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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------------------------
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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
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A-FEM MEDICAL CORPORATION
(Name of small business issuer in its charter)
NEVADA 33-0202574
(State or other jurisdiction of (I.R.S. Employer 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 March 15, 1999 the aggregate market value of $.01 par value Common
Stock held by non-affiliates of the issuer was $18,943,750.
As of March 15, 1999, the issuer had outstanding 9,471,875 shares of its
$.01 par value Common Stock.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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PART I
ITEM 1: DESCRIPTION OF BUSINESS
A-Fem Medical Corporation is a medical technology company with multiple
product platforms targeting unmet 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(TM) 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 menstrual cycle. The miniform will collect blood, along
with numerous cells, vaginal mucous and discharge flushed out by the menstrual
flow. The PadKit entered Pilot Study clinical trials in the 4th quarter of 1998.
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. The Rapid-Sense technology
enables visual quantification of a desired
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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. The Rapid-Sense
technology is in the development stage and has not yet entered the marketplace.
MARKETING AND DISTRIBUTION
The inSync miniform is marketed currently in the Western half of the
United States, excluding California, in retail grocery chains, drug stores and
mass merchandisers. A-Fem's marketing plan for the product includes television,
radio and print advertising, sampling and trade promotion. 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.
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 test
for cervical cancer. Although significant improvements have been made in the
area of Pap test sample reading and sample preparation, no improved sample
collection method has been developed. 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.
In order to focus on product development and increase the speed to
market for its 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 Procter & Gamble Company, Johnson &
Johnson, Kimberly-Clark and Playtex. The inSync miniform represents an entirely
new segment of the feminine protection market and provides benefits not offered
by competitive products. Features of the inSync miniform 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 test, the standard
diagnostic procedure for cervical cancer detection. While improvements have been
made in the area of Pap 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.
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A-Fem's proprietary Rapid-Sense technology has not yet been introduced
to the market. A-Fem believes that its Rapid-Sense technology will allow A-Fem
to address market needs that prior technology could not meet, provide
significant end-user cost savings over older technology, move various laboratory
tests to the point-of-use markets to increase early intervention and improve
women's healthcare in general. Its competition is likely to be primarily with
larger diagnostics companies that have strategic relationships with 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 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. A-Fem currently
purchases certain raw materials from a single supplier. A-Fem is in the process
of qualifying an additional vendor to supply this material.
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.
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The issued United States patents currently owned, assigned or licensed
to A-Fem and the pending patent applications are:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
US PATENT OR SERIAL DATE OF ISSUE OR
NUMBER FILING TITLE
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
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
- -----------------------------------------------------------------------------------------------
</TABLE>
- -----------
(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 rights to use
A-Fem's miniform technology, including United States Patent Nos. 4,995,150 and
5,575,047. See "Factors Affecting Forward-Looking Statements--Competition."
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 many of A-Fem's products are subject to
rigorous FDA regulation. Before a medical product may be marketed for use by
humans, months of laboratory and clinical trials must be performed to validate
the safety and effectiveness of the product. 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
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of scientific PhDs and MDs, to contribute to the scientific and medical validity
of its clinical trials.
To date this team has successfully obtained approval from the United
States Food and Drug Administration (FDA) to market the inSync miniform under a
510(k) application.
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.
ITEM 2. DESCRIPTION OF PROPERTY
A-Fem's corporate office and product development facilities are located
in 7,100 square feet of leased space in Portland, Oregon. A-Fem also leases
7,300 square feet of manufacturing and warehouse space in proximity to its
corporate office.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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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, acting as agent for individual investors, in exchange for
aggregate cash consideration of $300,000. This entity 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.
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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 stocks
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 2000. 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.
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 resulted primarily
from an increase in selling and research and development expenses. A-Fem's
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.
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.
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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 related to the
Rapid-Sense diagnostic technology and costs 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 dollars 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 into 2000,
because the costs of marketing and research and development are expected to
continue to exceed income 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 additional financing by
August 31, 1999. 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
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noncompliance. All of the computer hardware and software currently used by A-Fem
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 intends to communicate with the remainder of its key vendors
and customers during the next few months. A-Fem is not able at this time to
predict the impact that a material failure by one or more of its key vendors or
customers to comply with Year 2000 requirements in a timely fashion may have on
A-Fem's operations.
FACTORS AFFECTING FORWARD-LOOKING STATEMENTS
The statements contained in this report that are not statements of
historical fact may include forward-looking statements (as defined in Section
27A of the Securities Act of 1933, as amended) that involve a number of risks
and uncertainties. Moreover, from time to time A-Fem may issue other
forward-looking statements. The following factors are among those that could
cause actual results to differ materially from the forward-looking statements
and should be considered in evaluating any forward-looking statements.
LACK OF REVENUES FROM PRODUCTS; EARLY STAGE OF PRODUCT DEVELOPMENT
A-Fem's products, the inSync miniform, PadKit, and Rapid-Sense
diagnostic products, are in the early stages of development or marketing. There
have been no significant revenues from the inSync miniform, and there have been
no revenues at all from the PadKit or Rapid-Sense diagnostic products. A-Fem
does not have a stable baseload of demand for its products and cannot estimate
the potential market for its products.
Problems may be encountered by A-Fem because its products are in an
early stage of development or marketing, including:
o unanticipated developmental, testing, regulatory compliance,
manufacturing and marketing costs;
o competition;
o products in development that may not be successfully developed;
o products, that once developed, may not be successfully
manufactured, advertised and marketed;
o products that may not be commercially successful;
o products that may become obsolete within a short time after
their development; and
o costs of research and development and clinical trials for new
products that may substantially exceed A-Fem's expectations and
financial resources.
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MARKET ACCEPTANCE
A-Fem's only product in commercial production, the inSync miniform, is a
new product form that addresses women's concerns with current feminine
protection products. Although initial market response has been encouraging,
women may not purchase this product or our other products in commercially viable
quantities.
NEED FOR ADDITIONAL FINANCING
During the fiscal years ended December 31, 1997, and 1998, A-Fem
incurred losses of approximately $2 million and approximately $4.6 million,
respectively. A-Fem expects to continue to incur losses as the costs of
marketing and research and development during the roll-out of its inSync
miniform continue to exceed income from product sales.
In order to carry out our marketing plan for the inSync miniform we will
need to raise additional capital over the next two years or find one or more
partners to assist in marketing and distributing the product. To date, we have
been unable to raise such funds or attract a partner. In addition, we expect to
need additional funds through equity and/or debt financing for the development,
manufacture and marketing of additional products.
We do not expect significant amounts of debt financing to be available
in the near term and expect that we will have to issue additional equity to meet
our financing needs. These funds may not be available or available on terms
favorable to A-Fem or our shareholders. Future financings could have a dilutive
effect on holders or purchasers of the shares.
The inability of A-Fem to obtain financing would adversely affect A-Fem.
MANUFACTURING RISKS
A-Fem currently manufactures the inSync miniform and the Rapid-Sense
diagnostic products for use in clinical trials. As a manufacturer, A-Fem
continually faces risks regarding:
o the availability and costs of raw materials and labor;
o the potential need for additional capital equipment;
o increased operating costs;
o plant and equipment obsolescence;
o quality control; and
o excess or inadequate capacity.
A disruption in A-Fem's production or distribution could have a material
adverse effect on A-Fem's financial results.
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A-Fem currently purchases certain raw materials from one supplier.
Although we do not believe it would be difficult to replace this supplier, we
have not approved other suppliers for certain raw materials.
COMPETITION
A-Fem's current products and products in development will compete with
products from other companies that have an established market, more employees
and substantially greater research, financial and marketing resources than
A-Fem. Many of these competitors also have the resources to manufacture and
market their own products, which in many cases A-Fem may not be able to do.
A-Fem has licensed to the Proctor & Gamble Company non-exclusive rights
to its inSync miniform technology. The Proctor & Gamble Company has
significantly greater resources than does A-Fem.
LACK OF PATENT PROTECTION
A-Fem has no material patent protection for the inSync miniform.
A-Fem has filed patent applications for the PadKit collection device and
its first generation Rapid-Sense technology. A-Fem has received a patent with
respect to the PadKit collection device that covers the method and apparatus for
collection and use of vaginal fluid for diagnostic purposes.
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 of patents issued on applications filed before June 8, 1995, is
the greater of the 20-year term described above or 17 years from grant,
depending on the amount of time between application and issuance.
The issuance of patents to A-Fem is not conclusive as to validity or as
to the enforceable scope of claims. The validity and enforceability of a patent
can be challenged by litigation after its issuance, and, if the outcome of
litigation is adverse to the owner of the patent, the owner's rights could be
diminished or eliminated. The issuance of patents covering any of A-Fem's
products may be insufficient to prevent competitors from essentially duplicating
the product by designing around the patented aspects. The patent laws of other
countries may differ from those of the United States as to the patentability of
A-Fem's products and processes, and the degree of protection afforded by foreign
patents may be different from that in the United States.
The technologies used by A-Fem may infringe upon patents or proprietary
technology of others. The cost of enforcing A-Fem's patent rights in lawsuits
that A-Fem may bring against infringers or defending itself against infringement
charges by other patent holders may be high and could adversely affect A-Fem.
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Trade secrets and confidential know-how are important to A-Fem's
scientific and commercial success. Although A-Fem seeks to protect its
proprietary information through confidentiality agreements and appropriate
contractual provisions, others may develop independently the same or similar
information or gain access to proprietary information of A-Fem.
YEAR 2000 COMPLIANCE
A-Fem relies on computer systems and software to operate its business,
including applications used in sales, purchasing, inventory management, finance
and various administrative functions. All of the hardware and software we
currently use is "Year 2000" compliant.
However, A-Fem could be adversely affected by the failure of one or more
of its vendors, customers or other organizations with which it conducts business
to become fully Year 2000 compliant.
GOVERNMENT REGULATION
Many of A-Fem's activities are subject to regulation by various local,
state and federal regulatory authorities in the United States and by
governmental authorities in foreign countries where its products may be
marketed.
We have made requests for regulatory approval for marketing in several
countries. We have obtained regulatory approval in China. A-Fem cannot predict
when or whether we will obtain approvals in other countries.
The PadKit and Rapid-Sense diagnostic products are still in the
development stage and will require FDA approval and approval from similar
authorities in other countries. Obtaining such approvals may be a lengthy and
expensive proceeding and may involve extensive testing and clinical trials to
demonstrate safety, reliability and efficacy.
In addition, regulations may change, resulting in unexpected costs and
uncertainty. A-Fem may not be able to comply with the applicable requirements
and necessary approvals may not be granted. We cannot predict the extent and
impact of future governmental regulations. If we fail to comply with the
applicable regulatory requirements, we may be subject to fines, injunctions,
civil penalties, recall or product seizure, among other penalties.
DEPENDENCE ON MANAGEMENT AND CONSULTANTS
A-Fem depends to a large extent upon the abilities and continued
participation of its executive officers, consultants and current directors. The
loss of any of these people could have a serious adverse effect upon our
business. We may not be able to attract and retain key personnel with the skills
and expertise necessary to manage our business. We do not have key-man life
insurance on the lives of any of our personnel. Because competition for
management and scientific staff in the biotechnology, biomedical and health care
fields is intense, we may not be able to continue to employ personnel and
consultants with sufficient
13
<PAGE> 14
expertise to satisfy our needs. We do not have employment contracts with any
personnel other than Steven T. Frankel, James R. Wilson and Sara Van Dyck.
PRODUCT LIABILITY
A-Fem could be subject to claims for personal injuries or other damages
resulting from its products. We carry general liability insurance, including
products liability insurance, in the amount of $4,000,000. While there have been
no product liability claims against A-Fem, if any claims for amounts exceeding
our insurance coverage were successful, it would have a material adverse effect
on A-Fem. A-Fem's insurance may not adequately protect A-Fem against all such
liabilities. A-Fem's insurance does not cover actions brought in countries other
than the United States or claims relating to toxic shock syndrome.
POTENTIAL ISSUANCE OF PREFERRED STOCK; ANTI-TAKEOVER EFFECT OF NEVADA
LAW
A-Fem is authorized to issue up to 10,000,000 shares of preferred stock
and A-Fem's Board of Directors has the authority to fix the rights, preferences,
privileges and restrictions of such shares without any further vote or action by
A-Fem's shareholders.
Through March 1999, A-Fem issued a total of 5,929,655 shares of Series A
Convertible Preferred stock and warrants to purchase an additional 515,450
shares of Series A Convertible Preferred stock at a weighted average exercise
price of $0.90 to Capital Consultants, Inc., in exchange for aggregate
consideration consisting of 4,316,405 shares of A-Fem's common stock, warrants
to purchase 50,000 shares of A-Fem's common stock and $3,097,440.
This issuance of Series A Preferred stock and any future issuance of
preferred stock may:
o have the effect of delaying, deferring or preventing a change in
control of A-Fem;
o discourage bids for the common stock at a premium over the
market price of the common stock; or
o adversely affect the market price and the voting and other
rights of the holders of common stock.
Moreover, certain "business combination" provisions of Nevada law could
make it more difficult to consummate a merger or tender offer involving A-Fem,
even if such event could be beneficial to the interests of the shareholders.
ITEM 7. FINANCIAL STATEMENTS
Financial Statements begin on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
14
<PAGE> 15
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
A-Fem's executive officers, directors and key employees are:
<TABLE>
<CAPTION>
DIRECTORS AND EXECUTIVE OFFICERS AGE POSITION
-------------------------------- --- --------
<S> <C> <C>
James E. Reinmuth, Ph.D. 58 Chairman and Director
Steven T. Frankel 56 Chief Executive Officer, President and
Director
William H. Fleming, Ph.D. 52 Vice Chairman-Diagnostics, Secretary and
Director
Carol A. Scott, Ph.D. 49 Director
RoseAnna Sevcik 35 Director
James Wilson 49 Treasurer, Director of Business Development
and Director
Robert L. Buck, Ph.D. 47 Vice President, Chief Technical Officer
KEY EMPLOYEES
Martin Harvey 57 Controller
Sarah Van Dyck 32 Director of Marketing and Sales
</TABLE>
DIRECTORS AND EXECUTIVE OFFICERS
JAMES E. REINMUTH, Ph.D. has served as Chairman of A-Fem since September
1996, and has been a Director of A-Fem since May 1995. From September 1996 to
April 1998, Dr. Reinmuth served as Chief Executive Officer of A-Fem. From May
1995 to September 1996, Dr. Reinmuth served as Treasurer of A-Fem. From July
1994 to May 1997, Dr. Reinmuth served as the Charles H. Lundquist Distinguished
Professor of Business at the University of Oregon. From June 1976 until July
1994, Dr. Reinmuth served as Dean of the College of Business at the University
of Oregon. Since 1988, Dr. Reinmuth has also served in several administrative
positions within the University of Oregon. Dr. Reinmuth also serves as president
and chief executive officer of Fuji Advanced Filtration, an industrial filter
manufacturer. Dr. Reinmuth serves as a director on the advisory board of Capital
Consultants, Inc., an investment firm. Dr. Reinmuth serves as a director with
the following companies: W.E. Simon and Sons Asia Ltd., a merchant bank in Hong
Kong and Asia Capital Ltd., an investment bank in Sri Lanka.
STEVEN T. FRANKEL, has served as Chief Executive Officer and a Director
of A-Fem since April 1998, and as President of A-Fem since November 1998. From
May 1992 to March 1998, Mr. Frankel was president and chief executive officer of
Quidel Corporation, a manufacturer of physicians' office diagnostic test kits.
From January 1983 to May 1992, Mr. Frankel was president of various
international and domestic divisions of Becton Dickinson, a
15
<PAGE> 16
diagnostic and medical device manufacturer. From 1979 to 1983, Mr. Frankel was
vice president and general manager of the Becton Dickinson Home Health Care
unit. Mr. Frankel also serves as a director of: ID Biomedical Corp, Vancouver,
Canada, and HIDA Educational Foundation, Washington, D.C.
WILLIAM H. FLEMING, Ph.D., has served as Vice Chairman-Diagnostics of
the Company since August of 1997, and as a Director and Secretary of A-Fem since
February 1994. From February 1994 through August 1997, Dr. Fleming served as
President and Chief Operating Officer of A-Fem. He was president, chief
operating officer and a director of ProFem from July 1993 until its merger with
A-Fem in June 1994. From April 1992 until July 1993, Dr. Fleming served as an
associate with Sovereign Ventures, a healthcare consulting firm; concurrently
he served as director of corporate development of Antivirals, Inc., a
biotechnology company involved in antisense technology.
CAROL A. SCOTT, Ph.D., has served as a Director of A-Fem since February
1995. Dr. Scott is a professor of marketing and the chairman of the marketing
faculty at The John E. Anderson Graduate of Management at the University of
California, Los Angeles. Dr. Scott has been on the faculty at UCLA since 1977,
and served the school in a variety of administrative positions from 1986 through
1994, including as chairman of the faculty and associate dean for academic
affairs. She was also a visiting associate professor at the Harvard Business
School in 1985, and was on the faculty at Ohio State University for three years
prior to joining UCLA in 1977. Dr. Scott is a frequent author and lecturer and
has served on the Editorial Board of the Journal of Consumer Research since
1980. Dr. Scott also serves on the board of directors of Sizzler International.
ROSEANNA SEVCIK has served as a Director of A-Fem since May 1995. Ms.
Sevcik has been a vice president/senior portfolio manager of Penn Mutual, a life
insurance company since May of 1996. From February 1993 to March 1996, Ms.
Sevcik was vice president/senior portfolio manager and served as a director on
the pension plans board of the Life Insurance Company of the Southwest. From
February 1990 to February 1993, Ms. Sevcik was senior portfolio
manager/securities analyst at Securities Management and Research, an investment
management services company.
JAMES R. WILSON has served as Treasurer and a Director of A-Fem since
September 1996 and as Director of Business Development since July 1997. In
addition, since August 1995 Mr. Wilson has been a private financial consultant
to firms in both manufacturing and service industries. From August 1992 to
August 1995, Mr. Wilson was a sales manager for Advanced Equipment Systems, Inc.
From January 1985 to August 1992, Mr. Wilson was treasurer and director of
marketing in various divisions of Production Technologies, Inc. Mr. Wilson also
serves as a director of Design Pacific/Oregon Dome, Inc.
ROBERT L. BUCK, Ph.D., has served as Vice President-Technical Operations
of A-Fem since June 1994. Dr. Buck is a Major in the U.S. Army Reserves and a
company commander in the 104th Training Division. From August 1992 to January
1994, Dr. Buck was vice president of research and development for CELx, a
subsidiary of IMRE Corporation, a cancer diagnostic company. Dr. Buck has been
involved in the development of over 40 diagnostic
16
<PAGE> 17
products that have been introduced into the market, and has published several
manuscripts in medical and scientific journals.
KEY EMPLOYEES
MARTIN HARVEY has served as the Company's Controller since June 1998.
From August 1987 to June 1993, Mr. Harvey was division controller for Spacelabs
Medical, Inc. a manufacturer of critical care medical monitors. From January
1980 to August 1987 Mr. Harvey was division controller for the Medical Systems
Division of Control Data, Inc. From 1993 to 1998, Mr. Harvey held several other
controller positions with a variety of manufacturing companies.
SARAH VAN DYCK has served as the Company's Director of Marketing and
Sales since May 1996. Prior to joining A-Fem, Ms. Van Dyck was employed by The
Procter & Gamble Company, where she managed women's personal care brands, and
was responsible for new product launches and on-going brand management. Ms. Van
Dyck also has served as a management consultant with Corporate Decisions, Inc.,
where she worked with pharmaceutical and health care clients.
A-Fem's directors hold office until the next annual meeting of
stockholders or until their successors are duly elected and qualified; officers
hold office at the discretion of the Board. Directors are reimbursed for
expenses incurred in attending meetings of the Board of Directors. In the past,
certain directors have received options or warrants to purchase shares of
A-Fem's common stock in consideration for their services.
In March 1997, A-Fem formed a Medical Advisory Panel. This panel
currently consists of seven members, two of whom are employees of A-Fem. The
outside members are all prominent Ph.D.s and M.D.s specializing in public and/or
women's health. The Medical Advisory Board is expected to provide guidance to
A-Fem on clinical validations for its planned products.
ITEM 10. EXECUTIVE COMPENSATION
COMPENSATION SUMMARY
The following table sets forth certain information regarding the
compensation paid to the Chief Executive Officer and any other corporate
officers who received in excess of $100,000 in compensation (the "Named
Executive Officers") for each of the fiscal years ended December 31, 1998, 1997
and 1996.
17
<PAGE> 18
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------ -------------------
OTHER ANNUAL SECURITIES
NAME AND PRINCIPAL SALARY COMPENSATION UNDERLYING
POSITION YEAR ($) ($) OPTIONS/WARRANTS(#)
- ------------------ ---- -------- ------------ -------------------
<S> <C> <C> <C>
James E. Reinmuth(1) 1998 45,025 -- 150,000
Chief Executive Officer, 1997 40,000 -- 26,667
Chairman and Director 1996 7,500 -- 250,000
Steven T. Frankel(2) 1998 103,863 -- 1,700,000
Chief Executive Officer 1997 -- -- --
President and Director 1996 -- -- --
J. Peter Burke(3) 1998 129,833 -- 150,000
President, Chief Operating 1997 85,432 -- 133,334
Officer and Chief Financial 1996 -- -- --
Officer
William H. Fleming 1998 119,449 -- 150,000
Vice Chairman-Diagnostics, 1997 115,000 -- 26,667
Secretary and Director 1996 115,000 -- --
</TABLE>
(1) James E. Reinmuth served as Chief Executive Officer of A-Fem until April
1998.
(2) Steven T. Frankel became Chief Executive Officer of A-Fem in April 1998
and President of A-Fem in November 1998.
(3) J. Peter Burke resigned as President, Chief Operating Officer and Chief
Financial Officer of A-Fem on November 20,1998.
OPTION GRANTS
The following table sets forth certain information regarding options
granted to Named Executive Officers during the fiscal year ended December 31,
1998.
18
<PAGE> 19
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------------
PERCENT OF
TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES EXERCISE
OPTIONS IN PRICE EXPIRATION
NAME GRANTED FISCAL YEAR ($/SHARE) DATE
- ---- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C>
James E. Reinmuth 150,000(1) 2.4% $2.88 July 7, 2008
Steven T. Frankel 1,700,000(1) 27.2% $2.06 April 21, 2008
J. Peter Burke 150,000(1) 2.4% $2.88 July 7, 2008
William H. Fleming 150,000(1) 2.4% $2.88 July 7, 2008
</TABLE>
- --------------
(1) These options are subject to performance-based conditions.
EXERCISE OF STOCK OPTIONS AND YEAR-END OPTION/WARRANT VALUES
The following table sets forth certain information regarding options and
warrants of the Named Executive Officers
as of December 31, 1998.
1998 YEAR-END OPTIONS/WARRANT VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/WARRANTS AT OPTIONS/WARRANTS AT
DECEMBER 31, 1998 DECEMBER 31, 1998(1)
--------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C>
James E. Reinmuth 326,667 150,000 -0- -0-
Steven T. Frankel 462,500 1,237,500 -0- -0-
J. Peter Burke 83,334 200,000 -0- -0-
William H. Fleming 176,667 150,000 -0- -0-
</TABLE>
(1) Based on $1.81 per share, the fair market value of A-Fem's common stock
at December 31, 1998.
COMPENSATION OF DIRECTORS
Directors of A-Fem who are also employed by A-Fem do not receive
additional compensation for their services as directors. Non-employee directors
of A-Fem receive compensation in the form of options to purchase A-Fem's common
stock. Directors who serve on the committee that administers A-Fem's 1994
Incentive and Non-Qualified Stock Option Plan ("Plan") receive options pursuant
to paragraph 13 of the Plan.
19
<PAGE> 20
EMPLOYMENT AGREEMENTS
A-Fem entered into a consulting agreement with James E. Reinmuth dated
effective December 1, 1998 (the "Reinmuth Consulting Agreement"), with respect
to Mr. Reinmuth's services as Chairman of the Board. The Reinmuth Consulting
Agreement provides for a fee of $2,500 per month. The Reinmuth Consulting
Agreement may be terminated on 30 days' prior notice by either party.
A-Fem entered into an employment agreement with J. Peter Burke dated
effective April 28, 1997 (the "Burke Employment Agreement"), with respect to Mr.
Burke's services as A-Fem's President, Chief Operating Officer and Chief
Financial Officer. The Burke Employment Agreement provides for an annual salary
of $125,000. Mr. Burke resigned as an officer of A-Fem November 21, 1998. Mr.
Burke will continue to receive his annual base salary until June 30, 1999.
A-Fem entered into an employment agreement with Sarah P. Van Dyck dated
effective May 28, 1996 (the "Van Dyck Employment Agreement"), with respect to
Ms. Van Dyck's services as A-Fem's Director of Sales and Marketing. The Van Dyck
Employment Agreement provides for a salary of $7,917 per month. The Van Dyck
Employment agreement may be terminated on 20 days' prior notice by either party.
A-Fem entered into an employment agreement with James R. Wilson dated
effective May 1, 1997 (the "Wilson Employment Agreement"), with respect to Mr.
Wilson's services as A-Fem's Treasurer. The Wilson Employment Agreement provides
for a salary of $5,000 per month. The Wilson Employment agreement may be
terminated on 30 days' prior notice by either party.
A-Fem entered into an employment agreement with Steven T. Frankel dated
effective April 25, 1998 (the "Frankel Employment Agreement"), with respect to
Mr. Frankel's services as A-Fem's Chief Executive Officer. The Frankel
Employment Agreement provides for a salary of $20,000 per month. The Frankel
Employment agreement may be terminated on 30 days' prior notice by either party.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires that A-Fem's officers, directors and persons who own
more than 10 percent of A-Fem's common stock file with the Securities and
Exchange Commission (the "SEC") initial reports of beneficial ownership on Form
3 and reports of changes in beneficial ownership of common stock and other
equity securities of A-Fem on Form 4. Officers, directors and greater than 10
percent stockholders of A-Fem are required by SEC regulations to furnish to
A-Fem copies of all Section 16(a) reports that they file. To A-Fem's knowledge,
based solely on reviews of such reports furnished to A-Fem and written
representations that no other reports are required, all Section 16(a) filing
requirements applicable to its officers, directors and greater than ten percent
beneficial owners were complied with during the fiscal year ended December 31,
1998.
20
<PAGE> 21
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership as of March 15, 1999, of A-Fem's common stock by $0.01 par
value of (i) each beneficial owner of more than 5 percent of the common stock,
(ii) the Named Executive Officers, (iii) each director of A-Fem and (iv) all
directors and executive officers as a group. Each person named in the table has
sole investment and voting power with respect to the shares set forth opposite
his name or her name, except as otherwise noted.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF CLASS
BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) OUTSTANDING
- ---------------- ----------------------- ---------------
<S> <C> <C>
William H. Fleming 828,592(2) 8.6%
10180 SW Nimbus Ave.,
Suite J-5
Portland, OR 97223
Vice-Chairman, Secretary and Director
James E. Reinmuth 548,667(3) 5.6%
5171 Solar Heights Drive
Eugene, OR 97405
Chairman and Director
Steven T. Frankel 462,500(4) 4.7%
9668 Claiborne Square
LaJolla, CA 92037
Chief Executive Officer and President
J. Peter Burke 85,834(5) *
46A Alfred Drowne Road
Barrington, RI 02806
Carol A. Scott 30,000(6) *
1834 Park Blvd.
Palo Alto, CA 94306
Director
RoseAnna Sevcik 50,000(7) *
1736 Aidenn Lair
Dresher, PA 19025
Director
James R. Wilson 397,595(8) 4.2%
3198 Powder River Drive
Eugene, OR 97408
Treasurer and Director
Capital Consultants, Inc. 6,455,105(9) 40.5%
2300 SW First Avenue, Suite 200
Portland, OR 97201
</TABLE>
21
<PAGE> 22
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF CLASS
BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) OUTSTANDING
- ---------------- ----------------------- ---------------
<S> <C> <C>
Cort MacKenzie & Co., Inc. 1,206,000(10) 11.3%
5335 SW Meadows Road, Suite 270
Lake Oswego, OR 97035
Thomas C. Stewart 1,206,000(10) 11.3%
c/o Cort McKenzie & Co., Inc.
5335 SW Meadows Road, Suite 270
Lake Oswego, OR 97035
John F. Perry 517,140 5.5%
2451 S. Ponte Vedra Blvd.
Ponte Vedra, FL 32082
All directors and officers 2,604,854(11) 23.9%
As a group (7 persons)
</TABLE>
- --------------------
* Less than 1%.
(1) "Beneficial Ownership" is defined pursuant to Rule 13d-3 of the Exchange
Act, and generally means any person who directly or indirectly has or
shares voting or investment power with respect to a security. A person
shall be deemed to be the beneficial owner of a security if that person
has the right to acquire beneficial ownership of such security within 60
days, including, but not limited to, any right to acquire such security
through the exercise of any option or warrant or through the conversion
of a security. Any securities not outstanding that are subject to such
options or warrants shall be deemed to be outstanding for the purpose of
computing the percentage of outstanding securities of the class owned by
such person, but shall not be deemed to be outstanding for the purpose
of computing the percentage of the class owned by any other person.
(2) Includes 176,667 shares issuable upon the exercise of options to
purchase common stock.
(3) Includes 23,000 shares of common stock held by the Reinmuth Family
Trust, 8,000 shares held by Kazumitsu Shiomi, 23,000 shares held by
Terry A. Reinmuth, 4,000 shares held by Hilary J. Reinmuth, 4,000 shares
held by Jennifer C. Reinmuth, 250,000 shares issuable upon exercise of a
warrant to purchase common stock and 76,667 shares issuable upon
exercise of options to purchase common stock.
(4) Includes 462,500 shares issuable upon the exercise of options to
purchase common stock.
(5) Includes 83,334 shares issuable upon the exercise of options to purchase
common stock.
(6) Includes 30,000 shares issuable upon the exercise of options to purchase
common stock.
(7) Includes 50,000 shares issuable upon the exercise of options to purchase
common stock.
(8) Includes 160,000 shares of common stock held jointly with Mr. Wilson's
spouse and 84,167 shares issuable upon the exercise of options to
purchase common stock.
(9) Includes 5,929,655 shares issuable upon conversion of shares of
Convertible Preferred Stock, and an additional 515,450 shares issuable
upon conversion of shares issuable upon exercise of a warrant to
purchase Convertible Preferred Stock. Capital Consultants, Inc. acts as
an agent for individual investors with respect to all shares
beneficially owned by it. Capital Consultants, Inc., is an investment
advisor registered under Section 203 of the Investment Advisors Act of
1940 and has, on behalf of certain of its clients, sole voting power and
sole investment power with respect to certain of these shares.
(10) Consists of 936,000 and 270,000 shares issuable upon exercise of
warrants to purchase common stock held by Cort MacKenzie & Co., Inc.,
and Thomas C. Stewart, respectively.
(11) Includes 1,100,835 shares issuable upon the exercise of options to
purchase common stock and 250,000 shares issuable upon exercises of
warrants to purchase common stock.
22
<PAGE> 23
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There were no related transactions during the year ended December 31,
1998.
ITEM 13: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index.
(b) Reports on Form 8-K filed during Last Quarter of Fiscal Year.
None.
23
<PAGE> 24
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.
Portland, Oregon,
March 2, 1999
F-1
<PAGE> 25
A-FEM MEDICAL CORPORATION
BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
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 710,689 823,048
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> 26
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> 27
A-FEM MEDICAL CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------------------ -------------------------------------
Shares Amount Warrants Shares Amount Warrants
--------- ------- -------- ------------ --------- --------
<S> <C> <C> <C> <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 per share -- -- -- 480,000 4,800 --
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 per share -- -- -- 33,000 330 --
Common stock issued on warrants exercised for cash,
$1.64 per share -- -- -- 10,000 100 --
Common stock issued for cash, $2.00 per share,
net of financing costs -- -- -- 530,000 5,300 --
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 financing costs -- -- -- 989,586 9,896 --
Preferred stock issued in exchange of common shares 4,316,405 43,164 -- (4,316,405) (43,164) --
Preferred stock issued for cash $1.92 per share,
net of financing costs 1,457,000 14,570 -- -- -- --
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 -- -- 182,272 -- -- --
Net loss -- -- -- -- -- --
--------- ------- -------- ------------ --------- -------
BALANCE, December 31, 1998 5,773,405 $57,734 $182,272 9,471,875 $ 94,719 $76,491
========= ======= ======== ============ ========= =======
</TABLE>
<TABLE>
<CAPTION>
Additional Total
Paid-In Accumulated Stockholders'
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 per share 192,000 -- 196,800
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 per share 49,170 -- 49,500
Common stock issued on warrants exercised for cash,
$1.64 per share 16,300 -- 16,400
Common stock issued for cash, $2.00 per share,
net of financing costs 1,004,761 -- 1,010,061
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 financing costs 1,857,425 -- 1,867,321
Preferred stock issued in exchange of common shares -- -- --
Preferred stock issued for cash $1.92 per share,
net of financing costs 2,719,026 -- 2,733,596
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 stock (182,272) -- --
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> 28
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> 29
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(TM) miniform interlabial pad, another based on the RapidoSense(TM)
diagnostic products and a third based on the Padkit(TM) collection device. The
miniform is a new type of feminine hygiene product that is worn interlabially.
A-Fem's first miniform application, the inSync(TM) miniform, has received Food
and Drug Administration (FDA) approval and was launched in a market roll-out in
Oregon and Washington in January 1998. The Company expects to use its
RapidoSense diagnostic technology to create rapid response, low cost,
point-of-use diagnostic tools which generate quantifiable results. The core
technology development for RapidoSense(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 Company's product
development, marketing activities and other operations and the Company may be
forced to cease operations.
Fair Value
The carrying value of financial instruments approximates fair value, unless
otherwise disclosed.
Cash and Cash Equivalents
The Company considers all instruments with maturities of three months or less
when purchased to be cash equivalents.
F-6
<PAGE> 30
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.
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.
F-7
<PAGE> 31
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, 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 antidulitve.
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 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133).
This statement 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 133 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 133 is
effective for fiscal years beginning after June 15, 1999. The Company expects
that adoption of SFAS 133 will not have a material impact on the Company's
financial condition or results of operations.
F-8
<PAGE> 32
Reclassifications
Certain reclassifications have been made to prior year amounts to conform to the
current year presentation.
2. INVENTORIES:
Inventories consisted of the following components at December 31:
<TABLE>
<CAPTION>
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 yearend, 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-9
<PAGE> 33
Future minimum lease payments under capital leases as of December 31 are as
follows:
<TABLE>
<S> <C>
1999 $203,072
2000 38,960
2001 4,778
--------
Total minimum lease payments 246,810
========
</TABLE>
<TABLE>
<S> <C>
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 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.
F-10
<PAGE> 34
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.
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- --------------------------------------------------------- -----------------------------
Weighted Number of
Number Average Weighted Shares Weighted
Range of Outstanding at Remaining Average Exercisable at Average
Exercise December 31, Contractual Exercise December 31, Exercise
Prices 1998 Life - Years Price 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.
F-11
<PAGE> 35
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>
Shares Weighted Average
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.
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.
F-12
<PAGE> 36
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>
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 have caused an annual
limitation on the amount of carryforwards that can be utilized and start-up
costs that can be amortized. As of December 31, 1998 and 1997, the Company had
net deferred tax assets of approximately $7.2 million and $5.5 million,
respectively, primarily resulting from deferred start-up costs and 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.
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 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.
F-13
<PAGE> 37
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>
<S> <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-14
<PAGE> 38
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: March 31, 1999
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Steven T. Frankel Chief Executive Officer and March 31, 1999
- -------------------------------------- President
Steven T. Frankel (principal executive officer)
/s/James E. Reinmuth Chairman and Director March 31, 1999
- -------------------------------------- (principal executive officer)
James E. Reinmuth
/s/William H. Fleming Vice Chair-Diagnostics, March 31, 1999
- -------------------------------------- Secretary and Director
William H. Fleming
/s/James R. Wilson Treasurer and Director March 31, 1999
- --------------------------------------
James R. Wilson
/s/Martin Harvey Controller March 31, 1999
- -------------------------------------- (principal financial and
Martin Harvey accounting officer)
/s/ Carol A. Scott Director March 31, 1999
- --------------------------------------
Carol A. Scott
/s/ RoseAnna Sevcik Director March 31, 1999
- --------------------------------------
RoseAnna Sevcik
</TABLE>
<PAGE> 39
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
3.1(1) Articles of Incorporation, as amended
3.2(1) 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
*10.13(6) Employment Agreement between A-Fem Medical Corporation and James R.
Wilson, dated as of May 1, 1997
</TABLE>
<PAGE> 40
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
10.14(8) Form of Capital Lease between A-Fem Medical Corporation and First
Portland Leasing Corp.
27.1 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.
* Indicates management contract or compensation plan.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 668,369
<SECURITIES> 0
<RECEIVABLES> 59,735
<ALLOWANCES> 0
<INVENTORY> 70,855
<CURRENT-ASSETS> 1,056,562
<PP&E> 1,235,173
<DEPRECIATION> (524,484)
<TOTAL-ASSETS> 1,889,316
<CURRENT-LIABILITIES> 1,112,624
<BONDS> 0
0
57,734
<COMMON> 94,719
<OTHER-SE> 582,632
<TOTAL-LIABILITY-AND-EQUITY> 1,889,316
<SALES> 418,915
<TOTAL-REVENUES> 418,915
<CGS> 495,092
<TOTAL-COSTS> 495,092
<OTHER-EXPENSES> 4,532,795
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 88,950
<INCOME-PRETAX> (4,629,097)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,629,097)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,629,097)
<EPS-PRIMARY> (.38)
<EPS-DILUTED> (.38)
</TABLE>
