UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB/A
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER: 0-17119
A-FEM MEDICAL CORPORATION
(Name of small business issuer in its charter)
NEVADA 33-0202574
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10180 SW NIMBUS AVE., SUITE J-5
PORTLAND, OR 97223
(Address of principal executive offices)
Issuer's telephone number, including area code: (503) 968-8800
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SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
(Title of each class) (Name of each exchange on which registered)
None None
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
(Title of Class)
Common Stock, par value $0.01 per share
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X]
Issuer's revenues for the fiscal year ended December 31, 1998: $418,915
As of August 13, 1999 the aggregate market value of $.01 par value Common Stock held by non-affiliates of the issuer was $11,785,320.
As of August 13, 1999, the issuer had outstanding 9,563,558 shares of its $.01 par value Common Stock.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
This amendment to A-Fem Medical Corporation's annual report on Form 10-KSB contains amendments to Part I, Item 1, Part II, Items 5, 6 and 12, the financial statements and related notes, and the exhibit list and exhibits as set forth in the following pages.
PART I
ITEM 1: DESCRIPTION OF BUSINESS
A-Fem Medical Corporation is a medical technology company with multiple product platforms targeting women's health needs. A-Fem has developed three proprietary technology platforms: one based on its inSync(R) miniform interlabial pad, another based on its PadKit(R) Sample Collection System and the third based on its Rapid-Sense(TM) diagnostic tests. A-Fem currently markets the inSync miniform as an alternative to tampons, pads or liners for light flow protection. The PadKit, currently in clinical trials, utilizes a miniform as a non-invasive sample collection method for use in testing for certain cancers and diseases. A-Fem is also developing point-of-care diagnostic products that provide quantified results using its proprietary Rapid-Sense technology.
A-Fem was incorporated in Nevada on December 9, 1986, as Xtramedics, Inc. In June 1994, it changed its name to ATHENA Medical Corporation, and in July 1997, to A-Fem Medical Corporation.
PRINCIPAL PRODUCTS
A-Fem's inSync miniform is the first generation of a product that introduces an entirely new segment within the feminine protection market. The miniform is a small, convenient absorbent pad worn lengthwise between the labia where a woman's body naturally and comfortably holds it in place. The miniform provides dependable protection on light menstrual flow days and additional protection against leakage on heavy menstrual flow days. In addition, the miniform may be used as protection for slight urine loss (stress incontinence), vaginal discharge, mid-cycle spotting and to provide a general feeling of freshness.
A-Fem launched a marketing roll-out of its inSync miniform in grocery, drug and mass retailers in Oregon and Washington in January 1998. In July 1998, the product's area of distribution was expanded to include Colorado, Arizona, Utah, New Mexico, Nevada, Montana and Idaho. A-Fem is now seeking a strategic partner to assist in the continued national roll-out of the miniform.
A-Fem's PadKit integrates A-Fem's miniform technology with its diagnostic expertise to create a unique sample collection system. In March 1998, A-Fem was issued a patent that covers methods of collection and diagnosis of vaginal fluid, including menses, which form the technological basis for the PadKit. The PadKit is designed to replace the cervical scrape as a sample collection method for tests that screen for cervical cancer and certain other cancers and diseases. The PadKit contains a miniform to be used as a collection device during the normal
menstrual cycle. The miniform will collect blood, along with numerous cells, vaginal mucous and discharge flushed out by the menstrual flow.
A-Fem is currently completing a Pilot Study for its PadKit to demonstrate the effectiveness of this sample collection system as an alternative to the cervical scrape. An estimated 50 million cervical scrapes are performed annually in the United States alone to collect samples to use in the Pap smear test for cervical cancer. Although significant improvements have been made in the area of Pap smear test sample reading and sample preparation, no improved sample collection method has been developed. A-Fem believes the PadKit will provide a superior cell sample as well as a simpler, more comfortable and convenient procedure for collecting the cells.
A-Fem anticipates that its Rapid-Sense point-of-use diagnostic technology will enable consumers and healthcare providers to obtain quantifiable test results quickly, conveniently and inexpensively. Currently, there are only two alternatives for diagnostic testing: point-of-use tests that produce binary (yes/no) results and laboratory tests that provide quantitative results. While current point-of-use diagnostic tests are convenient and cost-effective, they do not provide quantitative results and are limited to applications that have a clear positive or negative response. Laboratory testing, on the other hand, produces more information but requires sophisticated instruments, more time and greater cost. The key to A-Fem's Rapid-Sense technology is that it combines the convenience and low cost of a point-of-use test with the type of semi-quantitative results previously only available from a laboratory or through the use of sophisticated instruments. The Rapid-Sense technology enables visual quantification of a desired substance, such as a disease marker, in a sample of blood, saliva or urine.
A-Fem expects to seek strategic partners to assist in the marketing and distribution of specific applications of its Rapid-Sense technology. To this end, in November 1998 A-Fem announced that it had entered into a development agreement with Konica, a large Japanese industrial chemical firm, to develop a proprietary test using A-Fem's Rapid-Sense technology. In addition, a Rapid-Sense test for the detection of cotinine (a metabolite of nicotine) is currently being evaluated for sales into the insurance testing market. A-Fem plans to manufacture the products and plans that sales and distribution would be handled through third parties. The Rapid-Sense technology is in the development stage and has not yet entered the marketplace.
MARKETING AND DISTRIBUTION
The inSync miniform is currently available for purchase in the western half of the United States, excluding California, in retail grocery chains, drug stores and mass merchandisers. In addition, the inSync miniform is available through catalog and on-line, web-based (Internet) retailers, such as Transitions for Health and SOMA, and directly from InSyncminiform.com. The inSync miniform competes within the $1.8 billion United States feminine protection market. The miniform represents a new category of products that both competes with and complements existing feminine protection products, including tampons, pads, and pantiliners.
In order to focus on product development and increase the speed to market for our products, A-Fem is seeking alliances with large strategic partners. For the miniform, PadKit and Rapid-Sense products, A-Fem will seek strategic partners with proven experience in consumer and diagnostics marketing. A-Fem has no such alliance at present.
COMPETITION
The United States feminine protection market is currently dominated by four major consumer products companies: the Proctor & Gamble Company, Johnson & Johnson, Kimberly-Clark and Playtex. The inSync miniform represents a new segment of the feminine protection market and provides benefits not offered by competitive products. Features of the inSync miniform that distinguish it competitively are its versatility, convenience, comfort and safety.
The first application of the PadKit will be an alternative to the cervical scrape as a sample collection process for the Pap smear test, the standard diagnostic procedure for cervical cancer detection. While improvements have been made in the area of Pap smear test sample preparation and interpretation by such companies as Cytyc, AutoCyte, Neopath and Neuro Medical Systems, no user-friendly sample collection method has been developed.
A-Fem's proprietary Rapid-Sense technology has not yet been introduced to the market. A-Fem believes that the semi-quantifiable test results provided by point-of-use tests that incorporate A-Fem's Rapid-Sense technology will address market needs that prior technology could not meet, provide significant end-user cost savings over older technology, move various laboratory tests to the point-of-use markets to increase early intervention and improve healthcare in general. Its competition is likely to be primarily with larger diagnostics companies, or smaller innovative companies.
A-Fem's current products and products under development will compete with products from other companies that have an established market, more employees and substantially greater research, financial and marketing resources than A-Fem.
MATERIALS AND MANUFACTURING
A-Fem's current miniform manufacturing facility in Portland, Oregon, was completed in 1996 and upgraded in 1997. This facility provides miniforms for both the inSync product and the PadKit. The present operation requires minimum overhead and direct labor and is capable of producing more than $1,000,000 wholesale value of miniforms monthly, which capacity is sufficient to meet A-Fem's forecast demand through market penetration of the Western half of the United States, excluding California, which represents approximately 9% of the total United States market. A-Fem can double its miniform production capacity with a capital expenditure of approximately $800,000 and a construction lead-time of approximately six months. A-Fem's miniform manufacturing facility encompasses 7,300 square feet and has been inspected by the United States Food and Drug Administration (FDA) and found to be without reportable deficiencies. A-Fem completed a $225,000 packaging automation process
improvement project during the first quarter of 1998 to increase line throughput and reduce direct labor. A-Fem will need additional space to manufacture sufficient quantities of the miniform to support a national marketing roll-out.
Raw materials used for production of the inSync miniform and A-Fem's diagnostic products are made and supplied in the United States. A-Fem's suppliers are meeting A-Fem's current manufacturing needs, although an uninterrupted flow of raw materials cannot be guaranteed. In the past, A-Fem purchased certain raw materials from a single supplier that has now ceased to conduct its fiber-processing business. A-Fem has located a replacement supplier for its raw materials, but has not yet entered into an agreement with such supplier. A-Fem has sufficient finished goods on hand to meet anticipated demand for at least the next 12 months.
A-Fem's current Rapid-Sense manufacturing facility is located within A-Fem's research and development facilities and is capable of producing prototypes to meet the expected needs of A-Fem's planned clinical trials and limited commercial distribution.
PATENTS AND TRADEMARKS
A-Fem has rights to or owns two United States patents and additional foreign patents in Canada and Japan relating to the miniform. These patents cover manufacturing apparatus and methods for making both the current miniform and a 100 percent biodegradable absorbent miniform. In 1998, A-Fem was issued a patent for the technology that is the basis for the PadKit collection device. Additionally, A-Fem has patents pending for its Rapid-Sense technology.
The issued United States patents currently owned, assigned or licensed to A-Fem and the pending patent applications are:
US PATENT OR DATE OF ISSUE OR
SERIAL NUMBER FILING TITLE
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4,995,150 02/26/91 Method and Apparatus for Making
Feminine Protection Pads
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5,575,047(1) 11/19/96 Method for Making Biodegradable
Absorbent Pads
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5,725,481 03/10/98 Method and Apparatus for Collecting
Vaginal Fluid and Exfoliated Vaginal
Cells for Diagnostic Purposes
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60/048,902(2) 06/05/97 Rapid-Sense Technology
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08/670,137(3) 06/25/96 Biodegradable Absorbent Pads
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(1) Also applied for in Germany, Japan, England, France, Italy, Sweden, and Canada.
(2) Patent pending.
(3) Reapplication pending.
A-Fem and The Proctor & Gamble Company have entered into a license agreement that grants to The Proctor & Gamble Company certain non-exclusive rights to use A-Fem's miniform technology, including United States Patent Nos. 4,995,150 and 5,575,047. Pursuant to the license agreement, The Proctor & Gamble Company has a non-exclusive right to make, use and sell products embodying A-Fem's interlabial product technology. Depending on The Proctor & Gamble Company's use of this technology, The Proctor & Gamble Company may be required to make up to two additional payments of $1 million each.
The term for patents issued on applications filed on or after June 8, 1995, is 20 years from the date of the application or, if the application contains a specific reference to an earlier filed application under 35 USC Sections 120, 121 or 365(c), 20 years from the date on which the earliest such application was filed. The term for patents issued on applications filed before June 8, 1995, is the greater of the 20-year term described above or 17 years from grant, depending on the amount of time between application and issuance.
A-Fem has applications for United States trademarks for PadKit, Rapid-Sense, and for inSync and its related design. In addition to these applications, A-Fem has also applied for international trademarks on Rapid-Sense and inSync and its related design. A-Fem relies on trade secrets and other unpatented proprietary information in its development activities.
REGULATORY REQUIREMENTS
The production and marketing of A-Fem's miniform products are subject to regulation by the United States Food and Drug Administration (FDA). Before a medical product may be marketed for use by humans, months of laboratory and clinical trials must be performed to validate the safety and effectiveness of the product. A-Fem's miniform product required FDA
approval before it could be marketed to the public, and such clearance was obtained in 1997. A-Fem's Rapid-Sense products for use in the industrial and environmental testing markets do not require FDA approval. However, when A-Fem develops products for the human diagnostic market that incorporate Rapid-Sense technology, such products will require FDA approval. A-Fem conducts safety and effectiveness testing on our proposed products until we are satisfied that the product performs as desired.
A-Fem has completed a Pilot Study clinical trial for its PadKit and is in the process of conducting additional studies before applying for FDA clearance. A-Fem hopes that this product will be ready for commercial production in the second quarter of the year 2001.
A-Fem has assembled a team to obtain marketing clearance from the FDA for its planned products. This team includes senior management, personnel with regulatory expertise, personnel with scientific skills for clinical field trials and a Medical Advisory Board, consisting of scientific Ph.D.s and M.D.s, to contribute to the scientific and medical validity of its clinical trials.
RESEARCH AND DEVELOPMENT
A-Fem spent approximately $988,000 on research and development in the year ended December 31, 1998, primarily with respect to development of the Rapid-Sense diagnostic technology, preparing the PadKit for clinical trials and applying for patents. A-Fem spent approximately $666,000 on research and development in the year ended December 31, 1997, primarily with respect to development of the Rapid-Sense diagnostic technology.
EMPLOYEES
As of December 31, 1998, A-Fem had 18 full-time employees. A-Fem believes that its relations with its employees are good.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Trading of A-Fem's common stock is reported in the OTC Bulletin Board. The following table sets forth the range of high and low bids for A-Fem's common stock as reported in the OTC Bulletin Board for the periods indicated.
HIGH LOW
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1st Quarter 1997 4.88 2.94
2nd Quarter 1997 4.13 2.44
3rd Quarter 1997 4.75 2.50
4th Quarter 1997 4.06 2.44
1st Quarter 1998 2.69 1.88
2nd Quarter 1998 3.63 2.06
3rd Quarter 1998 3.00 1.44
4th Quarter 1998 2.47 1.00
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The foregoing prices reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.
(b) On December 31, 1998, there were approximately 294 holders of record of A-Fem's common stock.
(c) A-Fem has paid no dividends and does not expect to pay any dividends in the foreseeable future because A-Fem intends to retain earnings, if any, to finance growth of its operations. A-Fem is not under any contractual restriction as to its present or future ability to pay dividends. The holders of A-Fem's preferred Stock have the right to receive dividends in preference to the holders of A-Fem's common stock.
RECENT SALES OF UNREGISTERED SECURITIES
On March 9, 1999, A-Fem issued 156,250 shares of A-Fem's Series A Convertible Preferred Stock and warrants to purchase an additional 31,250 shares of A-Fem's Series A Convertible Preferred Stock at an exercise price of $.01 per share to one entity, Capital Consultants, Inc., acting as agent for individual investors, in exchange for aggregate cash consideration of $300,000. The warrants expire 10 years from the date of issuance. Shares of Series A Convertible Preferred Stock are convertible into shares of Common Stock on a one-for-one basis, subject to adjustment in certain circumstances to prevent dilution. Capital Consultants, Inc. represented that such entity and each individual represented by such entity was an "accredited investor" within the meaning of Rule 501(a) of the Securities Act. In issuing these securities, A-Fem relied upon an exemption from registration pursuant to Section 4(2) of the Securities Act.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
OVERVIEW
A-Fem experienced significant operating losses during the years ended December 31, 1998 and 1997. Further, A-Fem has continued to incur losses into the first quarter of 1999 and has never generated significant revenues from operations. A-Fem expects that significant ongoing expenditures will be necessary to successfully implement its business plan and develop, manufacture and market its products. These circumstances raise substantial doubt about A-Fem's ability to continue as a going concern. Execution of A-Fem's plans and its ability to continue as a going concern depend upon its acquiring substantial additional financing. Management's plans include efforts to obtain additional capital and to seek potential partnering opportunities. A-Fem has raised operating funds in the past by selling shares of its common and preferred stock for consideration totaling approximately $1.8 million during 1997, $4.7 million during 1998, and $300,000 through March 1999.
A-Fem may not be able to raise additional funding or enter into a strategic alliance. If A-Fem is unable to obtain adequate additional financing, enter into such strategic alliance or generate sufficient sales revenues, management may be required to curtail A-Fem's product development, marketing activities and other operations, and A-Fem may be forced to cease operations.
RESULTS OF OPERATIONS
For the year ended December 31, 1998, A-Fem generated net sales of approximately $419,000 as compared to net sales of approximately $90,000 for the year ended December 31, 1997. This increase in net sales resulted from the marketing roll-out of the inSync miniform in the Western half of the United States, excluding California. A-Fem has received no revenues from any other products and does not expect to generate revenues from the sales of any other products until the year 2001. The cost of goods sold in the year ended December 31, 1998, was approximately $495,000, as compared to approximately $550,000 in the year ended December 31, 1997. This decrease resulted primarily from a reduction in manufacturing overhead in 1998 as compared to 1997. The reduction in manufacturing overhead consisted primarily of a reduction in inventory adjustment expense that was achieved through better inventory control.
A-Fem's operating loss for the year ended December 31, 1998 was approximately $4.6 million, compared to an operating loss of approximately $4.0 million for the previous year. The increase in operating loss was caused primarily by marketing and selling expenses related to the roll-out of the inSync miniform in the western half of the United States, excluding California, and an increase in research and development expenses.
Gross margin for the year ended December 31, 1998 was approximately -18.2% as compared to -512.8% for the year ended December 31, 1997. The change in gross margin resulted primarily from the increase in net sales and reduction in manufacturing overhead described above.
Marketing and selling expenses were approximately $2,562,000 for the year ended December 31, 1998, as compared to approximately $1,817,000 for the prior year. Such expenses accounted for the greatest share of all expenses in 1998 due to costs associated with the launch of the marketing roll-out of A-Fem's inSync miniform in the western United States. This marketing roll-out required expenditures for media, advertising production, packaging design, selling materials, and marketing and sales consultants. Marketing and selling expenses also accounted for the greatest share of all expenses in 1997 due to preparation for the marketing roll-out of the inSync miniform in Oregon and Washington. Marketing and selling expenses are expected to continue to exceed revenues through 1999.
Research and development expenses for the year ended December 31, 1998, totaled approximately $988,000. Research and development expenses for the year ended December 31, 1997, totaled approximately $666,000. The increase in these expenses is primarily attributable to development costs of approximately $102,000 related to the Rapid-Sense diagnostic technology and costs of approximately $220,000 associated with the PadKit Pilot Study clinical trials.
General and administrative expenses for the year ended December 31, 1998, totaled approximately $983,000, compared to approximately $1,078,000 for the year ended December 31, 1997. The decrease in these expenses is attributable primarily to decreases in A-Fem's legal and insurance expenses.
A-Fem's net loss for the year ended December 31, 1998, increased to approximately $4,629,000 from $1,994,000 for the year ended December 31, 1997. This increase reflects A-Fem's receipt during the year ended December 31, 1997, of a payment of $2,000,000 from The Proctor & Gamble Company pursuant to an A-Fem licensing agreement between The Proctor & Gamble Company and A-Fem.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, A-Fem had cash and cash equivalents of approximately $668,000 as compared to approximately $526,000 at December 31, 1997. To date, A-Fem has financed its growth and operations through private placements of common and preferred stock, rights to purchase common and preferred stock, promissory notes and capital leases. During 1998, A-Fem raised approximately $4.7 million from private investors in exchange for 989,586 shares of A-Fem's common stock, and 1,457,000 shares of A-Fem's preferred stock. In addition, during 1998 A-Fem exchanged 4,316,405 shares of common stock for 4,316,405 shares of Series A Convertible Preferred Stock. In 1997 A-Fem raised approximately $1.8 million from private investors in exchange for 2,670,780 shares of A-Fem's common stock.
A-Fem will need to raise additional capital in order to meet costs associated with research and development and related administrative activities. If A-Fem is unable to obtain such financing, it may be required to curtail its activities and may have to cease operations.
A-Fem expects to continue to incur losses through 1999 and through 2000, because the costs of marketing and research and development are expected to continue to exceed income
from product sales. Exclusive of marketing costs, A-Fem has approximately $200,000 per month of operating expenses. In order to carry out its development plans for Rapid-Sense and the PadKit, A-Fem estimates it will need to raise approximately $3.0 million in addition to the funds needed for its monthly operating expenses. If A-Fem were able to raise the entire $3 million at once, it would take approximately 18 to 24 months to complete A-Fem's development plans for Rapid-Sense and the PadKit. A-Fem does not expect significant amounts of debt financing to be available to it in the near term, and therefore expects that it will have to issue additional equity. A-Fem cannot predict on what terms any such financing might be available, but any such financing could involve issuance of equity below current market prices and result in significant dilution of existing stockholders.
YEAR 2000
A-Fem has conducted a review of its computer systems' devices, applications and manufacturing equipment to identify those areas that could be affected by Year 2000 noncompliance. All of the computer hardware and software currently used by A-Fem, including any embedded technology that is used in the manufacturing process, is Year 2000 compliant. Although A-Fem has not communicated yet with many of its suppliers, service providers, distributors, wholesalers and other entities with which it has a business relationship regarding their compliance with Year 2000 requirements, A-Fem believes that a material failure by one or more of its key vendors or customers to comply with Year 2000 requirements in a timely fashion would not have a material adverse impact on A-Fem's operations.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of December 31, 1998, William H. Fleming, A-Fem's Vice-Chairman of the Board and Secretary, had an outstanding balance of approximately $62,000 on a loan from the Company. This loan was made on November 18, 1994, and the original principal balance was $52,000. Interest accrues at a rate of 6.24% and is capitalized. Mr. Fleming used the proceeds from this loan to purchase shares of A-Fem's Common Stock upon exercise of a stock option.
A-FEM MEDICAL CORPORATION
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997
TOGETHER WITH AUDITORS' REPORT
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of A-Fem Medical Corporation:
We have audited the accompanying balance sheets of A-Fem Medical Corporation (a Nevada corporation) as of December 31, 1998 and 1997, and the related statements of operations, changes in stockholders' equity and cash flows for each of the two years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of A-Fem Medical Corporation as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1998, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and has limited net capital that raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.
/s/ ARTHUR ANDERSEN LLP
Portland, Oregon,
March 2, 1999
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A-FEM MEDICAL CORPORATION
BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
1998 1997
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 668,369 $ 525,767
Restricted cash -- 52,500
Accounts receivable 59,735 98,596
Inventories 70,855 172,963
Prepaid expenses 257,603 173,314
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Total current assets 1,056,562 1,023,140
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS 1,235,173 1,194,449
Less- Accumulated depreciation and amortization (524,484) (371,401)
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Total property, equipment and leasehold improvements 10,689 823,048
PATENTS, net 59,872 60,971
LOANS RECEIVABLE - Officers and directors 62,193 58,710
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Total assets $ 1,889,316 $ 1,965,869
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 299,471 $ 529,588
Current portion - capital lease obligations 183,339 262,772
Accrued expenses 74,075 59,368
Accrued salaries and benefits 138,394 162,174
Note payable 417,345 --
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Total current liabilities 1,112,624 1,013,902
LONG-TERM PORTION - CAPITAL LEASE OBLIGATIONS 41,607 221,357
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Total liabilities 1,154,231 1,235,259
COMMITMENTS (NOTE 7)
STOCKHOLDERS' EQUITY:
Series A Convertible Preferred Stock, $.01 par value; authorized 7,200,000
shares; issued 5,773,405 shares and 0 shares at December 31, 1998 and 1997,
respectively 57,734 --
Common stock, $.01 par value; authorized 33,000,000 shares; issued 9,471,875
shares and 12,798,694 shares at December 31, 1998 and 1997, respectively 94,719 127,987
Warrants issued for Series A Convertible Preferred Stock 182,272 --
Warrants issued for common stock 76,491 --
Additional paid-in capital 16,682,154 12,331,811
Accumulated deficit (16,358,285) (11,729,188)
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Total stockholders' equity 735,085 730,610
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Total liabilities and stockholders' equity $ 1,889,316 $ 1,965,869
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The accompanying notes are an integral part of these balance sheets.
A-FEM MEDICAL CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
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REVENUES:
Sales, net of discounts $ 418,915 $ 89,717
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Net sales 418,915 89,717
COST OF SALES:
Cost of goods sold 495,092 549,764
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Gross margin (76,177) (460,047)
OPERATING EXPENSES:
Selling and marketing 2,561,887 1,816,910
General and administrative 982,787 1,077,669
Research and development 988,121 665,740
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Operating loss (4,608,972) (4,020,366)
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OTHER INCOME (EXPENSE):
Interest income 25,021 94,273
Interest expense (88,950) (70,199)
Licensing income 35,000 2,000,000
Miscellaneous income 8,804 2,618
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(20,125) 2,026,692
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Net loss $ (4,629,097) $ (1,993,674)
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NET LOSS PER SHARE, basic and diluted $ (.38) $ (.17)
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WEIGHTED AVERAGE SHARES OUTSTANDING 12,178,262 11,682,687
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The accompanying notes are an integral part of these statements.
A-FEM MEDICAL CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
Preferred Stock
----------------------------------------
Shares Amount Warrants
--------- ---------- ----------
BALANCE, December 31, 1996 -- $ -- $ --
Common stock issued on options exercised for cash, $0.12
per share, net of financing costs -- -- --
Common stock issued on warrants exercised for cash, $0.41 -- -- --
per share
Common stock issued on warrants exercised for cash, $1.00
per share, net of financing costs -- -- --
Common stock issued on warrants exercised for cash, $1.50 -- -- --
per share
Common stock issued on warrants exercised for cash, $1.64 -- -- --
per share
Common stock issued for cash, $2.00 per share, net of -- -- --
financing costs
Common stock issued for proprietary assets, $2.00 per share -- -- --
Net loss -- -- --
--------- ---------- ----------
BALANCE, December 31, 1997 -- -- --
Common stock issued for cash $1.92 per share, net of -- -- --
financing costs
Preferred stock issued in exchange of common shares 4,316,405 43,164 --
Preferred stock issued for cash $1.92 per share, net of 1,457,000 14,570 --
financing costs
Warrants issued in connection with note payable -- -- --
Warrants issued in connection with issuance of common stock -- -- --
Warrants issued in connection with issuance of preferred -- -- 182,272
stock
Net loss -- -- --
--------- ---------- ----------
BALANCE, December 31, 1998 5,773,405 $ 57,734 $ 182,272
========= ========== ==========
|
Common Stock
--------------------------------------------
Shares Amount Warrants
---------- ------------ ------------
BALANCE, December 31, 1996 10,127,914 $ 101,279 $ --
Common stock issued on options exercised for cash, $0.12
per share, net of financing costs 1,174,280 11,743 --
Common stock issued on warrants exercised for cash, $0.41 480,000 4,800 --
per share
Common stock issued on warrants exercised for cash, $1.00
per share, net of financing costs 343,500 3,435 --
Common stock issued on warrants exercised for cash, $1.50 33,000 330 --
per share
Common stock issued on warrants exercised for cash, $1.64 10,000 100 --
per share
Common stock issued for cash, $2.00 per share, net of 530,000 5,300 --
financing costs
Common stock issued for proprietary assets, $2.00 per share 100,000 1,000 --
Net loss -- -- --
---------- ------------ ------------
BALANCE, December 31, 1997 12,798,694 127,987 --
Common stock issued for cash $1.92 per share, net of 989,586 9,896 --
financing costs
Preferred stock issued in exchange of common shares (4,316,405) (43,164) --
Preferred stock issued for cash $1.92 per share, net of -- -- --
financing costs
Warrants issued in connection with note payable -- -- --
Warrants issued in connection with issuance of common stock -- -- 76,491
Warrants issued in connection with issuance of preferred -- -- --
stock
Net loss -- -- --
---------- ------------ ------------
BALANCE, December 31, 1998 9,471,875 $ 94,719 $ 76,491
========== ============ ============
|
Additional Total
Paid-In Stockholders'
------------ Accumulated -------------
Capital Deficit Equity
------------ ------------ -------------
BALANCE, December 31, 1996 $ 10,403,611 $ (9,735,514) $ 769,376
Common stock issued on options exercised for cash, $0.12
per share, net of financing costs 128,841 -- 140,584
Common stock issued on warrants exercised for cash, $0.41 192,000 -- 196,800
per share
Common stock issued on warrants exercised for cash, $1.00
per share, net of financing costs 338,128 -- 341,563
Common stock issued on warrants exercised for cash, $1.50 49,170 -- 49,500
per share
Common stock issued on warrants exercised for cash, $1.64 16,300 -- 16,400
per share
Common stock issued for cash, $2.00 per share, net of 1,004,761 -- 1,010,061
financing costs
Common stock issued for proprietary assets, $2.00 per share 199,000 -- 200,000
Net loss -- (1,993,674) (1,993,674)
------------ ------------ -------------
BALANCE, December 31, 1997 12,331,811 (11,729,188) 730,610
Common stock issued for cash $1.92 per share, net of 1,857,425 -- 1,867,321
financing costs
Preferred stock issued in exchange of common shares -- -- --
Preferred stock issued for cash $1.92 per share, net of 2,719,026 -- 2,733,596
financing costs
Warrants issued in connection with note payable 32,655 -- 32,655
Warrants issued in connection with issuance of common stock (76,491) -- --
Warrants issued in connection with issuance of preferred (182,272) -- --
stock
Net loss -- (4,629,097) (4,629,097)
------------ ------------- -------------
BALANCE, December 31, 1998 $ 16,682,154 $(16,358,285) $ 735,085
============ ============= =============
|
The accompanying notes are an integral part of these statements.
A-FEM MEDICAL CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,629,097) $(1,993,674)
Adjustments to reconcile net loss to net cash
flows used in operating activities-
Depreciation and amortization 155,667 150,812
Loss (gain) on disposal of assets (134) 5,459
Other noncash income (3,483) --
Changes in operating assets and liabilities:
Restricted cash 52,500 106,875
Accounts receivable 38,861 (67,824)
Inventories 102,108 17,855
Prepaid expenses and other (84,289) (17,373)
Accounts payable (230,117) 280,116
Accrued expenses 14,707 3,147
Accrued salaries and benefits (23,780) (130,319)
Accrued settlement for litigation -- (40,000)
------------ ------------
Net cash used in operating activities (4,607,057) (1,684,926)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, equipment and leasehold improvements (37,909) (48,192)
Net proceeds from sale of equipment 350 1,650
Other assets (406) (34,621)
------------ ------------
Net cash used in investing activities (37,965) (81,163)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common stock 1,867,321 1,754,908
Net proceeds from sale of preferred stock 2,733,596 --
Repayments on capital lease obligations (263,293) (199,930)
Proceeds from note payable 450,000 --
Repayments of loans receivable, net -- 65,383
------------ ------------
Net cash provided by financing activities 4,787,624 1,620,361
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 142,602 (145,728)
CASH AND CASH EQUIVALENTS, beginning of period 525,767 671,495
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 668,369 $ 525,767
============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Exchange of preferred stock for common stock $ 8,287,498 $ --
Issuance of common stock as settlement for litigation -- 200,000
Equipment acquired under capital leases 4,110 310,014
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Total cash paid for interest 88,950 70,199
|
The accompanying notes are an integral part of these statements.
A-FEM MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
1. ORGANIZATION OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
A-Fem Medical Corporation (the Company or A-Fem) is a women's health care company. A-Fem has developed three core product technology platforms, one based on its inSync(R) miniform interlabial pad, another based on the Rapid-Sense(TM) diagnostic products and a third based on the PadKit(R) Sample Collection System. The miniform is a new type of feminine hygiene product that is worn interlabially. A-Fem's first miniform application, the inSync(R) miniform, has received Food and Drug Administration (FDA) approval and was launched in a market roll-out in Oregon and Washington in January 1998. The Company expects to use its Rapid-Sense diagnostic technology to create rapid response, low cost, point-of-use diagnostic tools which generate quantifiable results. The core technology development for Rapid-Sense(TM) diagnostic products has been completed and applications are under development. The PadKit(TM) contains a miniform to be used during a woman's menstrual cycle to collect a sample for diagnostic testing.
The Company has experienced significant operating losses during the years ended December 31, 1998 and 1997 and has continued to incur losses into the first quarter of 1999. Further, the Company has not generated significant revenues. The Company expects that significant ongoing expenditures will be necessary to successfully implement its business plan and develop, manufacture and market its products. These circumstances raise substantial doubt about the Company's ability to continue as a going concern. Execution of the Company's plans and its ability to continue as a going concern depend upon its acquiring substantial additional financing. Management's plans include efforts to obtain additional capital and to evaluate potential partnering opportunities. The Company has demonstrated the ability to raise operating funds in the past by securing investment commitments in its preferred and common stock of approximately $4.6 million during 1998 and in its common stock of approximately $1.8 million in 1997, net of issuance expenses. However, there can be no assurance that the Company's efforts to raise additional funding or enter into a strategic alliance will be successful. If the company is unable to obtain adequate additional financing, enter into such strategic alliance or generate sufficient profitable sales revenues, management may be required to curtail the
Company's product development, marketing activities and other operations and the Company may be forced to cease operations.
FAIR VALUE
The carrying value of financial instruments approximates fair value, unless otherwise disclosed.
CASH AND CASH EQUIVALENTS
The Company considers all instruments with maturities of three months or less when purchased to be cash equivalents.
RESTRICTED CASH
Restricted cash represents cash required to satisfy the Company's contractual obligation for salary and related benefits associated with the hiring of the Director of Sales and Marketing in 1996.
CONCENTRATION OF RISK
The Company currently purchases certain raw materials from a single supplier. Management believes that other suppliers could supply these products, but there is no assurance that such a change in suppliers would not adversely impact the terms currently received by the Company.
The Company performs periodic credit evaluations of its customers' financial conditions and generally does not require collateral. For the year ended December 31, 1998, sales to one customer amounted to approximately 50% of total sales. For the year ended December 31, 1997, sales to one customer amounted to approximately 20% of total sales.
INVENTORIES
Inventories are valued at the lower of cost or market with cost determined on a first-in, first-out basis and market based on the lower of replacement cost or estimated realizable value.
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements are recorded at cost and depreciated on a straight-line basis over useful lives ranging from 3 to 10 years. Leasehold improvements are amortized over the lives of the related leases. Maintenance and repair costs are expensed as incurred; renewals and betterments are capitalized.
PATENTS
Patent costs are capitalized and amortized by the straight-line method over a 17-year period beginning with the date the patent is granted. Total accumulated amortization for these patents was $20,475 and $18,970 as of December 31, 1998 and 1997, respectively.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). Under SFAS 109, deferred tax assets and liabilities are recorded based on the tax effected difference between the tax bases of assets and liabilities and their carrying amount for financial reporting purposes, referred to as "temporary differences," using enacted marginal income tax rates.
ADVERTISING COSTS
Advertising costs, which are included in sales and marketing expense, are expensed when the advertising first takes place. Advertising expense was $1,657,199 and $1,136,293 in 1998 and 1997, respectively.
NET LOSS PER SHARE
Basic earnings per share (EPS) and diluted EPS are required to be computed using the methods prescribed by Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). Basic EPS is calculated using the weighted average number of common shares outstanding for the period and diluted EPS is computed using the weighted average number of common shares and dilutive common equivalent shares outstanding. Following is a reconciliation of basic EPS and diluted EPS for the years ended December 31:
1998 1997
------------------------------------------- -------------------------------------------
Per Per
Share Share
Income Shares Amount Income Shares Amount
----------- ----------- ---------- ----------- ---------- ---------
Basic EPS:
Income available to
Common Shareholders $(4,629,097) 12,178,262 $ (.38) $(1,993,674) 11,682,687 $ (.17)
Effect of dilutive securities:
Stock options -- -- -- -- -- --
----------- ---------- -------- ----------- ---------- ---------
Diluted EPS:
Income available to
Common Shareholders $(4,629,097) 12,178,262 $ (.38) $(1,993,674) 11,682,687 $ (.17)
=========== ========== ======== =========== ========== =========
|
At December 31, 1998 and 1997, the Company had options and warrants outstanding covering 6,258,617 and 3,881,411, respectively, of the Company's common stock not included in the above calculations since they would have been antidilutive. In addition, at December 31,
1998, the Company had 5,773,405 shares issuable pursuant to the Company's convertible preferred stock and warrants outstanding covering 484,200 shares of the Company's convertible preferred stock that were not included as they would have been antidilutive.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, if any, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). This statement establishes standards for reporting and displaying comprehensive income and its components in a full set of general-purpose financial statements. The objective of SFAS 130 is to report a measure of all changes in equity of an enterprise that result from transactions with owners. The Company adopted SFAS 130 at the beginning of 1998. Comprehensive income did not differ from currently reported net income in the periods presented.
In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131 "Disclosures About Segments of an Enterprise and Related information" (SFAS 131). This statement revises existing standards for reporting information about operating segments and requires the reporting of selected information in interim financial reports. Based upon definitions contained within SFAS 131, the Company has determined that it operates in one segment.
In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 137). SFAS 137 is an amendment to previously issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 137 establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS 137 also requires that changes in the derivative instrument's fair value be recognized currently in results of operations unless specific hedge accounting criteria are met. SFAS 137 is effective for fiscal years beginning after June 15, 2000. The Company expects that adoption of SFAS 137 will not have a material impact on the Company's financial condition or results of operations.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts to conform to the current year presentation.
2. INVENTORIES:
Inventories consisted of the following components at December 31:
1998 1997
-------- --------
Raw materials $ 61,517 $ 79,695
Work-in-process 1,105 6,054
Finished goods 8,233 87,214
-------- --------
$ 70,855 $172,963
======== ========
|
3. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
1998 1997
---------- -----------
Property $ 37,099 $ 37,225
Equipment 1,080,923 1,040,073
Leasehold improvements 117,151 117,151
----------- -----------
1,235,173 1,194,449
Less- Accumulated depreciation and amortization (524,484) (371,401)
----------- -----------
Net property, equipment and leasehold improvements $ 710,689 $ 823,048
=========== ===========
|
Included in the above table are amounts relating to assets utilized under capital leases which had a net book value of $685,384 and $711,048 at December 31, 1998 and 1997, respectively.
4. FINANCING ARRANGEMENTS:
NOTE PAYABLE
During 1998, A-Fem entered into a note payable with an investor in the amount of $450,000. The agreement is collateralized by a one-half security interest in a licensing agreement between a major manufacturer and the Company (see Note 7). The Agreement requires monthly interest payments, at a fixed interest rate of 9.5%. The balance plus a $50,000 loan fee is payable one year from the date of the agreement, April 13, 1999. The loan fee is being accrued over the term of the Agreement. Subsequent to year-end, the investor verbally agreed to extend the due date of the Agreement by one year. The total interest expense on this note for 1998 was $68,000, including $33,333 for accrual of the loan fee.
CAPITAL LEASES
Certain collateralized equipment is leased by the Company, which obligations are reflected by the secured leases as noted below. This equipment is used for the research and development of new products and for the manufacturing and production of the miniform.
Future minimum lease payments under capital leases as of December 31 are as follows:
1999 $203,072
2000 38,960
2001 4,778
--------
Total minimum lease payments 246,810
Less- Amount representing interest (at rates ranging from
6.24% to 22.20%) 21,864
--------
Present value of minimum lease payments 224,946
Less- Current portion 183,339
--------
$ 41,607
========
|
5. STOCKHOLDERS' EQUITY:
PREFERRED STOCK
During the year ended December 31, 1998, the Company amended its Articles of Incorporation in order to authorize 10,000,000 shares of preferred stock having a par value of $.01 per share. The Company authorized the first series for up to 7,200,000 of the total authorized shares, of which 5,773,405 shares have been issued. These shares, designated as Series A Convertible Preferred Stock (the Preferred Stock), are nonredeemable, voting shares. The Preferred Stock is convertible at any time into shares of common stock on a one-for-one basis. The Preferred Stock has priority over other classes of capital stock with respect to dividends and upon liquidation.
During 1998, the Company entered into an agreement with an investor to exchange all of the investor's holdings of the Company's common stock into shares of the Company's Preferred Stock on a one-for-one basis in addition to additional Preferred Stock investment for cash. Additionally, this investor also exchanged 50,000 warrants to purchase common stock for 50,000 warrants to purchase Preferred Stock.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters requiring shareholder vote. Holders of Common Stock are entitled to receive dividends when and as declared by the Board of Directors out of any funds lawfully available therefor, and, in the event of liquidation or distribution of assets, are entitled to participate ratably in the distribution of such assets remaining after payment of liabilities, in each case subject to any preferential rights granted to any series of Preferred Stock that may then be outstanding.
COMMON STOCK OPTIONS
On April 21, 1998, the Company granted nonstatutory stock options to the new Chief Executive Officer of the Company exercisable for 1,700,000 shares of the Company's common
stock at an exercise price of $2.06 per share. At December 31, 1998, 462,500 of the granted options were exercisable with the remaining options vesting over the next ten years. The options expire ten years from the date of grant. On July 7, 1998, the Company granted nonstatutory stock options to the President of the Company exercisable for 150,000 shares of the Company's common stock at an exercise price of $2.88 per share. At December 31, 1998, none of these options were exercisable. The options vest over the next ten years and expire ten years from the date of grant. The vesting of the remaining unexercisable options for each employee may be accelerated upon meeting certain performance criteria.
In addition, the Company has an Incentive and Non-Qualified Stock Option Plan (the Incentive Plan), under which 3,300,000 shares of Common Stock are reserved for issuance under qualified options, nonqualified options, stock appreciation rights and other awards as set forth in the Incentive Plan. The Incentive Plan provides for administration by a Committee comprised of not less than two members of the Company's Board of Directors. Such Committee (or the Board of Directors in its absence) determines the number of shares, option price, duration and other terms of the options granted under the Incentive Plan. Qualified options are available for issuance to employees of the Company. Nonqualified options are available for issuance to consultants, advisors and others having a relationship with the Company, on terms as determined by the Committee. Under the Incentive Plan, the exercise price of a qualified option cannot be less than the fair market value on the date of grant and the exercise price of a nonqualified option is determined by the Committee on the date of grant. Options granted under the Incentive Plan generally vest three to five years from the date of grant and generally expire ten years from the date of grant.
Activity under the Incentive Plan as well as other issuances is summarized as follows:
WEIGHTED AVERAGE
SHARES SUBJECT EXERCISE PRICE
TO OPTIONS PER SHARE
-------------- ----------------
Balance at December 31, 1996 2,243,030 $ 1.77
Options granted 760,076 3.10
Options exercised (1,174,280) 0.12
Options canceled (433,831) 3.36
---------- --------
Balance at December 31, 1997 1,394,995 3.16
Options granted 2,528,538 2.29
Options canceled (184,922) .73
---------- --------
Balance at December 31, 1998 3,738,611 $ 2.66
========== ========
|
Of the outstanding options at December 31, 1998 and 1997, 1,645,861 and 1,182,245, respectively, were qualified stock options and 242,750 and 212,750, respectively, were nonqualified stock options. The options are exercisable for shares of the Company's Common Stock. Outstanding options and rights expire on various dates through November 2008. The number of shares available for grant under the Incentive Plan was 163,609 at December 31, 1998.
The following table summarizes information about stock options outstanding at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------------- -----------------------------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE NUMBER OF SHARES AVERAGE
RANGE OF EXERCISE NUMBER OUTSTANDING AT CONTRACTUAL LIFE - EXERCISE EXERCISABLE AT EXERCISE
PRICES DECEMBER 31, 1998 YEARS PRICE DECEMBER 31, 1998 PRICE
----------------- --------------------- ------------------ ------- ----------------- --------
$1.75-2.88 2,924,516 7.22 $ 2.26 93,807 $ 2.01
3.00-4.69 664,095 8.49 3.87 475,448 3.33
5.13 150,000 5.84 5.13 150,000 5.13
---------- --------- ------- ------- --------- ------
$1.75-5.13 3,738,611 7.78 $ 2.66 719,255 $ 2.78
========== ========= ======= ======= ========= ======
|
At December 31, 1997, 730,769 options were exercisable at a weighted average exercise price of $3.16 per share.
COMMON STOCK WARRANTS
As of December 31, 1998, warrants for a total of 2,520,006 shares of Common Stock had been awarded. The warrants may be exercised for shares of the Company's Common Stock. The following summarizes outstanding warrants for shares of the Company's Common Stock:
WEIGHTED AVERAGE
SHARES SUBJECT TO EXERCISE PRICE
WARRANTS PER SHARE
------------------ ----------------
Balance at December 31, 1996 3,351,250 $ 1.96
Warrants granted 50,000 2.00
Warrants exercised (866,500) 0.70
Warrants canceled (48,334) 3.02
--------- -------
Balance at December 31, 1997 2,486,416 2.39
Warrants granted 83,590 1.92
Warrants canceled (50,000) 4.25
--------- -------
Balance at December 31, 1998 2,520,006 $ 2.34
========= =======
Number exercisable at December 31, 1998 2,520,006 $ 2.34
|
During the year ended December 31, 1998, the Company granted warrants for 83,590 shares of the Company's Common Stock to various investors in the Company. The warrants are exercisable at a price of $1.92 per share and expire five years from the date of grant in 2003.
During February 1997, the Company granted warrants for 50,000 shares of the Company's Common Stock to an investor in the Company. The warrants are exercisable at a price of $2.00 per share and expire in January 2002.
PREFERRED STOCK WARRANTS
During 1998, the Company awarded warrants for a total of 484,200 shares of the Company's Preferred Stock. The warrants may be exercised for shares of the Company's Preferred Stock. As of December 31, 1998, 484,200 shares were granted and outstanding with a weighted average exercise price of $.96 per share. All warrants outstanding at December 31, 1998 are exercisable.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
During 1995, the FASB issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), which defines a fair value based method of accounting for an employee stock option and similar equity instruments and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, it also allows an entity to continue to measure compensation cost for those plans using the method of accounting prescribed by APB 25. Entities electing to remain with the accounting in APB 25 must make pro forma disclosures of net income and, if presented, earnings per share, as if the fair value based method of accounting defined in SFAS 123 had been adopted.
The Company has elected to account for its stock-based compensation plan under APB 25; however, the Company has computed, for pro forma disclosure purposes, the value of all options granted during 1998 and 1997 using the Black-Scholes option pricing model as prescribed by SFAS 123 using the following weighted average assumptions for grants:
FOR THE YEAR ENDED
DECEMBER 31,
----------------------
1998 1997
------ -------
Average risk-free interest rate 6.00% 6.00%
Expected dividend yield - -
Expected lives 6 years 6 years
Expected volatility 80.1% 83.3%
|
Using the Black-Scholes methodology, the total value of options granted during 1998 and 1997 was $5,169,875 and $1,399,835, respectively, which would be amortized on a pro forma basis over the vesting period of the options (typically four years). The weighted average fair value of options granted during 1998 and 1997 was $2.04 and $2.35 per share, respectively. If the Company had accounted for its stock-based compensation plan in accordance with SFAS 123, the Company's net loss and net loss per share would approximate the pro forma disclosures below:
1998 1997
--------------------------------- ---------------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- ----------- ----------- ------------
Net loss $(4,629,097) $(5,843,151) $(1,993,674) $(2,660,895)
Net loss per share (.38) (.48) (.17) (.23)
|
The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts. SFAS 123 does not apply to awards prior to January 1, 1995 and additional awards are anticipated in future years.
6. INCOME TAXES:
As of December 31, 1998, the Company had federal net operating loss (NOL) carryforwards of approximately $19 million. If not applied against future taxable income, the federal NOL carryforwards will expire in the years 2001 through 2018. Changes in the Company's ownership may cause an annual limitation on the amount of carryforwards that can be utilized. As of December 31, 1998 and 1997, the Company had net deferred tax assets of approximately $7.2 million and $5.5 million, respectively, primarily resulting from NOL carryforwards. In accordance with SFAS 109, at December 31, 1998 and 1997 a valuation allowance was recorded to reduce net deferred tax assets to zero.
The significant components of the Company's deferred tax assets and liabilities as of December 31, 1998 and 1997 are as follows:
1998 1997
----------- -----------
Components of deferred tax assets-
Accrued salaries and benefits $ 41,854 $ 9,138
Accrued expenses 28,503 8,006
Net operating loss and other tax credit
carryforwards 7,249,051 5,518,487
----------- -----------
Total deferred tax assets 7,319,408 5,535,631
Components of deferred tax liability:
Fixed assets (57,282) (36,328)
----------- -----------
Net asset before valuation allowance 7,262,126 5,499,303
Valuation allowance (7,262,126) (5,499,303)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
|
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:
1998 1997
------ ------
Statutory federal income tax rate 34.0 34.0
State taxes, net of federal tax benefit 4.1 4.4
Effect of change in valuation allowance (38.1) (38.4)
------ ------
-- --
====== ======
|
7. COMMITMENTS:
LICENSING AGREEMENT
On April 28, 1997, the Company entered into a license agreement with a major manufacturer and distributor of consumer products to make, use and sell the Company's
interlabial products and to use certain of the Company's trademarks. The Company received $2 million upon signing this agreement, with an additional $2 million to be received over the term of the agreement if certain milestones are achieved.
OPERATING LEASES
The Company has operating leases for its corporate office, warehouse, product development and manufacturing facilities, and some office equipment. The following is a schedule by years of the Company's future minimum rental payments required under these operating leases that have lease terms in excess of one year as of December 31, 1998:
1999 $138,656
2000 98,573
2001 19,981
--------
Total minimum payments required $257,210
========
|
Rent expense for the Company's operating leases was $147,661 and $124,821 for 1998 and 1997, respectively.
8. SUBSEQUENT EVENT:
FINANCING COMMITMENT
During the first quarter of 1999, the Company issued 156,250 shares of the Company's Series A Convertible Preferred Stock and warrants to purchase an additional 31,250 shares of the Company's Series A Convertible Preferred Stock in exchange for $300,000 in cash from a group of private investors. The financing is intended to assist in meeting the Company's operating needs while it pursues additional sources of financing.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
A-FEM MEDICAL CORPORATION
By: /s/ Steven T. Frankel
--------------------------------------------
Steven T. Frankel
Chief Executive Officer and President
Date: September 22, 1999
|
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
------- -----------
3.1(1) Articles of Incorporation, as amended
3.2 Bylaws, as amended
4.1(1) Form of Stock Purchase Warrant
4.2(1) Form of Series A Preferred Stock Certificate
*10.1(2) Employment Agreement between A-Fem Medical Corporation and Steven T. Frankel, dated effective
April 25, 1998
10.2(3) Business Park Lease between A-Fem Medical Corporation, Petula Associates, Ltd. and Koll Portland
Associates, dated March 1, 1996
10.3(9) Scholls Business Center First Amendment to Lease between A-Fem Medical Corporation, Petula
Associates, Ltd. and Equity FC, Ltd.
10.4(4) Form of Registration Rights Agreement used for Mr. Waller, Esler, Stephens & Buckley and Lane,
Powell, Spears and Lubersky
10.5(5) Form of Registration Rights Agreement
10.6(5) ATHENA Medical Corporation's 1994 Incentive and Non-Qualified Stock Option Plan, dated as of
June 7, 1994
*10.7(5) Form of Incentive Stock Option Agreement
*10.8(5) Form of Non-Statutory Stock Option Agreement
10.9(5) Form of Purchase Warrant Certificate
*10.10(5) Employment Agreement between A-Fem Medical Corporation and Sarah P. Van Dyck, dated May 28, 1996
*10.11(6) Employment Agreement between A-Fem Medical Corporation and J. Peter Burke, dated as of April 28,
1997
10.12(7) Agreement dated effective as of April 28, 1997, between The Proctor & Gamble Company and A-Fem
Medical Corporation
|
EXHIBIT NO. DESCRIPTION ------- ------------ *10.13(6) Employment Agreement between A-Fem Medical Corporation and James R. Wilson, dated as of May 1, 1997 10.14(8) Form of Capital Lease between A-Fem Medical Corporation and First Portland Leasing Corp. 27.1(10) Financial Data Schedule |
(1) Incorporated by reference to the exhibits to A-Fem's quarterly report on Form 10-QSB for the quarter ended September 30, 1998.
(2) Incorporated by reference to the exhibits to A-Fem's quarterly report on Form 10-QSB for the quarter ended June 30, 1998.
(3) Incorporated by reference to the exhibits to A-Fem's Registration Statement on Form S-2 (file no. 333-2053), filed with the SEC on March 29, 1996.
(4) Incorporated by reference to the exhibits to A-Fem's Registration Statement on Form S-2 (file no. 33-88230), filed with the SEC on January 5, 1995.
(5) Incorporated by reference to the exhibits to A-Fem's Annual Report on Form 10-KSB for the year ended December 31, 1996.
(6) Incorporated by reference to the exhibits to A-Fem's quarterly report on Form 10-QSB for the quarter ended June 30, 1997.
(7) Incorporated by reference to exhibit number 10.1 to A-Fem's Current Report on Form 8-K (file no. 0-17119) filed with the SEC on May 16, 1997.
(8) Incorporated by reference to the exhibits to A-Fem's Annual Report on Form 10-KSB for the year ended December 31, 1997.
(9) Incorporated by reference to the exhibits to A-Fem's Registration Statement on Form S-2 (file no. 333-2053), filed with the SEC on January 21, 1999.
(10) Incorporated by reference to the exhibits to A-Fem's annual report on Form 10-KSB for the year ended December 31, 1998.
* Indicates management contract or compensation plan.
EXHIBIT 3.2
BYLAWS
A-FEM MEDICAL CORPORATION
(fka Athena Medical Corporation, fka Xtramedics, Inc.)
ARTICLE I
OFFICES
Section 1. The registered office of the corporation shall be in the City of Reno, County of Washoe, State of Nevada. The principal office for the transaction of the business of the corporation shall be in the City of Portland, County of Washington, State of Oregon.
Section 2. The corporation may also have offices at such other places both within and without the State of Nevada as the Board of Directors may from time to time determine or the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Election of directors shall take place at the annual meeting of stockholders.
Section 2. Annual meetings of stockholders shall be held on the first Tuesday of February if not a legal holiday; and if a legal holiday, then on the next secular day following, at 11:00 a.m. at the principal office of the corporation; or at such other date, time and place as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting, at which they shall elect a Board of Directors, and transact such other business as may properly be brought before the meeting.
Section 3. Written notice of the annual meeting, stating the place, date and hour of the meeting and the purpose for which the meeting is called, shall be given to each stockholder entitled to vote at such meeting not less than ten (10) nor more than sixty (60) days before the date of the meeting.
Section 4. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of the stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any person who has been a stockholder of record for at least six months prior to the demand for such inspection or who holds at least five percent of all outstanding shares of the corporation, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present.
Section 5. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the certificate of incorporation, may be called by the chairman and shall be promptly called by the chairman, president or secretary at the request in writing of a majority of the Board of Directors or at the request in writing of stockholders owning at least one-fifth of the shares of the corporation issued and outstanding and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting.
Section 6. Written notice of a special meeting, stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called, shall be given not less than ten nor more than sixty days before the date of the meeting, to each stockholder entitled to vote at such meeting.
Section 7. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice.
Section 8. Holders of one-third of the shares issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be presented or represented. At such adjourned meeting at which a quorum shall be present or represented any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjournment meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting.
Section 9. When a quorum is present at any meeting, the vote of the holders of a majority of the shares having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which, by express provision of any statute or of the certificate of incorporation or these bylaws, a different vote is required, in which case such express provision shall govern and control the decision of such question.
Section 10. Each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the corporation having voting power held by such stockholder, but no proxy shall be valid after the expiration of six months from the date of its execution, unless coupled with an interest, or unless the person executing it specifies therein that the proxy is irrevocable and the length of time for which it is to continue in force, which in no case shall exceed seven years from the date of its execution. Stockholders may not cumulate votes for the election of directors.
Section 11. Any action, except the election of directors, required to be taken at any annual or special meeting of stockholders of the corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon where present and voted, except as may be otherwise specifically provided by statute or by the certificate of incorporation. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing.
ARTICLE III
DIRECTORS
Section 1. The number of directors who shall constitute the Board shall range from a minimum of five members to a maximum of nine members, the specific number to be set by resolution of the Board, provided that the Board may consist of fewer than five directors until vacancies are filled. The number of directors may be changed from time to time by amendment to these Bylaws, but no decrease in the number of directors shall have the effect of shortening the term of any incumbent director. The Board shall be divided into two classes, hereby designated Class 1
and 2, said classes to be as equal in number as may be possible. At the 1997 annual meeting of stockholders, the directors of Class 1 shall be elected for a term expiring at the 1998 annual meeting of stockholders and the directors of Class 2 shall be elected for a term expiring at the 1999 annual meeting of stockholders. Commencing in 1998, and at each annual meeting of stockholders thereafter, the successors to the class of directors whose terms expire at that meeting shall be elected to hold office for a term of two years, and each director shall serve for the term he or she was elected or until his or her successor shall have been elected and qualified or until his or her death, resignation, or removal from office. Directors need not be stockholders of the corporation or residents of the State of Nevada.
Section 2. Any vacancy occurring on the Board may be filled by the affirmative vote of a majority of the remaining directors then in office though less than a quorum of the Board. A director elected to fill a vacancy shall be elected for the unexpired term of his or her predecessor in office. Any directorship to be filled by reason of an increase in the number of directors may be filled by the Board for a term of office continuing only until the next election of the class for which such director shall have been chosen, and until his or her successor shall be elected and qualified.
Section 3. Any director, whether elected by the stockholders or appointed by the directors, may be removed from office by the vote or written consent of stockholders representing two-thirds of the issued and outstanding stock entitled to voting power.
Section 4. The business of the corporation shall be managed by its Board of Directors which may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the certificate of incorporation or by these bylaws directed or required to be exercised or done by the stockholders.
MEETINGS OF THE BOARD OF DIRECTORS
Section 5. The Board of Directors of the corporation may hold meetings, both regular and special, either within or without the State of Nevada.
Section 6. The first meeting of each newly elected Board of Directors shall be held immediately after the annual meeting of stockholders and no notice of such meeting, other than this bylaw, shall be necessary to the newly elected directors in
order legally to constitute the meeting, provided a quorum shall be present. In the event such meeting is not so held, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors, or as shall be specified in a written waiver signed by all of the directors.
Section 7. Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the Board.
Section 8. Special meetings of the Board may be called by the chairman on five days' notice to each director, either personally or by mail, facsimile transmission or telegram; and special meetings shall be promptly called by the chairman, the president or the secretary in like manner and on like notice on the written request of two directors or stockholders owning at least one-fifth of the shares of the corporation issued and outstanding and entitled to vote.
Section 9. At all meetings of the Board, a majority of directors then in office shall constitute a quorum for the transaction of business and the act of a majority of the directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present.
Section 10. Unless otherwise restricted by the certificate of incorporation or these bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee.
Section 11. Unless otherwise restricted by statute, the certificate of incorporation or these bylaws, members of the Board of Directors or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting.
COMMITTEE OF DIRECTORS
Section 12. Each committee shall fix its own rules of procedure and shall keep regular minutes of its meetings and report the same to the Board of Directors when required.
COMPENSATION OF DIRECTORS
Section 13. The Board of Directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation thereof. Members of special or standing committees may be allowed like compensation for attending committee meetings.
ARTICLE IV
NOTICES
Section 1. Whenever, under the provisions of a statute or of the certificate of incorporation or these bylaws, notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director or stockholder, at his or her address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given by facsimile transmission or telegram.
Section 2. Whenever any notice is required to be given under the provisions of a statute or of the certificate of incorporation or these bylaws, a waiver thereof in writing, signed by the person or persons entitled to the notice, whether before or after the time stated therein, shall be deemed equivalent thereto.
ARTICLE V
OFFICERS
Section 1. The officers of the corporation shall be chosen by the Board of Directors and shall be a chairman, a vice chairman, a president, a secretary and a treasurer. The Board of Directors may also choose one or more vice presidents, and one or more assistant secretaries and assistant treasurers. Any number of offices may be held by the same person, unless the articles of incorporation or these bylaws otherwise provide.
Section 2. The Board of Directors at its first meeting after each annual meeting of stockholders shall choose a chairman, a vice chairman, a president, a secretary and a treasurer.
Section 3. The Board of Directors may appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board.
Section 4. The salaries of all officers and agents of the corporation shall be fixed by the Board of Directors.
Section 5. The officers of the corporation shall hold office until their successors are chosen and qualify. Any officer elected or appointed by the Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors. Any vacancy occurring in any office of the corporation shall be filled by the Board of Directors.
THE CHAIRMAN, THE VICE CHAIRMAN, THE CHIEF
EXECUTIVE OFFICER, THE PRESIDENT AND THE VICE
PRESIDENT
Section 6. The chairman shall preside at all meetings of the stockholders and the Board of Directors and shall see that all orders and resolutions of the Board of Directors are carried into effect. In the absence of the vice chairman, or in the event of his inability to act, the chairman shall perform the duties of the vice chairman.
The vice chairman shall review, advise and consult with the officers of the corporation with respect to the day-to-day business operations of the corporation. In the absence of the chairman, or the president, or in the event of the inability of either of the same to act, the vice chairman shall perform the duties of either or both of the same.
Section 7. The Chief Executive Officer shall be the chief executive officer of the corporation.
Section 8. The president shall be the chief operating officer of the corporation and shall be responsible for the day-to-day business operations of the corporation. If the chairman and the vice chairman are absent, or if the chairman requests him to do so in writing, the president shall preside at meetings of the stockholders and the Board of Directors.
Section 9. Any of the chairman, the vice chairman and the president shall be authorized to execute bonds, mortgages and other contracts requiring a seal, under the seal of the corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board of Directors to some other officer or agent of the corporation.
THE VICE PRESIDENT
Section 10. In the absence of the president or in the event of his inability or refusal to act, the vice president (or in the event there be more than one vice president, the vice presidents in the order designated, or in the absence of any designation, then in the order of their election) shall perform the duties of the president, and when so acting, shall have all the powers of and be subject to all the restrictions upon the president. The vice presidents shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe.
THE SECRETARY AND ASSISTANT SECRETARIES
Section 11. The secretary shall attend all meetings of the Board of Directors and all meetings of the stockholders and record all the proceedings of the meetings of the corporation and the Board of Directors in a book to be kept for that purpose, and shall perform like duties for the standing committees when required. He or she shall give, or cause to be given, notice of all meetings of stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or president, under whose supervision he or she shall be. The secretary shall have custody of the corporate seal of the corporation and the secretary, or an assistant secretary, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by the secretary's signature or by the signature of such assistant secretary. The Board of Directors may give general authority to any other officer to affix the seal of the corporation and to attest the affixing by his or her signature.
Section 12. The assistant secretary, or if there be more than one, the assistant secretaries in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election), shall, in the absence of the secretary or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe.
THE TREASURER AND ASSISTANT TREASURERS
Section 13. The treasurer shall have the custody of the corporation funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys and other moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the Board of Directors.
Section 14. The treasurer shall disburse the funds of the corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the president and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all of his or her transactions as treasurer of the financial condition of the corporation.
Section 15. If required by the Board of Directors, the treasurer shall give the corporation a bond (which shall be renewed every six years) in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his or her office and for the restoration to the corporation, in case of his or her death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in the treasurer's possession or under his or her control belonging to the corporation.
Section 16. The assistant treasurer, or if there shall be more than one, the assistant treasurers in the order determined by the Board of Directors (or if there be no such determination, then in the order of their election), shall in the absence of the treasurer or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the treasurer and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe.
ARTICLE VI
CERTIFICATES OF SHARES
Section 1. Every holder of shares in the corporation shall be entitled to have a certificate signed by, or in the name of the corporation by, any two of the following: the chairman, a vice chairman, the president, a vice president, the chief executive officer, the treasurer, an assistant treasurer, the secretary or an assistant secretary of the corporation, certifying that the corporation is organized under the laws of the State of Nevada, the name of the person to whom the certificate is issued, the number and class of shares which the certificate represents, and the par value of the shares so represented.
Section 2. If the corporation shall be authorized to issue more than one class of shares or more than one series of any class, the powers, designations, preferences and
relative, participating, optional or other special rights of each class of shares or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the corporation shall issue to represent such class or series of shares, provided that in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the corporation shall issue to represent such class or series of shares a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of shares or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights.
Section 3. Where a certificate is countersigned: (a) by a transfer agent other than the corporation or its employee; or (b) by a registrar other than the corporation or its employee, any other signature on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he or she were such officer, transfer agent or registrar at the date of issue.
LOST CERTIFICATES
Section 4. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of shares to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his or her legal representative, to advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed.
TRANSFERS OF SHARES
Section 5. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books.
FIXING RECORD DATE
Section 6. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of shares or for the purpose of any other lawful action, the Board of Directors may fix in advance a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjournment meeting.
REGISTERED STOCKHOLDERS
Section 7. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the State of Nevada.
ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
Section 1. Dividends upon the shares of the corporation, subject to the provisions of the certificate of incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to the laws of the State of Nevada. Dividends may be paid in cash, in property or in shares of the corporation, subject to the provisions of the certificate of incorporation.
Section 2. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the directors shall think conducive to the interest of the corporation, and the directors may modify or abolish any such reserve in the manner in which it was created.
ANNUAL STATEMENTS
Section 3. The Board of Directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation.
CHECKS
Section 4. All checks or demands for money and notes of the corporation shall be signed by such officers or such other person or persons as the Board of Directors from time to time designate.
FISCAL YEAR
Section 5. The fiscal year of the corporation shall end on December 31, unless otherwise determined by the Board of Directors.
SEAL
Section 6. The corporation may have a corporate seal, which shall have inscribed thereon the name of the corporation, the year of its organization and the words "Incorporated, Nevada." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise.
NEVADA CONTROL SHARE ACQUISITION ACT
Section 7. The provisions of the Nevada Control Share Acquisition Act, Nevada Revised Statutes ("NRS") 78.378-78.3793, inclusive, shall not apply to any acquisition of a controlling interest in the corporation, with the term "acquisition" defined as provided in NRS 78.3783 and the term "controlling interest" defined as provided in NRS 78.3785.
ARTICLE VIII
INDEMNIFICATION OF DIRECTORS,
OFFICERS AND EMPLOYEES
Section 1. The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, except an action by or in the right of the corporation, by reason of the fact that he or she is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement actually and
reasonably incurred by him or her in connection with the action, suit or proceeding if he or she acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, does not, of itself, create a presumption that the person did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the corporation, and that, with respect to any criminal action or proceeding, he or she had reasonable cause to believe that his or her conduct was unlawful.
Section 2. The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he or she is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including amounts paid in settlement and attorneys' fees actually and reasonably incurred by him or her in connection with the defense or settlement of such action or suit if he or she acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the corporation. Indemnification may not be made for any claim, issue or matter as to which such person has been adjudged by a court of competent jurisdiction, after exhaustion of all appeals therefrom, to be liable to the corporation or for amount paid in settlement to the corporation, unless and only to the extent that the court in which the action or suit was brought or other court of competent jurisdiction determines upon application that, in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for such expenses as the court deems proper.
Section 3. To the extent that a director, officer, employee or agent of the corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 1 and 2, or in defense of any claim, issue or matter therein, he or she must be indemnified by the corporation against expenses, including attorneys' fees, actually and reasonably incurred by him or her in connection with the defense.
Section 4. Any indemnification under Sections 1 and 2, unless ordered by a court or advanced pursuant to Section 5, must be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances. The determination must be made:
(a) By the stockholders;
(b) By the Board of Directors by majority vote of a quorum consisting of directors who were not parties to the action, suit or proceeding;
(c) If a majority vote of a quorum consisting of directors who were not parties to the action, suit or proceeding so orders, by independent legal counsel in a written opinion; or
(d) If a quorum consisting of directors who were not parties to the action, suit or proceeding cannot be obtained, by independent legal counsel in a written opinion.
Section 5. Expenses incurred by a director or an officer in defending a civil or criminal action, suit or proceeding must be paid by the corporation as they are incurred and in advance of the final disposition of the action, suit or proceeding upon receipt of an undertaking by or on behalf of the director or officer to repay the amount if it is ultimately determined by a court of competent jurisdiction that he or she is not entitled to be indemnified by the corporation. The provisions of this Section do not affect any rights to advancement of expenses to which corporate personnel other than directors or officers may be entitled under any contract or otherwise by law.
Section 6. The indemnification and advancement of expenses authorized in or ordered by a court pursuant to this Article:
(a) Does not exclude any other rights to which a person seeking indemnification or advancement of expenses may be entitled under the certificate of incorporation or any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, for either an action in his or her official capacity or an action in another capacity while holding his or her office, except that indemnification, unless ordered by a court pursuant to Section 2 or for the advancement of expenses made pursuant to Section 5, may not be made to or on behalf of any director or officer if a final adjudication establishes that his or her acts or omissions involved intentional misconduct, fraud or a knowing violation of the law and was material to the cause of action; and
(b) Continues for a person who has ceased to be a director, officer, employee or agent and inures to the benefit of the heirs, executor and administrators of such a person.
ARTICLE IX
AMENDMENTS
Section 1. These bylaws may be altered, amended or repealed or new bylaws may be adopted by the stockholders or by the Board of Directors at any regular meeting of the Board of Directors or of the stockholders or at any special meeting of the Board of Directors or of the stockholders, if notice of such alteration, amendment, repeal or adoption or new bylaws be contained in the notice of such meeting of the stockholders or of the Board of Directors. These bylaws may also be altered, amended or repealed or new bylaws may be adopted by the stockholders or by the
Board of Directors by written consent without a meeting in compliance with the requirements of NRS 78.320(2) and 78.320(3) in the case of a stockholder consent and in compliance with the requirements of NRS 78.315(2) in the case of a consent of the Board of Directors.
* * * * * * * * * *
Adopted: 12/30/86
Amended: 10/9/87
9/29/88
9/29/89
2/16/94
3/24/94
6/13/94
6/24/94
6/13/97
11/4/98