampons, pads or liners for light flow
protection. The PadKit, currently in clinical trials, utilizes a miniform as a
non-invasive sample collection method for use in testing for certain cancers and
diseases. A-Fem is also developing point-of-care diagnostic products that
provide quantified results using its proprietary Rapid-Sense technology.
A-Fem was incorporated in Nevada on December 9, 1986, as Xtramedics,
Inc. In June 1994, it changed its name to ATHENA Medical Corporation, and in
July 1997, to A-Fem Medical Corporation.
PRINCIPAL PRODUCTS
A-Fem's inSync miniform is the first generation of a product that
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 additional
protection 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.
A-Fem launched a marketing roll-out of its inSync miniform in grocery,
drug and mass retailers in Oregon and Washington in January 1998. In July 1998,
the product's area of distribution was expanded to include Colorado, Arizona,
Utah, New Mexico, Nevada, Montana and Idaho. A-Fem is now seeking a strategic
partner to assist in the continued national roll-out of the miniform.
A-Fem's PadKit integrates A-Fem's miniform technology with its
diagnostic expertise to create a unique sample collection system. In March 1998,
A-Fem was issued a patent that covers methods of collection and diagnosis of
vaginal fluid, including menses, which form the technological basis for the
PadKit. The PadKit is designed to replace the cervical scrape as a sample
collection method for tests that screen for cervical cancer and certain other
cancers and diseases. The PadKit contains a miniform to be used as a collection
device during the normal
2
<PAGE> 3
menstrual cycle. The miniform will collect blood, along with numerous cells,
vaginal mucous and discharge flushed out by the menstrual flow.
A-Fem is currently completing a Pilot Study for its PadKit to
demonstrate the effectiveness of this sample collection system as an alternative
to the cervical scrape. An estimated 50 million cervical scrapes are performed
annually in the United States alone to collect samples to use in the Pap smear
test for cervical cancer. Although significant improvements have been made in
the area of Pap smear test sample reading and sample preparation, no improved
sample collection method has been developed. A-Fem believes the PadKit will
provide a superior cell sample as well as a simpler, more comfortable and
convenient procedure for collecting the cells.
A-Fem anticipates that its Rapid-Sense point-of-use diagnostic
technology will enable consumers and healthcare providers to obtain quantifiable
test results quickly, conveniently and inexpensively. Currently, there are only
two alternatives for diagnostic testing: point-of-use tests that produce binary
(yes/no) results and laboratory tests that provide quantitative results. While
current point-of-use diagnostic tests are convenient and cost-effective, they do
not provide quantitative results and are limited to applications that have a
clear positive or negative response. Laboratory testing, on the other hand,
produces more information but requires sophisticated instruments, more time and
greater cost. The key to A-Fem's Rapid-Sense technology is that it combines the
convenience and low cost of a point-of-use test with the type of
semi-quantitative results previously only available from a laboratory or through
the use of sophisticated instruments. The Rapid-Sense technology enables visual
quantification of a desired substance, such as a disease marker, in a sample of
blood, saliva or urine.
A-Fem expects to seek strategic partners to assist in the marketing and
distribution of specific applications of its Rapid-Sense technology. To this
end, in November 1998 A-Fem announced that it had entered into a development
agreement with Konica, a large Japanese industrial chemical firm, to develop a
proprietary test using A-Fem's Rapid-Sense technology. In addition, a
Rapid-Sense test for the detection of cotinine (a metabolite of nicotine) is
currently being evaluated for sales into the insurance testing market. A-Fem
plans to manufacture the products and plans that sales and distribution would be
handled through third parties. The Rapid-Sense technology is in the development
stage and has not yet entered the marketplace.
MARKETING AND DISTRIBUTION
The inSync miniform is currently available for purchase in the western
half of the United States, excluding California, in retail grocery chains, drug
stores and mass merchandisers. In addition, the inSync miniform is available
through catalog and on-line, web-based (Internet) retailers, such as Transitions
for Health and SOMA, and directly from InSyncminiform.com. The inSync miniform
competes within the $1.8 billion United States feminine protection market. The
miniform represents a new category of products that both competes with and
complements existing feminine protection products, including tampons, pads, and
pantiliners.
3
<PAGE> 4
In order to focus on product development and increase the speed to
market for our products, A-Fem is seeking alliances with large strategic
partners. For the miniform, PadKit and Rapid-Sense products, A-Fem will seek
strategic partners with proven experience in consumer and diagnostics marketing.
A-Fem has no such alliance at present.
COMPETITION
The United States feminine protection market is currently dominated by
four major consumer products companies: the Proctor & Gamble Company, Johnson &
Johnson, Kimberly-Clark and Playtex. The inSync miniform represents a new
segment of the feminine protection market and provides benefits not offered by
competitive products. Features of the inSync miniform that distinguish it
competitively are its versatility, convenience, comfort and safety.
The first application of the PadKit will be an alternative to the
cervical scrape as a sample collection process for the Pap smear test, the
standard diagnostic procedure for cervical cancer detection. While improvements
have been made in the area of Pap smear test sample preparation and
interpretation by such companies as Cytyc, AutoCyte, Neopath and Neuro Medical
Systems, no user-friendly sample collection method has been developed.
A-Fem's proprietary Rapid-Sense technology has not yet been introduced
to the market. A-Fem believes that the semi-quantifiable test results provided
by point-of-use tests that incorporate A-Fem's Rapid-Sense technology will
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 healthcare
in general. Its competition is likely to be primarily with larger diagnostics
companies, or smaller innovative companies.
A-Fem'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.
MATERIALS AND MANUFACTURING
A-Fem's current miniform manufacturing facility in Portland, Oregon,
was completed in 1996 and upgraded in 1997. This facility provides miniforms for
both the inSync product and the PadKit. The present operation requires minimum
overhead and direct labor and is capable of producing more than $1,000,000
wholesale value of miniforms monthly, which capacity is sufficient to meet
A-Fem's forecast demand through market penetration of the Western half of the
United States, excluding California, which represents approximately 9% of the
total United States market. A-Fem can double its miniform production capacity
with a capital expenditure of approximately $800,000 and a construction
lead-time of approximately six months. A-Fem's miniform manufacturing facility
encompasses 7,300 square feet and has been inspected by the United States Food
and Drug Administration (FDA) and found to be without reportable deficiencies.
A-Fem completed a $225,000 packaging automation process
4
<PAGE> 5
improvement project during the first quarter of 1998 to increase line throughput
and reduce direct labor. A-Fem will need additional space to manufacture
sufficient quantities of the miniform to support a national marketing roll-out.
Raw materials used for production of the inSync miniform and A-Fem's
diagnostic products are made and supplied in the United States. A-Fem's
suppliers are meeting A-Fem's current manufacturing needs, although an
uninterrupted flow of raw materials cannot be guaranteed. In the past, A-Fem
purchased certain raw materials from a single supplier that has now ceased to
conduct its fiber-processing business. A-Fem has located a replacement supplier
for its raw materials, but has not yet entered into an agreement with such
supplier. A-Fem has sufficient finished goods on hand to meet anticipated demand
for at least the next 12 months.
A-Fem's current Rapid-Sense manufacturing facility is located within
A-Fem's research and development facilities and is capable of producing
prototypes to meet the expected needs of A-Fem's planned clinical trials and
limited commercial distribution.
PATENTS AND TRADEMARKS
A-Fem has rights to or owns two United States 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. In 1998, A-Fem was issued a
patent for the technology that is the basis for the PadKit collection device.
Additionally, A-Fem has patents pending for its Rapid-Sense technology.
The issued United States patents currently owned, assigned or licensed
to A-Fem and the pending patent applications are:
5
<PAGE> 6
- --------------------------------------------------------------------------------
US PATENT OR DATE OF ISSUE OR
SERIAL NUMBER FILING TITLE
- --------------------------------------------------------------------------------
4,995,150 02/26/91 Method and Apparatus for Making
Feminine Protection Pads
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
60/048,902(2) 06/05/97 Rapid-Sense Technology
- --------------------------------------------------------------------------------
08/670,137(3) 06/25/96 Biodegradable Absorbent Pads
- --------------------------------------------------------------------------------
- -----------
(1) Also applied for in Germany, Japan, England, France, Italy, Sweden, and
Canada.
(2) Patent pending.
(3) Reapplication pending.
A-Fem and The Proctor & Gamble Company have entered into a license
agreement that grants to The Proctor & Gamble Company certain non-exclusive
rights to use A-Fem's miniform technology, including United States Patent Nos.
4,995,150 and 5,575,047. Pursuant to the license agreement, The Proctor & Gamble
Company has a non-exclusive right to make, use and sell products embodying
A-Fem's interlabial product technology. Depending on The Proctor & Gamble
Company's use of this technology, The Proctor & Gamble Company may be required
to make up to two additional payments of $1 million each.
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.
A-Fem has applications for United States trademarks for PadKit,
Rapid-Sense, and for inSync and its related design. In addition to these
applications, A-Fem has also applied for international trademarks on Rapid-Sense
and inSync and its related design. A-Fem relies on trade secrets and other
unpatented proprietary information in its development activities.
REGULATORY REQUIREMENTS
The production and marketing of A-Fem's miniform products are subject
to regulation by the United States Food and Drug Administration (FDA). 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. A-Fem's miniform product required FDA
6
<PAGE> 7
approval before it could be marketed to the public, and such clearance was
obtained in 1997. A-Fem's Rapid-Sense products for use in the industrial and
environmental testing markets do not require FDA approval. However, when A-Fem
develops products for the human diagnostic market that incorporate Rapid-Sense
technology, such products will require FDA approval. A-Fem conducts safety and
effectiveness testing on our proposed products until we are satisfied that the
product performs as desired.
A-Fem has completed a Pilot Study clinical trial for its PadKit and is
in the process of conducting additional studies before applying for FDA
clearance. A-Fem hopes that this product will be ready for commercial production
in the second quarter of the year 2001.
A-Fem has assembled a team to obtain marketing clearance 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 Ph.D.s and M.D.s, to
contribute to the scientific and medical validity of its clinical trials.
RESEARCH AND DEVELOPMENT
A-Fem spent approximately $988,000 on research and development in the
year ended December 31, 1998, primarily with respect to development of the
Rapid-Sense diagnostic technology, preparing the PadKit for clinical trials and
applying for patents. A-Fem 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.
EMPLOYEES
As of December 31, 1998, A-Fem had 18 full-time employees. A-Fem
believes that its relations with its employees are good.
7
<PAGE> 8
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Trading of A-Fem's common stock is reported in the OTC Bulletin Board.
The following table sets forth the range of high and low bids for
A-Fem's common stock as reported in the OTC Bulletin Board for the
periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
1st Quarter 1997 4.88 2.94
2nd Quarter 1997 4.13 2.44
3rd Quarter 1997 4.75 2.50
4th Quarter 1997 4.06 2.44
1st Quarter 1998 2.69 1.88
2nd Quarter 1998 3.63 2.06
3rd Quarter 1998 3.00 1.44
4th Quarter 1998 2.47 1.00
</TABLE>
The foregoing prices reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not represent actual transactions.
(b) On December 31, 1998, there were approximately 294 holders of record of
A-Fem's common stock.
(c) A-Fem has paid no dividends and does not expect to pay any dividends in
the foreseeable future because A-Fem intends to retain earnings, if
any, to finance growth of its operations. A-Fem is not under any
contractual restriction as to its present or future ability to pay
dividends. The holders of A-Fem's preferred Stock have the right to
receive dividends in preference to the holders of A-Fem's common stock.
RECENT SALES OF UNREGISTERED SECURITIES
On March 9, 1999, A-Fem issued 156,250 shares of A-Fem's Series A
Convertible Preferred Stock and warrants to purchase an additional 31,250 shares
of A-Fem's Series A Convertible Preferred Stock at an exercise price of $.01 per
share to one entity, Capital Consultants, Inc., acting as agent for individual
investors, in exchange for aggregate cash consideration of $300,000. The
warrants expire 10 years from the date of issuance. Shares of Series A
Convertible Preferred Stock are convertible into shares of Common Stock on a
one-for-one basis, subject to adjustment in certain circumstances to prevent
dilution. Capital Consultants, Inc. represented that such entity and each
individual represented by such entity was an "accredited investor" within the
meaning of Rule 501(a) of the Securities Act. In issuing these securities,
A-Fem relied upon an exemption from registration pursuant to Section 4(2) of the
Securities Act.
8
<PAGE> 9
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
OVERVIEW
A-Fem experienced significant operating losses during the years ended
December 31, 1998 and 1997. Further, A-Fem has continued to incur losses into
the first quarter of 1999 and has never generated significant revenues from
operations. A-Fem 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
A-Fem's ability to continue as a going concern. Execution of A-Fem'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 seek potential partnering opportunities. A-Fem has raised
operating funds in the past by selling shares of its common and preferred stock
for consideration totaling approximately $1.8 million during 1997, $4.7 million
during 1998, and $300,000 through March 1999.
A-Fem may not be able to raise additional funding or enter into a
strategic alliance. If A-Fem is unable to obtain adequate additional financing,
enter into such strategic alliance or generate sufficient sales revenues,
management may be required to curtail A-Fem's product development, marketing
activities and other operations, and A-Fem may be forced to cease operations.
RESULTS OF OPERATIONS
For the year ended December 31, 1998, A-Fem generated net sales of
approximately $419,000 as compared to net sales of approximately $90,000 for the
year ended December 31, 1997. This increase in net sales resulted from the
marketing roll-out of the inSync miniform in the Western half of the United
States, excluding California. A-Fem has received no revenues from any other
products and does not expect to generate revenues from the sales of any other
products until the year 2001. The cost of goods sold in the year ended December
31, 1998, was approximately $495,000, as compared to approximately $550,000 in
the year ended December 31, 1997. This decrease resulted primarily from a
reduction in manufacturing overhead in 1998 as compared to 1997. The reduction
in manufacturing overhead consisted primarily of a reduction in inventory
adjustment expense that was achieved through better inventory control.
A-Fem's operating loss for the year ended December 31, 1998 was
approximately $4.6 million, compared to an operating loss of approximately $4.0
million for the previous year. The increase in operating loss was caused
primarily by marketing and selling expenses related to the roll-out of the
inSync miniform in the western half of the United States, excluding California,
and an increase in research and development expenses.
Gross margin for the year ended December 31, 1998 was approximately
- -18.2% as compared to -512.8% for the year ended December 31, 1997. The change
in gross margin resulted primarily from the increase in net sales and reduction
in manufacturing overhead described above.
9
<PAGE> 10
Marketing and selling expenses were approximately $2,562,000 for the
year ended December 31, 1998, as compared to approximately $1,817,000 for the
prior year. Such expenses accounted for the greatest share of all expenses in
1998 due to costs associated with the launch of the marketing roll-out of
A-Fem's inSync miniform in the western United States. This marketing roll-out
required expenditures for media, advertising production, packaging design,
selling materials, and marketing and sales consultants. Marketing and selling
expenses also accounted for the greatest share of all expenses in 1997 due to
preparation for the marketing roll-out of the inSync miniform in Oregon and
Washington. Marketing and selling expenses are expected to continue to exceed
revenues through 1999.
Research and development expenses for the year ended December 31, 1998,
totaled approximately $988,000. Research and development expenses for the year
ended December 31, 1997, totaled approximately $666,000. The increase in these
expenses is primarily attributable to development costs of approximately
$102,000 related to the Rapid-Sense diagnostic technology and costs of
approximately $220,000 associated with the PadKit Pilot Study clinical trials.
General and administrative expenses for the year ended December 31,
1998, totaled approximately $983,000, compared to approximately $1,078,000 for
the year ended December 31, 1997. The decrease in these expenses is attributable
primarily to decreases in A-Fem's legal and insurance expenses.
A-Fem's net loss for the year ended December 31, 1998, increased to
approximately $4,629,000 from $1,994,000 for the year ended December 31, 1997.
This increase reflects A-Fem's receipt during the year ended December 31, 1997,
of a payment of $2,000,000 from The Proctor & Gamble Company pursuant to an
A-Fem licensing agreement between The Proctor & Gamble Company and A-Fem.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, A-Fem had cash and cash equivalents of
approximately $668,000 as compared to approximately $526,000 at December 31,
1997. To date, A-Fem has financed its growth and operations through private
placements of common and preferred stock, rights to purchase common and
preferred stock, promissory notes and capital leases. During 1998, A-Fem raised
approximately $4.7 million from private investors in exchange for 989,586 shares
of A-Fem's common stock, and 1,457,000 shares of A-Fem's preferred stock. In
addition, during 1998 A-Fem exchanged 4,316,405 shares of common stock for
4,316,405 shares of Series A Convertible Preferred Stock. In 1997 A-Fem raised
approximately $1.8 million from private investors in exchange for 2,670,780
shares of A-Fem's common stock.
A-Fem will need to raise additional capital in order to meet costs
associated with research and development and related administrative activities.
If A-Fem is unable to obtain such financing, it may be required to curtail its
activities and may have to cease operations.
A-Fem expects to continue to incur losses through 1999 and through
2000, because the costs of marketing and research and development are expected
to continue to exceed income
10
<PAGE> 11
from product sales. Exclusive of marketing costs, A-Fem has approximately
$200,000 per month of operating expenses. In order to carry out its development
plans for Rapid-Sense and the PadKit, A-Fem estimates it will need to raise
approximately $3.0 million in addition to the funds needed for its monthly
operating expenses. If A-Fem were able to raise the entire $3 million at once,
it would take approximately 18 to 24 months to complete A-Fem's development
plans for Rapid-Sense and the PadKit. A-Fem does not expect significant amounts
of debt financing to be available to it in the near term, and therefore expects
that it will have to issue additional equity. A-Fem cannot predict on what terms
any such financing might be available, but any such financing could involve
issuance of equity below current market prices and result in significant
dilution of existing stockholders.
YEAR 2000
A-Fem has conducted a review of its computer systems' devices,
applications and manufacturing equipment to identify those areas that could be
affected by Year 2000 noncompliance. All of the computer hardware and software
currently used by A-Fem, including any embedded technology that is used in the
manufacturing process, is Year 2000 compliant. Although A-Fem has not
communicated yet with many of its suppliers, service providers, distributors,
wholesalers and other entities with which it has a business relationship
regarding their compliance with Year 2000 requirements, A-Fem believes that a
material failure by one or more of its key vendors or customers to comply with
Year 2000 requirements in a timely fashion would not have a material adverse
impact on A-Fem's operations.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of December 31, 1998, William H. Fleming, A-Fem's Vice-Chairman of
the Board and Secretary, had an outstanding balance of approximately $62,000 on
a loan from the Company. This loan was made on November 18, 1994, and the
original principal balance was $52,000. Interest accrues at a rate of 6.24% and
is capitalized. Mr. Fleming used the proceeds from this loan to purchase shares
of A-Fem's Common Stock upon exercise of a stock option.
11
<PAGE> 12
A-FEM MEDICAL CORPORATION
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997
TOGETHER WITH AUDITORS' REPORT
<PAGE> 13
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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results of its operations
and its cash flows for each of the two years in the period ended December 31,
1998, 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.
/s/ ARTHUR ANDERSEN LLP
Portland, Oregon,
March 2, 1999
F-1
<PAGE> 14
A-FEM MEDICAL CORPORATION
BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 668,369 $ 525,767
Restricted cash -- 52,500
Accounts receivable 59,735 98,596
Inventories 70,855 172,963
Prepaid expenses 257,603 173,314
------------ ------------
Total current assets 1,056,562 1,023,140
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS 1,235,173 1,194,449
Less- Accumulated depreciation and amortization (524,484) (371,401)
------------ ------------
Total property, equipment and leasehold improvements 10,689 823,048
PATENTS, net 59,872 60,971
LOANS RECEIVABLE - Officers and directors 62,193 58,710
------------ ------------
Total assets $ 1,889,316 $ 1,965,869
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 299,471 $ 529,588
Current portion - capital lease obligations 183,339 262,772
Accrued expenses 74,075 59,368
Accrued salaries and benefits 138,394 162,174
Note payable 417,345 --
------------ ------------
Total current liabilities 1,112,624 1,013,902
LONG-TERM PORTION - CAPITAL LEASE OBLIGATIONS 41,607 221,357
------------ ------------
Total liabilities 1,154,231 1,235,259
COMMITMENTS (NOTE 7)
STOCKHOLDERS' EQUITY:
Series A Convertible Preferred Stock, $.01 par value; authorized 7,200,000
shares; issued 5,773,405 shares and 0 shares at December 31, 1998 and 1997,
respectively 57,734 --
Common stock, $.01 par value; authorized 33,000,000 shares; issued 9,471,875
shares and 12,798,694 shares at December 31, 1998 and 1997, respectively 94,719 127,987
Warrants issued for Series A Convertible Preferred Stock 182,272 --
Warrants issued for common stock 76,491 --
Additional paid-in capital 16,682,154 12,331,811
Accumulated deficit (16,358,285) (11,729,188)
------------ ------------
Total stockholders' equity 735,085 730,610
------------ ------------
Total liabilities and stockholders' equity $ 1,889,316 $ 1,965,869
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-2
<PAGE> 15
A-FEM MEDICAL CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
REVENUES:
Sales, net of discounts $ 418,915 $ 89,717
------------ ------------
Net sales 418,915 89,717
COST OF SALES:
Cost of goods sold 495,092 549,764
------------ ------------
Gross margin (76,177) (460,047)
OPERATING EXPENSES:
Selling and marketing 2,561,887 1,816,910
General and administrative 982,787 1,077,669
Research and development 988,121 665,740
------------ ------------
Operating loss (4,608,972) (4,020,366)
------------ ------------
OTHER INCOME (EXPENSE):
Interest income 25,021 94,273
Interest expense (88,950) (70,199)
Licensing income 35,000 2,000,000
Miscellaneous income 8,804 2,618
------------ ------------
(20,125) 2,026,692
------------ ------------
Net loss $ (4,629,097) $ (1,993,674)
============ ============
NET LOSS PER SHARE, basic and diluted $ (.38) $ (.17)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 12,178,262 11,682,687
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 16
A-FEM MEDICAL CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Preferred Stock
----------------------------------------
Shares Amount Warrants
--------- ---------- ----------
<S> <C> <C> <C>
BALANCE, December 31, 1996 -- $ -- $ --
Common stock issued on options exercised for cash, $0.12
per share, net of financing costs -- -- --
Common stock issued on warrants exercised for cash, $0.41 -- -- --
per share
Common stock issued on warrants exercised for cash, $1.00
per share, net of financing costs -- -- --
Common stock issued on warrants exercised for cash, $1.50 -- -- --
per share
Common stock issued on warrants exercised for cash, $1.64 -- -- --
per share
Common stock issued for cash, $2.00 per share, net of -- -- --
financing costs
Common stock issued for proprietary assets, $2.00 per share -- -- --
Net loss -- -- --
--------- ---------- ----------
BALANCE, December 31, 1997 -- -- --
Common stock issued for cash $1.92 per share, net of -- -- --
financing costs
Preferred stock issued in exchange of common shares 4,316,405 43,164 --
Preferred stock issued for cash $1.92 per share, net of 1,457,000 14,570 --
financing costs
Warrants issued in connection with note payable -- -- --
Warrants issued in connection with issuance of common stock -- -- --
Warrants issued in connection with issuance of preferred -- -- 182,272
stock
Net loss -- -- --
--------- ---------- ----------
BALANCE, December 31, 1998 5,773,405 $ 57,734 $ 182,272
========= ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Common Stock
--------------------------------------------
Shares Amount Warrants
---------- ------------ ------------
<S> <C> <C> <C>
BALANCE, December 31, 1996 10,127,914 $ 101,279 $ --
Common stock issued on options exercised for cash, $0.12
per share, net of financing costs 1,174,280 11,743 --
Common stock issued on warrants exercised for cash, $0.41 480,000 4,800 --
per share
Common stock issued on warrants exercised for cash, $1.00
per share, net of financing costs 343,500 3,435 --
Common stock issued on warrants exercised for cash, $1.50 33,000 330 --
per share
Common stock issued on warrants exercised for cash, $1.64 10,000 100 --
per share
Common stock issued for cash, $2.00 per share, net of 530,000 5,300 --
financing costs
Common stock issued for proprietary assets, $2.00 per share 100,000 1,000 --
Net loss -- -- --
---------- ------------ ------------
BALANCE, December 31, 1997 12,798,694 127,987 --
Common stock issued for cash $1.92 per share, net of 989,586 9,896 --
financing costs
Preferred stock issued in exchange of common shares (4,316,405) (43,164) --
Preferred stock issued for cash $1.92 per share, net of -- -- --
financing costs
Warrants issued in connection with note payable -- -- --
Warrants issued in connection with issuance of common stock -- -- 76,491
Warrants issued in connection with issuance of preferred -- -- --
stock
Net loss -- -- --
---------- ------------ ------------
BALANCE, December 31, 1998 9,471,875 $ 94,719 $ 76,491
========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
Additional Total
Paid-In Stockholders'
------------ Accumulated -------------
Capital Deficit Equity
------------ ------------ -------------
<S> <C> <C> <C>
BALANCE, December 31, 1996 $ 10,403,611 $ (9,735,514) $ 769,376
Common stock issued on options exercised for cash, $0.12
per share, net of financing costs 128,841 -- 140,584
Common stock issued on warrants exercised for cash, $0.41 192,000 -- 196,800
per share
Common stock issued on warrants exercised for cash, $1.00
per share, net of financing costs 338,128 -- 341,563
Common stock issued on warrants exercised for cash, $1.50 49,170 -- 49,500
per share
Common stock issued on warrants exercised for cash, $1.64 16,300 -- 16,400
per share
Common stock issued for cash, $2.00 per share, net of 1,004,761 -- 1,010,061
financing costs
Common stock issued for proprietary assets, $2.00 per share 199,000 -- 200,000
Net loss -- (1,993,674) (1,993,674)
------------ ------------ -------------
BALANCE, December 31, 1997 12,331,811 (11,729,188) 730,610
Common stock issued for cash $1.92 per share, net of 1,857,425 -- 1,867,321
financing costs
Preferred stock issued in exchange of common shares -- -- --
Preferred stock issued for cash $1.92 per share, net of 2,719,026 -- 2,733,596
financing costs
Warrants issued in connection with note payable 32,655 -- 32,655
Warrants issued in connection with issuance of common stock (76,491) -- --
Warrants issued in connection with issuance of preferred (182,272) -- --
stock
Net loss -- (4,629,097) (4,629,097)
------------ ------------- -------------
BALANCE, December 31, 1998 $ 16,682,154 $(16,358,285) $ 735,085
============ ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 17
A-FEM MEDICAL CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,629,097) $(1,993,674)
Adjustments to reconcile net loss to net cash
flows used in operating activities-
Depreciation and amortization 155,667 150,812
Loss (gain) on disposal of assets (134) 5,459
Other noncash income (3,483) --
Changes in operating assets and liabilities:
Restricted cash 52,500 106,875
Accounts receivable 38,861 (67,824)
Inventories 102,108 17,855
Prepaid expenses and other (84,289) (17,373)
Accounts payable (230,117) 280,116
Accrued expenses 14,707 3,147
Accrued salaries and benefits (23,780) (130,319)
Accrued settlement for litigation -- (40,000)
------------ ------------
Net cash used in operating activities (4,607,057) (1,684,926)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, equipment and leasehold improvements (37,909) (48,192)
Net proceeds from sale of equipment 350 1,650
Other assets (406) (34,621)
------------ ------------
Net cash used in investing activities (37,965) (81,163)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock 1,867,321 1,754,908
Net proceeds from sale of preferred stock 2,733,596 --
Repayments on capital lease obligations (263,293) (199,930)
Proceeds from note payable 450,000 --
Repayments of loans receivable, net -- 65,383
------------ ------------
Net cash provided by financing activities 4,787,624 1,620,361
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 142,602 (145,728)
CASH AND CASH EQUIVALENTS, beginning of period 525,767 671,495
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 668,369 $ 525,767
============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Exchange of preferred stock for common stock $ 8,287,498 $ --
Issuance of common stock as settlement for litigation -- 200,000
Equipment acquired under capital leases 4,110 310,014
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Total cash paid for interest 88,950 70,199
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 18
A-FEM MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
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(R) miniform interlabial pad, another based on the
Rapid-Sense(TM) diagnostic products and a third based on the PadKit(R) Sample
Collection System. The miniform is a new type of feminine hygiene product that
is worn interlabially. A-Fem's first miniform application, the inSync(R)
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, 1998 and 1997 and has continued to incur losses into
the first quarter of 1999. 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 preferred and common stock of
approximately $4.6 million during 1998 and in its common stock of approximately
$1.8 million in 1997, net of issuance expenses. 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
F-6
<PAGE> 19
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.
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 in 1996.
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.
The Company performs periodic credit evaluations of its customers'
financial conditions and generally does not require collateral. For the year
ended December 31, 1998, sales to one customer amounted to approximately 50% of
total sales. For the year ended December 31, 1997, sales to one customer
amounted to approximately 20% of total sales.
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 LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements are recorded at cost 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.
F-7
<PAGE> 20
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. Total
accumulated amortization for these patents was $20,475 and $18,970 as of
December 31, 1998 and 1997, respectively.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). Under SFAS 109, deferred tax assets and liabilities are recorded based on
the tax effected difference between the tax bases of assets and liabilities and
their carrying amount for financial reporting purposes, referred to as
"temporary differences," using enacted marginal income tax rates.
ADVERTISING COSTS
Advertising costs, which are included in sales and marketing expense,
are expensed when the advertising first takes place. Advertising expense was
$1,657,199 and $1,136,293 in 1998 and 1997, respectively.
NET LOSS PER SHARE
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. Following is a reconciliation
of basic EPS and diluted EPS for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------- -------------------------------------------
Per Per
Share Share
Income Shares Amount Income Shares Amount
----------- ----------- ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Income available to
Common Shareholders $(4,629,097) 12,178,262 $ (.38) $(1,993,674) 11,682,687 $ (.17)
Effect of dilutive securities:
Stock options -- -- -- -- -- --
----------- ---------- -------- ----------- ---------- ---------
Diluted EPS:
Income available to
Common Shareholders $(4,629,097) 12,178,262 $ (.38) $(1,993,674) 11,682,687 $ (.17)
=========== ========== ======== =========== ========== =========
</TABLE>
At December 31, 1998 and 1997, the Company had options and warrants
outstanding covering 6,258,617 and 3,881,411, respectively, of the Company's
common stock not included in the above calculations since they would have been
antidilutive. In addition, at December 31,
F-8
<PAGE> 21
1998, the Company had 5,773,405 shares issuable pursuant to the Company's
convertible preferred stock and warrants outstanding covering 484,200 shares of
the Company's convertible preferred stock that were not included as they would
have been antidilutive.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities, if any, at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130). This statement establishes standards for reporting and
displaying comprehensive income and its components in a full set of
general-purpose financial statements. The objective of SFAS 130 is to report a
measure of all changes in equity of an enterprise that result from transactions
with owners. The Company adopted SFAS 130 at the beginning of 1998.
Comprehensive income did not differ from currently reported net income in the
periods presented.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131 "Disclosures About Segments of an Enterprise and Related
information" (SFAS 131). This statement revises existing standards for reporting
information about operating segments and requires the reporting of selected
information in interim financial reports. Based upon definitions contained
within SFAS 131, the Company has determined that it operates in one segment.
In June 1999, the FASB issued Statement of Financial Accounting
Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 137). SFAS 137 is an amendment to previously issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 137
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS 137 also requires that changes in the
derivative instrument's fair value be recognized currently in results of
operations unless specific hedge accounting criteria are met. SFAS 137 is
effective for fiscal years beginning after June 15, 2000. The Company expects
that adoption of SFAS 137 will not have a material impact on the Company's
financial condition or results of operations.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts to
conform to the current year presentation.
F-9
<PAGE> 22
2. INVENTORIES:
Inventories consisted of the following components at December 31:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Raw materials $ 61,517 $ 79,695
Work-in-process 1,105 6,054
Finished goods 8,233 87,214
-------- --------
$ 70,855 $172,963
======== ========
</TABLE>
3. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
<TABLE>
<CAPTION>
1998 1997
---------- -----------
<S> <C> <C>
Property $ 37,099 $ 37,225
Equipment 1,080,923 1,040,073
Leasehold improvements 117,151 117,151
----------- -----------
1,235,173 1,194,449
Less- Accumulated depreciation and amortization (524,484) (371,401)
----------- -----------
Net property, equipment and leasehold improvements $ 710,689 $ 823,048
=========== ===========
</TABLE>
Included in the above table are amounts relating to assets utilized
under capital leases which had a net book value of $685,384 and $711,048 at
December 31, 1998 and 1997, respectively.
4. FINANCING ARRANGEMENTS:
NOTE PAYABLE
During 1998, A-Fem entered into a note payable with an investor in the
amount of $450,000. The agreement is collateralized by a one-half security
interest in a licensing agreement between a major manufacturer and the Company
(see Note 7). The Agreement requires monthly interest payments, at a fixed
interest rate of 9.5%. The balance plus a $50,000 loan fee is payable one year
from the date of the agreement, April 13, 1999. The loan fee is being accrued
over the term of the Agreement. Subsequent to year-end, the investor verbally
agreed to extend the due date of the Agreement by one year. The total interest
expense on this note for 1998 was $68,000, including $33,333 for accrual of the
loan fee.
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.
F-10
<PAGE> 23
Future minimum lease payments under capital leases as of December 31
are as follows:
<TABLE>
<S> <C> <C>
1999 $203,072
2000 38,960
2001 4,778
--------
Total minimum lease payments 246,810
Less- Amount representing interest (at rates ranging from
6.24% to 22.20%) 21,864
--------
Present value of minimum lease payments 224,946
Less- Current portion 183,339
--------
$ 41,607
========
</TABLE>
5. STOCKHOLDERS' EQUITY:
PREFERRED STOCK
During the year ended December 31, 1998, the Company amended its
Articles of Incorporation in order to authorize 10,000,000 shares of preferred
stock having a par value of $.01 per share. The Company authorized the first
series for up to 7,200,000 of the total authorized shares, of which 5,773,405
shares have been issued. These shares, designated as Series A Convertible
Preferred Stock (the Preferred Stock), are nonredeemable, voting shares. The
Preferred Stock is convertible at any time into shares of common stock on a
one-for-one basis. The Preferred Stock has priority over other classes of
capital stock with respect to dividends and upon liquidation.
During 1998, the Company entered into an agreement with an investor to
exchange all of the investor's holdings of the Company's common stock into
shares of the Company's Preferred Stock on a one-for-one basis in addition to
additional Preferred Stock investment for cash. Additionally, this investor also
exchanged 50,000 warrants to purchase common stock for 50,000 warrants to
purchase Preferred Stock.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all
matters requiring shareholder vote. Holders of Common Stock are entitled to
receive dividends when and as declared by the Board of Directors out of any
funds lawfully available therefor, and, in the event of liquidation or
distribution of assets, are entitled to participate ratably in the distribution
of such assets remaining after payment of liabilities, in each case subject to
any preferential rights granted to any series of Preferred Stock that may then
be outstanding.
COMMON STOCK OPTIONS
On April 21, 1998, the Company granted nonstatutory stock options to
the new Chief Executive Officer of the Company exercisable for 1,700,000 shares
of the Company's common
F-11
<PAGE> 24
stock at an exercise price of $2.06 per share. At December 31, 1998, 462,500 of
the granted options were exercisable with the remaining options vesting over the
next ten years. The options expire ten years from the date of grant. On July 7,
1998, the Company granted nonstatutory stock options to the President of the
Company exercisable for 150,000 shares of the Company's common stock at an
exercise price of $2.88 per share. At December 31, 1998, none of these options
were exercisable. The options vest over the next ten years and expire ten years
from the date of grant. The vesting of the remaining unexercisable options for
each employee may be accelerated upon meeting certain performance criteria.
In addition, the Company has an 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.
Activity under the Incentive Plan as well as other issuances is
summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES SUBJECT EXERCISE PRICE
TO OPTIONS PER SHARE
-------------- ----------------
<S> <C> <C>
Balance at December 31, 1996 2,243,030 $ 1.77
Options granted 760,076 3.10
Options exercised (1,174,280) 0.12
Options canceled (433,831) 3.36
---------- --------
Balance at December 31, 1997 1,394,995 3.16
Options granted 2,528,538 2.29
Options canceled (184,922) .73
---------- --------
Balance at December 31, 1998 3,738,611 $ 2.66
========== ========
</TABLE>
Of the outstanding options at December 31, 1998 and 1997, 1,645,861 and
1,182,245, respectively, were qualified stock options and 242,750 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 November 2008. The number of shares available for grant
under the Incentive Plan was 163,609 at December 31, 1998.
F-12
<PAGE> 25
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------------------- -----------------------------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE NUMBER OF SHARES AVERAGE
RANGE OF EXERCISE NUMBER OUTSTANDING AT CONTRACTUAL LIFE - EXERCISE EXERCISABLE AT EXERCISE
PRICES DECEMBER 31, 1998 YEARS PRICE DECEMBER 31, 1998 PRICE
- ----------------- --------------------- ------------------ ------- ----------------- --------
<S> <C> <C> <C> <C> <C>
$1.75-2.88 2,924,516 7.22 $ 2.26 93,807 $ 2.01
3.00-4.69 664,095 8.49 3.87 475,448 3.33
5.13 150,000 5.84 5.13 150,000 5.13
---------- --------- ------- ------- --------- ------
$1.75-5.13 3,738,611 7.78 $ 2.66 719,255 $ 2.78
========== ========= ======= ======= ========= ======
</TABLE>
At December 31, 1997, 730,769 options were exercisable at a weighted
average exercise price of $3.16 per share.
COMMON STOCK WARRANTS
As of December 31, 1998, warrants for a total of 2,520,006 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>
WEIGHTED AVERAGE
SHARES SUBJECT TO EXERCISE PRICE
WARRANTS PER SHARE
------------------ ----------------
<S> <C> <C>
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
Warrants granted 83,590 1.92
Warrants canceled (50,000) 4.25
--------- -------
Balance at December 31, 1998 2,520,006 $ 2.34
========= =======
Number exercisable at December 31, 1998 2,520,006 $ 2.34
</TABLE>
During the year ended December 31, 1998, the Company granted warrants
for 83,590 shares of the Company's Common Stock to various investors in the
Company. The warrants are exercisable at a price of $1.92 per share and expire
five years from the date of grant in 2003.
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.
F-13
<PAGE> 26
PREFERRED STOCK WARRANTS
During 1998, the Company awarded warrants for a total of 484,200 shares
of the Company's Preferred Stock. The warrants may be exercised for shares of
the Company's Preferred Stock. As of December 31, 1998, 484,200 shares were
granted and outstanding with a weighted average exercise price of $.96 per
share. All warrants outstanding at December 31, 1998 are exercisable.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
During 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (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 1998 and 1997 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,
----------------------
1998 1997
------ -------
<S> <C> <C>
Average risk-free interest rate 6.00% 6.00%
Expected dividend yield - -
Expected lives 6 years 6 years
Expected volatility 80.1% 83.3%
</TABLE>
Using the Black-Scholes methodology, the total value of options granted
during 1998 and 1997 was $5,169,875 and $1,399,835, 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 1998 and
1997 was $2.04 and $2.35 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>
1998 1997
--------------------------------- ---------------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net loss $(4,629,097) $(5,843,151) $(1,993,674) $(2,660,895)
Net loss per share (.38) (.48) (.17) (.23)
</TABLE>
F-14
<PAGE> 27
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, 1998, the Company had federal net operating loss
(NOL) carryforwards of approximately $19 million. If not applied against future
taxable income, the federal NOL carryforwards will expire in the years 2001
through 2018. Changes in the Company's ownership may cause an annual limitation
on the amount of carryforwards that can be utilized. As of December 31, 1998 and
1997, the Company had net deferred tax assets of approximately $7.2 million and
$5.5 million, respectively, primarily resulting from NOL carryforwards. In
accordance with SFAS 109, at December 31, 1998 and 1997 a valuation allowance
was recorded to reduce net deferred tax assets to zero.
The significant components of the Company's deferred tax assets and
liabilities as of December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Components of deferred tax assets-
Accrued salaries and benefits $ 41,854 $ 9,138
Accrued expenses 28,503 8,006
Net operating loss and other tax credit
carryforwards 7,249,051 5,518,487
----------- -----------
Total deferred tax assets 7,319,408 5,535,631
Components of deferred tax liability:
Fixed assets (57,282) (36,328)
----------- -----------
Net asset before valuation allowance 7,262,126 5,499,303
Valuation allowance (7,262,126) (5,499,303)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
</TABLE>
The reconciliation between the effective tax rate and the statutory
federal tax rate on net loss as a percentage is as follows for the years ending
December 31:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Statutory federal income tax rate 34.0 34.0
State taxes, net of federal tax benefit 4.1 4.4
Effect of change in valuation allowance (38.1) (38.4)
------ ------
-- --
====== ======
</TABLE>
7. COMMITMENTS:
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
F-15
<PAGE> 28
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.
OPERATING LEASES
The Company has operating leases for its corporate office, warehouse,
product development and manufacturing facilities, and some office equipment. The
following is a schedule by years of the Company's future minimum rental payments
required under these operating leases that have lease terms in excess of one
year as of December 31, 1998:
<TABLE>
<C> <C>
1999 $138,656
2000 98,573
2001 19,981
--------
Total minimum payments required $257,210
========
</TABLE>
Rent expense for the Company's operating leases was $147,661 and
$124,821 for 1998 and 1997, respectively.
8. SUBSEQUENT EVENT:
FINANCING COMMITMENT
During the first quarter of 1999, the Company issued 156,250 shares of
the Company's Series A Convertible Preferred Stock and warrants to purchase an
additional 31,250 shares of the Company's Series A Convertible Preferred Stock
in exchange for $300,000 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-16
<PAGE> 29
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/ Steven T. Frankel
--------------------------------------------
Steven T. Frankel
Chief Executive Officer and President
Date: September 22, 1999
<PAGE> 30
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <C>
3.1(1) Articles of Incorporation, as amended
3.2 Bylaws, as amended
4.1(1) Form of Stock Purchase Warrant
4.2(1) Form of Series A Preferred Stock Certificate
*10.1(2) Employment Agreement between A-Fem Medical Corporation and Steven T. Frankel, dated effective
April 25, 1998
10.2(3) Business Park Lease between A-Fem Medical Corporation, Petula Associates, Ltd. and Koll Portland
Associates, dated March 1, 1996
10.3(9) Scholls Business Center First Amendment to Lease between A-Fem Medical Corporation, Petula
Associates, Ltd. and Equity FC, Ltd.
10.4(4) Form of Registration Rights Agreement used for Mr. Waller, Esler, Stephens & Buckley and Lane,
Powell, Spears and Lubersky
10.5(5) Form of Registration Rights Agreement
10.6(5) ATHENA Medical Corporation's 1994 Incentive and Non-Qualified Stock Option Plan, dated as of
June 7, 1994
*10.7(5) Form of Incentive Stock Option Agreement
*10.8(5) Form of Non-Statutory Stock Option Agreement
10.9(5) Form of Purchase Warrant Certificate
*10.10(5) Employment Agreement between A-Fem Medical Corporation and Sarah P. Van Dyck, dated May 28, 1996
*10.11(6) Employment Agreement between A-Fem Medical Corporation and J. Peter Burke, dated as of April 28,
1997
10.12(7) Agreement dated effective as of April 28, 1997, between The Proctor & Gamble Company and A-Fem
Medical Corporation
</TABLE>
<PAGE> 31
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- ------------
<S> <C>
*10.13(6) Employment Agreement between A-Fem Medical Corporation and James R. Wilson, dated as of May 1, 1997
10.14(8) Form of Capital Lease between A-Fem Medical Corporation and First Portland Leasing Corp.
27.1(10) Financial Data Schedule
</TABLE>
- ----------------------------------------------
(1) Incorporated by reference to the exhibits to A-Fem's quarterly report on
Form 10-QSB for the quarter ended September 30, 1998.
(2) Incorporated by reference to the exhibits to A-Fem's quarterly report on
Form 10-QSB for the quarter ended June 30, 1998.
(3) Incorporated by reference to the exhibits to A-Fem's Registration
Statement on Form S-2 (file no. 333-2053), filed with the SEC on March
29, 1996.
(4) Incorporated by reference to the exhibits to A-Fem's Registration
Statement on Form S-2 (file no. 33-88230), filed with the SEC on January
5, 1995.
(5) Incorporated by reference to the exhibits to A-Fem's Annual Report on
Form 10-KSB for the year ended December 31, 1996.
(6) Incorporated by reference to the exhibits to A-Fem's quarterly report on
Form 10-QSB for the quarter ended June 30, 1997.
(7) Incorporated by reference to exhibit number 10.1 to A-Fem's Current
Report on Form 8-K (file no. 0-17119) filed with the SEC on May 16,
1997.
(8) Incorporated by reference to the exhibits to A-Fem's Annual Report on
Form 10-KSB for the year ended December 31, 1997.
(9) Incorporated by reference to the exhibits to A-Fem's Registration
Statement on Form S-2 (file no. 333-2053), filed with the SEC on January
21, 1999.
(10) Incorporated by reference to the exhibits to A-Fem's annual report on
Form 10-KSB for the year ended December 31, 1998.
* Indicates management contract or compensation plan.
- --------
<PAGE> 1
EXHIBIT 3.2
BYLAWS
A-FEM MEDICAL CORPORATION
(fka Athena Medical Corporation, fka Xtramedics, Inc.)
ARTICLE I
OFFICES
Section 1. The registered office of the corporation shall be in the
City of Reno, County of Washoe, State of Nevada. The principal office for the
transaction of the business of the corporation shall be in the City of Portland,
County of Washington, State of Oregon.
Section 2. The corporation may also have offices at such other places
both within and without the State of Nevada as the Board of Directors may from
time to time determine or the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Election of directors shall take place at the annual meeting
of stockholders.
Section 2. Annual meetings of stockholders shall be held on the first
Tuesday of February if not a legal holiday; and if a legal holiday, then on the
next secular day following, at 11:00 a.m. at the principal office of the
corporation; or at such other date, time and place as shall be designated from
time to time by the Board of Directors and stated in the notice of the meeting,
at which they shall elect a Board of Directors, and transact such other business
as may properly be brought before the meeting.
Section 3. Written notice of the annual meeting, stating the place,
date and hour of the meeting and the purpose for which the meeting is called,
shall be given to each stockholder entitled to vote at such meeting not less
than ten (10) nor more than sixty (60) days before the date of the meeting.
Section 4. The officer who has charge of the stock ledger of the
corporation shall prepare and make, at least ten days before every meeting of
the stockholders, a
<PAGE> 2
complete list of the stockholders entitled to vote at the meeting, arranged in
<PAGE> 3
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any person who has been a stockholder of record for at least
six months prior to the demand for such inspection or who holds at least five
percent of all outstanding shares of the corporation, for any purpose germane to
the meeting, during ordinary business hours, for a period of at least ten days
prior to the meeting, either at a place within the city where the meeting is to
be held, which place shall be specified in the notice of the meeting, or, if not
so specified, at the place where the meeting is to be held. The list shall also
be produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
Section 5. Special meetings of the stockholders, for any purpose or
purposes, unless otherwise prescribed by statute or by the certificate of
incorporation, may be called by the chairman and shall be promptly called by the
chairman, president or secretary at the request in writing of a majority of the
Board of Directors or at the request in writing of stockholders owning at least
one-fifth of the shares of the corporation issued and outstanding and entitled
to vote. Such request shall state the purpose or purposes of the proposed
meeting.
Section 6. Written notice of a special meeting, stating the place, date
and hour of the meeting and the purpose or purposes for which the meeting is
called, shall be given not less than ten nor more than sixty days before the
date of the meeting, to each stockholder entitled to vote at such meeting.
Section 7. Business transacted at any special meeting of stockholders
shall be limited to the purposes stated in the notice.
Section 8. Holders of one-third of the shares issued and outstanding
and entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute or by the certificate of
incorporation. If, however, such quorum shall not be present or represented at
any meeting of the stockholders, the stockholders entitled to vote thereat,
present in person or represented by proxy, shall have power to adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be presented or represented. At such adjourned
meeting at which a quorum shall be present or represented any business may be
transacted which might have been transacted at the meeting as originally
notified. If the adjournment is for more than thirty days, or if after the
adjournment a new record date is fixed for the adjournment meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
<PAGE> 4
Section 9. When a quorum is present at any meeting, the vote of the
holders of a majority of the shares having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which, by express provision of any statute or of
the certificate of incorporation or these bylaws, a different vote is required,
in which case such express provision shall govern and control the decision of
such question.
Section 10. Each stockholder shall at every meeting of the stockholders
be entitled to one vote in person or by proxy for each share of the corporation
having voting power held by such stockholder, but no proxy shall be valid after
the expiration of six months from the date of its execution, unless coupled with
an interest, or unless the person executing it specifies therein that the proxy
is irrevocable and the length of time for which it is to continue in force,
which in no case shall exceed seven years from the date of its execution.
Stockholders may not cumulate votes for the election of directors.
Section 11. Any action, except the election of directors, required to
be taken at any annual or special meeting of stockholders of the corporation, or
any action which may be taken at any annual or special meeting of such
stockholders, may be taken without a meeting, without prior notice and without a
vote, if a consent in writing, setting forth the action so taken, shall be
signed by the holders of outstanding shares having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon where present and voted,
except as may be otherwise specifically provided by statute or by the
certificate of incorporation. Prompt notice of the taking of the corporate
action without a meeting by less than unanimous written consent shall be given
to those stockholders who have not consented in writing.
ARTICLE III
DIRECTORS
Section 1. The number of directors who shall constitute the Board shall
range from a minimum of five members to a maximum of nine members, the specific
number to be set by resolution of the Board, provided that the Board may consist
of fewer than five directors until vacancies are filled. The number of directors
may be changed from time to time by amendment to these Bylaws, but no decrease
in the number of directors shall have the effect of shortening the term of any
incumbent director. The Board shall be divided into two classes, hereby
designated Class 1
<PAGE> 5
and 2, said classes to be as equal in number as may be possible. At the 1997
annual meeting of stockholders, the directors of Class 1 shall be elected for a
term expiring at the 1998 annual meeting of stockholders and the directors of
Class 2 shall be elected for a term expiring at the 1999 annual meeting of
stockholders. Commencing in 1998, and at each annual meeting of stockholders
thereafter, the successors to the class of directors whose terms expire at that
meeting shall be elected to hold office for a term of two years, and each
director shall serve for the term he or she was elected or until his or her
successor shall have been elected and qualified or until his or her death,
resignation, or removal from office. Directors need not be stockholders of the
corporation or residents of the State of Nevada.
Section 2. Any vacancy occurring on the Board may be filled by the
affirmative vote of a majority of the remaining directors then in office though
less than a quorum of the Board. A director elected to fill a vacancy shall be
elected for the unexpired term of his or her predecessor in office. Any
directorship to be filled by reason of an increase in the number of directors
may be filled by the Board for a term of office continuing only until the next
election of the class for which such director shall have been chosen, and until
his or her successor shall be elected and qualified.
Section 3. Any director, whether elected by the stockholders or
appointed by the directors, may be removed from office by the vote or written
consent of stockholders representing two-thirds of the issued and outstanding
stock entitled to voting power.
Section 4. The business of the corporation shall be managed by its
Board of Directors which may exercise all such powers of the corporation and do
all such lawful acts and things as are not by statute or by the certificate of
incorporation or by these bylaws directed or required to be exercised or done by
the stockholders.
MEETINGS OF THE BOARD OF DIRECTORS
Section 5. The Board of Directors of the corporation may hold meetings,
both regular and special, either within or without the State of Nevada.
Section 6. The first meeting of each newly elected Board of Directors
shall be held immediately after the annual meeting of stockholders and no notice
of such meeting, other than this bylaw, shall be necessary to the newly elected
directors in
<PAGE> 6
order legally to constitute the meeting, provided a quorum shall be present. In
the event such meeting is not so held, the meeting may be held at such time and
place as shall be specified in a notice given as hereinafter provided for
special meetings of the Board of Directors, or as shall be specified in a
written waiver signed by all of the directors.
Section 7. Regular meetings of the Board of Directors may be held
without notice at such time and at such place as shall from time to time be
determined by the Board.
Section 8. Special meetings of the Board may be called by the chairman
on five days' notice to each director, either personally or by mail, facsimile
transmission or telegram; and special meetings shall be promptly called by the
chairman, the president or the secretary in like manner and on like notice on
the written request of two directors or stockholders owning at least one-fifth
of the shares of the corporation issued and outstanding and entitled to vote.
Section 9. At all meetings of the Board, a majority of directors then
in office shall constitute a quorum for the transaction of business and the act
of a majority of the directors, except as may be otherwise specifically provided
by statute or by the certificate of incorporation. If a quorum shall not be
present at any meeting of the Board of Directors, the directors present thereat
may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
Section 10. Unless otherwise restricted by the certificate of
incorporation or these bylaws, any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee thereof may be taken
without a meeting, if all members of the Board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board or committee.
Section 11. Unless otherwise restricted by statute, the certificate of
incorporation or these bylaws, members of the Board of Directors or any
committee designated by the Board of Directors, may participate in a meeting of
the Board of Directors, or any committee, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
<PAGE> 7
COMMITTEE OF DIRECTORS
Section 12. Each committee shall fix its own rules of procedure and
shall keep regular minutes of its meetings and report the same to the Board of
Directors when required.
COMPENSATION OF DIRECTORS
Section 13. The Board of Directors shall have the authority to fix the
compensation of directors. The directors may be paid their expenses, if any, of
attendance at each meeting of the Board of Directors and may be paid a fixed sum
for attendance at each meeting of the Board of Directors or a stated salary as
director. No such payment shall preclude any director from serving the
corporation in any other capacity and receiving compensation thereof. Members of
special or standing committees may be allowed like compensation for attending
committee meetings.
ARTICLE IV
NOTICES
Section 1. Whenever, under the provisions of a statute or of the
certificate of incorporation or these bylaws, notice is required to be given to
any director or stockholder, it shall not be construed to mean personal notice,
but such notice may be given in writing, by mail, addressed to such director or
stockholder, at his or her address as it appears on the records of the
corporation, with postage thereon prepaid, and such notice shall be deemed to be
given at the time when the same shall be deposited in the United States mail.
Notice to directors may also be given by facsimile transmission or telegram.
Section 2. Whenever any notice is required to be given under the
provisions of a statute or of the certificate of incorporation or these bylaws,
a waiver thereof in writing, signed by the person or persons entitled to the
notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE V
OFFICERS
Section 1. The officers of the corporation shall be chosen by the Board
of Directors and shall be a chairman, a vice chairman, a president, a secretary
and a treasurer. The Board of Directors may also choose one or more vice
presidents, and one or more assistant secretaries and assistant treasurers. Any
number of offices may be held by the same person, unless the articles of
incorporation or these bylaws otherwise provide.
<PAGE> 8
Section 2. The Board of Directors at its first meeting after each
annual meeting of stockholders shall choose a chairman, a vice chairman, a
president, a secretary and a treasurer.
Section 3. The Board of Directors may appoint such other officers and
agents as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the Board.
Section 4. The salaries of all officers and agents of the corporation
shall be fixed by the Board of Directors.
Section 5. The officers of the corporation shall hold office until
their successors are chosen and qualify. Any officer elected or appointed by the
Board of Directors may be removed at any time by the affirmative vote of a
majority of the Board of Directors. Any vacancy occurring in any office of the
corporation shall be filled by the Board of Directors.
THE CHAIRMAN, THE VICE CHAIRMAN, THE CHIEF
EXECUTIVE OFFICER, THE PRESIDENT AND THE VICE
PRESIDENT
Section 6. The chairman shall preside at all meetings of the
stockholders and the Board of Directors and shall see that all orders and
resolutions of the Board of Directors are carried into effect. In the absence of
the vice chairman, or in the event of his inability to act, the chairman shall
perform the duties of the vice chairman.
The vice chairman shall review, advise and consult with the officers of
the corporation with respect to the day-to-day business operations of the
corporation. In the absence of the chairman, or the president, or in the event
of the inability of either of the same to act, the vice chairman shall perform
the duties of either or both of the same.
Section 7. The Chief Executive Officer shall be the chief executive
officer of the corporation.
Section 8. The president shall be the chief operating officer of the
corporation and shall be responsible for the day-to-day business operations of
the corporation. If the chairman and the vice chairman are absent, or if the
chairman requests him to do so in writing, the president shall preside at
meetings of the stockholders and the Board of Directors.
<PAGE> 9
Section 9. Any of the chairman, the vice chairman and the president
shall be authorized to execute bonds, mortgages and other contracts requiring a
seal, under the seal of the corporation, except where required or permitted by
law to be otherwise signed and executed and except where the signing and
execution thereof shall be expressly delegated by the Board of Directors to some
other officer or agent of the corporation.
THE VICE PRESIDENT
Section 10. In the absence of the president or in the event of his
inability or refusal to act, the vice president (or in the event there be more
than one vice president, the vice presidents in the order designated, or in the
absence of any designation, then in the order of their election) shall perform
the duties of the president, and when so acting, shall have all the powers of
and be subject to all the restrictions upon the president. The vice presidents
shall perform such other duties and have such other powers as the Board of
Directors may from time to time prescribe.
THE SECRETARY AND ASSISTANT SECRETARIES
Section 11. The secretary shall attend all meetings of the Board of
Directors and all meetings of the stockholders and record all the proceedings of
the meetings of the corporation and the Board of Directors in a book to be kept
for that purpose, and shall perform like duties for the standing committees when
required. He or she shall give, or cause to be given, notice of all meetings of
stockholders and special meetings of the Board of Directors, and shall perform
such other duties as may be prescribed by the Board of Directors or president,
under whose supervision he or she shall be. The secretary shall have custody of
the corporate seal of the corporation and the secretary, or an assistant
secretary, shall have authority to affix the same to any instrument requiring it
and when so affixed, it may be attested by the secretary's signature or by the
signature of such assistant secretary. The Board of Directors may give general
authority to any other officer to affix the seal of the corporation and to
attest the affixing by his or her signature.
Section 12. The assistant secretary, or if there be more than one, the
assistant secretaries in the order determined by the Board of Directors (or if
there be no such determination, then in the order of their election), shall, in
the absence of the secretary or in the event of his or her inability or refusal
to act, perform the duties and exercise the powers of the secretary and shall
perform such other duties and have such other powers as the Board of Directors
may from time to time prescribe.
<PAGE> 10
THE TREASURER AND ASSISTANT TREASURERS
Section 13. The treasurer shall have the custody of the corporation
funds and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all moneys
and other moneys and other valuable effects in the name and to the credit of the
corporation in such depositories as may be designated by the Board of Directors.
Section 14. The treasurer shall disburse the funds of the corporation
as may be ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the president and the Board of Directors, at
its regular meetings, or when the Board of Directors so requires, an account of
all of his or her transactions as treasurer of the financial condition of the
corporation.
Section 15. If required by the Board of Directors, the treasurer shall
give the corporation a bond (which shall be renewed every six years) in such sum
and with such surety or sureties as shall be satisfactory to the Board of
Directors for the faithful performance of the duties of his or her office and
for the restoration to the corporation, in case of his or her death,
resignation, retirement or removal from office, of all books, papers, vouchers,
money and other property of whatever kind in the treasurer's possession or under
his or her control belonging to the corporation.
Section 16. The assistant treasurer, or if there shall be more than
one, the assistant treasurers in the order determined by the Board of Directors
(or if there be no such determination, then in the order of their election),
shall in the absence of the treasurer or in the event of his or her inability or
refusal to act, perform the duties and exercise the powers of the treasurer and
shall perform such other duties and have such other powers as the Board of
Directors may from time to time prescribe.
ARTICLE VI
CERTIFICATES OF SHARES
Section 1. Every holder of shares in the corporation shall be entitled
to have a certificate signed by, or in the name of the corporation by, any two
of the following: the chairman, a vice chairman, the president, a vice
president, the chief executive officer, the treasurer, an assistant treasurer,
the secretary or an assistant secretary of the corporation, certifying that the
corporation is organized under the laws of the State of Nevada, the name of the
person to whom the certificate is issued, the number and class of shares which
the certificate represents, and the par value of the shares so represented.
Section 2. If the corporation shall be authorized to issue more than
one class of shares or more than one series of any class, the powers,
designations, preferences and
<PAGE> 11
relative, participating, optional or other special rights of each class of
shares or series thereof and the qualifications, limitations or restrictions of
such preferences and/or rights shall be set forth in full or summarized on the
face or back of the certificate which the corporation shall issue to represent
such class or series of shares, provided that in lieu of the foregoing
requirements, there may be set forth on the face or back of the certificate
which the corporation shall issue to represent such class or series of shares a
statement that the corporation will furnish without charge to each stockholder
who so requests the powers, designations, preferences and relative,
participating, optional or other special rights of each class of shares or
series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights.
Section 3. Where a certificate is countersigned: (a) by a transfer
agent other than the corporation or its employee; or (b) by a registrar other
than the corporation or its employee, any other signature on the certificate may
be facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the corporation with the same effect as if he or she
were such officer, transfer agent or registrar at the date of issue.
LOST CERTIFICATES
Section 4. The Board of Directors may direct a new certificate or
certificates to be issued in place of any certificate or certificates
theretofore issued by the corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of shares to be lost, stolen or destroyed. When authorizing such
issue of a new certificate or certificates, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or certificates, or his or
her legal representative, to advertise the same in such manner as it shall
require and/or to give the corporation a bond in such sum as it may direct as
indemnity against any claim that may be made against the corporation with
respect to the certificate alleged to have been lost, stolen or destroyed.
TRANSFERS OF SHARES
Section 5. Upon surrender to the corporation or the transfer agent of
the corporation of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, it shall be
the duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
<PAGE> 12
FIXING RECORD DATE
Section 6. In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of shares or for the purpose of
any other lawful action, the Board of Directors may fix in advance a record
date, which shall not be more than sixty nor less than ten days before the date
of such meeting, nor more than sixty days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the
adjournment meeting.
REGISTERED STOCKHOLDERS
Section 7. The corporation shall be entitled to recognize the exclusive
right of a person registered on its books as the owner of shares to receive
dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of the
State of Nevada.
ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
Section 1. Dividends upon the shares of the corporation, subject to the
provisions of the certificate of incorporation, if any, may be declared by the
Board of Directors at any regular or special meeting, pursuant to the laws of
the State of Nevada. Dividends may be paid in cash, in property or in shares of
the corporation, subject to the provisions of the certificate of incorporation.
Section 2. Before payment of any dividend, there may be set aside out
of any funds of the corporation available for dividends such sum as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purpose as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
<PAGE> 13
ANNUAL STATEMENTS
Section 3. The Board of Directors shall present at each annual meeting,
and at any special meeting of the stockholders when called for by vote of the
stockholders, a full and clear statement of the business and condition of the
corporation.
CHECKS
Section 4. All checks or demands for money and notes of the corporation
shall be signed by such officers or such other person or persons as the Board of
Directors from time to time designate.
FISCAL YEAR
Section 5. The fiscal year of the corporation shall end on December 31,
unless otherwise determined by the Board of Directors.
SEAL
Section 6. The corporation may have a corporate seal, which shall have
inscribed thereon the name of the corporation, the year of its organization and
the words "Incorporated, Nevada." The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or reproduced or otherwise.
NEVADA CONTROL SHARE ACQUISITION ACT
Section 7. The provisions of the Nevada Control Share Acquisition Act,
Nevada Revised Statutes ("NRS") 78.378-78.3793, inclusive, shall not apply to
any acquisition of a controlling interest in the corporation, with the term
"acquisition" defined as provided in NRS 78.3783 and the term "controlling
interest" defined as provided in NRS 78.3785.
ARTICLE VIII
INDEMNIFICATION OF DIRECTORS,
OFFICERS AND EMPLOYEES
Section 1. The corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, except an action by or in the right of the corporation, by reason
of the fact that he or she is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses, including attorneys' fees,
judgments, fines and amounts paid in settlement actually and
<PAGE> 14
reasonably incurred by him or her in connection with the action, suit or
proceeding if he or she acted in good faith and in a manner which he or she
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful. The termination of
any action, suit or proceeding by judgment, order, settlement, conviction, or
upon a plea of nolo contendere or its equivalent, does not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
or she reasonably believed to be in or not opposed to the best interests of the
corporation, and that, with respect to any criminal action or proceeding, he or
she had reasonable cause to believe that his or her conduct was unlawful.
Section 2. The corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he or she is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses, including amounts paid in settlement and attorneys' fees actually and
reasonably incurred by him or her in connection with the defense or settlement
of such action or suit if he or she acted in good faith and in a manner which he
or she reasonably believed to be in or not opposed to the best interests of the
corporation. Indemnification may not be made for any claim, issue or matter as
to which such person has been adjudged by a court of competent jurisdiction,
after exhaustion of all appeals therefrom, to be liable to the corporation or
for amount paid in settlement to the corporation, unless and only to the extent
that the court in which the action or suit was brought or other court of
competent jurisdiction determines upon application that, in view of all the
circumstances of the case, the person is fairly and reasonably entitled to
indemnity for such expenses as the court deems proper.
Section 3. To the extent that a director, officer, employee or agent of
the corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in Sections 1 and 2, or in defense of any
claim, issue or matter therein, he or she must be indemnified by the corporation
against expenses, including attorneys' fees, actually and reasonably incurred by
him or her in connection with the defense.
Section 4. Any indemnification under Sections 1 and 2, unless ordered
by a court or advanced pursuant to Section 5, must be made by the corporation
only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances. The determination must be made:
<PAGE> 15
(a) By the stockholders;
(b) By the Board of Directors by majority vote of a quorum
consisting of directors who were not parties to the action,
suit or proceeding;
(c) If a majority vote of a quorum consisting of directors who
were not parties to the action, suit or proceeding so orders,
by independent legal counsel in a written opinion; or
(d) If a quorum consisting of directors who were not parties to
the action, suit or proceeding cannot be obtained, by
independent legal counsel in a written opinion.
Section 5. Expenses incurred by a director or an officer in defending a
civil or criminal action, suit or proceeding must be paid by the corporation as
they are incurred and in advance of the final disposition of the action, suit or
proceeding upon receipt of an undertaking by or on behalf of the director or
officer to repay the amount if it is ultimately determined by a court of
competent jurisdiction that he or she is not entitled to be indemnified by the
corporation. The provisions of this Section do not affect any rights to
advancement of expenses to which corporate personnel other than directors or
officers may be entitled under any contract or otherwise by law.
Section 6. The indemnification and advancement of expenses authorized
in or ordered by a court pursuant to this Article:
(a) Does not exclude any other rights to which a person seeking
indemnification or advancement of expenses may be entitled
under the certificate of incorporation or any bylaw,
agreement, vote of stockholders or disinterested directors or
otherwise, for either an action in his or her official
capacity or an action in another capacity while holding his or
her office, except that indemnification, unless ordered by a
court pursuant to Section 2 or for the advancement of expenses
made pursuant to Section 5, may not be made to or on behalf of
any director or officer if a final adjudication establishes
that his or her acts or omissions involved intentional
misconduct, fraud or a knowing violation of the law and was
material to the cause of action; and
(b) Continues for a person who has ceased to be a director,
officer, employee or agent and inures to the benefit of the
heirs, executor and administrators of such a person.
<PAGE> 16
ARTICLE IX
AMENDMENTS
Section 1. These bylaws may be altered, amended or repealed or new
bylaws may be adopted by the stockholders or by the Board of Directors at any
regular meeting of the Board of Directors or of the stockholders or at any
special meeting of the Board of Directors or of the stockholders, if notice of
such alteration, amendment, repeal or adoption or new bylaws be contained in the
notice of such meeting of the stockholders or of the Board of Directors. These
bylaws may also be altered, amended or repealed or new bylaws may be adopted by
the stockholders or by the
Board of Directors by written consent without a meeting in compliance
with the requirements of NRS 78.320(2) and 78.320(3) in the case of a
stockholder consent and in compliance with the requirements of NRS 78.315(2) in
the case of a consent of the Board of Directors.
* * * * * * * * * *
Adopted: 12/30/86
Amended: 10/9/87
9/29/88
9/29/89
2/16/94
3/24/94
6/13/94
6/24/94
6/13/97
11/4/98
