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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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER: 0-17119
A-FEM MEDICAL CORPORATION
----------------------------------------------
(Name of small business issuer in its charter)
NEVADA 33-0202574
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10180 SW NIMBUS AVE., SUITE J-5
PORTLAND, OR 97223
(Address of principal executive offices)
Issuer's telephone number, including area code: (503) 968-8800
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
(Title of each class) (Name of each exchange on which registered)
None None
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
(Title of Class)
Common Stock, par value $0.01 per share
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
Issuer's revenues for the fiscal year ended December 31, 1999: $66,535
As of March 23, 2000 the aggregate market value of $.01 par value Common
Stock held by non-affiliates of the issuer was $17,144,819.
As of March 23, 2000, the issuer had outstanding 9,563,225 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 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 RAPID-SENSE(R) diagnostic tests, and the
third based on its PADKIT(R) SAMPLE COLLECTION SYSTEM. A-Fem currently markets
the INSYNC miniform as an alternative to tampons, pads and liners for light
flow, or in combination for heavier 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 sexually transmitted and infectious
diseases. A-Fem has also entered into several joint relationships to develop
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 rollout 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. In 1999, the Company added several
Internet outlets to its distribution network, continuing to broaden market
exposure. A-Fem is also continuing to expand its patent portfolio to protect the
miniform technology as the Company identifies new product applications. A-Fem is
now seeking a strategic partner to assist in the continued national rollout of
the miniform.
A-Fem anticipates that its RAPID-SENSE point-of-use diagnostic
technology will enable consumers and healthcare providers to obtain quantifiable
test results quickly, conveniently and inexpensively. Currently, there are only
two alternatives for diagnostic testing: point-of-use tests that produce
qualitative (yes/no) results and laboratory tests that provide quantitative
results. While current point-of-use diagnostic tests are convenient and
cost-effective, they do not provide quantitative results and are limited to
applications that have a clear positive or negative response. Laboratory
testing, on the other hand, produces more information but requires sophisticated
instruments, more time and greater cost. The key to A-Fem's RAPID-SENSE
technology is that it combines the convenience and low cost of a point-of-use
test with the type of semi-quantitative results previously only available when
using an instrument to interpret the results. The RAPID-SENSE technology enables
visual quantification of a desired substance, such as a hormone, disease marker
or analyte of infection, in a sample of blood, saliva or urine.
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A-Fem expects to continue to seek strategic partners to assist in the
marketing and distribution of specific applications of its RAPID-SENSE
technology. To this end, in November 1998 A-Fem announced that it had entered
into a development agreement with Konica, a large Japanese industrial chemical
firm, to develop a proprietary test using A-Fem's RAPID-SENSE technology. In
late 1999 A-Fem entered into a development contract with Biex, Inc. Biex has
developed a unique patented system to help identify risk in pregnant women for
developing spontaneous preterm labor - the SalEst(R) System salivary estriol
test.
A-Fem's PADKIT SAMPLE COLLECTION SYSTEM integrates A-Fem's miniform
technology with its diagnostic expertise to create a unique sample collection
system that provides a novel approach to diagnostic testing. The PADKIT allows
women to collect a menstrual or cervical-vaginal fluid sample at home, using an
interlabial pad. The sample collected with the interlabial pad is mailed to a
laboratory that processes the sample and provides test results to the physician
prior to the patient's annual gynecological examination. Thus, one
self-collected and laboratory-processed PADKIT sample has the potential to be
used by a physician to screen for cervical and other cancers, Human Papilloma
Virus (a precursor to cervical cancer), and sexually transmitted and other
infectious diseases, before the patient visit. Clinical and laboratory testing
has demonstrated the PADKIT's effectiveness as a sample collection system that
may be processed in a laboratory to detect cervical and other cancers, the Human
Papilloma Virus and sexually transmitted and other diseases. 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. An additional patent was issued in December 28, 1999 further expanding
the PADKIT patent portfolio.
A-Fem is completing clinical studies for its PADKIT to demonstrate the
effectiveness of this sample collection system as an alternative to the cervical
scrape. An estimated 50 million cervical scrapes are performed annually in the
United States alone to collect samples to use in the Pap smear test for cervical
cancer. Although significant improvements have been made in the area of Pap
smear test sample reading and sample preparation, no improved sample collection
method has been developed. A-Fem believes the PADKIT will provide a superior
cell sample as well as a simpler, more comfortable and convenient procedure for
collecting the cells. The Company expects to demonstrate the significant market
advantages, cost effectiveness, improved disease specificity, and patient
preference for the self-collected PADKIT sampling system.
MARKETING AND DISTRIBUTION
The INSYNC MINIFORM is currently available for purchase in the western
half of the United States, excluding California, in retail grocery chains,
drugstores and mass merchandisers. In addition, the INSYNC MINIFORM is available
through catalog and on-line, web-based (Internet) retailers, such as PlanetRx,
Transitions for Health and CVS, and directly from INSYNCMINIFORM.com. The INSYNC
MINIFORM competes within the $1.8 billion United States feminine protection
market. The miniform represents a new category of products that both competes
with and complements existing feminine protection products, including tampons,
pads, and pantiliners.
In order to focus on research and product development opportunities and
increase the speed to market for our products, A-Fem is seeking alliances with
strategic marketing partners. For the miniform 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.
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In April 1997, A-Fem and The Proctor & Gamble Company entered into a
license agreement that granted to The Proctor & Gamble Company certain
non-exclusive rights to use A-Fem's miniform technology and certain trademarks.
That agreement expired October 28, 1999 and the product technology has reverted
to A-Fem. P&G retained certain rights to trademarks not used by A-Fem.
COMPETITION
Four major consumer products companies currently dominate the United
States feminine protection market: the Procter & Gamble Company, Johnson &
Johnson, Kimberly-Clark and Playtex. The INSYNC MINIFORM represents a new
segment of the feminine protection market and provides benefits not offered by
competitive products. Features of the INSYNC MINIFORM that distinguish it
competitively are its versatility, convenience, comfort and safety. The Company
believes these competitors are evaluating the interlabial pad and market, and
will eventually enter it. This entry is expected to rapidly expand market
acceptance for the interlabial pad and enhance the value of the miniform.
A-Fem's proprietary RAPID-SENSE technology is expected to be introduced
to the market in 2000. A-Fem believes that the semi-quantifiable test results
provided by point-of-use tests that incorporate A-Fem's RAPID-SENSE technology
will address market needs that prior technology could not meet, provide
significant end-user cost savings over older technology and move various
laboratory tests to the point-of-use markets, which will increase early patient
intervention to improve healthcare in general. Competition for A-Fem's
RAPID-SENSE products is likely to come primarily from larger diagnostics
companies, and/or smaller innovative companies.
The first application of the PADKIT will be an alternative to the
cervical scrape as a sample collection process for the Pap smear test, the
standard diagnostic procedure for cervical cancer detection. While improvements
have been made in the area of Pap test sample preparation and interpretation by
such companies as Cytyc, and TriPath (formed through the merger of AutoCyte, and
Neopath), the PADKIT represents the first improvement in the method of sample
collection by introducing a non-invasive, user-friendly sample collection
method.
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 forecasted demand for the foreseeable future within current area of
distribution. A-Fem's current miniform manufacturing facility encompasses 3,700
square feet and has been inspected by the United States Food and Drug
Administration and found to be without reportable deficiencies. A-Fem will need
additional space and equipment to manufacture sufficient quantities of the
miniform to support a national marketing rollout.
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Raw materials used for production of the INSYNC MINIFORM and A-Fem's
diagnostic products are produced in the United States. A-Fem's suppliers are
meeting A-Fem's current manufacturing needs, although an uninterrupted flow of
raw materials cannot be guaranteed. In the past, A-Fem purchased certain raw
materials from a single supplier that has now ceased to conduct its
fiber-processing business. However, A-Fem has located a replacement supplier for
its raw materials, but has not yet entered into an agreement with that supplier.
A-Fem's current RAPID-SENSE manufacturing facility is located within
A-Fem's research and development facilities and is capable of producing product
to meet the expected needs of A-Fem's planned clinical trials and limited
commercial distribution.
PATENTS AND TRADEMARKS
A-Fem owns 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%
biodegradable absorbent miniform. In 1998 and 1999, A-Fem was granted broad
patents for the technology that is the basis for the PADKIT collection system.
Additionally, A-Fem has patents pending for its RAPID-SENSE and miniform
technology.
The issued United States patents currently owned, assigned or licensed
to A-Fem and the pending patent applications are as follows:
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<TABLE>
<CAPTION>
US PATENT OR
SERIAL NUMBER DATE OF ISSUE OR FILING TITLE
- ------------- ----------------------- -----
<S> <C> <C>
MINIFORM
4,995,150 02/26/91 Method and Apparatus for Making Feminine Protection Pads
08/670,137 06/25/96 Biodegradable Absorbent Pads
5,575,047(1) 11/19/96 Method for Making Biodegradable Absorbent Pads
- ---------- -------- --------------------------------------------------------
PADKIT
5,725,481(1) 03/10/98 Method and Apparatus for Collecting Vaginal Fluid and
Exfoliated Vaginal Cells for Diagnostic Purposes
Method and Apparatus for Collecting Vaginal Fluid and
6,007,498(1) 12/28/99 Exfoliated Vaginal Cells for Diagnostic Purposes
- ---------- -------- --------------------------------------------------------
RAPID-SENSE
60/092,191(2) 06/05/97 Rapid-Sense Technology
09/417,957(2) 10/13/99 Rapid-Sense Technology
</TABLE>
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(1) Also applied for in Germany, Japan, England, France, Italy, Sweden, and
Canada.
(2) Patent pending.
The term for patents issued on applications filed on or after June 8,
1995, is 20 years from the date of the application or, if the application
contains a specific reference to an earlier filed application under 35 USC
Sections 120, 121 or 365(c), 20 years from the date on which the earliest such
application was filed. The term for patents issued on applications filed before
June 8, 1995, is the greater of the 20-year term described above or 17 years
from grant, depending on the amount of time between application and issuance.
A-Fem holds United States trademarks for all its current products,
including for the PADKIT, RAPID-SENSE and its related design, 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 also relies on trade secrets and other unpatented proprietary information.
REGULATORY REQUIREMENTS
The production and marketing of A-Fem's products are subject to
regulation by the United States Food and Drug Administration. 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.
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A-Fem's miniform product required FDA approval before being marketed to the
public, and such clearance was obtained in 1997. A-Fem's RAPID-SENSE products
sold to the industrial and environmental testing markets do not require FDA
clearance. However, when A-Fem's RAPID-SENSE technology is applied to the human
diagnostic market, such products will require FDA clearance.
A-Fem is completing clinical trials for its PADKIT, and is in the
process of conducting additional studies in order to receive FDA clearance.
A-Fem anticipates that this product will be ready for commercial production in
late 2001. A-Fem has assembled a team to obtain marketing clearance from the FDA
for its planned products. This team includes senior management, personnel with
regulatory expertise, personnel with scientific skills for clinical field trials
and a Medical Advisory Board, consisting of scientific Ph.D.s and M.D.s, to
contribute to the scientific and medical validity of its clinical trials.
RESEARCH AND DEVELOPMENT
A-Fem invested approximately $1,074,000 on research and development in
the year ended December 31, 1999, primarily with respect to ongoing PADKIT
clinical trials and continued patent applications. 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.
EMPLOYEES
As of December 31, 1998, A-Fem had 12 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
3,700 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) A-Fem's common stock low and high bid prices are reported on the OTC
Bulletin Board. The following table sets forth the range of high and low
bids for A-Fem's common stock as reported on the OTC Bulletin Board for the
periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
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
1st Quarter 1999 2.34 1.31
2nd Quarter 1999 2.69 1.25
3rd Quarter 1999 2.06 .94
4th Quarter 1999 1.22 .69
</TABLE>
The foregoing prices reflect inter-dealer prices, without retail markup,
markdown or commission, and may not represent actual transactions.
(b) On December 31, 1999, there were approximately 292 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 under 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
1. On December 22, 1999 A-Fem issued 260,400 shares of Series A Preferred Stock
and warrants to purchase an additional 118,364 shares of Series A Preferred
Stock at an exercise price of $.01 per share to one entity, Capital Consultants,
LLC, acting as agent for individual investors, for cash consideration of
$499,968.00. The warrants expire 10 years from their respective dates of issue.
Shares of Series A Preferred Stock are convertible into shares of the Company's
common stock on a one-for-one basis, subject to adjustment under certain
circumstances to prevent dilution. Capital Consultants, LLC, 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.
2. On March 24, 2000 A-Fem issued 260,415 shares of Series A Preferred Stock and
warrants to purchase an additional 174,365 shares of Series A Preferred Stock at
an exercise price of $.01 per share to one entity, Capital Consultants, LLC,
acting as agent for individual investors, for cash consideration of $499,996.80.
The warrants expire 10 years from their respective dates of issue. Shares of
Series A Preferred Stock are convertible into shares of A-Fem's common stock on
a one-for-one basis, subject to
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adjustment under certain circumstances to prevent dilution. Capital Consultants,
LLC 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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
OVERVIEW
A-Fem continued to experience operating losses during the years ended
December 31, 1999 and 1998. Further, A-Fem has continued to incur losses into
the first quarter of 2000 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. 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
partnering opportunities. A-Fem has raised operating funds in the past by
selling shares of its common and preferred stock for consideration totaling
approximately $2.4 million during 1999 and $4.6 million during 1998.
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, 1999, A-Fem generated net sales of
approximately $67,000 as compared to net sales of approximately $419,000 for the
year ended December 31, 1998. This decrease in net sales was the result of
decreased levels of promotional support for the INSYNC MINIFORM as compared to
the levels maintained during the product introduction and rollout in the prior
year. A-Fem has received contract development income for the joint development
of several RAPID-SENSE products, which income is reflected in Other Income. The
cost of goods sold for the year ended December 31, 1999, was approximately
$274,000, as compared to approximately $495,000 in the year ended December 31,
1998. This decrease was the result of a reduced quantity of goods sold in 1999
as compared to 1998. A-Fem's operating loss for the year ended December 31, 1999
was approximately $2.5 million, compared to an operating loss of approximately
$4.6 million for the previous year. The decrease in operating loss was caused
primarily by decreased marketing and selling expenses related to reduced levels
of promotional support for the INSYNC MINIFORM, offset by an increase in
research and development expenses.
Gross margin for the year ended December 31, 1999 was approximately
- -$207,000 (-311.2% of net sales) as compared to -$76,177 (-18.2% of net sales)
for the year ended December 31, 1998. The change in the gross margin resulted
primarily from the decrease in net sales as compared to our minimum fixed
manufacturing costs.
Marketing and selling expenses were approximately $298,000 for the year
ended December 31, 1999, as compared to approximately $2,562,000 for the prior
year. Prior year expenses resulted from the
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launch of the marketing rollout of A-Fem's INSYNC MINIFORM in the western United
States. This marketing rollout required expenditures for packaging design,
selling materials, advertising production, and media, marketing and sales
consultants. We reduced these expenses in 1999 by limiting consumer advertising
and promotional support for INSYNC MINIFORM.
Research and development expenses for the year ended December 31, 1999,
totaled approximately $1,074,000, as compared to approximately $988,000 for the
year ended December 31, 1998. The increase in these expenses is primarily
attributable to development costs related to the PADKIT clinical trials, which
include the expenses of a contact research organization to administer the
clinical trials, and compensation for the examining physician, the medical
facility and the patient, and laboratory costs for sample evaluation.
General and administrative expenses for the year ended December 31,
1999, totaled approximately $919,000, compared to approximately $983,000 for the
year ended December 31, 1998. The decrease in these expenses is attributable
primarily to decreases in professional fees and a reduction in the number of
employees, offset by increases in bank charges.
A-Fem's net loss for the year ended December 31, 1999, decreased to
approximately $2,494,000 from $4,629,000 for the year ended December 31, 1998.
This positive change reflects the reduction in sales and marketing expenses in
1999 as compared to 1998.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, A-Fem had cash and cash equivalents of
approximately $429,000 as compared to approximately $668,000 at December 31,
1998. 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 and promissory notes, and through capital leases. During 1999,
A-Fem raised approximately $2.4 million from private investors in exchange for
91,350 shares of A-Fem's common stock and 1,197,900 shares of A-Fem's preferred
stock. In 1998, A-Fem raised approximately $4.7 million from private investors
in exchange for 989,586 shares of A-Fem's common stock and 1,457,000 shares of
A-Fem's preferred stock.
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 2000 and 2001, because
the costs of development are expected to continue to exceed income from product
sales. A-Fem has approximately $160,000 per month of operating expenses. In
order to carry out its development plans for RAPID-SENSE and the PADKIT, A-Fem
estimates it will need to raise approximately $3.0 million in addition to the
funds needed for its monthly operating expenses. If A-Fem were able to raise the
entire $3 million at once, it would take approximately 18 months to complete
A-Fem's development plans for RAPID-SENSE and the PADKIT. A-Fem does not expect
significant amounts of debt financing to be available to it in the near term,
and therefore expects that it will have to issue additional equity. A-Fem cannot
predict on what terms any such financing might be available, but any such
financing could involve issuance of equity below current market prices and
result in significant dilution of existing stockholders.
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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.
IF A-FEM IS NOT ABLE TO OBTAIN ADDITIONAL FINANCING OR ATTRACT A STRATEGIC
PARTNER, A-FEM MAY NOT BE ABLE TO CONTINUE OPERATING
During the fiscal year ended December 31, 1999, A-Fem incurred losses of
approximately $2.5 million. Further, A-Fem has not generated significant
revenues from operations. A-Fem expects to continue to incur losses as the costs
of developing, manufacturing and marketing our products continue to exceed
income from product sales.
In order to carry out our development and marketing plans for our PADKIT
and RAPID-SENSE products, we will need to raise significant additional capital.
If we are unable to obtain sufficient financing, it would have a material
adverse effect on our financial condition.
A-Fem expects that significant, ongoing expenditures will be necessary
to successfully implement our business plan and develop, manufacture and market
our products. These circumstances raise substantial doubt about A-Fem's ability
to continue as a going concern. If A-Fem is unable to obtain adequate additional
financing, enter into a strategic partnership, or generate sufficient profitable
sales revenues, we may be required to curtail our product development, marketing
activities and other operations, and we may be forced to cease operations.
IF A-FEM IS NOT ABLE TO ATTRACT A STRATEGIC PARTNER, A-FEM MAY BE UNABLE TO
EXECUTE OUR MARKETING PLANS FOR OUR PRODUCTS
In order to carry out our marketing plans, we will need to find one or
more partners to assist in marketing our miniform and RAPID-SENSE products. To
date we have been unable to attract such a partner. If we are not able to
attract one or more partners, we may be unable to carry out our marketing plans
for these products, which could have a material adverse effect on our financial
condition and results of operations.
A-FEM IS UNLIKELY TO EARN SIGNIFICANT REVENUES FROM OUR PRODUCTS IN THE NEAR
TERM BECAUSE MOST OF A-FEM'S PRODUCTS ARE IN THE EARLY STAGES OF PRODUCT
DEVELOPMENT OR MARKETING
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 has
concluded that we cannot raise sufficient funds to market the INSYNC MINIFORM
nationally through retail outlets. A-Fem cannot estimate the potential market
for our products.
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You should be aware that A-Fem may encounter problems because our
products are in an early stage of development or marketing, including the
following risks:
- A-Fem may encounter unanticipated developmental, testing, regulatory
compliance and marketing costs;
- The new products that A-Fem is developing may not be successfully
developed;
- A-Fem's new products, once developed, may not be successfully
manufactured, advertised and marketed;
- Any of A-Fem's products may become obsolete within a short time after
its development; and
- Costs of research and development and clinical trials for A-Fem's new
products may substantially exceed A-Fem's expectations and financial
resources.
A-FEM'S PRODUCTS MAY NOT ACHIEVE 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. Because the INSYNC MINIFORM is worn interlabially, unlike
any other existing feminine protection products, women may not understand how to
use the INSYNC MINIFORM or may not find it comfortable, and women may not
purchase this product or our other products in commercially viable quantities.
If our products do not achieve adequate market acceptance, such failure may have
a material adverse effect on our financial condition and results of operations.
A-FEM'S PRODUCTS MAY NOT BE ABLE TO COMPETE SUCCESSFULLY WITH EXISTING OR FUTURE
PRODUCTS PRODUCED BY A-FEM'S COMPETITORS
A-Fem's current product 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. With respect to our miniform products, these competitors include the
Procter & Gamble Company, Johnson & Johnson, Kimberly-Clark and Playtex. A-Fem's
research, financial and marketing resources may not be adequate to create and
market products that will compete successfully with existing or future products
created and marketed by such competitors.
HOLDERS OF A-FEM'S COMMON STOCK MAY EXPERIENCE DILUTION IF WE FULFILL OUR
FINANCING NEEDS BY ISSUING ADDITIONAL SHARES OF STOCK
In order to carry out our development, marketing and distribution plans
for our products, we will need to raise significant funds through equity and/or
debt financing. 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. Such equity financing may not be available
or may not be available on terms favorable to A-Fem or our shareholders. If we
issue additional equity in the future to raise funds, this could have a dilutive
effect on holders or purchasers of shares of our common stock.
12
<PAGE> 13
A-FEM'S PATENT AND OTHER INTELLECTUAL PROPERTY PROTECTION MAY NOT BE ADEQUATE
A-Fem has received patents with respect to the PADKIT that cover the
method and apparatus for collection and use of vaginal fluid for diagnostic
purposes. A-Fem has received a patent with respect to the INSYNC MINIFORM that
covers the manufacturing methods and manufacturing materials. A-Fem has filed
patent applications for our first generation RAPID-SENSE technology. The term
for these patents is or will be 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 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 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.
Trade secrets and confidential know-how are important to A-Fem's
scientific and commercial success. Although A-Fem seeks to protect our
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.
A-FEM MAY BE ADVERSELY AFFECTED BY CERTAIN GOVERNMENT REGULATIONS
Many of A-Fem's activities are subject to regulation by various local,
state and federal regulatory authorities in the United States.
Before a medical product may be marketed for use by humans, laboratory
and clinical trials must be performed to validate the safety and effectiveness
of the product. The PADKIT is still in the development stage and will require
FDA approval before being marketed to the public. Obtaining such approval 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.
13
<PAGE> 14
A-FEM DEPENDS ON OUR MANAGEMENT AND CONSULTANTS TO SUCCESSFULLY IMPLEMENT OUR
BUSINESS PLAN
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 healthcare
fields is intense, we may not be able to continue to employ personnel and
consultants with sufficient expertise to satisfy our needs. We do not have
employment contracts with any personnel other than Steven T. Frankel and James
R. Wilson.
A-FEM'S PRODUCT LIABILITY INSURANCE COVERAGE FOR CLAIMS IS LIMITED AND DOES NOT
COVER CLAIMS ARISING FROM TOXIC SHOCK SYNDROME
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 $5,000,000. 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 MAY ISSUE ADDITIONAL SHARES OF PREFERRED STOCK, WHICH COULD DILUTE THE
INTERESTS OF HOLDERS OF OUR COMMON STOCK
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 December 1999, A-Fem issued shares of Series A Convertible
Preferred Stock and warrants to purchase additional shares of Series A
Convertible Preferred Stock to Capital Consultants, LLC (formerly Capital
Consultants, Inc.) as follows:
- 4,316,405 shares of Series A Convertible Preferred Stock issued in
exchange for 4,316,405 shares of A-Fem's common stock;
- 2,654,900 shares of Series A Convertible Preferred Stock and warrants
to purchase an additional 790,064 shares of Series A Convertible
Preferred Stock (at a weighted average exercise price of $0.59 per
share) in exchange for aggregate consideration consisting of
approximately $5.1 million and warrants to purchase 50,000 shares of
A-Fem's common stock.
These issuances of Series A Preferred Stock and any future issuance of
preferred stock may:
- have the effect of delaying, deferring or preventing a change in
control of A-Fem;
- discourage bids for the common stock at a premium over the market
price of the common stock; or
14
<PAGE> 15
- adversely affect the market price and the voting and other rights of
the holders of common stock.
CERTAIN MERGERS OR TAKEOVER ATTEMPTS COULD BE DELAYED OR PREVENTED BY THE
ANTI-TAKEOVER EFFECT OF NEVADA LAW
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.
THE THIN PUBLIC MARKET FOR A-FEM'S COMMON STOCK MAY CAUSE VOLATILITY IN OUR
STOCK PRICE
A-Fem's common stock trades on the OTC Bulletin Board and is thinly
traded.
The market price of our common stock has experienced significant
volatility. During 1999, the price of our common stock ranged from $0.69 per
share to $2.69 per share. The market price of the common stock could be subject
to significant variation due to:
- the degree of success A-Fem achieves in implementing its business
strategy, changes in business or economic conditions affecting A-Fem,
its customers or its competitors;
- fluctuations in A-Fem's operating results, changes in or actual
results varying from earnings or other estimates made by securities
analysts;
- announcements by A-Fem or our competitors concerning product
developments, patents or proprietary rights; and
- other factors both within and outside our control.
In addition, the stock market may experience volatility that affects the
market prices of companies in ways unrelated to the operating performance of
such companies, and such volatility may adversely affect the market price of our
common stock.
There has been significant volatility in the market price of securities
of other early stage companies, technology companies in general and
biotechnology companies in particular.
A-FEM MAY NOT BE ABLE TO SUCCESSFULLY MANUFACTURE OUR PRODUCTS
A-Fem currently manufactures the INSYNC MINIFORM. As a manufacturer,
A-Fem faces the following risks:
- A-Fem may not be able to maintain sufficient numbers of employees, or
may have to pay increased wages.
- A-Fem may not be able to obtain sufficient raw materials, including
the fiber used to manufacture the miniform, when needed or at
reasonable prices.
15
<PAGE> 16
- A-Fem may have to expend additional funds to purchase additional
capital equipment to be able to increase the quantity of miniforms we
manufacture or to remedy plant or equipment obsolescence.
- A-Fem may not be able to adequately maintain the quality of the
miniforms we manufacture.
- If the demand for miniforms is significantly greater or lower than we
predict, we may experience excess or inadequate manufacturing
capacity.
Any of the risks listed above, or any other disruption in A-Fem's
production, could have a material adverse effect on A-Fem's results of
operations and financial condition.
A-FEM MAY EXPERIENCE AN ADVERSE IMPACT FROM FUTURE SALES OF OUR STOCK
As of December 31, 1999, 3,477,488 shares of common stock were subject
to outstanding stock options under A-Fem's stock option plans at a weighted
average exercise price of approximately $2.55 per share. As of December 31,
1999, 2,428,656 shares were issuable upon exercise of outstanding warrants at a
weighted average exercise price of $2.37 per share.
We intend to file a registration statement on Form S-8 under the
Securities Act to register for resale a total of 5 million shares of common
stock reserved for issuance under A-Fem's stock option plans. Sales of
substantial amounts of A-Fem's common stock in the public market by existing
shareholders or holders of options or warrants could cause the price of the
common stock to go down.
Approximately 2.8 million shares of A-Fem's common stock are registered
or in the process of being registered under the Securities Act, approximately
1.3 million shares are freely tradable under the federal securities laws subject
to volume limitations under Rule 144, and approximately 6.6 million additional
shares are freely tradable under the federal securities laws to the extent they
are not held by our affiliates or are not subject to certain contractual volume
restrictions.
In general, under Rule 144 as currently in effect, any person (or
persons whose shares are aggregated) who has beneficially owned restricted
securities for at least one year is entitled to sell, within any three-month
period, a number of shares that does not exceed the greater of:
- 1% of the then outstanding shares of the issuer's common stock, and
- the average weekly trading volume during the four calendar weeks
preceding such sale
provided that certain public information about the issuer as required by Rule
144 is then available and the seller complies with certain other requirements.
A person who:
- is not an affiliate,
- has not been an affiliate within three months prior to sale, and
- has beneficially owned the restricted securities for at least two
years
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<PAGE> 17
is entitled to sell such shares under Rule 144(k) without regard to any of the
limitations described above.
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.
17
<PAGE> 18
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. 59 Chairman and Director
Steven T. Frankel 57 Chief Executive Officer, President and Director
William H. Fleming, Ph.D. 53 Vice Chairman-Diagnostics, Secretary and
Director
Carol A. Scott, Ph.D. 50 Director
RoseAnna Sevcik 36 Director
James Wilson 50 Treasurer, Director of Business Development
and Director
KEY EMPLOYEE
------------
Martin Harvey 58 Controller
</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. Since July
1994, Dr. Reinmuth has 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 and Company, a
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 HIDA Educational Foundation,
Washington, D.C.
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<PAGE> 19
WILLIAM H. FLEMING, Ph.D., has served as Vice Chairman-Diagnostics of
A-Fem 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 School 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 serving as Director of Mortgage Backed Securities for SunAmerica
Investments since July of 1999. From March 1996 to May 1999, Ms. Sevcik served
as vice president/senior portfolio manager of Penn Mutual. 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.
KEY EMPLOYEE
MARTIN HARVEY has served as the Company's Controller since June 1998.
From 1993 to 1998, Mr. Harvey held several other controller positions with a
variety of manufacturing companies. 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.
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. Non-employee
directors receive options or warrants to purchase shares of A-Fem's common stock
in consideration for their services.
19
<PAGE> 20
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 $100,000 in compensation (the "Named
Executive Officers") for each of the fiscal years ended December 31, 1999, 1998
and 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------- ---------------------
OTHER ANNUAL SECURITIES UNDERLYING
NAME AND PRINCIPAL SALARY COMPENSATION OPTIONS/WARRANTS
POSITION YEAR ($) ($) (#)
- --------------------------- ---- ------- ------------ ---------------------
<S> <C> <C> <C> <C>
James E. Reinmuth (1) 1999 30,000 -- --
Chief Executive Officer, 1998 45,025 -- 150,000
Chairman and Director 1997 40,000 -- 26,667
Steven T. Frankel (2) 1999 300,769 -- --
Chief Executive Officer, 1998 103,863 -- 1,700,000
President and Director 1997 -- -- --
William H. Fleming 1999 115,000 -- --
Vice Chairman-Diagnostics, 1998 119,449 -- 150,000
Secretary and Director 1997 115,000 -- 26,667
</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. Mr. Frankel's 1999 salary reflects
$60,769 in deferred salary from 1998.
OPTION GRANTS
No options were granted to Named Executive Officers during the fiscal
year ended December 31, 1999.
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<PAGE> 21
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, 1999.
1999 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, 1999 DECEMBER 31, 1999(2)
----------------------------- --------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
James E. Reinmuth 326,667 150,000(1) -0- -0-
Steven T. Frankel 475,000 1,225,000(1) -0- -0-
William H. Fleming 176,667 150,000(1) -0- -0-
</TABLE>
(1) These options are subject to performance-based conditions.
(2) Based on a fair market value of $.72 per share, the price per share of
A-Fem's common stock on December 31, 1999.
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 receive options pursuant to
paragraph 13 of the Plan.
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. Either party may terminate the
Reinmuth Consulting Agreement on 30 days' prior notice.
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. Either party may terminate the Wilson
Employment Agreement on 30 days' prior notice.
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. Either party
may terminate the Frankel Employment Agreement on 30 days' prior notice.
21
<PAGE> 22
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires that A-Fem's officers, directors and persons who own more than 10% of
A-Fem's common stock file with the Securities and Exchange Commission 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% 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 10% beneficial owners were complied with during the
fiscal year ended December 31, 1999.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership as of December 31, 1999, of A-Fem's common stock $0.01 par
value of (i) each beneficial owner of more than 5% 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>
Capital Consultants, LLC 7,021,305(2) 42.3%
2300 SW First Avenue, Suite 200
Portland, OR 97201
Cort MacKenzie & Co., Inc. 1,206,000(3) 11.2%
PO Box 716
Lake Oswego, OR 97034
William H. Fleming 828,592(4) 8.5%
10180 SW Nimbus Ave.,
Suite J-5
Portland, OR 97223
Vice-Chairman, Secretary and Director
Steven T. Frankel 475,000(5) 4.7%
9668 Claiborne Square
LaJolla, CA 92037
Chief Executive Officer,
President and Director
Jeffrey L. Grayson 7,021,305(6) 42.3%
2300 SW First Avenue, Suite 200
Portland, OR 97201
</TABLE>
22
<PAGE> 23
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF CLASS
BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) OUTSTANDING
- ---------------------------------------- ------------------------ ----------------
<S> <C> <C>
540,667(7) 5.5%
James E. Reinmuth
5171 Solar Heights Drive
Eugene, OR 97405
Chairman and Director
Richard T. Schroeder 539,000(8) 5.5%
3840 SW 75th Ave.
Portland, OR 97225
Carol A. Scott 40,000(9) *
1834 Park Blvd.
Palo Alto, CA 94306
Director
RoseAnna Sevcik 50,000(10) *
3843 Cottonwood Grove Terrace
Calabasas, CA 91301
Director
Thomas C. Stewart 1,206,000(3) 11.2%
c/o Cort McKenzie & Co., Inc.
PO Box 716
Lake Oswego, OR 97034
James R. Wilson 410,095(11) 4.3%
2968 Matt Drive
Eugene, OR 97408
Treasurer and Director
All directors and officers 2,344,354(12) 21.9%
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 6,971,305 shares issuable upon conversion of shares of Series A
Convertible Preferred Stock, and an additional 50,000 shares issuable upon
conversion of shares issuable upon exercise of warrants to purchase Series
A 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.
23
<PAGE> 24
(3) Consists of 869,650 and 270,000 shares issuable upon exercise of warrants
to purchase common stock held by Cort MacKenzie & Co., Inc. and Thomas C.
Stewart, respectively.
(4) Includes 176,667 shares issuable upon the exercise of options to purchase
common stock.
(5) Consists of 475,000 shares issuable upon the exercise of options to
purchase common stock.
(6) Mr. Grayson is the Chairman and Chief Executive Officer of Capital
Consultants LLC, with which entity Mr. Grayson shares voting and
dispositive power with respect to these shares.
(7) Includes 23,000 shares of common stock held by the Reinmuth Family Trust,
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.
(8) Includes 250,000 shares issuable upon the exercise of warrants to purchase
common stock, 30,000 shares held by Mr. Schroeder's spouse, and 29,000
shares held by their children. Mr. Schroeder disclaims beneficial ownership
of the 29,000 shares held by his children.
(9) Includes 40,000 shares issuable upon the exercise of options to purchase
common stock.
(10) Includes 50,000 shares issuable upon the exercise of options to purchase
common stock.
(11) Includes 160,000 shares of common stock held jointly with Mr. Wilson's
spouse, with whom Mr. Wilson shares voting power with respect to an
additional 153,428 shares, and 96,667 shares issuable upon the exercise of
options to purchase common stock.
(12) Includes 915,001 shares issuable upon the exercise of options to purchase
common stock and 250,000 shares issuable upon exercises of warrants to
purchase common stock.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of December 31, 1999, William H. Fleming, A-Fem's Vice-Chairman of
the Board and Secretary, had an outstanding balance of approximately $66,000 on
a loan from A-Fem. This loan was made on November 18, 1994, and the original
principal balance was $52,000. Interest accrues at a rate of 6.24% and is
capitalized. Mr. Fleming used the proceeds from this loan to purchase shares of
A-Fem's common stock upon exercise of a stock option.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index.
(b) Reports on Form 8-K filed during Last Quarter of Fiscal Year.
None.
24
<PAGE> 25
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 30, 2000
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, March 30, 2000
- -------------------------------------- President and Director
Steven T. Frankel (principal executive officer)
/s/ James E. Reinmuth Chairman and Director March 30, 2000
- --------------------------------------
James E. Reinmuth
/s/ William H. Fleming Vice Chair-Diagnostics, March 30, 2000
- -------------------------------------- Secretary and Director
William H. Fleming
/s/ James R. Wilson Treasurer and Director March 30, 2000
- --------------------------------------
James R. Wilson
/s/ Martin Harvey Controller March 30, 2000
- -------------------------------------- (principal financial and accounting
Martin Harvey officer)
/s/ Carol A. Scott Director March 30, 2000
- --------------------------------------
Carol A. Scott
/s/ RoseAnna Sevcik Director March 30, 2000
- --------------------------------------
RoseAnna Sevcik
/s/ Merry Disney Director March 30, 2000
- --------------------------------------
Merry Disney
</TABLE>
25
<PAGE> 26
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
A-Fem Medical Corporation:
We have audited the accompanying balance sheets of A-Fem Medical
Corporation (a Nevada corporation) as of December 31, 1999 and 1998, 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, 1999. 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 auditing standards generally
accepted in the United States. 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, 1999 and 1998, and the results of its operations
and its cash flows for each of the two years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States.
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.
ARTHUR ANDERSEN LLP
Portland, Oregon
February 25, 2000
F-1
<PAGE> 27
A-FEM MEDICAL CORPORATION
BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
ASSETS
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 428,845 $ 668,369
Accounts receivable 6,622 38,235
Inventories 65,581 70,855
Prepaid expenses 86,649 257,603
---------- ----------
Total current assets 587,697 1,035,062
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS 1,286,012 1,235,173
Less - Accumulated depreciation and amortization (640,331) (524,484)
---------- ----------
Total property, equipment and leasehold 645,681 710,689
improvements
PATENTS, net 54,700 59,872
LOANS RECEIVABLE - Officers and directors 65,675 62,193
---------- ----------
Total assets $1,353,753 $1,867,816
========== ==========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 64,101 $ 299,471
Current portion - capital lease obligations 31,664 183,339
Accrued expenses 83,796 74,075
Accrued salaries and benefits 84,857 138,394
Note payable -- 417,345
------------ ------------
Total current liabilities 264,418 1,112,624
LONG-TERM LIABILITIES:
Long-term portion - capital lease obligations 4,660 41,607
Long-term note payable 450,000 --
------------ ------------
Total long-term liabilities 454,660 41,607
------------ ------------
Total liabilities 719,078 1,154,231
COMMITMENTS (NOTE 7)
STOCKHOLDERS' EQUITY:
Series A Convertible Preferred Stock, $.01 par value; authorized 8,200,000 69,713 57,734
shares; issued 6,971,305 shares and 5,773,405 shares at December 31, 1999
and 1998, respectively
Common stock, $.01 par value; authorized 33,000,000 shares; issued 9,563,225 95,632 94,719
shares and 9,471,875 shares at December 31, 1999 and 1998, respectively
Warrants issued for Series A Convertible Preferred Stock 1,152,148 761,882
Warrants issued for common stock 76,491 76,491
Additional paid-in capital 18,093,143 16,081,044
Accumulated deficit (18,852,452) (16,358,285)
------------ ------------
Total stockholders' equity 634,675 713,585
------------ ------------
Total liabilities and stockholders' equity $ 1,353,753 $ 1,867,816
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-2
<PAGE> 28
A-FEM MEDICAL CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
REVENUES:
Sales, net of discounts $ 66,534 $ 418,915
----------- -----------
Net sales 66,534 418,915
COST OF SALES:
Cost of goods sold 273,589 495,092
----------- -----------
Gross margin (207,055) (76,177)
OPERATING EXPENSES:
Selling and marketing 297,822 2,561,887
General and administrative 919,355 982,787
Research and development 1,074,346 988,121
----------- -----------
Operating loss (2,498,578) (4,608,972)
----------- -----------
OTHER INCOME (EXPENSE):
Interest income 13,611 25,021
Interest expense (69,561) (88,950)
Licensing income 35,000 35,000
Other income 25,361 8,804
----------- -----------
4,411 (20,125)
----------- -----------
Net loss $(2,494,167) $(4,629,097)
=========== ===========
NET LOSS PER SHARE, basic and diluted $ (.26) $ (.38)
=========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 9,520,249 12,178,262
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 29
A-FEM MEDICAL CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
---------------------------------- ----------------------------------
SHARES AMOUNT WARRANTS SHARES AMOUNT WARRANTS
--------- ------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
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, 1,457,000 14,570 -- -- -- --
net of financing costs
Warrants issued in connection with note payable -- -- -- -- -- --
Warrants issued in connection with issuance of
common stock -- -- -- -- -- 76,491
Warrants issued in connection with issuance of
preferred stock -- -- 761,882 -- -- --
Net loss -- -- -- -- -- --
--------- ------- ---------- ---------- -------- --------
BALANCE, December 31, 1998 5,773,405 57,734 761,882 9,471,875 94,719 76,491
Common stock issued for cash $1.50 per share, -- -- -- 25,000 250 --
net of financing costs
Common stock issued for cash $1.49 per share, -- -- -- 33,333 333 --
net of financing costs
Common stock issued for cash $1.52 per share, -- -- -- 33,017 330 --
net of financing costs
Preferred stock issued for cash $1.92 per share, 1,197,900 11,979 -- -- -- --
net of financing costs
Warrants issued in connection with issuance of
preferred stock -- -- 390,266 -- -- --
Net loss -- -- -- -- -- --
--------- ------- ---------- ---------- -------- --------
BALANCE, December 31, 1999 6,971,305 $69,713 $1,152,148 9,563,225 $ 95,632 $76,491
========= ======= ========== ========== ======== ========
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
PAID-IN ACCUMULATED STOCKHOLDERS'
CAPITAL DEFICIT EQUITY
----------- ------------- ------------
<S> <C> <C> <C>
BALANCE, December 31, 1997 $12,310,311 $(11,729,188) $ 709,110
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, 2,719,026 -- 2,733,596
net of financing costs
Warrants issued in connection with note payable 32,655 -- 32,655
Warrants issued in connection with issuance of
common stock (76,491) -- --
Warrants issued in connection with issuance of
preferred stock (761,882) -- --
Net loss -- (4,629,097) (4,629,097)
----------- ------------- ------------
BALANCE, December 31, 1998 16,081,044 (16,358,285) 713,585
Common stock issued for cash $1.50 per share, 37,250 -- 37,500
net of financing costs
Common stock issued for cash $1.49 per share, 49,167 -- 49,500
net of financing costs
Common stock issued for cash $1.52 per share, 49,695 -- 50,025
net of financing costs
Preferred stock issued for cash $1.92 per share, 2,266,253 2,278,232
net of financing costs
Warrants issued in connection with issuance of
preferred stock (390,266) -- --
Net loss -- (2,494,167) (2,494,167)
----------- ------------- ------------
BALANCE, December 31, 1999 $18,093,143 $(18,852,452) $ 634,675
=========== ============= ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 30
A-FEM MEDICAL CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,494,167) $(4,629,097)
Adjustments to reconcile net loss to net cash flows
used in operating activities-
Depreciation and amortization 126,581 155,667
Loss (gain) on disposal of assets 362 (134)
Other noncash income (3,482) (3,483)
Other noncash expense 32,655 --
Changes in operating assets and liabilities:
Restricted cash -- 52,500
Accounts receivable 31,613 38,861
Inventories 5,274 102,108
Prepaid expenses and other 170,954 (84,289)
Accounts payable (235,370) (230,117)
Accrued expenses 9,721 14,707
Accrued salaries and benefits (53,537) (23,780)
----------- -----------
Net cash used in operating activities (2,409,396) (4,607,057)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, equipment and leasehold (61,183)) (37,909)
improvements
Net proceeds from sale of equipment 825 350
Other assets 3,595 (406)
----------- -----------
Net cash used in investing activities (56,763) (37,965)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock 137,025 1,867,321
Net proceeds from sale of preferred stock 2,278,232 2,733,596
Repayments on capital lease obligations (188,622) (263,293)
Proceeds from note payable -- 450,000
----------- -----------
Net cash provided by financing activities 2,226,635 4,787,624
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (239,524) 142,602
CASH AND CASH EQUIVALENTS, beginning of period 668,369 525,767
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 428,845 $ 668,369
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Exchange of preferred stock for common stock $ -- $ 8,287,498
Equipment acquired under capital leases -- 4,110
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Total cash paid for interest 69,561 88,950
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 31
A-FEM MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
1. ORGANIZATION OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
A-Fem Medical Corporation (the Company or A-Fem) is a medical technology
company with multiple product platforms targeting women's health needs. A-Fem
has developed three proprietary technology platforms: one based on its INSYNC(R)
miniform interlabial pad, another based on its RAPID-SENSE(R) diagnostic tests
and the third based on its PADKIT(R) SAMPLE COLLECTION SYSTEM. A-Fem currently
markets the INSYNC miniform as an alternative to tampons, pads and liners for
light flow, or in combination for heavier flow protection. The PADKIT, currently
in clinical trials, utilizes a miniform as a noninvasive sample collection
method for use in testing for certain cancers and sexually transmitted and
infectious diseases. A-Fem has also entered into several joint relationships to
develop point-of-care diagnostic products that provide quantified results using
its proprietary RAPID-SENSE technology.
The Company has experienced significant operating losses during the
years ended December 31, 1999 and 1998 and has continued to incur losses into
the first quarter of 2000. 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 $2.4 million and $4.6 million during 1999 and 1998, respectively,
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> 32
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, 1999, sales to one customer amounted to approximately 18% of
total sales. For the year ended December 31, 1998, sales to one customer
amounted to approximately 50% 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.
LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 121,
long-lived assets held and used by the Company are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. For purposes of evaluating the recoverability
of long-lived assets, the recoverability test is performed using undiscounted
net cash flows of the asset.
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 $22,052 and $20,475 as of
December 31, 1999 and 1998, 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.
F-7
<PAGE> 33
ADVERTISING COSTS
Advertising costs, which are included in sales and marketing expense,
are expensed when the advertising first takes place. Advertising expense was
$41,934 and $1,657,199 in 1999 and 1998, respectively.
NET LOSS PER SHARE
Basic earnings per share (EPS) and diluted EPS are required to be
computed using the methods prescribed by Statement of Financial Accounting
Standards No. 128, "Earnings per Share" (SFAS 128). Basic EPS is calculated
using the weighted average number of common shares outstanding for the period
and diluted EPS is computed using the weighted average number of common shares
and dilutive common equivalent shares outstanding. Following is a reconciliation
of basic EPS and diluted EPS for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998
--------------------------------------- --------------------------------------
PER PER
SHARE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
----------- --------- ------ ----------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Income available to $(2,494,167) 9,520,249 $(.26) $(4,629,097) 12,178,262 $(.38)
Common Stockholders
Effect of dilutive
securities:
Stock options -- -- -- -- -- --
----------- --------- ----- ----------- ---------- -----
Diluted EPS:
Income available to
Common Stockholders $(2,494,167) 9,520,249 $(.26) $(4,629,097) 12,178,262 $(.38)
=========== ========= ===== =========== ========== =====
</TABLE>
At December 31, 1999 and 1998, the Company had options and warrants
outstanding covering 5,906,144 and 6,258,617 shares, respectively, of the
Company's common stock not included in the above calculations because they would
have been antidilutive. In addition, at December 31, 1999 and 1998, the Company
had 6,971,305 and 5,773,405 shares, respectively, issuable pursuant to the
Company's convertible preferred stock and warrants outstanding covering 790,064
and 484,200 shares, respectively, of the Company's convertible preferred stock
that were not included because they would have been antidilutive.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities, if any, at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
F-8
<PAGE> 34
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1999, the FASB issued Statement of Financial Accounting
Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 137). SFAS 137 is an amendment to previously issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 137
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS 137 also requires that changes in the
derivative instrument's fair value be recognized currently in results of
operations unless specific hedge accounting criteria are met. SFAS 137 is
effective for fiscal years beginning after June 15, 2000. The Company expects
that adoption of SFAS 137 will not have a material impact on the Company's
financial condition or results of operations.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts to
conform to the current year presentation.
2. INVENTORIES:
Inventories consisted of the following components at December 31:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Raw materials $40,629 $61,517
Work-in-process -- 1,105
Finished goods 24,952 8,233
------- -------
$65,581 $70,855
======= =======
</TABLE>
3. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Property $ 37,099 $ 37,099
Equipment 1,131,762 1,080,923
Leasehold improvements 117,151 117,151
1,286,012 1,235,173
Less- Accumulated depreciation and amortization (640,331) (524,484)
---------- ----------
Net property, equipment and leasehold improvements $ 645,681 $ 710,689
========== ==========
</TABLE>
Included in the above table are amounts relating to assets utilized under
capital leases which had a net book value of $228,100 and $685,384 at December
31, 1999 and 1998, respectively.
F-9
<PAGE> 35
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 was payable one year
from the date of the agreement, April 13, 1999. The loan fee is being accrued
over the term of the Agreement. Subsequent to year-end, the investor agreed to
extend the due date of the Agreement by two years. The total interest expense on
this note for 1999 and 1998 was $69,551 and $68,000, respectively, including
$16,667 and $33,333, respectively, 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.
Future minimum lease payments under capital leases as of December 31 are
as follows:
<TABLE>
<S> <C>
2000 $33,667
2001 4,778
-------
Total minimum lease payments 38,445
Less - Amount representing interest (at rates 2,121
ranging from 6.24% to 22.20%)
-------
Present value of minimum lease payments 36,324
Less - Current portion 31,664
-------
Long-term lease obligation $ 4,660
=======
</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 8,200,000 of the total authorized shares, of which 6,971,305
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.
F-10
<PAGE> 36
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 stockholder 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, 1999, 475,000 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 then 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,
1999, 108,333 of these options were exercisable. The vesting of the remaining
unexercisable options for each employee may be accelerated upon meeting certain
performance criteria.
In addition, the Company has an Incentive and Non-Qualified Stock Option
Plan (the Incentive Plan), under which 3,300,000 shares of common stock are
reserved for issuance under qualified options, nonqualified options, stock
appreciation rights and other awards as set forth in the Incentive Plan. The
Incentive Plan provides for administration by a Committee comprised of not less
than two members of the Company's Board of Directors. The Committee (or the
Board of Directors in its absence) determines the number of shares, option
price, duration and other terms of the options granted under the Incentive Plan.
Qualified options are available for issuance to employees of the Company.
Nonqualified options are available for issuance to consultants, advisors and
others having a relationship with the Company, on terms as determined by the
Committee. Under the Incentive Plan, the exercise price of a qualified option
cannot be less than the fair market value on the date of grant and the exercise
price of a nonqualified option is determined by the Committee on the date of
grant. Options granted under the Incentive Plan generally vest three to five
years from the date of grant and generally expire ten years from the date of
grant.
F-11
<PAGE> 37
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, 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
Options granted 570,833 2.77
Options canceled (831,956) 2.81
--------- -----
Balance at December 31, 1999 3,477,488 $2.55
========= =====
</TABLE>
Of the outstanding options at December 31, 1999 and 1998, 963,905 and
1,645,861, respectively, were qualified stock options and 242,750 and 242,750,
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 were 660,643 and 163,609 at December 31, 1999 and 1998,
respectively.
The following table summarizes information about stock options
outstanding at December 31, 1999:
<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 1999 LIFE - YEARS PRICE 1999 PRICE
---------- -------------- ------------ -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$1.75-2.88 2,699,516 5.80 $2.21 874,250 $2.03
3.00-4.69 627,972 5.03 3.43 589,972 3.38
5.13 150,000 4.84 5.13 150,000 5.13
---------- --------- ---- ----- --------- -----
$1.75-5.13 3,477,488 5.56 $2.55 1,614,222 $2.81
========== ========= ==== ===== ========= =====
</TABLE>
At December 31, 1998, 719,255 options were exercisable at a weighted
average exercise price of $2.78 per share.
COMMON STOCK WARRANTS
As of December 31, 1999, warrants for a total of 2,428,656 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:
F-12
<PAGE> 38
<TABLE>
<CAPTION>
SHARES WEIGHTED AVERAGE
SUBJECT TO EXERCISE PRICE
WARRANTS PER SHARE
---------- ----------------
<S> <C> <C>
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
Warrants granted -- --
Warrants canceled -- --
Warrants exercised (91,350) 1.50
--------- -----
Balance at December 31, 1999 2,428,656 $2.37
========= =====
Number exercisable at December 31, 1999 2,428,656 $2.37
</TABLE>
During the year ended December 31, 1999, the Company extended the
exercise date of warrants for 141,350 shares of the Company's Common Stock
previously granted to various investors in the Company. The warrants are
exercisable at a price of $1.50 per share and expire in 2004, five years from
the date of the extension.
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 1999, the Company awarded warrants for a total of 305,864 shares
of the Company's Preferred Stock. 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, 1999,
warrants for 790,064 preferred shares were granted and outstanding with a
weighted average exercise price of $.59 per share. The warrants vest on the date
two years from the date of issuance. At December 31, 1999, warrants for a total
of 50,000 shares 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 Accounting Principals Board No. 25 (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-13
<PAGE> 39
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 1999 and 1998 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,
------------------------
1999 1998
------- -------
<S> <C> <C>
Average risk-free interest rate 5.85% 6.00%
Expected dividend yield -- --
Expected lives 6 years 6 years
Expected volatility 108.80% 80.10%
</TABLE>
Using the Black-Scholes methodology, the total value of options and
warrants granted during 1999 and 1998 was $1,120,818 and $5,169,875,
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 1999 and 1998 was $1.57 and $2.04 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>
1999 1998
--------------------------------- ---------------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net loss $(2,494,167) $(4,329,973) $(4,629,097) $(5,843,151)
Net loss per share (.26) (.45) (.38) (.48)
</TABLE>
While additional awards are anticipated in future years, 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.
6. INCOME TAXES:
As of December 31, 1999, the Company had federal net operating loss
(NOL) carryforwards of approximately $21 million. If not applied against future
taxable income, the federal NOL carryforwards will expire in the years 2001
through 2019. Changes in the Company's ownership may cause an annual limitation
on the amount of carryforwards that can be utilized. As of December 31, 1999 and
1998, the Company had net deferred tax assets of approximately $8.4 million and
$7.2 million, respectively, primarily resulting from NOL carryforwards. In
accordance with SFAS 109, at December 31, 1999 and 1998 a valuation allowance
was recorded to reduce net deferred tax assets to zero.
The significant components of the Company's deferred tax assets and
liabilities as of December 31, 1999 and 1998 are as follows:
F-14
<PAGE> 40
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Components of deferred tax assets:
Accrued salaries and benefits $ 25,852 $ 41,854
Accrued expenses 22,196 28,503
Net operating loss and other tax credit
carryforwards -- --
8,440,058 7,249,051
----------- -----------
Total deferred tax assets 8,488,106 7,319,408
Components of deferred tax liability:
Fixed assets (80,024) (57,282)
Valuation allowance (8,408,082) (7,262,126)
----------- -----------
Net asset $ -- $ --
=========== ===========
</TABLE>
The reconciliation between the effective tax rate and the statutory
federal tax rate on net loss as a percentage is as follows for the years ending
December 31:
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Statutory federal income tax rate 35.0 34.0
State taxes, net of federal tax benefit 4.3 4.1
Effect of change in valuation allowance (39.3) (38.1)
----- -----
-- --
===== =====
</TABLE>
7. RELATED PARTY TRANSACTIONS
As of December 31, 1999, the Company's Vice-Chairman of the Board and
Secretary, had an outstanding balance of approximately $66,000 on a loan from
the Company. This loan was made on November 18, 1994, and the original principal
balance was $52,000. Interest accrues at a rate of 6.24% and is capitalized. The
proceeds from this loan were used to purchase shares of the Company's common
stock upon exercise of a stock option.
8. 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,
F-15
<PAGE> 41
with an additional $2 million to be received over the term of the agreement if
certain milestones are achieved. The manufacturer opted not to continue with the
contract.
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, 1999:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 98,609
2001 19,367
--------
Total minimum payments required $117,976
========
</TABLE>
Rent expense for the Company's operating leases was $134,968 and
$125,351 for 1999 and 1998, respectively.
9. SUBSEQUENT EVENT:
Financing Commitment
During the first quarter of 2000, the Company issued 260,415 shares of the
Company's Series A Convertible Preferred Stock and warrants to purchase an
additional 174,365 shares of the Company's Series A Convertible Preferred Stock
in exchange for approximately $500,000 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 source of financing.
F-16
<PAGE> 42
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
3.1(1) Articles of Incorporation, as amended
3.2(2) Bylaws, as amended
4.1(3) Form of Stock Purchase Warrant
4.2(3) Form of Series A Preferred Stock Certificate
*10.1(4) Employment Agreement between A-Fem Medical Corporation and Steven T. Frankel, dated effective
April 25, 1998
10.2(5) Business Park Lease between A-Fem Medical Corporation, Petula Associates, Ltd. and Koll Portland
Associates, dated March 1, 1996
10.3(6) Scholls Business Center First Amendment to Lease between A-Fem Medical Corporation, Petula
Associates, Ltd. and Equity FC, Ltd.
10.4(7) Form of Registration Rights Agreement used for Mr. Waller, Esler, Stephens & Buckley and Lane,
Powell, Spears and Lubersky
10.5(8) Form of Registration Rights Agreement
10.6(8) ATHENA Medical Corporation's 1994 Incentive and Non-Qualified Stock Option Plan, dated as of
June 7, 1994
*10.7(8) Form of Incentive Stock Option Agreement
*10.8(8) Form of Non-Statutory Stock Option Agreement
10.9(8) Form of Purchase Warrant Certificate
10.12(9) Agreement dated effective as of April 28, 1997, between The Proctor & Gamble Company and A-Fem
Medical Corporation
*10.13(10) Employment Agreement between A-Fem Medical Corporation and James R. Wilson, dated as of May 1, 1997
10.14(11) Form of Capital Lease between A-Fem Medical Corporation and First Portland Leasing Corp.
27.1 Financial Data Schedule
</TABLE>
<PAGE> 43
- ---------------------------------------------------
(1) Incorporated by reference to the exhibits to A-Fem's quarterly report on
Form 10-QSB for the quarter ended September 30, 1999.
(2) Incorporated by reference to the exhibits to A-Fem's annual report on Form
10-KSB/A to the year ended December 31, 1998.
(3) Incorporated by reference to the exhibits to A-Fem's quarterly report on
Form 10-QSB for the quarter ended September 30, 1998.
(4) Incorporated by reference to the exhibits to A-Fem's quarterly report on
Form 10-QSB for the quarter ended June 30, 1998.
(5) 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.
(6) 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.
(7) 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.
(8) Incorporated by reference to the exhibits to A-Fem's Annual Report on Form
10-KSB for the year ended December 31, 1996.
(9) 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.
(10) Incorporated by reference to the exhibits to A-Fem's quarterly report on
Form 10-QSB for the quarter ended June 30, 1997.
(11) Incorporated by reference to the exhibits to A-Fem's Annual Report on Form
10-KSB for the year ended December 31, 1997.
* Indicates management contract or compensation plan.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM A-FEM
MEDICAL CORPORATION'S FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 429
<SECURITIES> 0
<RECEIVABLES> 7
<ALLOWANCES> 0
<INVENTORY> 66
<CURRENT-ASSETS> 588
<PP&E> 1,286
<DEPRECIATION> (640)
<TOTAL-ASSETS> 1,354
<CURRENT-LIABILITIES> 264
<BONDS> 0
0
70
<COMMON> 96
<OTHER-SE> 469
<TOTAL-LIABILITY-AND-EQUITY> 1,354
<SALES> 67
<TOTAL-REVENUES> 67
<CGS> 274
<TOTAL-COSTS> 274
<OTHER-EXPENSES> 2,292
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 70
<INCOME-PRETAX> (2,494)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,494)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,494)
<EPS-BASIC> (.26)
<EPS-DILUTED> (.26)
</TABLE>
