UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the Fiscal year ended September 30, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file number 0-18849
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THE FEMALE HEALTH COMPANY
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(Exact name of registrant as specified in its charter)
Wisconsin 39-1144397
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
919 N. Michigan Ave. Suite 2208
Chicago, Illinois 60611
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (312) 280-2281
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 [ ] No [ X ] 1
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any
amendments to this Form 10-K. [ X ]
As of December 9, 1996, 7,553,581 shares of Common Stock were outstanding. As
of December 9, 1996, the aggregate market value of shares of Common Stock held
by nonaffiliates was approximately $28 million (based upon the last reported
sale price of $4.50 on that date on the American Stock Exchange).
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K Into Which
Document Incorporated
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The Company's Notice of
Annual Meeting of Shareholders
Proxy Statement for the 1996 Part III, Items 10, 11, 12 and 13
Annual Meeting of Shareholders
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FORM 10-K INDEX
PART I PAGE
Item 1. Business 4
Item 2. Properties 10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Supplemental Item. Executive Officers of Registrant 11
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 14
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 8. Financial Statements and Supplementary Data 23
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 78
PART III
Item 10. Directors and Executive Officers of the Registrant 79
Item 11. Executive Compensation 79
Item 12. Security Ownership of Certain Beneficial Owners
and Management 79
Item 13. Certain Relationships and Related Transactions 79
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 80
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PART I
ITEM 1.BUSINESS.
GENERAL
The Female Health Company ("FHC" or the "Company") markets and manufactures the
female condom, the only product, approved by the FDA, under a woman's control
which can prevent unintended pregnancy and sexually transmitted diseases
("STD's), including HIV/AIDS. The female condom is sold over-the-counter and
is marketed under the brand name "Reality" in the U.S., "femy" in Spain and
"femidom" in other parts of the world where the female condom is marketed. The
Company owns certain global intellectual property rights relating to the female
condom, including patents in the U.S., where the female condom is marketed,
Japan, the European Union and various other countries; regulatory approvals in
certain countries, including a Pre-Market Approval ("PMA") in the U.S. and
U.K.; and certain proprietary manufacturing technology related to the
production of the female condom.
At national and global levels, the impact of STDs and unintended pregnancies is
alarming. In the United States alone, the estimated direct and indirect costs
of teenage pregnancies and STDs total over $30 billion a year. Five of the 10
most common diseases in the United States reported to the Centers for Disease
Control and Prevention last year were STDs. A recent report by the National
Academy of Sciences indicated that for every $1 spent on prevention of STDs in
the U.S. $43 is spent on treatment. The World Health Organization ("WHO")
estimates that each year there are 333 million new cases of STDs contracted
worldwide. Today, AIDS is the first and third leading cause of death among men
and women in the U.S., respectively, for those 15-44 years of age.
When used correctly and consistently, the contraceptive effectiveness of the
female condom is statistically indistinguishable from other barrier
contraceptives such as the male condom, diaphragm and the cervical cap. Unlike
the diaphragm and cervical cap the female condom is effective in preventing
sexually transmitted diseases. Consequently, the transmission of STDs and the
number of pregnancies by those who cannot or are not prepared to support
children could be dramatically reduced with the regular use of the female
condom.
While the actual level of future demand of the female condom is at this point
unknown, management believes there is a clear, vast global potential for the
product. The potential exists, in part, from attracting a segment of those
customers who annually purchase more than an estimated four billion male
condoms worldwide. The significant worldwide sales of male condoms reflects
regular use by a small minority of the world's population. Many persons at risk
to STDs and unintended pregnancy simply don't like to use the male condom.
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The female condom offers certain advantages over the male condom including the
ability to be inserted prior to commencement of sexual activity and enhanced
sensitivity and greater comfort. Its polyurethane material is also less likely
to tear than latex. The Company believes that given these favorable
characteristics and the fact that most potential customers have not yet tried
the female condom a significant opportunity exists to increase the product's
usage and market share.
The Company's strategy to capitalize on the worldwide opportunity is threefold:
1. Work with agencies such as the Joint United Nation Programme on HIV/AIDS,
The World Health Organization and the United States Agency for
International Development to establish the female condom in the global
public sector. Male condoms distributed through these channels are
estimated to exceed one billon units annually,
2. Build consumer acceptance of the female condom in the U.S., and
3. Develop the commercial market for the female condom in key international
countries through the establishment of effective partnerships with
companies on a country specific or multicountry basis.
The Company is in a start-up stage. Management belives that the successful
implementation of its strategy will enable the Company to increase sales
suffcient to cover its operating costs and achieve profitability. Units sales
necessary to achieve this objective represent a relatively small share of the
global market for male condoms. Sales equal to the Company's annual
manufacturing capacity of 60 million units would represent less than 1.5% of
the estimated global unit market for male condoms.
Significant Transactions
During 1996, The Female Health Company completed a number of transactions as
elements of a continuing strategy to realize the global potential of the female
condom. The nature of these transactions and their impact on the results of
operations and financial condition of The Female Health Company are further
discussed below and in the following sections.
In January 1996, the Company sold WPC Holdings, Inc. ("Holdings"), which owned
all of the assets and liabilities of the Company other than those related
primarily to the female condom. In February 1996, the Company acquired Chartex
Resources Limited ("Chartex"), the manufacturer and owner of certain worldwide
rights to, and the Company's sole supplier of, the female condom.
The purchase of Chartex provides certain worldwide rights to the female condom,
enables the Company to pursue strategies for global sales, improves the
Company's ability to contract with partners to market and distribute the female
condom in select markets worldwide and streamlines the organizational structure
and decision-making associated with the global marketing and manufacture of the
female condom. In addition, the Company acquired a net operating loss
carryover in the U.K. of approximatley $63.2 million at the date of acquisition
As a result of the sale of Holdings and the Chartex acquisition, The Female
Health Company evolved to its current state with its sole business consisting
of the manufacture, marketing and sale of the female condom.
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Major Markets
Global Public Sector
The Female Health Company pursued significant strategic initiatives during 1996
through alliances with global public sector agencies. These initiatives are
part of a continuing strategy to enhance the awareness of the benefits of
prevention and to increase distribution of the female condom throughout the
world, particularly in developing countries.
In pursuit of these strategic initiatives, FHC's management has met and
continues to have extensive discussions with officials of various international
organizations including the Joint United Nations Programme on HIV/AIDS
("UNAIDS"), the World Health Organization ("WHO"), and the United States Agency
for International Development ("USAID"). It is estimated these organizations
and their affiliates purchase and distribute more than one billion male condoms
annually. As a direct result of these discussions the Company has entered into
an agreement with UNAIDS to supply the female condom to developing countries at
a special public sector price based on total worldwide volume. From an inquiry
made by UNAIDS to 160 U.N. member states, some 80 have responded to the
initiative, identifying an overall requirement for more than 7 million female
condoms in 1997, more than half of which have funding in place.
In 1997, The Female Health Company will continue to pursue these and other
initiatives in an effort to increase awareness of the benefits of prevention of
STDs and unintended pregnancy and the effectiveness and availability of the
female condom.
United States
During 1996, FHC increased its marketing of the female condom including the use
of a wide range of programs and strategies including print and radio
advertising, in-store merchandising, and consumer promotions. FHC's efforts
include an aggressive campaign to promote the distribution of the female condom
through the public sector. These efforts have included meetings, in-service
presentations and participation at professional conferences, exhibits and
lectures involving employees and volunteers of city, district and state public
health departments.
The Company has achieved wide retail distribution for the female condom. The
Reality female condom is currently available through drug store, mass
merchandise, grocery and catalog retailers and, in the public sector, from
family planning clinics; community-based organizations; and city, county and
state health clinics.
The Company is evaluating a number of other programs designed to increase
awareness and usage of the female condom including public service
announcements, direct mail programs, marketing and educational materials on the
World Wide Web and television commercials advertising the product. Some or all
of these programs may be used in 1997.
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The Company formed the Female Health Foundation, a non-profit group dedicated
to educating women about their health. Prevention of sexually transmitted
disease and unintended pregnancy using the female condom is the first health
issue being addressed by the Foundation and its group of scientific advisors.
The Strategic Advisory Group ("SAGE") consisting of public health advocates and
scientists has agreed to advise the Foundation on education, communication and
behavioral programs.
Actress Drew Barrymore appeared at a press conference to launch the Foundation.
Public service announcements, featuring Ms. Barrymore encouraging women to
protect themselves and to consider the female condom as an option, are expected
to begin airing in early 1997.
International
The Company's strategy to realize the potential of the female condom includes
developing country specific partnerships with health care and consumer product
companies with local market expertise. These agreements would provide for FHC
to manufacture the female condom and the Company's partner to market and
distribute the product in major international markets.
The Company has entered into an exclusive distributor agreement with a $1
billion division of a $5 billion Japanese health care company. Pursuant to the
agreement, this company will market the female condom in Japan. Clinical and
marketing studies have successfully been completed. An estimated $1.5 million
was spent in 1996 in preparation for the upcoming launch of the female condom.
Japanese regulatory approval is anticipated to occur in 1997. In Japan, the
majority of contracepting couples use the male condom since oral contraceptives
have not been approved. It is estimated that Japan uses about one-quarter of
the world's male condoms, excluding the public sector. The Company's market
research shows that the concept of a female condom and its use are of high
interest to Japanese consumers.
Under a similar agreement the female condom was recently launched in Korea
where initial sales exceeded expectations. Currently, the Company is discussing
distribution of the female condom with several prospective partners in a number
of high-potential countries. The Company is currently in discussions with
potential partners in The People's Republic of China, Russia, India and Canada
and plans to initiate discussions for continental Europe.
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GOVERNMENT REGULATION
In the U.S., the female condom is specifically regulated by the U.S. Food and
Drug Administration ("FDA"). Pursuant to section 515(a)(3) of the Safe Medical
Amendments Act of 1990 (the "SMA Act"), the FDA may temporarily suspend
approval and initiate withdrawal of the Pre-Market Approval ("PMA") if the FDA
finds that any device is unsafe or ineffective, or on the basis of new
information with respect to the device, which, when evaluated together with
information available at the time of approval, indicates a lack of showing of
reasonable assurance that the device is safe or effective under the conditions
of use prescribed, recommended, or suggested in the labeling thereof. Failure
to comply with the conditions of FDA approval invalidates the approval order.
Commercial distribution of a device that is not in compliance with these
conditions is a violation of the SMA Act.
COMPETITION
The Company is manufacturing and marketing the only female condom. While
management believes that the female condom is a brand new category of product,
management believes that it will compete in part with male condoms. The market
for male condoms is characterized by a number of larger companies which have
significantly greater financial resources and whose brand names are more widely
recognized. Due principally to extensive manufacturing processes involved with
the female condom as compared to male condoms, the female condom will generally
be sold at the retail level at a price which is higher than male condoms.
The Company is aware of at least one other party who was developing a female
condom designed to compete with Reality and who has obtained a patent on its
device. However, management believes this party is not currently pursuing its
product. Other parties may also seek to develop a female condom. These
competing products could be distributed by companies with greater financial
resources and customer contacts than the Company's.
EMPLOYEES
As of November 30, 1996, the Company's operations had 51 full-time employees
within the U.S. and the U.K. and 1 part-time employee. No Company employees are
represented by a labor union. The Company believes that its employee relations
are good.
BACKLOG
At November 30, 1996 the Company had a backlog of unfilled orders of $155,307
(including $21,614 for FHC and $133,693 for Chartex). Comparable amounts as of
November 30, 1995 were $17,662 ($17,662 for FHC and $-0- for Chartex). All
orders contained in the Company's current backlog are expected to be filled
during Fiscal 1997.
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PATENTS AND TRADEMARKS
The Company holds patents on the female condom in the Unites States, the
European Union, Japan, Canada, Australia, Brazil and The People's Republic of
China and holds patents and patent applications on the manufacturing technology
in various countries. The Company also licenses the trademark "Reality" in
the United States and Canada has trademarks on the names "femidom" and "femy"
in certain foreign countries.
RESEARCH AND DEVELOPMENT
In Fiscal 1996, 1995 and 1994, the Company incurred research and development
expenditures from continuing operations of $361,094, $135,121 and $164,877,
respectively. These expenditures have primarily been related to developing and
conducting clinical trials for the female condom.
INDUSTRY SEGMENTS AND FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC
OPERATIONS
See Note 11 in financial statements included herein at Part II, Item 8.
HISTORY
The Female Health Company is the successor to Wisconsin Pharmacal Company,
Inc., a company previously manufacturing and marketing a wide variety of
disparate specialty chemical and branded consumer products. A summary of the
Company's origins and the development of the female condom follows.
The female condom was developed by a Danish physician who obtained a U.S.
patent for the product in 1988. The physician subsequently sold certain rights
to the condom to Chartex Resources Limited. In the years that followed,
Chartex, with resources provided by a nonprofit Danish foundation, developed
the manufacturing processes and completed other activities associated with
bringing the female condom to market, in certain non-U.S. countries. Wisconsin
Pharmacal Company, Inc., which then owned certain rights to the female condom
in the U.S., Canada, and Mexico, pursued the pre-clinical and clinical studies
and overall development of the product for worldwide use and FDA approval of
the product in the U.S.
In the U.S., because the product was the first of its kind, the FDA Obstetrics
and Gynecology Devices Advisory Panel determined that the female condom
required a Pre-Market Approval ("PMA"). In 1993, after years of research, the
FDA approved the product for use in the U.S. In 1993, the product was
distributed on a limited basis to public health and family planning clinics.
In 1994, the FDA inspected and approved the Chartex London manufacturing
facility. In 1994, the product was shipped for the first time to wholesalers
and retailers throughout the U.S. Subsequently, major cities such as Chicago
and Philadelphia launched programs in the public sector which provided
educational materials and free trial samples to interested individuals.
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In Fiscal 1995, the Company's Board of Directors approved a plan to complete a
series of actions designed, in part, to maximize the potential of the female
condom. First, the Company restructured and transferred all of the assets and
liabilities of the Company other than those related primarily to the female
condom to a newly formed wholly-owned subsidiary of the Company, WPC Holdings,
Inc. ("Holdings"). In January 1996, the Company sold Holdings to an unrelated
third party. Then, in February 1996, the Company acquired Chartex, the
manufacturer and owner of certain worldwide rights to, and the Company's sole
supplier of, the female condom. As a result of the sale of Holdings and the
Chartex acquisition, The Female Health Company evolved to its current state
with its sole business consisting of the manufacture, marketing and sale of the
female condom.
ITEM 2. PROPERTIES.
The Company leases approximately 4,504 square feet of office space at 875 North
Michigan Avenue, Suite 3660, Chicago, IL 60611. The lease expires in 2001.
The Company also operates corporate offices at 919 North Michigan Avenue, Suite
2208, Chicago, Illinois, 60611. The Company utilizes warehouse space and sales
fulfillment services of an independent public warehouse located near
Minneapolis, Minnesota for storage and distribution of the female condom. The
Company manufactures the female condom in a 40,000 square foot facility located
in London, England. The facility was, in substance, sold by and leased back to
the Company in a transaction consummated after fiscal year-end. The
manufacturing operation involves proprietary equipment owned by the Company to
manufacture the polyurethane female condom. The facility, approved by the FDA,
is subject to periodic FDA inspections and has the capacity to produce
approximately 60 million female condoms per year.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not involved in any material pending legal proceedings.
ITEM 4. SUBMISSION TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of the Fiscal year ended September 30, 1996.
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SUPPLEMENTAL ITEM.
The following table sets forth certain information about the Company's
executive officers:
Name, Age and Positions
O.B. Parrish, 63 Mr. Parrish has served as Chief Executive Officer
Chief Executive Officer since 1994 and as Chairman of the Board and
Chairman of the Board and director of the Company since 1987. Mr. Parrish is
Director a shareholder and has served as the President and
as a director of Phoenix Health Care of Illinois,
Inc. ("Phoenix of Illinois") since 1987. ("Phoenix
Partnership"), the owner of approximately 21% of
the outstanding Common Stock of the Company. Mr.
Parrish also was the Co-Chairman and a director of
Inhalon Pharmaceuticals, Inc. until its sale to
Medeva PLC and is Chairman and a director of
ViatiCare LTD. From 1977 until 1986, Mr. Parrish
was the President of the Global Pharmaceutical
Group of G.D. Searle & Co. ("Searle"). From 1974
until 1977, Mr. Parrish was the President of
Searle International, the foreign sales operation
of Searle. Prior to that Mr. Parrish was
Executive Vice President of Pfizer's International
Division.
William R. Gargiulo, Jr.,68 Mr. Gargiulo has served as Vice President and
Secretary, Vice President- Secretary of the Company from 1996 to present, as
International, Assistant Secretary of the Company from 1989 to
and Director 1996, as Vice President - International of The
Female Health Company Division from 1994 until
1996, as Chief Operating Officer of the Company
from 1989 to 1994, and as General Manager of the
Company from 1988 to 1994. Mr. Gargiulo has also
served as a Director of the Company since 1987.
Mr. Gargiulo is a trustee of a trust which is a
stockholder of Phoenix of Illinois. From 1984
until 1986, Mr. Gargiulo was the Executive Vice
President of Searle's European operations. From
1976 until 1984, Mr. Gargiulo was the Vice
President of Searle's Latin American operations.
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Mary Ann Leeper, Ph.D., 56 Dr. Leeper has served as the President and Chief
President, Chief Operating Operating Officer of the Company since 1996 and as
Officer and Director a director of the Company since 1987. Dr. Leeper
served as President and Chief Executive Officer of
The Female Health Company Division from May 1994
until January 1996, and as Senior Vice President -
Development of the Company from 1989 until January
1996. Dr. Leeper is a shareholder and has served
as a Vice President and director of Phoenix of
Illinois since 1987. Previously, Dr. Leeper
served as Vice President - Market Development for
Searle's Pharmaceutical Group and in various
Searle research and development management
positions. As Vice President - Market Development,
Dr. Leeper was responsible for worldwide licensing
and acquisition, marketing and market research.
In earlier positions she was responsible for
preparation of New Drug Applications and was a
liaison with the FDA.
Jack Weissman, 48 Mr. Weissman has served as Vice President-Trade
Vice President-Trade Sales Sales since June 1995. From 1992 to 1994, Mr.
Weissman was Vice President-Sales for Capitol
Spouts, Inc. During the 1989-1992 period, he
acted as General Manager-HTV Group, an investment
group involved in the development of retail
stores. Mr. Weissman joined Searle's Consumer
Products Group in 1979 and held positions of
increasing responsibility, including National
Account Manager and Military Sales Manager from
1985-1989. He was Director - Retail Business
Development for The NutraSweet Company, a Searle
subsidiary. Prior to Searle, Mr. Weissman worked
in the consumer products field as account manager
and territory manager for Norcliff Thayer and
Whitehall Laboratories.
Michael Pope, 38 Mr. Pope has served as Vice President of the
Vice President Company since 1996 and as General Manager of
of the Company Chartex International, Plc since the Company's
Director of Chartex 1996 acquisition of Chartex. Mr. Pope has also
Resources served as a Director of Chartex Resources Limited
Limited, Director of and Chartex International, Plc since 1995.
Chartex International, Plc Previously, Mr. Pope was Director of Technical
and General Manager of Operations for Chartex which included
Chartex International, Plc responsibility for manufacturing, engineering,
process development and quality assurance. Mr.
Pope was responsible for the development of the
high speed proprietary manufacturing technology
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for the female condom and securing the necessary
approvals of the manufacturing process by
regulatory organizations, including the FDA. Mr.
Pope was also instrumental in developing and
securing Chartex's relationship with its Japanese
marketing partner. Prior to joining Chartex, Mr.
Pope was Production Manager and Technical Manager
for Franklin Medical, a manufacturer of disposable
medical devices. Prior to that, Mr. Pope was Site
Manager, Engineering and Production Manager,
Development Manager and Silicon Manager for Warne
surgical Products.
Mark Osborn, 38 Mr. Osborn has served as Vice President and Chief
Vice President Financial Officer since October, 1996. Prior to
Chief Financial Officer joining FHC, Mr. Osborn was a management
consultant with The LakeWest Group. From 1990 to
1995, Mr. Osborn served as Divisional Vice
President - Finance and in other management
positions for Venture Stores, Inc., a mass
merchandise retailer. Prior to Venture, Mr.
Osborn was Director of Planning and Analysis for
Tonka Corporation, a manufacturer and marketer of
toys and games.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the American Stock Exchange under the
symbol "FHC". Prior to January 26, 1995 the Company's Common Stock traded
over-the-counter on the NASDAQ Small-Cap Market (symbol "WPCI"). The
approximate number of record holders of the Company's Common Stock at December
1, 1996 was 530.
The Company has paid no cash dividends on its Common Stock and does not expect
to pay cash dividends in the foreseeable future. The Company intends to
reinvest any earnings in the continued development and expansion of its
business. The Company does not currently have a working capital credit facility
with a bank. The Company expects that any future working capital credit
facilities it might obtain would include restrictions on the payment of
dividends on its Common Stock.
The following table sets forth the historical quotations or market prices of a
share of the Common Stock on the applicable market for the periods indicated.
1996 1995
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High Low High Low
------- ------- ------- -------
First quarter $ 3-5/16 $ 2-1/2 $10-3/4 $3-3/4
Second quarter 5 2-9/16 6-3/4 3-3/4
Third quarter 6-7/8 3-13/16 4-3/4 2-3/8
Fourth quarter 6-5/8 4-1/4 4 2-1/2
ITEM 6. SELECTED FINANCIAL DATA.
(Dollars in thousands except per share amounts)
1996(5) 1995 1994(1) 1993 1992
-------- ------- ------- --------- --------
OPERATING STATEMENT
Net Revenues:
Continuing Operations $ 2,064 $ 2,179 $ 1,672 $ 25 $ ---
Discontinued Operations 13,488 14,503(3) 12,484 11,258
Income (Loss) From:
Continuing Operations $(8,656) $(8,447) $(5,502) $(3,972) $(4,195)
Discontinued Operations (4) 65 2,502(3) 236 (126)
-------- -------- -------- -------- --------
$(8,660) $(8,382) $(3,000) $(3,736) $(4,321)
======== ======== ======== ======== ========
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1996(5) 1995 1994(1) 1993 1992
-------- ------- ------- ------- ------
Weighted Average Number of
Common Shares Outstanding 6,611,796 6,023,460 4,849,160 3,896,423 3,492,692
Net income (loss) per
Weighted average common
shares outstanding:
Continuing Operations $(1.31) $(1.40) $(1.13) $(1.02) $(1.20)
Discontinued Operations --- 0.01 0.51 0.06 (0.04)
------- ------- ------- ------- -------
$(1.31) $(1.39) $(0.62) $(0.96) $(1.24)
======= ======= ======= ======= =======
Cash Dividends Declared per
Share --- --- --- --- ---
BALANCE SHEET
Total assets:
Continuing Operations $ 11,266 $ 6,575 $ 9,246(4) $3,615 $ 2,444
Net Discontinued Operations:
Gross assets --- 9,540 9,401(4) 6,461 7,662
Less Liabilities and Minority
Interest associated with
discontinued operations --- (2,376) (2,363) (2,886) (4,399)
-------- -------- -------- -------- --------
--- 7,164 7,038 3,575 3,263
-------- -------- -------- -------- --------
$ 11,266 $ 13,739 $ 16,284 $ 7,190 $ 5,707
======== ======== ======== ======== ========
Long-Term Indebtedness:(2)
Continuing Operations $ 4,445 $ 146 $ 85 $ --- $ ---
Discontinued Operations --- 1,583 1,742 1,869 1,933
-------- -------- -------- -------- --------
Total $ 4,445 $ 1,729 $ 1,827 $ 1,869 $ 1,933
======== ======== ======== ======== ========
Stockholders' Equity:
Continuing Operations $ 2,944 $ 388 $ 5,639 $ 763 $ 2,192
Discontinued Operations --- 7,163 7,038 3,575 3,263
-------- -------- -------- ------- --------
Total $ 2,944 $ 7,551 $ 12,677 (4)$4,338 $ 5,455
======== ======= ======== ====== ========
- ----------------------
(1)Includes results related to the commencement of nationwide marketing and
distribution of Reality beginning in the fourth quarter of Fiscal 1994.
(2)Includes current portion
(3)In December 1993, Holdings received $2,299,787 from the Disposer Care
licensing litigation settlement.
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(4) In February 1994, the Company received $10.8 million (net) from a private
placement of 1,250,000 shares of Common Stock. See Note 10 to Notes to
Consolidated Financial Statements. Approximately $1 million of proceeds
from the February 1994 private placement of Common Stock was allocated to
Holdings.
(5) On January 29, 1996, the Company completed the sale of the net assets of
Holdings for consideration valued at $8.285 million. In addition, on
February 1, 1996, the Company completed the purchase of Chartex Resources
Limited. See Note 2 and 3 in financial statements included at Item 8
herein.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The Company has experienced significant losses from continuing operations over
the past three Fiscal years, largely as a result of the substantial costs
incurred to develop, obtain FDA approval of and commercially launch the female
condom.
Consumer research completed by independent organizations revealed significant
rates of acceptance among those individuals who have recently tried the female
condom in the U.S. Further, the Company continues to make progress in
establishing partnerships with companies seeking to market the female condom in
countries outside the U.S. and U.K.
In the near term, the Company's revenue will depend on global public sector
sales, key country partners, and consumer acceptance in the U.S. The Company
believes that a variety of factors will determine the ultimate level of
worldwide acceptance of the female condom including; (1) global public sector
use, (2) cultural factors, (3) availability of funds to spend on marketing and
promotional programs in the U.S., (4) production volume levels and the
resultant effect on the cost of the female condom, (5) the regulatory
environment and (6) agreements with third parties to market the female condom
in select international markets.
In Fiscal 1997, the Company plans to; (1) distribute the female condom to
developing countries based on its agreement with UNAIDS, (2) promote the female
condom through media which may include television, print and the World Wide
Web, (3) finalize contractual agreements with international distributors and
begin shipments of the female condom to major international markets, and (4)
increase sales volume and lower product costs through increased production
volume at its London-based manufacturing facility.
As a result of acquiring Chartex in 1996, the Company has significant
production capacity of the female condom. If sales volume does not increase,
fixed manufacturing costs will cause further operating losses.
16
<PAGE>
The Company believes that as awareness of the female condom increases, sales
will grow. Accordingly, if resources permit, FHC will continue to incur
marketing and advertising costs in the U.S. to promote consumer awareness and
use of the female condom. Until sales increase to a level sufficient to fund
these costs, the Company will continue to incur operating losses.
RESULTS OF OPERATIONS
Fiscal Year Ended September 30, 1996 ("Fiscal 1996") Compared to Fiscal Year
Ended September 30, 1995 ("Fiscal 1995")
Continuing Operations
The Female Health Company had revenues of $2.1 million and a net loss of $8.7
million ($1.31 per share) in Fiscal 1996 compared to revenues of $2.2 million
and a net loss of $8.4 million ($1.40 per share) in Fiscal 1995.
Fiscal 1996 revenues reflect a decline in U.S. sales, a consequence, in part,
of reduced domestic advertising and promotional expenditures, some pipeline
fill in 1995, and sales returns of dated product, offset largely by the
inclusion of Chartex sales since the February 1, 1996 acquisition. Net
revenues for both periods pertain exclusively to sales of the female condom.
In Fiscal 1996 cost of goods sold increased from $2.6 million to $3.7 million
principally due to fixed manufacturing costs at the Company's Chartex
production facility which are included in cost of goods sold since the Chartex
acquisition. Cost of goods sold includes $950,000 and $1,000,000 for a
reduction in the expected value of the Company's inventory in Fiscal 1996 and
Fiscal 1995, respectively. The inventory write-down reflects historical rates
of sale and on-hand inventory levels of dated product.
In 1994, the female condom was granted a two-year product life by the FDA.
Then in July 1995, the FDA extended the product's useful life to three years.
In response to an application by the Company, the FDA recently notified the
Company verbally that it will extend the product's useful life to four years
and is considering a useful life in excess of four years.
The Company's finished goods inventory and current retail inventories in the
U.S. generally reflect expiration dates between July 1997 and September 1997,
although the product's useful life is one year longer and may actually
extend further pending approval from the FDA. The Company's obsolescence and
sales return provisions reflect costs associated with repackaging the Company's
product to ensure it is properly labeled.
Sales and marketing expense aggregated $3.0 million for Fiscal 1996 compared to
$4.3 million for Fiscal 1995. Sales and marketing expense includes print
magazine and radio advertising, public relations expenses, trade promotions and
administrative expenses of the Company's sales and marketing organization.
Resource constraints limited spending on advertising and promotional programs
particularly in early 1996.
17
<PAGE>
General and administrative expenses totaled $3.0 million for Fiscal 1996
compared to $1.0 million in Fiscal 1995. The increase in Fiscal 1996 was
principally due to the inclusion of eight months of Chartex's administrative
costs.
Research and development expenses increased to $.4 million for Fiscal 1996 from
$.1 million for Fiscal 1995 due to costs incurred in connection with clinical
trials.
The Company did not incur any exclusivity fees for the current year compared to
$2.6 million for Fiscal 1995. Exclusivity fees were previously paid to Chartex
as part of the Company's agreement with Chartex for certain rights to the
female condom.
Nonoperating expense for Fiscal 1996 increased $.7 million for Fiscal 1996 from
$.03 million for Fiscal 1995 due to increased interest expense on the Company's
borrowings and a reduction in the estimated value of warehouse space provided
as part of the consideration for the sale of Holdings.
Discontinued Operations
Results from the discontinued Holdings operations reflect a loss of $4,461 in
Fiscal 1996 compared to income from operations of $64,599 for Fiscal 1995. The
measurment date for discontinuing Holdings was March 10, 1995, and Holdings
was sold on January 29, 1996. The results of discontinued operations reflect
four and twelve months in Fiscal 1996 and Fiscal 1995, respectively.
Fiscal Year Ended September 30, 1995 ("Fiscal 1995") Compared to Fiscal Year
Ended September 30, 1994 ("Fiscal 1994")
Continuing Operations
The Company reported an $8.4 million loss from continuing operations for Fiscal
1995 compared to a loss of $5.5 million for Fiscal 1994. The $2.9 million
increase in loss from continuing operations was primarily due to extensive
marketing costs associated with the commercial launch and national distribution
of Reality in the U.S. and a $1 million write-down related to slow-moving
inventory because of anticipated expiration of dated product before sale.
The Company reported a $.5 million increase in net revenues to $2.2 million for
Fiscal 1995 compared to the preceding year. Net revenues pertain exclusively
to sales of the female condom. Approximately 46% of Reality sales for Fiscal
1995 were trade sales and 54% were sales to the public sector. In Fiscal 1994,
approximately 85% of Reality sales were retail trade and 15% were for the
public sector.
The Company reported a 28% gross margin in Fiscal 1995 before the $1 million
inventory write-down compared to 32% in Fiscal 1994. The decrease in gross
margin percentage relates primarily to shift in mix of sales between trade and
18
<PAGE>
public sector, with public sector sales carrying reduced pricing. The $1
million inventory write-down was due to lower than expected sales and the level
of product inventory on hand at September 30, 1995. Product purchases were
impacted by minimum purchase requirements under the Company's supply agreement
with Chartex.
Sales and marketing expense, including the launch, aggregated $4.3 million for
Fiscal 1995 compared to $2.1 million for Fiscal 1994. During much of the prior
year period, Reality was still being developed and as a result was not actively
marketed. Fiscal 1995 expense included print magazine and radio advertising
directed to consumers and public health providers and professional "detailing",
mailings and public relations expenses incurred in connection with the
education-based portion of the overall marketing program. Current period
expenses also included expenses of the sales and marketing organization
established by FHC during the third quarter of Fiscal 1994.
General and administrative expense totaled $1.0 million in Fiscal 1995 compared
to $.9 million in Fiscal 1994. Fiscal 1995 results include a full year of
expense related to administrative functions of FHC.
Research and new product development expense decreased slightly to $.1 million
for Fiscal 1995 compared to $.2 million for Fiscal 1994. R&D expense relates
to costs incurred in connection with ongoing government-funded clinical trials.
Reality exclusivity fees represented the difference between actual royalties
owed based on product sales of Reality and the minimum annual amounts due for
the U.S., Canada and Mexico in order to maintain exclusivity. Through June 30,
1995, the Company accrued on a monthly basis, a pro rata portion of the annual
amounts due. Actual royalties due are "paid" by reducing the prepaid royalty
asset on the Company's balance sheet. Reality exclusivity fees decreased $.4
million in Fiscal 1995 compared to Fiscal 1994. A $3 million minimum
exclusivity fee for the U.S. royalty period ended February 27, 1994 was for an
18 month period. Subsequent royalty periods are for 12 months. The Company
ceased accruing further exclusivity shortfall amounts as of June 30, 1995, as
explained in Note 1 to the financial statements.
Nonoperating expense for Fiscal 1995 relates to interest on FHC's revolving
credit facility. Nonoperating income in Fiscal 1994 represents interest income
generated through investment of proceeds from the Company's February 1994
private placement of Common Stock.
Discontinued Operations
Income from discontinued operations decreased from $2.5 million for Fiscal 1994
to $.06 million for Fiscal 1995. Results for 1994 included a nonrecurring gain
of $2.3 million from a licensing settlement. Results for 1995 include a $.3
million charge related to a litigation settlement.
19
<PAGE>
Net revenues of Holdings decreased $1 million to $13.5 million for Fiscal 1995
compared to $14.5 million for Fiscal 1994. Prior year results include
nonrecurring revenue of $2.3 in connection with a product licensing litigation
settlement. Exclusive of this nonrecurring item, net revenues of discontinued
operations increased $1.3 million over the prior year amounts.
Financial Condition, Liquidity and Sources of Capital
Historically, the Company has incurred significant operating losses. Cash used
in continuing operations was $4.1 million, $4.0 million and $9.4 million for
Fiscal 1996, 1995, and 1994, respectively. Historically, the Company has
funded operating losses and capital costs, in large part, by securing outside
sources of capital, primarily through the sale of common stock.
During Fiscal 1996, the Company received approximately $2.2 million in proceeds
from newly-issued notes payable, $1.8 million (net of transaction costs) from
the sale of convertible debentures and warrants, $2.8 million (net of
transaction costs) from the sale of common stock. The Company also realized
approximately $5.2 million (net of transaction costs) from the sale of
Holdings. The total cash cost of the Chartex acquisition (including expenses)
was approximately $5.1 million. Together with the proceeds from financing
transactions discussed above, FHC used these amounts to fund current operations
of the Company including for working capital and marketing expenditures and to
repay existing liabilities. Subsequent to its Fiscal year end, the Company
completed the sale and lease back of its manufacturing facility raising
approximately $1.1 million (net of the repayment of the mortgage secured by the
facility) to fund working capital requirement and for general corporate
purposes.
Due to the Company's sale of Holdings and its purchase of Chartex, the Company
does not believe that its historical liquidity, results of operations and
capital requirements are necessarily representative of expected future results
of operations or capital requirements. In the near term, FHC management
expects operating and capital costs to continue to exceed funds generated from
operations due principally to the Company's fixed manufacturing costs relative
to current production volumes and the ongoing need to spend heavily on
advertising and promotion in the U.S. to expand consumer awareness and
acceptance of the female condom. Increased demand for the female condom may
add to the Company's near term cash requirements as investment in working
capital is required to support higher sales and production levels. With the
exception of a final payment of (Pounds)153,000 due on manufacturing equipment
purchased in 1996, the Company does not anticipate significant capital
expenditures for Fiscal 1997.
In 1997, management will pursue other avenues to obtain financing including
pursuing strategies to secure additional capital from a debt or equity
securities offering.
20
<PAGE>
Until internally generated funds are sufficient to meet cash requirements, FHC
will remain dependent upon its ability to generate sufficient capital from
outside sources. While management believes that revenue from sales of the
female condom will eventually exceed operating costs and that ultimately
operations will generate sufficient funds to meet capital requirements, there
can be no assurance that such level of operations will ultimately be achieved,
or be achieved in the near term. Likewise, there can be no assurance that the
Company will be able to source all or any portion of its required capital
through the sale of debt or equity or, if raised, the amount will be sufficient
to operate the Company until sales of the female condom generate sufficient
revenues to fund operations. In addition, any funds raised may be costly to
the Company and/or dilutive to stockholders. If the Company is not able to
source the required funds or any future capital which becomes required, the
Company may be forced to sell certain of its assets or rights or cease
operations. The Company does not currently have in place any line of credit
financing and has not yet actively pursued such financing. Depending on the
level of sales of the female condom and estimated operating losses, it may be
difficult to source such financing initially.
If the Company is not able to source additional capital, the lack of funds to
promote the female condom may significantly limit the Company's ability to
realize value from its existing inventory and to capitalize on the investments
made in the female condom.
IMPACT OF INFLATION AND CHANGING PRICES
Although the Company cannot accurately determine the precise effect of
inflation, the Company has experienced increased costs of product, supplies,
salaries and benefits, and increased general and administrative expenses. The
Company attempts to pass on increased costs and expenses by increasing selling
prices, when possible, and by improved efficiencies of operations.
FOREIGN CURRENCY AND MARKET RISK
The Company manufactures the female condom in a facility located in London,
England. Further, a material portion of the Company's future sales are likely
to be in foreign markets. Manufacturing costs and sales to foreign markets are
subject to normal currency risks associated with changes in the exchange rate
of foreign currencies relative to the United States Dollar. In addition, some
of the Company's future international sales may be in developing nations where
dramatic political or economic changes are possible. Such factors may
adversely affect the Company's results of operations and financial condition.
FORWARD-LOOKING STATEMENTS
Statements contained herein which are not historical in nature are
forward-looking and are subject to risks inherent in the assumptions used to
make such forward-looking statements.
21
<PAGE>
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company wishes to caution readers that the
following important factors could cause the Company's actual results to differ
materially from those projected in forward-looking statements made by, or on
behalf of, the Company:
The Company's inability to secure adequate capital to fund operating losses,
working capital requirements, advertising and promotional expenditures and
principal and interest payments on debt obligations,
Factors related to increased competition from existing and new competitors
including price reduction and increased spending on marketing and product
development,
Limitations on the Company's opportunities to enter into and/or renew
agreements with international partners,
The failure of the Company or its partners to successfully market, sell, and
deliver its product in international markets; and risks inherent in doing
business on an international level, such as laws governing medical devices
that differ from those in the U.S., unexpected changes in the regulatory
requirements, political risks, export restrictions, tariffs, and other trade
barriers, and fluctuations in currency exchange rates.
The disruption of production at the Company's manufacturing facility due to
raw material shortages, labor shortages, and/or physical damage to the
Company's facilities,
The Company's inability to manage its growth and to adapt its
administrative, operational and financial control systems to the needs of
the expanded entity and the failure of management to anticipate, respond to
and manage changing business conditions,
The loss of the services of executive officers and other key employees and
the Company's continued ability to attract and retain highly-skilled and
qualified personnel,
The costs and other effects of litigation, governmental investigations,
legal and administrative cases and proceedings, settlements and
investigations, and developments or assertions by or against the Company
relating to intellectual property rights.
NEW ACCOUNTING PRONOUNCEMENTS
Please see "Current Accounting Developments" in Note 1 in financial statements
included herein at Part II Item 8.
22
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS:
Independent Auditors' Reports:
McGladrey & Pullen, LLP 23
Ernst & Young, LLP 25
Consolidated Balance Sheets -
September 30, 1996 and 1995 27
Consolidated Statements of Operations
for each of the three years
ended September 30, 1996 29
Consolidated Statements of Stockholders'
Equity for each of the three years
ended September 30, 1996 31
Consolidated Statements of Cash Flows for
each of the three years
ended September 30, 1996 35
Notes to Consolidated Financial Statements 39
Financial Statements Schedules:
Independent Auditors' Reports on Supplemental Schedules 70
Schedule I - Condensed Financial
Information of Registrant 71
Schedule II - Valuation and Qualifying Accounts 74
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
The Female Health Company and Subsidiaries
Chicago, Illinois
We have audited the accompanying consolidated balance sheets of The Female
Health Company and Subsidiaries, as of September 30, 1996, and the related
statements of operations, stockholders' equity, and cash flows for the year
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. The consolidated balance sheet as of
September 30, 1995, and the related statements of operations, stockholders'
equity and cash flows for the two years ended September 30, 1995 and 1994, were
audited by other auditors, whose report dated November 10, 1995, expressed an
unqualified opinion on those statements.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the 1996 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Female
Health Company and subsidiaries as of September 30, 1996, and the results of
their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
23
<PAGE>
The accompanying consolidated financial statements have been presented assuming
that the Female Health Company will continue as a going concern. As more fully
described in Note 15, the Company has experienced slower than expected growth
in revenues from its sole product, which has adversely affected the Company's
current results of operations and liquidity. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 15.
The consolidated financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
or the amounts of classification of liabilities that may result from the
outcome of this uncertainty.
As discussed in Note 1, the Company adopted the nonemployee provisions of
Financial Accounting Standards Board Statement No. 123 in 1996.
/s/McGLADREY & PULLEN, LLP
McGLADREY & PULLEN, LLP
Schaumburg, Illinois
December 13, 1996
24
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We have audited the accompanying consolidated balance sheet of The Female
Health Company (the Company) as of September 30, 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended September 30, 1995 and 1994. Our audits also included the
financial statement schedules as of September 30, 1995 and for the years ended
September 30, 1995 and 1994 listed in the Index at Item 14(a). These financial
statements and schedules are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedules 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
statements presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company at September 30, 1995, and the consolidated results of its operations
and its cash flows for the years ended September 30, 1995 and 1994, in
conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedules, when considered in relation
to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 15,
the Company's Female Health Division (FHD) has experienced slower than expected
growth in revenues from its sole product, which has adversely affected the
Company's current results of operations and liquidity. In addition, as
discussed in Note 2, the Company entered into an agreement to acquire all of
the outstanding stock of Chartex Resources Limited, the parent corporation of
Chartex International PLC (Chartex), FHD's sole supplier, subject to the
Company completing the sale of its subsidiary WPC Holdings, Inc., as discussed
in Note 3. Chartex itself has reported recurring operating losses and is
experiencing cash flow difficulties. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 15. The financial
statements do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.
25
<PAGE>
As discussed in Note 1 to the consolidated financial statements, effective
October 1, 1993, the Company changed its method of accounting for income taxes.
/s/Ernst & Young, LLP
Ernst & Young, LLP
Milwaukee, Wisconsin
November 10, 1995, except as to the
acquisition of Chartex and loan from
a stockholder, the date of which is
November 21, 1995.
26
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30
----------------------------
1996 1995
----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $2,914,080 $1,521,344
Trade accounts receivable, less allowances of
$208,618 in 1996 and $51,024 in 1995 457,226 415,089
Inventories, net of allowance for
obsolescence of $1,950,000 in 1996 and
$1,000,000 in 1995 967,398 3,192,570
Prepaid expenses and other current assets 370,555 233,095
Net current assets of discontinued operations --- 3,913,511
---------- -----------
TOTAL CURRENT ASSETS 4,709,259 9,275,609
---------- -----------
OTHER ASSETS
Prepaid royalties --- 1,875,491
Note receivable, net of unamortized discount
of $189,003 810,997 ---
Intellectual property rights, less
accumulated amortization of $77,823 1,089,518 ---
Other assets 194,032 399,062
----------- -----------
2,094,547 2,274,553
----------- ----------
PROPERTY, PLANT AND EQUIPMENT
Land and building 1,222,511 ---
Equipment, furniture and fixtures 3,710,683 351,784
----------- -----------
4,933,194 351,784
Less: accumulated depreciation (471,377) (115,644)
----------- -----------
4,461,817 236,140
----------- -----------
Net noncurrent assets of discontinued
operations --- 1,952,269
----------- -----------
$11,265,623 $13,738,571
=========== ===========
See notes to consolidated financial statements.
27
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--Continued
September 30,
---------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
---------- ---------
CURRENT LIABILITIES
Notes payable to stockholders, net of
unamortized discount of $173,430 $1,986,570 $ 19,795
Notes payable to bank --- 109,503
Current maturities of long-term debt and
capital lease obligations 1,736,706 56,703
Trade accounts payable 721,015 1,121,549
Accrued product returns and trade
promotions allowance 635,000 --
Accrued royalty and exclusivity fees --- 4,761,198
Accrued expenses and other current
liabilities 533,668 29,648
---------- ----------
TOTAL CURRENT LIABILITIES 5,612,959 6,098,396
---------- ----------
LONG-TERM LIABILITIES
Long term debt and capital lease
obligations, less current maturities 477,296 89,017
Convertible debentures, net of unamortized
discount of $90,000 1,910,000 ---
Other long term liabilities 321,096 ---
---------- ---------
2,708,392 89,017
---------- ---------
STOCKHOLDERS' EQUITY
Convertible Preferred Stock, par value
$.01 per share. Authorized 5,000,000
shares; none issued and outstanding --- ---
Common Stock, par value $.01 per share--
Authorized 15,000,000 shares; issued
and outstanding: 7,211,662 shares in
1996; and 6,392,732 shares in 1995 72,117 63,928
Additional paid-in capital 32,864,572 29,411,702
Additional paid-in capital warrants 508,500 ---
Foreign currency translation gain 83,858 ---
Accumulated deficit (30,584,775)(21,924,472)
----------- -----------
2,944,272 7,551,158
----------- -----------
$11,265,623 $13,738,571
=========== ===========
See Notes to Consolidated Financial Statements.
28
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended September 30
---------------------------------
1996 1995 1994
----------- ----------- -----------
NET REVENUES $2,064,258 $2,179,155 $1,671,885
COST OF PRODUCTS SOLD Including
inventory obsolescence provisions of
$950,000 in 1996 and $1,000,000
in 1995 and none in 1994. 3,684,698 2,558,420 1,138,905
---------- ---------- ---------
GROSS PROFIT (LOSS) (1,620,440) (379,265) 532,980
---------- ---------- ---------
OPERATING EXPENSES
Sales and marketing 2,980,540 4,276,610 2,099,533
General and administrative 2,987,839 1,042,715 925,876
Research and development 361,094 135,121 164,877
Royalty and exclusivity fees --- 2,578,941 2,993,299
----------- ----------- ---------
6,329,473 8,033,387 6,183,585
----------- ----------- ---------
(LOSS) FROM OPERATIONS (7,949,913) (8,412,652) (5,650,605)
NONOPERATING INCOME (EXPENSE):
Interest expense (560,030) (48,775) (3,512)
Interest income 106,708 13,508 139,483
Other, net (252,607) 961 12,867
---------- ---------- ----------
(705,929) (34,306) 148,838
---------- ---------- ----------
(LOSS) FROM CONTINUING OPERATIONS (8,655,842) (8,446,958) (5,501,767)
DISCONTINUED OPERATIONS
Income (loss) from operations and gain
on sale, net of applicable income
tax expense (credit) of 1996, $0;
1995, ($13,469); and 1994, $30,050 (4,461) 64,599 2,501,633
------------ ----------- -----------
NET (LOSS) $(8,660,303)$(8,382,359)$(3,000,134)
============ =========== ===========
29
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended September 30
----------------------------------
1996 1995 1994
----------- ----------- -----------
Net income (loss) per weighted
average number of common
shares outstanding:
Continuing operations $(1.31) $(1.40) $(1.13)
Discontinued operations --- 0.01 0.51
------- ------- -------
$(1.31) $(1.39) $(0.62)
====== ====== ======
Weighted average number of common
shares outstanding 6,611,796 6,023,460 4,849,160
========= ========= =========
See notes to consolidated financial statements.
30
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Foreign
Additional Currency
Additional Paid-in Translation
Common Stock Paid-in Capital, Gain
Shares Amount Capital Warrants (Loss)
-------- -------- --------- --------- --------
Balance September 30,
1993 4,087,078 $40,872 $14,838,628 --- ---
Issuance of Common Stock
(net of offering costs
of $1,087,137) 1,250,000 12,500 10,775,363 --- ---
Issuance of Common Stock in
acquisition (net of costs of
$7,832) 52,942 529 538,689 --- ---
Issuance of Common Stock
upon exercise of stock
options 2,412 24 12,136 --- ---
Net (loss) --- --- --- --- ---
-------- -------- ---------- -----------------
Balance September 30,
1994 5,392,432 53,925 26,164,816 --- ---
Issuance of Common Stock
(net of offering costs
of $25,200) 970,000 9,700 3,129,240 --- ---
Issuance of Common
Stock in Reflect
settlement 30,000 300 114,075 --- ---
Other 300 3 3,571 --- ---
Net (loss) -- --- --- --- ---
---------- -------- ------------------- --------
31
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Foreign
Additional Currency
Additional Paid-in Translation
Common Stock Paid-in Capital, Gain
Shares Amount Capital Warrants (Loss)
-------- -------- --------- --------- --------
Balance September 30,
1995 6,392,732 63,928 29,411,702 --- ---
Issuance of Common Stock
(net of offering costs
of $293,313) 700,000 7,000 2,779,417 --- ---
Issuance of Common Stock
upon exercise of stock
options 13,350 133 46,741 --- ---
Issuance of Common Stock
for consulting and
other services 105,580 1,056 626,712 --- ---
Warrants:
Issued with convertible
debenture --- --- --- 90,000 ---
Issued with short-term notes
payable --- --- --- 340,000 ---
As amended in consulting
agreement --- --- --- 78,500 ---
Translation Adjustment --- --- --- --- 83,858
Net (loss) --- --- --- --- ---
--------- -------- ----------- -------- --------
Balance, September 30,
1996 7,211,662 $ 72,117 $32,864,572 $508,500 $83,858
========= ======== ========== ======= =======
See notes to consolidated financial statements.
32
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
(Deficit) Total
---------- --------
Balance September 30,
1993 $(10,541,979) $4,337,521
Issuance of Common Stock
(net of offering costs
of $1,087,137) --- 10,787,863
Issuance of Common Stock in
acquisition (net of costs of
$7,832) --- 539,218
Issuance of Common Stock
upon exercise of stock
options --- 12,160
Net (loss) (3,000,134)(3,000,134)
---------- ----------
Balance September 30,
1994 (13,542,113) 12,676,628
Issuance of Common Stock
(net of offering costs
of $25,200) --- 3,138,940
Issuance of Common
Stock in Reflect
settlement --- 114,375
Other --- 3,574
Net (loss) (8,382,359)(8,382,359)
---------------------
33
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
(Deficit) Total
---------- --------
Balance September 30,
1995 (21,924,472) 7,551,158
Issuance of Common Stock
(net of offering costs
of $293,313) --- 2,786,417
Issuance of Common Stock
upon exercise of stock
options --- 46,874
Issuance of Common Stock
for consulting and
other services --- 627,768
Warrants:
Issued with convertible
debenture --- 90,000
Issued with short-term notes
payable --- 340,000
As amended in consulting
agreement --- 78,500
Translation Adjustment --- 83,858
Net (loss) (8,660,303)(8,660,303)
------------- ----------
Balance, September 30,
1996 $(30,584,775) $2,944,272
============ =========
34
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30
------------------------------------
1996 1995 1994
------------ ---------- -----------
OPERATING ACTIVITIES
Net (loss) $(8,660,303)$(8,382,359)$(3,000,134)
Adjustments to reconcile net
(loss) to net cash (used in)
operating activities:
Depreciation 425,084 66,493 20,112
Amortization of debenture issuance costs 4,278 --- ---
Provision for doubtful accounts,
returns and discounts 120,126 145,202 140,891
Provision for inventory obsolescence 950,000 1,000,000 ---
Gain on sale of Holdings (224,538) --- ---
Loss on disposal of equipment 37,576 --- ---
Issuance of stock, warrants and options
for services 706,268 --- ---
Amortization of discount on note receivable
and interest earned on lease deposit (29,703) --- ---
Amortization of discounts on notes
payable and convertible debentures 166,570 --- ---
Amortization of other assets 250,000 --- ---
Changes in operating assets
and liabilities of continuing
operations, excluding effect of
purchase of Chartex:
Receivables 47,269 778,518 (1,465,701)
Inventories 1,935,923(1,611,111) (2,557,452)
Prepaid expenses and other 177 770,488 (819,862)
Accounts payable (914,876) (126,027) 1,171,969
Accrued exclusivity and
royalty fees --- 2,578,941 (197,237)
Accrued product returns and
trade promotions allowance 635,000 --- ---
Due to Stockholder (19,795) 19,795 (230,580)
Other current liabilities 498,407 (62,451) 82,099
Discontinued operations -- noncash
charges and working capital charges --- 190,954 (807,781)
----------- ---------- -----------
NET CASH (USED IN)
OPERATING ACTIVITIES (4,072,537)(4,631,557) (7,663,676)
---------- ---------- ----------
35
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30
------------------------------------
1996 1995 1994
------------ ---------- -----------
INVESTING ACTIVITIES
Capital expenditures (596,402) (2,064) (51,584)
Purchase of Chartex, less $71,417
cash received (5,103,088) --- ---
Sale of Holdings, net of
expenses and cash sold 5,213,263 --- ---
Increase in other assets --- (168,754) (78,364)
Investing activities of discontinued
operations --- (289,575) (411,121)
--------------------- ----------
NET CASH PROVIDED BY (USED IN)
Investing Activities (486,227) (460,393) (541,069)
---------- ---------- ----------
FINANCING ACTIVITIES
Proceeds from issuance of
Common Stock 3,080,000 3,164,140 12,984,135
Costs of common stock
issuance (293,583) (25,200) (1,053,557)
Proceeds from issuance of Common
Stock upon exercise of options 46,874 --- ---
Proceeds from issuance of
convertible debentures and
warrants 2,000,000 --- ---
Cost to issue convertible
debentures (154,000) --- ---
Increase (decrease) in notes
payable (109,503) 109,503 ---
Payments of long term debt and
capital lease obligations (768,613) (43,404) (8,768)
Proceeds from notes payable,
stockholders 2,160,000 --- ---
(Decrease) in amount due to
stockholder --- --- (114,905)
Financing activities of
discontinued operations --- (120,464) (97,987)
Other --- 3,574 ---
---------- ---------- -----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 5,961,175 3,088,149 11,708,918
---------- ---------- ----------
36
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30
----------------------------------
1996 1995 1994
------------ ---------- -----------
Effect of exchange rate changes
on cash and cash equivalents (9,675) --- ---
----------- ---------- ----------
Increase (decrease) in cash and
cash equivalents 1,392,736(2,003,801) 3,504,173
Cash and cash equivalents at
beginning of year 1,521,344 3,525,145 20,972
---------- ---------- ----------
Cash and cash equivalents at
end of year $2,914,080 $1,521,344 $3,525,145
========== ========== ==========
SUPPLEMENTAL INFORMATION
Interest paid $ 457,280 $ 423,226 $ 329,514
Income taxes paid --- 5,531 68,310
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Common Stock issued:
Issuance of detachable warrants
on convertible debentures and
notes payable 430,000
Capital lease obligations incurred
for equipment --- 103,737 179,733
Reduction of capital lease
obligation as consideration
for landlord sale of portion of
leasehold --- 38,291 ---
Sale of WPC Holdings, Inc.:
Selling price $8,285,000
Liabilities assumed by buyer (916,060)
Note receivable taken (785,000)
Other assets received (250,000)
----------
Cash received 6,333,940
Expenses on sale and cash sold (1,120,677)
----------
$5,213,263
==========
37
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30
------------------------------------
1996 1995 1994
------------ ---------- -----------
Purchase of Chartex:
Assets acquired:
Trade receivables $203,613
Inventories 644,268
Other current assets 82,053
Property and equipment 3,870,167
Intellectual property rights 1,127,469
----------
5,927,570
----------
Liabilities assumed:
Accounts payable and accrued
expenses (835,725)
Bank debt (1,615,229)
Other long-term debt (1,109,235)
-----------
(3,560,189)
-----------
Net assets acquired, net of cash
received of $71,417 $2,367,381
Settlement of intercompany assets
and liabilities existing before
purchase:
Prepaid royalties (1,875,491)
Accrued royalties and exclusivity
fees 4,761,198
Option fee paid in 1995 (150,000)
----------
Cash paid in 1996 $5,103,088
==========
See notes to consolidated financial statements.
38
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of operations: The Female Health Company ("FHC" or the "Company") is
currently engaged in the marketing, manufacture and distribution of a consumer
health care product known as the Reality female condom ("Reality") in the U.S.
and "femidom" or "femy" outside the U.S. Chartex Resources Limited is the
holding company of Chartex International PLC which operates a 40,000 sq. ft.
manufacturing facility located in London, England.
The Company changed its name from Wisconsin Pharmacal, Inc. to The Female
Health Company concurrently with the sale of Holdings on January 29, 1996.
The Company sells primarily to public sector institutions, wholesalers,
distributors, and drug, general merchandise, and grocery retailers in the U.S.
and United Kingdom.
Accounting estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and use assumptions that affect certain reported amounts and
disclosures. Actual results may differ from those estimates. Significant
estimates made in the preparation of the financial statements include the
following:
Inventory allowance for obsolescence: The market value of inventory is
based on management's estimate of future sales before expiration of current
product life. The estimate assumes the current product life will be
increased by one year, pending regulatory approval to a four-year life.
Management has obtained verbal approval from the Federal Drug Administration
for extending the life.
Allowances for product returns: Liabilities include a provision for sales
returns and trade allowances, which is based on management's estimate of
future product returns from customers in connection with unsold product
which has expired or is expected to expire before it is sold. The estimated
cost for product returns and trade allowances are accrued for when the
initial sale is recorded.
Intellectual property: The Company evaluates intellectual property rights
for impairment by comparing the net present value of the asset's estimated
future income stream to the asset's carrying value.
Although management uses the best information available, it is reasonably
possible that these estimates could change in the near term and the change
could be material.
39
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Principles of consolidation: The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries, Chartex Resources
Limited and Chartex International, PLC ("Chartex"). All significant
intercompany transactions and accounts have been eliminated in consolidation.
Cash equivalents: The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.
Inventories: Inventories are valued at the lower of cost or market. The
Company's inventories are stated at cost using the first-in, first-out (FIFO)
method.
Foreign currency translation: In accordance with Financial Accounting
Standards No. 52, "Foreign Currency Translation," The financial statements of
international subsidiaries are translated into U.S. dollars using the exchange
rate at each balance sheet date for assets and liabilities, the historical
exchange rate for stockholders' equity and a weighted average exchange rate for
each period for revenues, expenses, and gains and losses. Translation
adjustments are recorded as a separate component of shareholders' equity as the
local currency is the functional currency.
Building, equipment, furniture and fixtures and assets under capital leases:
Depreciation and amortization is computed by the estimated useful lives of the
respective assets which range as follows:
Building 45 years
Equipment 5 - 10 years
Furniture and fixtures 3 years
Amortization of assets under capital lease is included with depreciation and
amortization for owned assets.
Intellectual property rights: The Company holds patents on the female condom
in the United States, the European Union, Japan, Canada, Australia and The
People's Republic of China and holds patents on the manufacturing technology in
various countries. The Company also licenses the trademark "Reality" in the
United States and has trademarks on the names "femidom" and "femy" in certain
foreign countries. Intellectual property rights are amortized on a
straight-line basis over their remaining estimated useful life of eight years.
40
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Financial Instruments: The Company has no financial instruments for which the
carrying value materially differs from fair value.
Revenue Recognition: Revenues from product sales are recognized as the
products are shipped to the customers.
Research and Development Costs: Research and development costs are expensed as
incurred.
Royalties, Prepaid Royalties and Exclusivity Fees: Prior to the acquisition of
Chartex, FHC paid royalties based on product sales, with annual minimum amounts
due. From the fourth quarter of 1993 through June 30, 1995, the Company
recorded a periodic accrual for the greater of the cumulative amount of: (a)
royalties due based on actual unit sales at the contractual royalty rate, or
(b) pro rata straight-line accrual of the annual minimum royalty based on the
contractual royalty period. The Company ceased accruing royalties after June
30, 1995, due to pending negotiations with Chartex.
Income Taxes: The Company files separate income tax returns for its foreign
subsidiaries. Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" (Statement 109) requires recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that have
been included in the financial statements or tax returns. Under this method,
deferred tax assets and liabilities are determined based on the differences
between the financial statements and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. In addition, the amount of any future tax benefits is reduced by a
valuation allowance to the extent such benefits are not expected to be
realized. Statement 109, which was adopted October 1, 1993, had no effect at
the time of adoption.
Advertising: The Company's policy is to expense production costs in the period
in which the initial advertisement is run and, in the case of product sales
brochures and aids, as the materials are used. The cost of advertising space
or airtime is expensed in the related period in which the advertisement is run.
The Company incurred advertising costs from continuing operations of
$1,694,085, $2,996,350 and $971,281 for the years ended September 30, 1996,
1995 and 1994, respectively. Advertising costs related to discontinued
operations were $179,411, $762,303 and $1,203,311 for 1996, 1995 and 1994,
respectively.
Net Loss Per Common Share: Net loss per common share is computed using the
weighted average number of shares of Common Stock outstanding. Fully diluted
income per share is not presented for each of the periods since the effect of
including common equivalent shares would be antidilutive.
41
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Current Accounting Developments: Financial Accounting Standards Board
Statement No. 123, Accounting for Stock Based Compensation establishes
financial accounting and reporting standards for stock-based employee
compensation plans. Those plans include all arrangements by which employees
receive shares of stock or other equity instruments of the employer or the
employer incurs liabilities to employees in amounts based on the price of the
employer's stock. This statement also applies to transactions in which an
entity issues its equity instruments to acquire goods or services from non
employees. The statement provides for the accounting for those transactions
based on the fair value of the consideration received or the fair value of the
equity instruments issued, whichever is more reliably measurable. The
statement also allows entities to continue following their current accounting
policy for employee transactions but requires disclosure giving the effect of
the new standard. The employee provisions of this statement are effective for
transactions entered into by the Company's beginning with year ending September
30, 1997. It is expected that the Company will not adopt the new accounting
methodology but will provide the required footnote disclosures in 1997. The
nonemployee provisions of the Statement were effective in 1996. As a result
the Company recognized $169,500 of consulting and legal fees.
Reclassifications: Certain prior year amounts have been reclassified on the
Consolidated Balance sheet and the Consolidated Statement of Cash Flows to
conform to the 1996 presentation.
NOTE 2-- ACQUISITION OF CHARTEX
On February 1, 1996 the Company completed its purchase of all of the issued and
outstanding share capital of Chartex Resources Limited the parent company and
sole owner of stock in Chartex International, PLC (collectively referred to as
"Chartex"). Chartex is based in London, England and owns certain worldwide
intellectual property and proprietary manufacturing technology for the female
condom.
42
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The acquisition of Chartex was accounted for as a purchase. The fair value of
total consideration paid for Chartex of $2,438,798 (consisting of approximately
$5.2 million in cash payments, reduced by the elimination of a $2.8 million net
royalty liability to Chartex from the Company) is less than the fair value of
net assets purchased by $7,547,356. The excess of the fair value of the net
assets acquired over the purchase price was allocated to reduce long-term
assets on a pro rata basis in order to arrive at the following purchase
accounting values for the assets and liabilities acquired:
Excess of Net
Assets Acquired Purchase
Fair Over Purchase Accounting
Value Price Value
----------- ----------- -----------
Cash $ 71,417 --- $ 71,417
Trade Receivables 203,613 --- 203,613
Inventories 644,268 --- 644,268
Other Current Assets 82,053 --- 82,053
Property Plant & Equipment 9,715,683 (5,845,516) 3,870,167
Intellectual Property Rights 2,829,309 (1,701,840) 1,127,469
---------- ----------- -----------
Total Assets 13,546,343 (7,547,356) 5,998,987
Accounts Payable & Accrued
Liabilities 835,725 --- 835,725
Bank Debt 1,615,229 --- 1,615,229
Other long-term debt 1,109,235 --- 1,109,235
----------- ------------ -----------
Total Liabilities 3,560,189 --- 3,560,189
----------- ------------ -----------
Net Assets Acquired $ 9,986,154 $(7,547,356) $ 2,438,798
=========== =========== ==========
The results of Chartex are combined with the Company after the February 1, 1996
acquisition date.
43
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The following unaudited summary, prepared on a pro forma basis, combines the
operating results of the Company and Chartex as if the acquisition of Chartex
had occurred on October 1, 1994:
1996 1995
------------ ------------
Net revenues $2,120,000 $2,564,000
Net loss (9,326,898) (10,574,000)
Net loss per share (1.41) (1.76)
The above amounts reflect adjustments for amortization of intangibles and
depreciation based upon purchase accounting values, imputed interest on
borrowed funds, and elimination of intercompany transactions. The pro forma
information is not necessarily indicative of the results that would have
occurred had the purchase been made at the beginning of the period or of the
future results of the combined operations.
NOTE 3--DISCONTINUED OPERATIONS
On March 10, 1995, the Company's Board of Directors approved a formal plan to
sell WPC Holdings, Inc. ("Holdings"). On January 29, 1996, the Company
completed the sale of the net assets of Holdings for total consideration of
$8.75 million, valued for accounting purposes at $8.285 million. Total
consideration included a $1 million note receivable with interest at 8 percent,
principal due in four annual installments of $250,000 beginning January 29,
1999. This note receivable was discounted using an effective rate of interest
of 15 percent and, as a result, was valued at inception at $785,000. The
accreted value as of September 30, 1996, was $810,997. The Company recorded a
$4,461 loss on sale of discontinued operations during 1996, which consists of
$228,999 in deferred operating losses offset by a $224,538 gain on the sale.
Prior to its sale, Holdings (which contained the Company's leisure time,
institutional health care and other products segments) was accounted for as a
discontinued operation.
44
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Net results of Holdings through January 29, 1996 were as follows:
Years Ended September 30
1996 1995 1994
----------- ----------- -----------
Net revenues $3,258,346 $13,487,562 $14,503,175
Gross profit 1,524,302 5,735,846 7,624,161
Operating expenses 1,623,100 5,187,762 4,545,826
----------- ----------- -----------
Operating income (loss) (98,798) 548,084 3,078,335
Nonoperating expense (130,201) (318,285) (284,486)
Income taxes --- 13,469 (30,050)
Minority interest --- (178,669) (262,166)
----------- ---------- -----------
Income (loss) from operations (228,999) 64,599 2,501,633
Gain on sale of discontinued
operations 224,538 --- ---
---------- ---------- ----------
$ (4,461) $ 64,599 $2,501,633
========== ========== ==========
Net assets of Holdings have been segregated in the September 30, 1995
consolidated balance sheets from their historic classifications. Details of
such amounts (exclusive of cash of $1,297,766 as of September 30, 1995) were as
follows:
Accounts receivable, net $1,436,736
Inventory 3,030,483
Prepaid expense and other 339,310
Trade accounts payable (439,640)
Accrued expenses (328,715)
Current maturities of capital lease
obligations (124,663)
----------
Net current assets of discontinued
operations $3,913,511
==========
45
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Property, plant and equipment,
including capital lease
assets, net $2,469,898
Intangibles, net 890,843
Other assets 75,340
Long-term portion of capital
lease obligations (1,458,204)
Minority interest (25,608)
-----------
Net noncurrent assets of discontinued
operations $1,952,269
==========
Holdings leisure-time product sales to two major customers aggregated 32
percent and 10 percent and 34 percent and 19 percent of Holdings net products
sales in Fiscal 1995 and 1994, respectively.
Interest expense included in discontinued operations totaled $81,731, $374,451
and $324,309 for the years ended September 30, 1996, 1995 and 1994,
respectively.
The purchaser of Holdings has assumed responsibility for all of Holdings
obligations. However, the Company remains contingently liable for certain
obligations incurred prior to the sale of Holdings (See Note 12 - Contingent
Liabilities).
NOTE 4--LEASES
Property, plant and equipment include the following amounts for leases which
have been capitalized:
September 30
---------------------
1996 1995
--------- -----------
Building and improvements $ --- $1,618,492
Equipment, furniture and fixtures 189,124 478,986
--------- ----------
189,124 2,097,478
Less accumulated amortization 96,817 620,344
--------- ----------
92,307 1,477,134
Discontinued operations --- 1,333,166
--------- ----------
$ 92,307 $ 143,968
========= ==========
46
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The Company entered into a seven year operating lease with a third party for
office space effective September 12, 1994. The lease is cancelable at the end
of the 36th and 60th months of the term of the lease upon payment of a
termination fee of $116,203 or $63,867, respectively. The Company has an
informal agreement to reimburse an affiliate for office space used by the
officers of the Company. The affiliate's lease is with an unrelated third
party which expires September 30, 2001.
In 1987, Chartex entered into a lease for office space expiring March 3, 1999.
In 1993, Chartex vacated these offices and subsequently subleased this space to
a third party for a period expiring February 28, 1999. At the time the
sublease was entered into a liability was established for all future costs to
the end of the lease, net of sublease receipts.
Details of lease rent expense in total and separately for transactions with
related parties is as follows:
Year Ended September 30
--------------------------
1996 1995 1994
------- ------- -------
Operating lease expense:
Building lease with officer/
stockholder $ --- $ 86,224 $ 89,803
Reimbursement of affiliate for
office space used by officers 57,640 --- ---
Other 114,684 128,835 64,856
-------- -------- --------
172,324 215,059 154,659
Discontinued operations 32,035 93,416 101,178
-------- -------- --------
Continuing operations $140,289 $121,643 $ 53,481
======== ======== ========
Sublease rental income was $30,752 for the year ended September 30, 1996.
47
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Future minimum payments under capital and operating leases, including planned
reimbursement of affiliate for office space used by officers, consisted of the
following at September 30, 1996:
Rentals
Receivable
Under
CapitalOperating Subleases
--------- -------- --------
1997 $70,428 $263,581 $61,504
1998 26,374 263,983 61,504
1999 --- 168,477 15,376
2000 --- 148,605 ---
2001 --- 152,681 ---
-------- -------- --------
Total minimum payments 96,802 $996,827 $138,384
======== ========
Amount representing interest (7,785)
--------
$ 89,017
========
NOTE 5-- NOTES PAYABLE AND LONG-TERM DEBT
During Fiscal 1996, the Company borrowed $1,000,000 with interest payable at 12
percent from an affiliate of Mr. Dearholt, a current director of the Company,
under a one year note payable in full on November 20, 1996. The note is
recorded net of unamortized discount of $9,514 resulting from the issuance of
detachable stock warrants. The discount resulted in an effective interest rate
of 17 percent on the note. As part of this transaction, Mr. Dearholt
guaranteed the Company's obligations under the $1,000,000 promissory note. In
consideration of the transaction, the Company issued warrants to each of Mr.
Dearholt and the lender, which entitle each of them to purchase 10,000 shares
of the Company's Common Stock at $3.00 per share, which represented the average
trading price of the Company's Common Stock for the five trading days prior to
the issuance of such warrants. The warrants expire upon the earlier of their
exercise or the year 2000. Any stock issued under the warrants carries certain
registration rights. Subsequent to the Company's Fiscal year end the note was
repaid.
48
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
During Fiscal 1996, the Company also borrowed $1,000,000 with interest payable
at 12 percent from Mr. Dearholt, a current director of the Company, under a one
year note payable in full in 1997. The note is recorded net of unamortized
discount of $163,916 resulting from the issuance of detachable stock warrants.
The discount resulted in an effective interest rate of 60 percent on the note.
As part of the transaction, the Company issued to Mr. Dearholt and his
affiliate, warrants to purchase 200,000 and 20,000 shares of the Company's
Common Stock, respectively, at $3.10 per share, which represented the average
trading price of the Company's Common Stock for the five trading days prior to
the originally scheduled closing date for the transaction. In addition, if the
Company defaults on its obligation under this note, the Company is required to
issue an additional 200,000 shares of its common stock to Mr. Dearholt, in
addition to all other remedies to which Mr. Dearholt may be entitled. Any
stock issued under the warrants or this default provision carry certain
registration rights. The warrants expire upon the earlier of their exercise or
2001.
During Fiscal 1996, the Company borrowed $160,000 from Mr. Parrish, a current
officer and director of the Company. Funds were used to make a nonrefundable
deposit in connection with the Chartex Acquisition. The borrowing is evidenced
by a $160,000 demand note with interest payable on the first day of each
quarter at a bank's prime rate of interest plus 1 1/4%. The note is
collateralized by an option agreement which provides that, upon default, the
officer/stockholder may require the Company in lieu of cash to issue sufficient
shares of the Company's Common Stock (with demand registration rights) such
that the net proceeds to be realized from the sale of such shares by the
officer/stockholder are equal to the amount then due under the note.
49
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Long-term debt and capital lease obligations at September 30, 1996 and 1995
consisted of the following:
September 30
-------------------------
Continuing Discontinued
1996 Operations Operations
----------- ---------- ----------
Mortgage debt ,interest at LIBOR plus
2.25%, due 1996 $1,673,161 $ --- $ ---
Foundation note, noninterest bearing,
due 1999, net of unamortized discount
of $130,555, interest imputed at 11% 451,824 --- ---
Convertible debentures, interest at 8%,
due 1999, net of unamortized discount
of $90,000 1,910,000 --- ---
Capital lease obligations:
Equipment 89,017 145,719 80,219
Building with officer/stockholder --- --- 1,502,648
---------- ---------- ---------
4,124,002 145,719 1,582,867
Less current portion of long-term debt
and capital lease obligations 1,736,706 56,702 124,663
---------- --------- ---------
Long-term portion, due in 1999 $2,387,296 $ 89,017$1,458,204
========== ========= =========
The Company's long-term debt and capital leases are composed of the following:
(1) The mortgage loan of $1,673,161 ((Pounds)1,062,500) is collateralized by the
Company's London-based manufacturing facilities. The note is due the earlier
of the completion of a sale of the facility by the Company or December 31,
1996. (See Note 14)
(2) The Foundation note for $451,824 ((Pounds)287,055) in a noninterest bearing
Economic Development Grant provided by the United Kingdom Regional Selective
Assistance Program. The grant is repayable by the Company if certain
conditions of the grant are not satisfied.
50
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(3)$1,910,000 (net of $90,000 in unamortized discount) in convertible
debentures with detachable warrants for 40,201 shares of Common Stock (the
"Debentures") at 8% maturing in 1999. The Debentures are convertible into the
Company's Common Stock at $5.275 ( representing the average market price for
the five days preceding the date the Debentures were sold) or 80% of the market
price at the time the debentures are converted into FHC Common Stock, whichever
is less. The discount relates to the valuation of the detachable warrants.
(4) Capital lease obligations at September 30, 1995, relating to discontinued
operations consist primarily of a building under an agreement determined to
qualify as a capital lease. This obligation arose in 1992, upon completion by
the lessor (a partnership -- one partner of which is a former officer and
stockholder of the Company) of a 30,000 sq. ft. warehouse expansion at
Holding's leased manufacturing facility. The Company entered into a 15-year
lease with the lessor which provided for current monthly rental payments of
$25,015 which were adjusted to $27,907 on July 1, 1993, and which are to be
adjusted every third year thereafter during the term of the lease or any
extension thereof to reflect any increase in the cost of living as measured by
the percentage change in the Consumer Price Index. The Company is required to
pay all real estate taxes and other costs under the lease. The lease includes
a purchase option wherein the Company may purchase the leased facility for the
greater of (1) $1,600,000 plus the cost of any additions made by the lessor
since July 31, 1989, plus 5 percent per year after July 31, 1989, or (2) the
value of the facility as determined by an appraisal conducted by an appraiser
satisfactory to both parties. On March 31, 1994, the Company assigned its
rights and obligations under the building lease to Holdings. In addition,
effective January 29, 1996, as discussed in Note 3, the Company sold Holdings.
NOTE 6 - INCOME TAXES
A reconciliation of income tax expense and the amount computed by applying the
statutory Federal income tax rate to loss from continuing operations before
income taxes as of September 30, 1996, 1995 and 1994, are as follows
1996 1995 1994
---------- ---------- ----------
Tax credit statutory rates $(2,944,503)$(2,871,966)$(1,870,601)
State income tax, net of
federal benefits (184,227) -- --
Benefit of net operating loss
not recognized, increase in
valuation allowance 3,153,062 2,871,966 1,870,601
Other (24,332) --- ---
---------- --------- ---------
$ --- $ --- $ ---
========== ========= =========
51
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
As of September 30, 1996, the Company had federal net operating loss
carryforwards of approximately $25,100,000 and state net operating loss
carryforwards of $23,300,000, respectively, for income tax purposes expiring in
years 2005 to 2012. The benefit relating to $1,440,677 of these net operating
losses relates to exercise of Common Stock options and will be credited
directly to stockholders' equity when realized. The Company also has
investment tax and research and development credit carryforwards for income tax
purposes aggregating approximately $181,000 at September 30, 1996 expiring in
years 1997 to 2008. The Company's Chartex subsidiary has U.K. net operating
loss carryforwards of approximately $65,700,000 as of September 30, 1996. These
U.K. net operating loss carryforwards can be carried forward indefinitely to be
used to offset future U.K. taxable income.
Significant components of the Company's deferred tax assets and liabilities are
as follows:
1996 1995
----------- ----------
Deferred tax liabilities:
Equipment, furniture and fixtures $ (5,694) $ (17,084)
----------- -----------
Deferred tax assets:
Federal net operating loss carryforwards 8,527,506 5,364,007
State net operating loss carryforwards 873,773 594,641
Foreign net operating loss carryforwards 21,681,000 ---
Tax credit carryforwards 181,750 181,210
Accrued Reality exclusivity fees --- 1,904,479
Inventory obsolescence 834,000 400,000
Accounts receivable allowance 10,000 6,679
Sales discounts and returns allowance 46,775 13,730
Accrued product return and
trade promotions 254,000 ---
Other 13,200 12,846
Discontinued operations, net --- 702,309
----------- -----------
Total gross deferred tax assets 32,422,004 9,179,901
Valuation allowance for deferred tax assets (32,416,310) (9,109,557)
----------- -----------
Deferred tax assets net of valuation allowance 5,694 70,344
----------- -----------
Net deferred tax assets (included in
other assets) $ --- $ 53,260
=========== ===========
52
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
A reconciliation of the valuation allowance for deferred tax assets for the
year ending September 30, 1996, is as follows:
Balance, beginning of year $(9,109,557)
Elimination of valuation allowance
provided on assets of Holdings 702,309
Valuation allowance provided on foreign
net operating losses acquired in purchase
of Chartex (20,856,000)
Increase in valuation allowance charged
to current operations (3,153,062)
------------
Balance, end of year $(32,416,310)
============
NOTE 7 - ROYALTY AND LICENSING AGREEMENTS
Prior to the February 1, 1996, acquisition of Chartex, the Company paid
royalties under a series of licensing agreements to market the female condom in
the United States, Canada and Mexico. These royalty agreements have ceased
upon the acquisition and unpaid royalties were settled at the acquisition date.
Effective September 24, 1992, the Company entered into an agreement with Family
Health International ("FHI"). FHI is a nonprofit organization supported in
part by the United States Agency for International Development ("USAID"), a
U.S. Government agency, to conduct research on products used to prevent
unwanted pregnancies and sexually transmitted diseases. FHI, in conjunction
with the Contraceptive Research and Development Program ("CONRAD"), conducted a
major contraceptive effectiveness study (the "Effectiveness Study") for the
Reality female condom to assess safety and efficacy. USAID sponsored and
funded the Reality Effectiveness Study as part of its overall program on
population, family planning and AIDS awareness and prevention. The agreement
with FHI provides that FHI may not use, or permit the use of, the data
supporting the Effectiveness Study (the "Data") in connection with any company
competitive with the Company or product competitive with Reality.
53
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The agreement with FHI sets forth the terms and conditions regarding the future
utilization of the pregnancy efficacy study results and provides that the
Company will provide Reality to certain "Public Sector" organizations at a
selling price of 115% of the Company's cost of manufacture and distribution as
defined in the agreement--but not to exceed the best price given to any other
customer ("Public Sector Price"). However, product requirements are limited
to: (1) 20% of product available for sale by the Company ("Product
Availability") in years one and two; (2) the greater of 6 million units or 20%
of Product Availability in year three; (3) the greater of 8 million units or
20% of Product Availability in year four; and (4) the greater of 10 million
units or 20% of Product Availability in year five and beyond.
The agreement further provides that FHI will be paid a royalty on private
sector Reality sales. The royalty is calculated on a sliding scale based on
the number of Reality units sold. The royalty rates range from the greater of
$.005/unit or .36% of the manufactured sales price for product sales in excess
of 10 million units to $.025/unit or 1.8% of the manufactured sales price for
product sales in excess of 50 million units, all subject to a cumulative
maximum royalty of $10 million. Since less than 10 million units have been
sold to date no royalties have been incurred.
The Company has an exclusive license (except for licensor's rights) with
Meijers Inc. to use the trademark "Reality" in the U.S. and Canada. For this
exclusive license to the Reality trademark, the Company agreed to pay the
licensor the greater of (a) $0.015 per female condom sold thereafter or (b) a
minimum annual royalty equal to 50% of the average annual royalties paid during
the period beginning five years immediately preceding the year for which the
royalties are due or $4,500 whichever is greater.
In 1994, the Company settled its dispute with Colgate-Palmolive Company related
to a product (Disposer Care), and received $2,299,787 net of fees and expenses.
This settlement was recognized in the 1994 statement of operations and is
included as part of discontinued operations.
54
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 8-- INVENTORIES
The components of inventory, relating to continuing operations consist of the
following:
September 30
-------------------------
1996 1995
----------- -----------
Raw material $ 325,818 $ ---
Work in process 45,636 ---
Finished goods 2,545,934 4,192,570
Less allowance for obsolescence (1,950,000) (1,000,000)
----------- -----------
$ 967,398 $ 3,192,570
=========== ===========
NOTE 9--STOCK OPTIONS AND OTHER COMPENSATION
In October 1989, in conjunction with an amendment of the officer/stockholder's
employment agreement, the Company adopted the 1989 Stock Option Plan which
granted the officer/stockholder (now "former officer") options to purchase up
to 50,000 shares of Common Stock over a five year period at the price per share
in the Company's initial public offering ($6.00). During a previous year,
30,000 of these options were canceled. The remaining options for 20,000 shares
are currently exercisable.
On April 6, 1991 the Company entered into a stock option agreement with this
same former officer. Under the agreement, the Company granted the former
officer the option to purchase up to 130,000 shares of the Company's Common
Stock at the market price at the date of the grant ($4.75 per share). Exercise
of the option was contingent upon the market price of the Common Stock equaling
at least $9.50 per share within a three-day period immediately preceding the
date of exercise. On July 31, 1996, the Board of Directors amended the plan
entitling the exercise of these options for 130,000 shares of Common Stock at
any time prior to the expiration of the option period. At September 30, 1996
options to purchase 130,000 shares of Common Stock were outstanding under this
agreement. In October, 1996 36,000 of these shares were exercised.
55
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The 1990 Stock Option Plan provides for the award of options to purchase up to
200,000 shares of the Company's Common Stock to key Company employees at an
option price and term as determined by the compensation committee of the Board
of Directors (Board), subject to prior approval by the Board in certain
circumstances. Commencing 12 months after award, employees may exercise up to
25% of their option shares. Employees may exercise up to an additional 25% of
their option shares on each of the three following annual anniversary dates so
that the awarded options will become fully exercisable on and after the fourth
anniversary date. Options for 117,904 shares were outstanding under the plan
at September 30, 1996, including options for 94,904 shares which are
exercisable.
In 1991, the Company entered into a management services, noncompetition and
confidentiality agreement with Phoenix Health Care Limited Partnership
("PHCLP"), a stockholder, to provide certain advisory services through
September 30, 1996. As part of this agreement, the Company issued options to
purchase up to 300,000 shares of the Company's Common Stock at the market price
of the stock at the date of grant ($4.75 per share). Exercise of the options
by the stockholder was contingent upon the Company's Common Stock doubling in
price (from the market price at date of grant) and maintaining that price for a
period of time. In October 1991 this contingency was met and on December 13,
1991, options to acquire 105,263 shares at $4.75 per share were exercised by
the stockholder. Notes payable to this stockholder were canceled as
consideration for the exercise price of the Common Stock options exercised. On
January 28, 1993, the stockholder exercised options for an additional 34,353
shares of Common Stock at $4.75 per share. The remaining 160,384 options
expired at September 30, 1996.
On September 10, 1994, the Company entered into an employment contract with an
officer of the Company. The agreement is for an initial term of three years
and automatically renews for additional three-year terms thereafter unless
terminated by either party. The agreement provides for a base salary of
$175,000 during the first year of the agreement ($195,000 in year two and
$225,000 in year three) and provides for a performance-based cash bonus of
between 60% and 100% of the base salary. The agreement also provides for
certain other fringe benefits and participation in a stock option plan at a
level to be approved by the Board of Directors. The agreement provides that
the officer will continue to be paid the base salary for a period equal to the
longer of two years from the date of termination or the remainder of the terms
of the employment agreement or any renewals thereof, unless terminated for
cause or due to disability.
56
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
On November 2, 1994 the Company adopted the 1994 Stock Option Plan ("1994
Plan"), subject to shareholder approval. The 1994 Plan provides for the award
of options to purchase up to 449,000 shares of the Company's Common Stock in
the aggregate and options for no more than 200,000 shares to any one
participant. Options are granted at an option price and term as determined by
the Compensation Committee of the Board. The exercise price of granted options
may not be less than the closing price of the Company's Common Stock on the
date of grant. Commencing with the award date, options vest as follows:
(a) One-third of the options vest one year after the date of grant.
(b) One-third of the options vest when the average closing price per share of
the Company's Common Stock for any ten consecutive trading days is at least 25%
higher than the closing price on the date the options were granted.
(c) One-third of the options vest on the date of issuance of the Company's
audited financial statements for the first Fiscal year in which the Company's
Female Health division achieves fully diluted earnings per share of at least
$.80.
On November 21, 1994 the Company granted 427,500 options under the 1994 Plan to
certain employees at an exercise price of $6.00 per share. Following the
original award, but prior to shareholder approval, 57,400 awarded options were
forfeited. Subsequently, an additional 64,100 options were forfeited.
On January 27, 1995 Phoenix Health Care of Illinois, Inc. ("PHC"), the general
partner of PHCLP was awarded, subject to shareholder approval, options to
purchase 90,000 shares of the Company's Common Stock at $6.00 per share ("1994
PHC Option Plan"). The options vest in accordance with the same vesting
criteria as the 1994 Plan above.
On April 4, 1995 the Company's shareholders approved the 1994 Plan, the grant
of 370,100 options (original grant less options forfeited prior to shareholder
meeting) and the 90,000 options awarded to PHC. Options for 262,000 shares of
Common Stock granted to current employees under the 1994 Plan and options for
90,000 shares granted to PHC were amended on March 19 and April 4, 1996,
respectively, by changing (i) the exercise price from $6.00 to $3.875 per share
(the last sale price of the Company's Common Stock as of March 19, 1996), and
(ii) the vesting criteria under paragraph (c) above to provide for vesting of
one-third of the options on the date when the Company and its subsidiaries, on
a consolidated financial basis, achieve a positive cash flow for a six months
period, as determined by Company's independent auditors. On March 19, 1996 the
Compensation Committee of the Board also granted options for 140,900 shares of
Common Stock under the 1994 Plan to an officer of the Company and to employees
at the Company's subsidiary, Chartex International, based on the foregoing
amended vesting criteria. At September 30, 1996 536,900 options were
57
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
outstanding under the 1994 Plan and the 1994 PHC Option plan, 132,000 were
exercisable.
On March 19, 1996, the Compensation Committee of the Board also granted special
stock options to a consultant to purchase 30,000 shares and an officer of the
Company to purchase 120,000 shares at an exercise price of $3.875. The Company
recognized a charge to income of $91,000 in connection with the issuance of
options to a nonemployee under FAS 123. The options vest in accordance with
the same vesting criteria under the 1994 Plan as described above. At September
30, 1996 150,000 options were outstanding, none of which were exercisable.
Directors who are employees of the Company do not receive compensation for
serving in such capacity. Directors who are not employees of the Company each
receive $1,000 for attendance at each Board meeting or a meeting of a committee
of which he or she is a member. In addition, on April 29, 1996 the Company
established The Female Health Company Outside Director Stock Option Plan which
provides that each director who is not an employee of the Company receives an
automatic grant of options to purchase 30,000 shares of the Company's Common
Stock at an exercise price equal to the last sale price of the Company's Common
Stock on the date of grant. The options vest in one-third increments on the
grant date and each of the two successive anniversaries thereafter provided the
director continues to serve on the Board. On April 29, 1996, options to
purchase 30,000 shares of Common Stock at $5.25 per share were granted to one
director and on July 31, 1996 options to purchase 30,000 shares of Common Stock
at $5.9375 were granted to another director. At September 30, 1996, of the
60,000 options outstanding, 20,000 options were exercisable.
During Fiscal 1996, the Company granted Mr. Parrish options to purchase 120,000
shares of the Company's Common Stock. The options vest in 40,000 share
increments on each of (i) the first anniversary of the grant date (ii) the date
when the average last sale price of the Company's Common Stock is at least
$7.50 per share and (iii) the date when the Company and its subsidiaries, on a
consolidated basis, achieve a positive cash flow for a six-month period, as
determined by the Company's independent auditors. The exercise price for each
share of Common Stock is $3.875, which was the last sale price of the Company's
Common Stock on the American Stock Exchange on the date of grant.
58
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Transactions regarding stock options in Fiscal 1994, 1995 and 1996 were as
follows:
Number of Weighted Average
Shares Option Price/Share
--------- -------------------
Outstanding at September 30, 1993 416,050 $ 5.78
--------- -------
Exercisable at September 30, 1993 296,641 $ 5.36
--------- -------
Granted 47,500 $ 9.50
Exercised (2,412) 5.04
Forfeited/canceled (7,300) 9.48
--------- -------
Outstanding at September 30, 1994 453,838 $ 6.11
========= =======
Exercisable at September 30, 1994 363,011 $ 5.39
========= =======
Granted 517,500 $ 6.01
Exercised (300) 4.00
Forfeited/canceled (133,400) 6.16
--------- -------
Outstanding at September 30, 1995 837,638 $ 6.04
========= =======
Exercisable at September 30, 1995 235,175 $ 5.97
========= =======
Granted 470,900 $ 4.09
Exercised (13,350) 3.51
Forfeited/canceled (160,384) 4.75
--------- -------
Outstanding at September 30, 1996 1,485,704 $ 4.89
========= =======
Exercisable at September 30, 1996 396,904 $ 5.82
========= =======
59
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 10-- STOCKHOLDERS' EQUITY
On February 23, 1994 the Company completed a private placement of 1,250,000
shares of its Common Stock. Proceeds, net of offering expenses of $1,087,137,
were $10,787,863 and primarily used to support the nationwide marketing and
commercial distribution of Reality.
On July 26, 1994 the Company issued 52,942 shares of its Common Stock valued at
$547,050 in connection with the acquisition of certain assets and the business
of Reflect, Inc. These assets have been sold in the 1996 sale of Holdings.
In June, 1995 30,000 shares of the Company's Common Stock with a market value
of $114,375 were issued in settlement of a dispute arising in connection with
the acquisition of the assets of Reflect, Inc.
In connection with the Company's 1990 initial public offering of Common Stock,
its underwriters received, for a nominal cost, warrants to purchase 25,000
shares of the Company's Common Stock at $7.20 per share. The warrants lapsed
on July 19, 1995.
In February and March 1995 the Company issued 970,000 shares of Common Stock to
two investors in a "Regulation S" private placement for proceeds of $3,138,940
(net of expenses of $25,200).
On March 13, 1995 the Company entered into an agreement ("Consulting
Agreement") engaging the services of a consultant to perform and provide
investor relations and development services for the Company. In connection with
the Consulting Agreement, the Company granted the consultant warrants to
purchase 150,000 shares of the Company's Common Stock exercisable at $5.00 per
share. In April, 1996 the Board of Directors approved the Amendment of
Consulting Agreement which provided for a warrant exercise price of $3.50 per
share, the last sale price of the Company's Common Stock on the date of the
agreement. 50,000 shares were exercisable on the date of the amendment and
the warrant becomes exercisable as to an additional 50,000 shares on August 1,
1996 if, on that date, the closing price of the Company's Common Stock wherever
listed is $7.50 per share or higher. The warrant becomes exercisable as to the
last 50,000 shares on November 1, 1996 if, on that date, the closing price of
the Company's Common Stock wherever listed is $9.00 per share or higher. In
addition, if either of the two stock performance parameters set forth above for
a specific period is not met for such period, but in a subsequent period the
stock performance parameter for such subsequent period is met, then, in
addition to the shares which would otherwise be exercisable for such subsequent
period, any shares which have not vested for a prior period or periods shall
also become exercisable on such subsequent period vesting date. Warrant shares
which have not vested as of March 13, 1997 in accordance with these terms shall
60
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
not be exercisable and the warrants shall terminate as to such unvested shares
after March 13, 1997. At September 30, 1996 the warrant was exercisable as to
50,000 shares. The Company recognized $78,500 of compensation in connection
with the exercisable shares under FAS 123.
On May 29, 1996 the Company entered into a consulting agreement which was
subsequently amended and restated on June 17, 1996. The "Restated Consulting
Agreement" engaged the services of a consulting firm and provided for the
Company to pay up to 96,000 shares of the Company's Common Stock. 90,000
shares were issued in May and August, 1996 and 6,000 shares were issued in
October, 1996 to the consulting firm to complete the obligation.
In June and July, 1996 the Company sold in a public offering 700,000 shares of
Common Stock. The proceeds were used to repay a (Pounds)312,000 promissory
note and make a partial prepayment on another promissory note and to fund the
Company's operating, working capital, and marketing needs. Net proceeds to the
Company from the offering, after deduction of associated expenses were
$2,779,417. In addition, 27,000 shares of Common Stock were issued to the
placement agent in November, 1996 for accrued offering expenses.
No warrants were exercised during Fiscal 1996. At September 30, 1996 the
following warrants were outstanding:
Warrant in connection with the consulting agreement
(see above) 150,000
Warrant to the lender and the guarantor in connection
with a $1,000,000 note (See Note 5) 20,000
Warrant to the lender and the guarantor in connection
with a $1,000,000 note (See Note 5) 220,000
Warrants issued in connection with Convertible Debentures
(See Note 5) 40,201
-------
Outstanding at September 30, 1996 430,201
=======
At September 30, 1996 the Company has reserved a total of 2,985,638 shares of
its Common Stock for the exercise of options under the management agreement,
the agreement with the officer/stockholder, the option plans and warrants
outstanding. It also includes the additional shares reserved if the Company
defaults on its obligation to pay interest and principal on a $1,000,000
Stockholder notes and for the conversion of the debentures.
61
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 11--INDUSTRY SEGMENTS AND FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC
OPERATIONS
Prior to January 29, 1996, the effective date of the sale of Holdings, the
Company operated in three principal segments - leisure time products,
institutional health care and consumer health care products. The Company's
leisure time products were marketed by Holdings primarily through independent
sales representatives and broker organizations and the Holdings' sales force to
retail consumer outlets, including the sporting goods and household departments
of mass merchandisers, and sporting goods, grocery and drug store chains. The
Company's institutional health care products were primarily marketed through
Holdings' joint venture partner's sales force, which includes a dealer network.
The Company's consumer health care product is marketed by FHC's sales force
and separate independent sales representative and broker organizations to
wholesalers, distributors and retail consumer outlets. With the decision to
sell Holdings, the leisure time, institutional health care and other products
segments have been reclassified as discontinued operations.
Segment information for the four months ended January 29, 1996, are not
included as it is not material.
Summary industry segment information for Fiscal 1995 and Fiscal 1994 is as
follows:
Years Ended September 30
1995 1994
----------- -----------
Net Revenues
Continuing operations - Consumer Health Care $ 2,179,155 $ 1,671,885 (a)
=========== ===========
Discontinued operations:
Leisure time $11,059,196 $10,140,690
Institutional Health Care 1,236,685 1,447,890
Other:
Total 1,356,807 3,451,973 (b)
Intersegment (165,126) (537,378)
----------- -----------
Unaffiliated customers 1,191,681 2,914,595
----------- -----------
$13,487,562 $14,503,175
=========== ===========
62
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Years Ended September 30
1995 1994
------------ -----------
Loss from Continuing Operations:
Consumer Health Care $(7,952,993)$(5,417,562)
Corporate (458,698) (220,176)
------------ -----------
TOTAL $(8,411,691)$(5,637,738) (a)
Interest income 13,508 139,483
Interest expense (48,775) (3,512)
------------ -----------
LOSS FROM CONTINUING OPERATIONS $(8,446,958)$(5,501,767)
============ ===========
Depreciation and amortization Expense:
Continuing operations, Consumer
Health Care $ 66,493 $ 20,112
Discontinued operations:
Leisure Time 393,925 377,056
Institutional Health Care 32,433 40,426
Other 67,006 42,816
----------- -----------
493,364 460,298
----------- -----------
TOTAL DEPRECIATION AND AMORTIZATION $ 559,857 $ 480,410
=========== ===========
Capital expenditures:
Continuing operations, Consumer Health
Care $ 105,801 $ 145,739
Discontinued operations:
Leisure time 125,589 116,281
Institutional Health Care 13,732 14,987
Other 15,257 136,039
----------- -----------
154,578 267,307
----------- -----------
TOTAL CAPITAL EXPENDITURES $ 260,379 $ 413,045
=========== ===========
63
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Years Ended September 30
1995 1994
------------ -----------
Identifiable Total Assets:
Continuing operations, Consumer
Health Care $ 6,575,025 $ 9,245,775 (c)
Discontinued operations:
Leisure time 8,301,794 8,413,455
Institutional Health Care 482,512 415,669
Other 756,070 572,417
----------- -----------
9,540,376 9,401,541
Liabilities of discontinued operations (2,376,830) (2,363,369)
----------- -----------
7,163,546 7,038,172
----------- -----------
TOTAL IDENTIFIABLE ASSETS $13,738,571 $16,283,947
=========== ===========
(a) Reflects the fourth quarter commercial launch of Reality in the U.S.
(b) Includes $2,299,787 in net proceeds from settlement of the Disposer Care
licensing litigation. See Note 7 of Notes to Consolidated Financial
Statements.
(c) Reflects net proceeds of $10,787,863 from the private placement of
1,250,000 shares of Company Common Stock.
NOTE: The segments of the Company's Holdings subsidiary have been accounted
for as discontinued operations (see Note 3) and, as a result, previously
reported segment information has been restated to reflect this change. Any
corporate overhead incurred by Holdings which was previously allocated to the
Consumer Health Care segment or corporate expense, depreciation or identifiable
assets has also been reclassified and now is included with amounts reported as
discontinued operations. Also, interest on debt related to the discontinued
operations aggregating $374,451 and $324,309 for Fiscal 1995 and 1994 has been
included in discontinued operations.
64
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
With the February 1, 1996 acquisition of Chartex (see Note 2) the Company now
operates internationally. Summary financial information for Fiscal 1996 is as
follows:
U.S. U.K. Eliminations Consolidated
----------- ---------- ----------- ------------
Net revenues $1,514,432 $ 570,450 $ 20,624 $2,064,258
Net loss (6,763,536) (1,896,768) --- (8,660,304)
Identifiable assets 7,382,396 6,320,099 2,436,872 11,265,623
NOTE 12--CONTINGENT LIABILITIES
Prior to the sale of Holdings, the Company entered into an employment agreement
with Mr. Wundrock and an agreement for the lease of Holdings' facilities. Each
of these agreements was assigned to Holdings and assumed by the buyer of
Holdings. However, because the third party creditor did not release the
Company from any future liability under these employment and lease agreements
at the time of their assignment, the Company remains contingently liable if
Holdings defaults in making any payments under the agreements. At September
30, 1996, the total future payments for these contingent liabilities was $3.5
million for the lease of Holding facilities and $.9 million for the employment
agreement.
The testing, manufacturing and marketing of consumer products by the Company
entail an inherent risk that product liability claims will be asserted against
the Company. The Company maintains product liability insurance coverage for
claims arising from the use of its products. The coverage amount is currently
$5,000,000 for FHC's consumer health care product.
NOTE 13--RELATED PARTY TRANSACTIONS
During Fiscal 1996, the Company entered into an agreement with John A. Wundrock
and Thomas J. Bonesho, two of its former directors. Pursuant to this
agreement, the Company acknowledged that Mr. Wundrock and Mr. Bonesho incurred
$67,186.87 of expenses in connection with the Company's special meeting proxy
related to the approval of the sale of Holdings and the change in the Company's
name. In accordance with this agreement, the Company agreed to reimburse
Messrs. Wundrock and Bonesho for such expenses by issuing them 15,580 shares of
the Company's Common Stock, representing the number of shares required to
reimburse them for such expenses based on the last sale price of the Company's
Common Stock on March 11, 1996
65
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
During Fiscal 1996, the Compensation Committee of the Board of Directors of the
Company repriced and changed one of the vesting criteria on options granted to
certain employees of the Company on November 21, 1994, including options for
200,000 shares to Dr. Leeper, options for 44,000 shares to Mr. Parrish and
options for 90,000 shares to Phoenix Health Care of Illinois, Inc., a
corporation in which Mr. Parrish and Dr. Leeper are officers, directors and
shareholders. The option exercise price was reduced from the initial exercise
price of $6.00 to $3.875 (which was the last sale price of the Company's Common
Stock on the American Stock Exchange on the date of the repricing). The
options vest in one-third increments on each of (i) the first anniversary of
the initial grant date, (ii) the date when average sale price for the Company's
Common Stock for any 10 consecutive trading days is at least $7.50 per share
and (iii) the date the Company and its subsidiaries, on a consolidated basis,
achieve a positive cash flow for a six-month period. Initially, the last
one-third of the options were to vest when the Company achieved fully diluted
earnings per share of at least $.80 for any Fiscal year. The Compensation
Committee elected to reprice the options and change the final vesting criteria
because the Committee felt that due to changed circumstances, including the
reduction in the trading price of the Company's Common Stock, the options were
no longer providing the incentive they were designed to provide.
During Fiscal 1996, the Company paid $60,000 for consulting services to Phoenix
Health Care of Illinois, Inc., a corporation in which Mr. Parrish and Dr.
Leeper are officers, directors and shareholders. The Company has an informal
agreement to reimburse Phoenix for office space used by the officers of the
Company (See Note 4). The space is leased by Phoenix Health Care of Illinois
from a third party.
It has been and currently is the policy of the Company that transactions
between the Company and its officers, directors, principal shareholders or
affiliates are to be on terms no less favorable to the Company than could be
obtained from unaffiliated parties. The Company intends that any future
transactions between the Company and its officers, directors, principal
shareholders or affiliates will be approved by a majority of the directors who
are not financially interested in the transaction.
66
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 14. - SUBSEQUENT EVENTS
Subsequent to September 30, 1996, a former officer of the Company exercised
36,000 options resulting in issuance of 36,000 shares for $171,000.
Certain convertible debt holders converted $1,116,550 of debt plus accrued
interest in exchange for 319,150 shares of Common Stock in accordance with the
conversion feature of the bonds.
On October 28, 1996, the Company's Board of Directors approved the issuance of
10,000 shares of Common Stock and granted 22,500 stock options to its newly
hired chief financial officer.
On December 10, 1996, the Company's subsidiary, Chartex Resources, Ltd. entered
into an agreement to lease its 40,000 square foot manufacturing facility
located in London, England. The lease is in essence a sale of the facility as
it requires up front consideration of (Pounds)1,950,000 ($3,080,000) due at
closing, a nominal annual rental charge and contains an option for the lessee
to purchase the facility for one pound from the period December 2006 to
December 2027.
As part of the same transaction, Chartex Intentional PLC and Chartex Resources
Limited entered into an agreement to lease back the facility for
(Pounds)195,000 ($307,900) per year until 2016. The lease also requires a
deposit of (Pounds)195,000 to be reduced in subsequent years until the Company
achieves an operating profit for three consecutive years. The Female Health
Company, the parent, has guaranteed the payment of the lease. The facility
had a net book value of (Pounds)777,000 (approximately $1,226,883) at September
30, 1996. Any gain resulting from this transaction will be recognized ratably
over the life of the subsequent leaseback.
Concurrent with this transaction, the Company repaid the mortgage loan on this
property which, at September 30, 1996, had a balance of (Pounds)1,062,500
($1,673,161).
67
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
On June 15, 1995, the Company and Holdings entered into a settlement agreement
("Settlement Agreement") with Reflect, Inc. regarding certain disputes arising
in connection with Holdings' July 1994 acquisition of certain assets of
Reflect, Inc. Terms of the Settlement Agreement included the issuance in June
1995 of 30,000 shares of Company Common Stock to Reflect with a market value of
$114,375, advance payments of royalties (up to $68,343) under the royalty
agreement which was part of the original Reflect purchase agreement and certain
other requirements. Subsequent to September 30, 1996, the Company was informed
by Reflect, Inc., that $150,000 was owed jointly by Holdings and Female Health
Company in connection with requirements of the June 1995 settlement agreement.
The Female Health Company recorded a $60,000 liability representing their
allocable share in the September 30, 1996, financial statements.
NOTE 15 - CONTINUING OPERATIONS
The Company's consolidated financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the settlement
of liabilities and commitments in the normal course of business. The Company
incurred a loss of $8.7 million for the year ended September 30, 1996 and as of
September 30, 1996 had an accumulated deficit of $31 million. At September 30,
1996, the Company had deficit working capital of $.9 million and stockholders'
equity of $2.9 million. The Company expects to incur substantial expenditures
in an effort to increase consumer awareness and acceptance of the female
condom. As a result, operations in the near future are expected to continue to
use working capital. Management recognizes that the Company must generate
additional resources or consider modification to its current plan to promote
and distribute the female condom. Management's plans include the sale of
additional equity or debt securities under appropriate market conditions,
alliances or other partnership agreements or other business transactions.
At various points during the developmental stage of the product, the Company
was able to secure resources, in large part through the sale of equity and debt
securities, to satisfy its funding requirements. As a result, the Company was
able to obtain FDA approval, worldwide rights, manufacturing facilities and
equipment and to commercially launch the female condom. Management believes
that recent developments, including the Company's agreement with the Joint
United Nations Programme on HIV/AIDS ("UNAIDS") provide an indication of the
Company's early success in broadening awareness and distribution of the female
condom and may benefit efforts to raise additional capital and to secure
additional agreements to promote and distribute the female condom throughout
other parts of the world.
68
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Management has held preliminary discussions with potential investors and
financial institutions regarding the Company's capital requirements. These
parties have expressed interest in providing financing under certain
circumstances that may satisfy the Company's currently anticipated
requirements. While the Company intends to pursue these opportunities to raise
additional capital, no assurances can be given that the Company will be
successful in entering into either other agreements for the sale of the female
condom or for raising additional capital. Further, there can be no assurance,
assuming the Company successfully raises additional funds or enters into
business agreements with third parties, that the Company will achieve
profitability or positive cash flow. If the Company is unable to obtain
adequate financing, management will be required to sharply curtail the
Company's efforts to promote the female condom and to curtail certain other of
its operations.
69
<PAGE>
INDEPENDENT AUDITOR'S REPORT ON SUPPLEMENTAL SCHEDULES
To the Board of Directors
The Female Health Company
Chicago, Illinois
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The consolidated
supplemental Schedules I and II are presented for purposes of complying with
the Securities and Exchange Commission's rules and are not a part of the basic
consolidated financial statements. These schedules have been subjected to the
auditing procedures applied in our audits of the basic consolidated financial
statements taken as a whole.
/s/McGLADREY & PULLEN, LLP
McGLADREY & PULLEN, LLP
Schaumburg, Illinois
December 13, 1996
70
<PAGE>
SCHEDULE I - CONDENSED FINANCIAL
INFORMATION OF REGISTRANT
The Female Health Company
CONDENSED BALANCE SHEETS
September 30
1995
------------
Assets
Current assets:
Cash $ 223,578
Accounts receivable, less allowances
$51,024 in 1995 415,089
Inventories 3,192,570
Prepaid expenses and other 233,095
-----------
Total current assets 4,064,332
Other assets:
Prepaid royalties 1,875,491
Other 399,062
Investment in and advances to wholly-owned
subsidiary 7,425,751
-----------
9,700,304
Equipment and leasehold improvements, cost 351,784
Less allowances for depreciation (115,644)
-----------
236,140
-----------
$14,000,776
===========
Liabilities and stockholders' equity
Current liabilities:
Notes payable - bank $ 109,503
Accounts payable 1,383,754
Accrued minimum royalties 4,761,198
Other 106,146
-----------
Total current liabilities 6,360,601
Long-term debt 89,017
Stockholders' equity 7,551,158
-----------
$14,000,776
===========
71
<PAGE>
SCHEDULE I - CONDENSED FINANCIAL
INFORMATION OF REGISTRANT (continued)
The Female Health Company
Years Ended September 30
-------------------------
CONDENSED STATEMENTS OF OPERATION 1995 1994
----------- ----------
Net sales and other revenue $2,179,155 $1,671,885
Management fees from wholly-owned,
discontinued subsidiary -- 12,500
---------- ----------
2,179,155 1,684,385
Costs and expenses:
Cost of products sold 2,558,420 1,138,905
Selling and administrative expenses 5,319,325 2,700,630
Reality exclusivity fees 2,578,941 2,993,299
Research and new product development
expense 135,121 489,656
Net interest expense (income) 34,306 (148,838)
----------- -----------
10,626,113 7,173,652
----------- -----------
Loss from continuing operations (8,446,958) (5,489,267)
Discontinued operations - Note A 64,599 2,489,133
------------ -----------
Net loss $(8,382,359) $(3,000,134)
CONDENSED STATEMENTS OF CASH FLOW
Cash provided by (used in) operating activities $(4,887,110) $(8,749,316)
INVESTING ACTIVITIES
Cash contributed to wholly-owned
discontinued subsidiary 53,600 (1,100,249)
Distributions from controlled joint
venture - 203,449
Other (170,818) (117,582)
------------ --------
(117,218) (1,014,382)
FINANCING ACTIVITIES
Proceeds from issuance of common stock 3,164,140 12,984,135
Cost of issuing common stock (25,200) (1,045,725)
Net increase (decrease) in notes payable 109,503 -
Other (39,830) (176,391)
------------ -----------
3,208,613 11,762,019
------------ -----------
Increase (decrease) in cash $(1,795,715) $1,998,321
=========== ==========
72
<PAGE>
SCHEDULE I - CONDENSED FINANCIAL
INFORMATION OF REGISTRANT (continued)
The Female Health Company
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The Female Health Company (Parent Company) owned 100% of WPC Holdings, Inc.
("Holdings"), which in-turn controls a joint venture investment. Holdings was
sold effective January 29, 1996. The operations of Holdings, including its
joint venture, are reflected as discontinued operations in the Parent Company -
only condensed statements of operations. Holdings, which previously was a
division of the Parent Company, did not become a subsidiary until an April 1,
1994 corporate restructuring.
In the Parent Company-only condensed balance sheet, the Parent Company's
investment in Holdings is stated at cost plus equity in its undistributed
earnings since the date of the restructuring plus any intercompany advances.
The Parent Company's equity in the earnings of Holdings (since April 1, 1994),
and Holdings' and the joint venture's operating results for periods prior to
the April 1, 1994 restructuring, are reflected as discontinued operations in
the Parent Company - only condensed statements of operations. The parent
company-only financial statements should be read in conjunction with the
Company's consolidated financial statements.
NOTE B--NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consisted of the following at September 30, 1995:
Equipment leases due at various dates bearing
interest at rates ranging from 5% to 18% $145,720
Less current maturities 56,703
-------
$89,017
=======
Following the April 1, 1994 incorporation of Holdings (the Company's
wholly-owned subsidiary) the Company transferred certain assets and assigned
certain liabilities not related to the Company's consumer health care segment
to Holdings. As of September 30, 1995 amounts due under capital lease
obligations assigned to Holdings aggregated $3,501,896. The Company remains
contingently liable under these obligations.
73
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
The Female Health Company and Subsidiaries
Charged
Balance at Acquired Charged to to Other
Beginning with Costs and Accounts
Description of Period Chartex Expenses Described
- ------------------------------------------------------------------------------
Year ended September 30, 1996
Deducted from asset accounts:
Allowance for doubtful
accounts and returns $ 51,024 $ 72,404 $ 501,509 $ ---
Inventory Reserve 1,000,000 --- 950,000 ---
---------- -------- ---------- --------
$1,051,024 $ 72,404 $1,452,509 $ ---
---------- -------- ---------- --------
Year ended September 30, 1995
Deducted from asset accounts:
Continuing operations:
Allowance for doubtful
accounts and returns $ 67,200 $ --- $ 145,202 $ ---
Inventory Reserve --- --- 1,000,000 ---
--------- -------- ---------- --------
$ 67,200 $ --- $1,145,202 $ ---
--------- -------- ---------- -------
Discontinued operations:
Allowance for doubtful
accounts and returns $280,000 $ --- $682,272 $ ---
Co-op advertising allowance 515,531 --- (5,376) ---
-------- -------- -------- --------
795,531 --- 676,896 ---
--------- --------- --------- --------
$862,731 $ ---- $1,822,098 $ ---
======== ======== ========== ========
74
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
The Female Health Company and Subsidiaries
Charged
Balance at Acquired Charged to to Other
Beginning with Costs and Accounts
Description of Period Chartex Expenses Described
- ------------------------------------------------------------------------------
Year ended September 30, 1994
Continuing operations:
Deducted from asset accounts:
Allowance for doubtful
accounts and returns $ --- $ --- $140,891 $ ---
Inventory Reserve --- --- --- ---
-------- ------- -------- --------
$ --- $ --- $140,891 $ ---
-------- ------- -------- --------
Discontinued operations:
Allowance for doubtful
accounts and returns $522,243 $ --- $399,151 $ ---
Co-op advertising allowance 220,626 --- 426.905 ---
-------- -------- -------- --------
742,869 --- 826.056 ---
--------- --------- --------- --------
$742,869 $ ---- $966,947 $ ---
======== ======== ======== ========
75
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
The Female Health Company and Subsidiaries
Deductions at End
Description Describe of Period
- -----------------------------------------------------------------------------
Year ended September 30, 1996
Deducted from asset accounts:
Allowance for doubtful
accounts and returns $(416,319) $ 208,618
Inventory Reserve -- 1,950,000
---------- ----------
$(416,319) $2,159,618
---------- ----------
Year ended September 30, 1995
Continuing operations:
Deducted from asset accounts:
Allowance for doubtful
accounts and returns $(161,378) $ 51,024
Inventory Reserve --- 1,000,000
---------- ----------
$(161,378) $1,051,024
---------- ----------
Discontinued operations:
Allowance for doubtful
accounts and returns $(597,771) $ 364,501
Co-op advertising allowance (220,155) 290,000
---------- ----------
(817,916) 654,501
---------- ----------
$(979,304) $1,705,525
========= ==========
76
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
The Female Health Company and Subsidiaries
Deductions at End
Description Describe of Period
- -----------------------------------------------------------------------------
Year ended September 30, 1994
Continuing operations:
Deducted from asset accounts:
Allowance for doubtful
accounts and returns $(73,691) $ 67,200
Inventory Reserve --- ---
--------- --------
$ 73,691 $ 67,200
--------- --------
Discontinued operations:
Allowance for doubtful
accounts and returns $(641,394) $ 280,000
Co-op advertising allowance (132,000) 515,531
---------- ---------
(773,394) 795,531
---------- ---------
$(847,085) $ 862,731
========= =========
77
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
78
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Certain information in response to this item is incorporated herein by
reference to "Election of Directors" in the Company's Proxy Statement for its
1996 Annual Meeting of Shareholders (the "Proxy Statement"), which will be
filed with the Securities and Exchange Commission within 120 days after the end
of the Company's Fiscal year ended September 30, 1996., and to "Executive
Officers of the Registrant" in Part I hereof.
ITEM 11. EXECUTIVE COMPENSATION.
Information required by this Item is omitted from this Report as the Registrant
intends to file its definitive proxy statement not later than 120 days after
the end of the Fiscal year covered by this Report, and the information to be
included therein is included herein by reference. Information in response to
this item is incorporated herein by reference to "Executive Compensation" in
the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information required by this Item is omitted from this Report as the Registrant
intends to file its definitive proxy statement not later than 120 days after
the end of the Fiscal year covered by this Report, and the information to be
included therein is included herein by reference. Information in response to
this item is incorporated herein by reference to "Principal Security Holders
and Security Holdings of Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required by this Item is omitted from this Report as the Registrant
intends to file its definitive proxy statement not later than 120 days after
the end of the Fiscal year covered by this Report, and the information to be
included therein is included herein by reference. Information in response to
this item is incorporated herein by reference to "Certain Transactions" in the
Proxy Statement.
79
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
A. Documents Filed as a Part of This Report:
1. Financial Statements.
The following consolidated financial statements of the Company are
included in Item 8 hereof:
Consolidated Balance Sheets - September 30, 1996 and 1995
Consolidated Statements of Operations--Years ended September 30, 1996,
1995 and 1994
Consolidated Statements of Stockholders' Equity--Years ended September
30, 1996, 1995 and 1994
Consolidated Statements of Cash Flows - Years ended September 30,
1996, 1995 and 1994
Notes to Consolidated Financial Statements
80
<PAGE>
2. Financial Statement Schedules.
The following financial statement schedules of the Company are included in
Item 8 hereof:
Schedule I - Condensed Financial Information of Registrant
Schedule II - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
3. Exhibits Filed:
Exhibit
Number Description
- ------ -------------
3.1 Amended and Restated Articles of Incorporation. (1)
3.2 Amended and Restated By-Laws of the Company. (2)
4.1 Amended and Restated Articles of Incorporation same as Exhibit 3.1 (1)
4.2 Articles II, VII, and XI of the Amended and restated By-Laws of the
Company. (included in Exhibit 3.2 (2))
10.1 Employment Agreement between John Wundrock and the Company dated October
1, 1989. (1)
10.2 Wisconsin Pharmacal Company, Inc. (k/n/a The Female Health Company) 1990
Stock Option Plan. (3)
10.3 Commercial Building Lease dated May 1, 1992 covering the Jackson,
Wisconsin office and manufacturing facility. (4)
10.4 Reality Female Condom Clinical Trial Data Agreement between the Company
and Family Health International dated September 24, 1992. (5)
10.5 Trademark License Agreement for Reality Trademark. (6)
10.6 Office space lease between the Company and John Hancock Mutual Life
Insurance Company dated June 1, 1994. (7)
10.7 Employment Agreement dated September 10, 1994 between the Company and
Dr. Mary Ann Leeper. (8)
10.8 1994 Stock Option Plan. (9)
81
<PAGE>
10.9 Investor relations and development services Consulting Agreement between
the Company and CCRI Corporation dated March 13, 1995. (10)
10.10 Consultant Warrant Agreement dated March 13, 1995 between the Company
and CCRI Corporation, as amended on April 22, 1996. (11)
10.11 Offshore Securities Subscription Agreement for the sale of 370,000
shares of Company Common Stock dated February 7, 1995. (10)
10.12 Offshore Securities Subscription Agreement for the sale of 100,000
shares of Company Common Stock dated February 7, 1995. (10)
10.13 Offshore Securities Subscription Agreement for the sale of 500,000
shares of Company Common Stock dated February 7, 1995. (10)
10.14 Settlement Agreement and Mutual Release of All Claims between WPC
Holdings, Inc., Reflect, Inc. and the Company dated June 15, 1995. (11)
10.15 Stock Purchase Agreement by and between WPC Acquisition Corporation and
the Company dated June 20, 1995. (12)
10.16 Agreement relating to the acquisition of the entire issued share capital
of Chartex Resources Limited and exhibits thereto. (13)
10.17 Demand note payable between the Company and an officer/stockholder of
the Company dated October 2, 1995. (2)
10.18 Company Promissory Note payable to Dean & Co. for $1 million dated
November 21, 1995, and related Note Purchase and Warrant Agreement
Guarantee Agreements and Stock Issuance Agreement by and between the
Company, Dean & Co., Stephen M. Dearholt, O.B. Parrish, William R.
Gargiulo, Jr., and Mary Ann Leeper. (2)
10.19 Company Promissory Note payable to Stephen M. Dearholt for $1 million
dated March 25, 1996 and related Note Purchase and Warrant Agreement,
Warrants and Stock Issuance Agreement. (12)
10.20 Outside Director Stock Option Plan (11)
10.21 Exclusive Distribution Agreement between Charter International Plc and
Taiho Pharmaceutical Co., Ltd. dated October 18, 1994. (14)
10.22 Supply Agreement between Chartex International Plc and Deerfield
Urethane, Inc. dated August 17, 1994. (14)
10.23 Employment Letter dated February 28, 1990 from Chartex Resource Ltd. to
Michael Pope, and Board amendments thereto. (14)
82
<PAGE>
10.24 Grant Letter dated March 7, 1996 from the Government office for London
of the Secretary of State of Trade and Industry regarding economic
development grant to the Company. (14)
10.25 Letter Amendment to Asset Sale Agreement dated April 29, 1996 between
the Company and Dowty Seals Limited and Chartex International Plc. (14)
10.26 Form of Offshore Securities Subscription Agreement entered into between
the Company and certain foreign investors on September 12, 1996.
10.27 Form of 8% Convertible Debenture Due August 31, 1999 issued by the
Company to certain foreign investors on September 12, 1996.
10.28 Form of Warrant issued by the Company to certain foreign investors as of
September 12, 1996.
(1) Incorporated herein by reference to the Company's Registration Statement
on Form S-18, Registration No. 33-35096, as filed with the Securities
and Exchange Commission on May 25, 1990.
(2) Incorporated herein by reference to the Company's 1995 Form 10-K.
(3) Incorporated herein by reference to the Company's December 31, 1990 Form
10-Q.
(4) Incorporated herein by reference to the Company's June 30, 1992 Form
10-Q.
(5) Incorporated herein by reference to Pre-Effective Amendment No. 1 to the
Company's Registration Statement on Form S-1, Registration No. 33-51586,
as filed with the Securities and Exchange Commission on September 28,
1992.
(6) Incorporated herein by reference to the Company's 1992 Form 10-K.
(7) Incorporated herein by reference to the Company's June 30, 1994 Form
10-Q.
(8) Incorporated herein by reference to the Company's Registration Statement
on Form S-2, Registration No. 33-84524, as filed with the Securities and
Exchange Commission on September 28, 1994.
(9) Incorporated herein by reference to the Company's 1994 Form 10-K.
(10) Incorporated herein by reference to the Company's March 31, 1995 Form
10-Q.
(11) Incorporated herein by reference to the Company's Form S-1 Registration
Statement filed with the Securities and Exchange Commission on April 23,
1996.
83
<PAGE>
(12) Incorporated herein by reference to the Company's June 30, 1995 Form
10-Q.
(13) Incorporated herein by reference to the Company's Current Report on Form
8-K dated November 20, 1995.
(14) Incorporated herein by reference to Pre-Effective Amendment No. 1 to the
Company's Form S-1 Registration Statement filed with the Securities and
Exchange Commission on June 5, 1996.
84
<PAGE>
B. Reports on Form 8-K:
The Company has not filed any reports on Form 8-K during the last quarter of
the period covered by this report.
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE FEMALE HEALTH COMPANY
BY: /s/O. B. Parrish
-------------------------------------------
O. B. Parrish, Chief Executive Officer
Date: December 30, 1996
85
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following on behalf of the Company and in
the capacities and on the date indicated.
Signature Title Date
/s/O.B. Parrish
- ---------------------------- Chairman of the Board, December 30, 1996
O.B. Parrish Chief Executive Officer
and Director
/s/Mary Ann Leeper
- ----------------------------- President, Chief Operating December 30, 1996
Mary Ann Leeper, Ph.D. Officer and Director
/s/Mark A. Osborn
- ----------------------------- Vice President - Finance December 30,1996
Mark A. Osborn Chief Financial Officer
(Principal Accounting Officer)
/s/William R. Gargiulo
- ----------------------------- Secretary, Vice-President- December 30, 1996
William R. Gargiulo, Jr. International and Director
/s/David R. Bethune
- ----------------------------- Director December 30, 1996
David R. Bethune
/s/Stephen M. Dearholt
- ----------------------------- Director December 30, 1996
Stephen M. Dearholt
86
<PAGE>
EXHIBIT INDEX
Exhibit Page
Number Description Number
- ------- ---------------------------- -------
3.2 By-laws of Company, as amended.
10.62 Demand note payable between the Company
and an officer/stockholder of the Company
dated October 2, 1995.
10.63 Company Promissory Note Payable to Dean &
Co. for $1,000,000 dated November 21, 1995
and related Note Purchase and Warrant
Agreement, Guarantee Agreements and Stock
Issuance Agreement by and between the Company,
Dean & Co., Steven Dearholt, O.B. Parrish, William
R. Gargiulo, Jr. and Mary Ann Leeper.
21 Subsidiaries of Registrant
23 Consent of Ernst & Young LLP, Independent Auditors
23 Consent of McGladrey & Pullen, LLP, Independent Auditors
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
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