<PAGE>
Filed Pursuant to Rule
424(b)(3). Registration
No. 333-3922.
PROSPECTUS
DATED JUNE 18, 1996
1,776,580 Shares
THE FEMALE HEALTH COMPANY
COMMON STOCK
Of the 1,776,580 shares of Common Stock of The Female Health Company (the
"Company") offered hereby, 1,500,000 shares are being offered for sale by the
Company to the public on a "best efforts" basis with no required minimum and up
to 96,000 shares are or may be issued by the Company to the Company's secondary
placement agent as compensation for consulting and other services. See "Plan of
Distribution." The remaining 180,580 shares are being sold by the Selling
Shareholders, including 150,000 shares which may be received by a Selling
Shareholder upon exercise of a warrant. The warrant is currently exercisable as
to 50,000 shares and becomes exercisable for the remaining shares if the market
price of the Company's Common Stock achieves certain preestablished levels. The
exercise price per share of stock under this warrant is $3.50. The Company will
not receive any of the proceeds from the sale of the shares of Common Stock by
the Selling Shareholders. See "Principal and Selling Shareholders."
The Common Stock is currently listed on the American Stock Exchange under the
symbol "FHC." As of June 11, 1996, the last reported sale price of the Common
Stock on the American Stock Exchange was $5.50 per share.
THERE ARE CERTAIN RISK FACTORS WHICH SHOULD BE CONSIDERED BEFORE PURCHASING
SHARES IN THIS OFFERING. SEE "RISK FACTORS" ON PAGE 8.
______________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Underwriting Discounts and Proceeds to Proceeds to Selling
Price to Public(1) Commissions(2) Company(3)(4) Shareholders
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share............... $ 4.40 $ .08 $ 4.32 $ 4.40
Total(5)................ $7,394,552 $120,000 $6,480,000 $794,552
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Of the 1,776,580 shares being registered for sale hereby, 1,500,000 shares
are being offered for sale by the Company to the public (the "Shares"), up
to 96,000 will be sold by the Company to its secondary placement agent in
this offering and 180,580 shares will be sold by Selling Shareholders. The
shares to be sold by the Company to the public will be offered at the Price
to Public specified above on a "best efforts" basis for a period
terminating 30 days after the date of this Prospectus. The up to 96,000
shares to be sold by the Company to the Company's secondary placement agent
will be sold in consideration of certain consulting and other services.
Accordingly, the Company will not receive any cash proceeds from this sale.
It is anticipated that the 180,580 shares being sold by the Selling
Shareholders will be sold from time to time by the Selling Shareholders
primarily in transactions (which may include block transactions) on the
American Stock Exchange at the market price then prevailing, although sales
may also be made by the Selling Shareholders in negotiated transactions or
otherwise. The shares being sold by the Selling Shareholders may be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933. The Price to Public represents the public offering price for
the Shares being sold by the Company. The shares may be sold by the Selling
Shareholders at prices more or less than this price. See "Plan of
Distribution" for a more complete discussion of the method of distribution
of the shares by the Company and the Selling Shareholders.
(2) The Company has employed two placement agents to assist the Company in its
sales efforts in this offering. The Company will pay the primary placement
agent commissions of $.08 per share on sales of 1,500,000 Shares of the
Common Stock to be sold by the Company to the public. In addition, the
Company will issue to this placement agent, 9,000 shares of the Company's
Common Stock (or, in the Company's discretion, cash at the Per Share Price
to Public in lieu of some or all of such shares) for each $1 million of
gross proceeds to the Company in this offering, up to a maximum of 54,000
shares. The Company has agreed to issue to the secondary placement agent
60,000 shares of the Company's Common Stock and an additional 10,000 shares
for each $1 million of proceeds received by the Company in this offering as
a result of the sales efforts of this secondary placement agent, up to a
maximum of 36,000 additional shares. The Company may, in its discretion,
elect to pay the secondary placement agent cash, at the Per Share Price to
Public, in lieu of some or all of the shares to which the secondary
placement agent is or becomes entitled to receive. Underwriting discounts
and commissions in the table above does not include the market value of
$528,000 (based on the $5.50 last sale price per share of the Company's
Common Stock on June 11, 1996) for the 96,000 shares which may be issued to
the Company's secondary placement agent. See "Plan of Distribution."
2
<PAGE>
Underwriting discounts and commissions in the table above also does not
include $297,000 (based on the $5.50 last sale price per share of the
Company's Common Stock on June 11, 1996) for the 54,000 shares which will
be issued to the Company's primary placement agent in this offering if all
of the Shares are sold. The Company has also agreed to reimburse the
primary placement agent for its actual out-of-pocket expenses incurred in
this offering. It is estimated that such expenses will not exceed $5,000.
All discounts and commissions on sales of Common Stock by the Selling
Shareholders, if any, will be paid directly by the Selling
Shareholders.
(3) Before deducting expenses payable by the Company estimated to be
approximately $245,000, including certain expenses of the Selling
Shareholders. The expenses of this offering, other than brokerage
commissions and certain expenses being paid by one of the Selling
Shareholders, are being paid by the Company. See "Principal and Selling
Shareholders."
(4) Proceeds to Company does not include the exercise price which would be
received by the Company upon a Selling Shareholder's exercise of its
warrant to purchase 150,000 shares of the Company's Common Stock at an
exercise price of $3.50 per share, the underlying stock of which is being
registered for resale by the Selling Shareholder. The warrant is currently
exercisable as to 50,000 shares and will become exercisable for the
remaining shares if the market price of the Company's Common Stock achieves
certain preestablished values. If the warrant is exercised in full, the
Company would receive additional proceeds of $525,000 and if the warrant is
exercised as to the currently vested portion, the Company would receive
additional proceeds of $175,000. See "Principal and Selling Shareholders."
(5) Assumes all of the shares being offered by the Company are sold. The
shares are being offered on a "best efforts" basis and, accordingly, the
Company may sell less than all of the shares offered hereby.
The Shares to be sold by the Company to the public hereunder are being
offered on a "best efforts" basis by the Company with the assistance of the two
placement agents, subject to prior sale, withdrawal or cancellation of the
offering without notice. Any modification to the offering will be made by means
of an amendment to this Prospectus. Certain directors and officers of the
Company may participate in the sale of the Shares by the Company. Such officers
and directors will rely on the exemption from broker-dealer registration
contained in Rule 3a4-1 of the Securities Exchange Act of 1934, as amended and
sales of the Shares by the Company will be conducted within the requirements of
Rule 3a4-1, so as to permit such officers and directors (all of whom may be
deemed to be associates within the meaning of Rule 3a4-1) to participate in the
sale of the Shares. No directors or officers of the Company will be compensated
in connection with his or her participation in the offering by the payment of
commissions or other renumeration based either directly or indirectly on the
sales of the Shares. There is no minimum offering amount. Accordingly, the
Company may sell less than all of the Shares. The Company will receive and
retain the proceeds from its sales of the Shares from time to time during this
offering and no arrangements have been made to place any such proceeds in
escrow. There can be no assurance that the proceeds raised by the Company in
this offering, whether all or less than all of the Shares are sold, will provide
the Company with sufficient capital to achieve its plans. See "Risk Factors."
The shares being sold by the Selling Shareholders will be sold primarily in
transactions on the American Stock Exchange. However, the Selling Shareholders
may sell shares to market makers acting as principals, or through broker dealers
acting as principals for themselves or agents for their customers or in
privately negotiated transactions. See "Plan of Distribution" for a more
complete discussion of the method of distribution of the shares by the Company
and the Selling Shareholders.
GS/2/ SECURITIES, INC.
COLLOPY & COMPANY, INC.
The date of this Prospectus is June 18, 1996.
3
<PAGE>
AVAILABLE INFORMATION
This Prospectus, which constitutes a part of a Registration Statement on
Form S-1 (the "Registration Statement") filed by the Company with the Securities
and Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Securities Act"), omits certain of the information set forth in
the Registration Statement. Reference is hereby made to the Registration
Statement and to the exhibits thereto for further information with respect to
the Company and the securities offered hereby. Copies of the Registration
Statement and the exhibits thereto are on file at the offices of the Commission
and may be obtained upon payment of the prescribed fee or may be examined
without charge at the public reference facilities of the Commission described
below.
Statements contained herein and concerning the provisions of documents are
necessarily summaries of such documents, and each statement is qualified in its
entirety by references to the copy of the applicable document filed with the
Commission.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and in accordance
therewith files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information can be
inspected and copied at the Public Reference Section of the Commission at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the following
regional offices of the Commission: Midwest Regional Office, Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, IL 60661, and Northeast Regional
Office, 7 World Trade Center, Suite 1300, New York, NY 10048. Copies of such
material can also be obtained at prescribed rates by writing to the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. In addition, the Commission maintains a Web site that contains reports,
proxy and information statements and other information regarding registrants,
such as the Company, that file electronically with the Commission. The address
of this Web site is (http: //www.sec.gov). The Company's Common Stock is traded
on the American Stock Exchange and copies of the foregoing material may also be
inspected and copied at such exchange.
PROSPECTUS SUMMARY
THE COMPANY
The Company today is a global start-up company. Its business consists of
the manufacture and sale of the female condom, known in the United States as
Reality(R) and under various other trade names in foreign countries. The
Company was incorporated in its original form in Wisconsin in 1971.
Over the past several years, the Company has expended significant time and
resources in the development of the female condom and securing FDA approval to
market the female condom in the United States. During this time, the Company
also operated its original business of developing, manufacturing and marketing
specialty chemical and branded consumer products for the leisure time, household
and institutional health care markets and for third parties. Prior to entering
the commercialization phase of the female condom, the Company's Board of
Directors determined that the continued growth and development of the female
condom and the Company's other products would require separate management and
accountability. Accordingly, in April of 1994, the Board of Directors formed
WPC Holdings, Inc. ("Holdings") as a wholly owned subsidiary of the Company and
transferred to Holdings all of the assets and liabilities of the Company other
than those related primarily to the female condom. Prior to this restructuring,
the Board of Directors determined that the Company was not able to
simultaneously devote the time and resources necessary to adequately and
effectively develop its two entirely different businesses.
After considering various alternatives, on March 10, 1995, the Board of
Directors selected the female condom as the central focus for the Company's
strategic direction. This resulted in a strategy to sell Holdings and change
the Company's name to The Female Health Company. After negotiations with the
two potential purchasers, the Company executed a purchase agreement in June 1995
agreeing to sell Holdings to WPC Acquisition Corporation, subject to approval of
the Company's shareholders (the
4
<PAGE>
"Sale"). At a special meeting of the Company's shareholders held on January 18,
1996, the shareholders approved the Sale and on January 29, 1996, the Company
effectuated the Sale.
While the Company was in the process of preparing a proxy statement to
request that the Company's shareholders approve the Sale, the Company became
aware that the sole stockholder of Chartex Resources Limited (which, together
with its wholly owned subsidiary, Chartex International, Plc, is referred to
herein collectively as "Chartex"), the manufacturer and owner of certain
worldwide rights to, and the Company's sole supplier of, the female condom, was
considering various alternatives for Chartex's future, including a sale of its
stock or assets to a third party or a liquidation. Because of this and the
perceived benefits of an acquisition of Chartex, the Company negotiated with the
sole stockholder to acquire Chartex, and on November 20, 1995 the Company
executed an acquisition agreement to purchase the outstanding stock of Chartex
(the "Chartex Acquisition"). The Company effectuated the Chartex Acquisition on
February 1, 1996.
As a result of the Sale and the Chartex Acquisition, the Company's sole
business now consists of the manufacture, marketing and sale of the female
condom. The Company owns certain global intellectual property rights for the
female condom, including patents in the United States, the European Union, Japan
and various other countries, regulatory approvals in certain countries,
including a PMA in the U.S., and certain proprietary manufacturing technology.
In addition, the Company owns a state of the art, FDA approved, manufacturing
facility in London, England capable of producing 60 million female condoms per
year. The Company also has an approximately (Pounds)39 million (approximately
$60 million) tax loss carryforward in the U.K.
The Company believes the female condom has global potential to prevent
unintended pregnancy and sexually transmitted diseases, including AIDS ("STDs").
The World Health Organization ("WHO") estimates that worldwide there are 333
million new cases of STDs each year and the American Journal of Obstetrics and
Gynecology (1993) noted that half of all pregnancies in women between the ages
of 15 and 44 in the U.S. alone are unintended. Prevention of STDs and
unintended pregnancies can significantly lower health care costs through the
avoidance of expensive treatment for STDs and the expenses associated with
unintended pregnancies.
The Company intends to initially focus the majority of its marketing
efforts on three key markets: the United States, Japan and the global public
sector market. The Company will also seek to continue to establish marketing
partners in other markets throughout the world. In the United States, the
Company will continue the educational-based thrust of its marketing, focusing on
advertisement and promotion directed toward young adults and city, county and
state public sector programs. In Japan, the Company has entered into a
relationship with a $1 billion division of a $5 billion Japanese health care
company. This division will market the female condom in Japan once it receives
Japanese regulatory approval, which is currently anticipated to occur in late
1996 or early 1997. As the third part of its main marketing focus, the Company
intends to continue to develop its global public sector sales through sales to
WHO, the United States Agency for International Development ("USAID") and their
affiliates.
The Company believes that in addition to these high priority markets,
opportunities exist in several other markets worldwide. As appropriate and the
Company's resources permit, additional markets may be introduced. Specifically,
the female condom has not yet been introduced in Brazil, Canada, China, France,
Germany, Italy, India, Mexico and Russia. To date, Chartex has entered into
exclusive distributor arrangements with several companies in various countries,
including Argentina, Austria, Belgium, Greece, Hong Kong, Korea, the
Netherlands, Portugal, Singapore, Spain, Switzerland and Thailand. These
exclusive distributor agreements generally require the distributor to purchase a
specified minimum quantity of units per year during the term of the agreement
and require the distributor to spend a specified minimum amount on promotional
expenses.
5
<PAGE>
To date, the product has not been launched in any major markets other than
the United States and the United Kingdom. However, the product has been
launched in 14 other smaller countries representing less than 2% of the
potential market, and the sales volume in these countries has been less than
anticipated. Management believes the lower than expected sales in these
countries resulted from Chartex's initial failure to utilize an education-based
marketing strategy.
Management believes that a steady education based approach to marketing the
female condom will successfully develop the market. Experience to date suggests
this is occurring. 21 studies conducted by various independent investigators in
17 countries with 3,500 participants reflected the following response ranges:
50% to 90% like the female condom
30% to 97% would recommend its use
25% to 86% preferred it to the male condom
In addition, according to various studies, about 40% to 60% of women who
try the female condom indicate that they would continue to use it. Significant
scientific support has developed for the female condom. There are more than 20
studies underway in the U.S., including comparison to the male condom,
effectiveness, propensity to use and acceptability. The U.S. government is
providing more than $8 million to fund this research. There is also significant
and growing public sector interest. USAID is conducting a 22-country needs
assessment study. WHO has conducted several studies and has expressed serious
interest in the female condom. In addition, the cities of Philadelphia and
Chicago have initiated successful public sector outreach/distribution programs.
Management believes that given the market need and the results of these
studies, as the health care community and women become familiar with the female
condom, use of the female condom throughout the world will increase.
The Company's corporate offices are located at 919 North Michigan Avenue,
Suite 2208, Chicago, Illinois, 60611, and its telephone number is (312) 280-
2281. The Company's operating unit is located at 875 North Michigan Avenue,
Suite 3660, Chicago, Illinois 60611, and its telephone number is (312) 280-1119.
THE OFFERING
Shares Offered . . . . . . . . 1,776,580 shares of the $.01 par value Common
Stock of the Company (the "Common Stock"), up to
1,596,000 of which will be sold by the Company
(the "Shares") and up to 180,580 of which will
be sold by the Selling Shareholders (see
"Principal and Selling Shareholders" and "Plan
of Distribution").
Shares to be Outstanding
After the Offering . . . . . 8,108,312 shares of Common Stock (assuming all
of the Shares are sold, the Company's primary
placement agent receives 54,000 shares in
connection with this offering, the Company's
secondary placement agent receives 96,000 shares
and that a Selling Shareholder exercises its
warrant to purchase the 50,000 shares of Common
Stock which are currently vested under a
warrant).
American Stock Exchange
Symbol . . . . . . . . . . FHC
6
<PAGE>
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Year Ended September 30, Six Months Ended
---------------------------------------- -------------------
March 31,
-------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ -------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues............................ $ 25,379 $ 1,671,885 $ 2,179,155 $ 982,902 $ 730,508
Cost of products sold................... 25,379 1,138,905 2,558,420 690,972 1,197,455(1)
Selling expense......................... -- 1,774,754 4,276,610 3,092,224 797,334
Research and new product
development expenses................... 1,103,790 489,656 135,121 67,415 154,612
Reality exclusivity fees(2)............. 2,766,462 2,993,299 2,578,941 1,727,390 --
Loss from continuing
operations............................. (3,971,861) (5,501,767) (8,446,958) (5,214,740) (2,439,492)
Net loss................................ (3,736,000) (3,000,134) (8,382,359) (5,834,487) (2,443,953)
Loss from continuing
operations per common and
dilutive common equivalent
share.................................. (1.02) (1.13) (1.40) (0.92) (0.38)
September 30, March 31,
------------ ---------
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ -------------------
BALANCE SHEET DATA:
CONTINUING OPERATIONS:
Working capital (Deficit)............... (1,717,088) 3,216,970 (2,034,064) N/A(3) (656,912)
Total assets............................ 3,615,142 9,245,775 6,575,025 N/A(3) 11,518,051
Long-term debt and capital lease
obligations............................ -- 85,387 145,720 N/A(3) 2,799,657
Stockholders' equity.................... 763,073 5,638,456 387,612 N/A(3) 5,087,222
DISCONTINUED OPERATIONS:
Working capital......................... 1,698,344 4,827,966 5,211,277 N/A(3) --
Total assets............................ 6,460,448 9,401,541 9,540,376 N/A(3) --
Long-term debt, capital lease
obligations and minority interest...... 1,927,782 1,763,122 1,608,475 N/A(3) --
Stockholders' equity.................... 3,574,448 7,038,172 7,163,596 N/A(3) --
</TABLE>
____________________
(1) Includes a $300,000 charge for inventory obsolescence reserve in the
quarter ended March 31, 1996 which was taken by the Company to reflect the
aging of its current inventory and the Company's lower than anticipated
sales volume.
(2) Prior to June 30, 1995, the Company recorded charges relating to minimum
royalties necessary to maintain exclusive rights to market and distribute
Reality in the U.S., Canada and Mexico. Due to pending discussions with
Chartex as to a potential acquisition or other arrangement between the
companies, the Company ceased recording further exclusivity charges after
June 30, 1995. In conjunction with the Company's acquisition of Chartex
effective February 1, 1996, the balances of the Company's exclusivity
liability and prepaid royalty asset were eliminated in the purchase
accounting. Refer to Notes 1 and 7 of the Company's September 30, 1995
Consolidated Financial Statements for further information on these
items.
(3) Balance sheet information as of March 31, 1995 was not deemed necessary.
7
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RISK FACTORS
Prospective investors should carefully consider the risk factors set forth
below as well as the other information contained in this Prospectus.
1. Additional Capital Required; Potential Dilution. The Female Health
Company and its wholly owned subsidiary Chartex Resources Limited ("Chartex
Limited") and Chartex Limited's wholly owned subsidiary Chartex International
Plc ("Chartex International" and together with Chartex Limited, collectively,
"Chartex") have fixed cash expenses of approximately $400,000 per month before
capital expenditures and debt repayment. At May 31, 1996, the Company had
approximately $0.6 million of cash available for working capital purposes. If
the Company meets its operating plans, it will need to source at least
approximately $1 million by June 30, 1996, an additional $1 million within one
month thereafter and a cumulative amount of approximately $8.0 million by March
31, 1997.
The Company intends to seek to source the foregoing amounts from one
or more of the following sources: refinance of the Chartex manufacturing
facility (including refinancing the approximately $1.7 million mortgage and
extracting up to $1 million of cash from equity (appraised value in excess of
current loan value)); up to $0.6 million from a working capital credit facility
which would be based on eligible accounts receivable; and up to approximately
$6.2 million from sales of Common Stock in this offering. However, there can be
no assurance that the Company will be able to source all or any portion of this
required capital through these or other sources or that such amount, if raised,
will be sufficient to operate the Company until sales of the female condom
generate sufficient revenues to fund operations. In addition, any such funds
raised may be costly to the Company and/or dilutive to existing shareholders. At
present, the Company has no immediate plans to sell any additional shares of its
Common Stock other than the sale of the shares contemplated by this Prospectus.
The Company is offering its shares hereunder on a "best efforts" basis
with no minimum number of shares required to be sold. Accordingly, the Company
may sell all or less than all of the Shares offered hereby. 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 has had preliminary contacts with two possible
sources for a refinancing of the Chartex facility. Based on these discussions,
management believes that the Company will be able to complete a refinancing
before the end of 1996. The Company does not currently have in place any
accounts receivable financing or other line of credit financing but it will
actively pursue such financing once this offering is completed.
2. Potential Negative Impact on the Current Market Price for the
Company's Common Stock; Potential for Differing Sales Prices Per Share Sold in
This Offering. The Company is offering the Shares to the public at a price per
share which is less than the current market price of the Company's Common Stock.
As a result, the market price for the Company's Common Stock may be negatively
impacted. Accordingly, purchasers of the shares of Common Stock in this offering
should not assume that they will be able to sell any Common Stock purchased at a
price equal to recent market prices or at a price in excess of the price at
which they purchased shares in the offering. The Selling Shareholders may sell
shares in transactions (which may include block transactions) on the American
Stock Exchange at the market price then prevailing. As a result, purchasers of
the Common Stock from the Selling Shareholders in this offering may pay more per
share
8
<PAGE>
than purchasers who purchase the Shares from the Company. See "Plan of
Distribution."
3. Potential for Sales by Selling Shareholders to Adversely Affect the
Company's Offering and the Market Price of the Common Stock. The offering of
shares by the Company will be conducted contemporaneously with the offering of
shares by the Selling Shareholders. Due to the relatively small size of the
Company and the fact that the Company's Common Stock is relatively thinly
traded, either the Company or a Selling Shareholder may be unable to effect
sales if the other party is offering to sell shares simultaneously. In addition,
Selling Shareholders may be willing to sell their shares at a discount below the
then current market price or the public offering price for the Shares being sold
by the Company. In such event, the market price for the Company's Common Stock
and the Company's stock offering could be adversely affected.
4. Reliance on Product Line; Lower Than Anticipated Reality Sales;
Operating Losses. The Company expects to derive its future revenues from sales
of the female condom, its sole current product. The female condom is a
revolutionary new product. The product itself is in the early stages of its
commercialization. The female condom has been on retailers' shelves in the
United States for approximately 19 months as of March 31, 1996 and has been
launched by Chartex in the U.K. and 14 other small countries between 1992 and
1995. Since such time, sales of the female condom have been significantly lower
than management's expectations. The Company had net sales from continuing
operations of $730,508 for the six months ended March 31, 1996 compared to sales
of $982,902 for the six months ended March 31, 1995. Net sales to the "private
sector" (trade sales) were $296,271 for the six month period ended March 31,
1996 compared with $643,318 for the prior year period. Net sales to the "public
sector" for the six month period ended March 31, 1996 were $434,237 compared
with $339,584 for the prior year period. In addition, during the period from
January 1, 1996 through the date of the Chartex Acquisition on February 1, 1996,
Chartex had net sales of (Pounds)15,000 (approximately $23,000). Accordingly,
the ultimate level of consumer acceptance of the female condom, which includes
the consumer's decision to purchase the female condom versus other available
products, is not yet known.
Management believes that sales of the female condom have been less
than anticipated due to its revolutionary nature as the first female condom, the
seriousness of the consumer decision to use it and the understanding required to
use a new class of product. In considering using the female condom, women often
ask three questions: "Will it work?"; "How do I use it correctly?"; and "How
will my partner react?" Addressing these questions requires education over time
and the support of the medical provider community. Management believes that with
additional marketing and consumer education, sales will increase. However, there
can be no assurance to this effect.
The Company's current level of expenditures has been established to
support a higher level of revenues associated with the female condom. The
Company will continue to report operating losses until such revenues
significantly increase or the Company significantly reduces its cost structure.
If sales do not significantly increase, the Company will continue to
report operating losses and, ultimately, the Company's viability may be in
jeopardy. For the period beginning with the commercial launch of Reality in the
United States in the fourth quarter of fiscal 1994 and ending on March 31, 1996,
the Company sold approximately 3.4 million Reality devices. The Company's
average selling price during this period was $1.33 per device, including 250,000
devices sold to Family Health International for a clinical acceptability study
(supported by the United States Agency for International Development) at a
discounted price. For the Company's six month period ended March 31, 1996, the
average selling price of the female condom was $1.22 per device. From 1992
through March 31, 1996, Chartex sold approximately 5.4 million devices
(exclusive of sales to the Company) at an average selling price of less than
$1.00 per device. The Company estimates that approximately 18.8 million female
condoms must be sold worldwide at an average selling price of $1.00 per device
to break even on a cash basis. The $1.00 per device average selling price is
based on the Company's estimate of projected mix in sales of devices based on
current prices.
5. Market Acceptance of the Female Condom and Potential Write-Off of
Assets. There can be no assurance that the female condom will be accepted by a
sufficient number of consumers to be profitable to the Company. The Company will
be required to write-off or write-down any assets related to the female condom,
with a resulting charge to earnings, if the Company is not able to successfully
market and generate substantial revenue from sales of the female condom.
6. Integration of Chartex Operations. The Company's future short-term and
long-term success will be dependent upon its ability to effectively integrate
and manage Chartex's operations. The Company believes that its current
management team will be sufficient to properly manage the
9
<PAGE>
Company's and Chartex's operations. However, because Chartex is located in
London, England and the Company's management team is primarily located in the
United States, there can be no assurance that the Company will not find it
necessary to seek additional managers in the future to be located in London or
that such managers will be available on terms acceptable to the Company or that,
with or without such additional managers, the Company will be able to
effectively integrate the Company's and Chartex's operations.
7. Foreign Currency and Market Risk. The Company anticipates that a
material portion of the Company's future sales will be in foreign markets. Sales
in such foreign markets will be 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 impair the Company's future sales, or the collectability of any
such sales, in those countries.
8. Dependence on Key Personnel. The Company's success will depend in
large part upon its ability to attract and retain highly qualified marketing and
sales personnel. The Company is particularly dependent upon the services of O.B.
Parrish, its Chairman of the Board and Chief Executive Officer and Mary Ann
Leeper, Ph.D., its President and Chief Operating Officer. The Company has
entered into an employment agreement with Dr. Leeper. The loss of the services
of these or certain other key individuals, or the failure of the Company to
attract and retain other skilled personnel, could have a material adverse impact
on the Company.
9. Future Research on Product Efficacy. The Company continues research
and is participating and expects to continue to participate in future
government-sponsored studies on the effectiveness of the female condom compared
to other barrier contraceptive products in preventing sexually transmitted
diseases and unintended pregnancy. The Company believes that the results of
these additional studies will be favorable to the Company. However, if the
results prove to be unfavorable, such unfavorable results would have a material
adverse impact on the Company.
10. Potential Inventory Writedowns. The United States Food and Drug
Administration ("FDA") approved an increased shelf life for Reality from two
years to three years, which provides a new average shelf life of 16 months (as
of March 31, 1996) for the Company's existing Reality inventory. If the
Company's sales of Reality do not significantly increase, the Company may need
to expend funds to relabel this inventory to reflect the new shelf life and may
also experience significant additional inventory writedowns in the future.
11. Volatility of Stock Price. The market price of the Company's Common
Stock has been and may continue to be affected by quarter-to-quarter variations
in the Company's operating results, announcements by the Company's competitors
and other factors. In addition, the stock market has from time to time
experienced extreme price and volume fluctuations, particularly among emerging
growth company stocks, which have often been unrelated to the operating
performance of particular companies. Factors not directly related to the
Company's performance, such as governmental regulation or negative industry
reports, may also have a significant adverse impact on the market price of the
Company's Common Stock. See "Price Range of Common Stock."
12. Product Liability. The nature of the Company's product may expose the
Company to significant product liability risks. The Company maintains product
liability insurance with coverage limits of $5 million per year on the female
condom. There can be no assurance that the Company will be able to maintain such
insurance on acceptable terms or that such insurance will provide adequate
coverage against product liability claims. While no product liability claims on
the female condom have been brought against the Company to date, a successful
product liability claim against the Company in excess of the Company's insurance
coverage could have a material adverse effect on the Company.
13. Future Sales of Common Stock. Sales of the Company's Common Stock in
the public market after this offering, or the perception that such sales may
occur, could adversely affect the market
10
<PAGE>
price of the Company's Common Stock. Upon completion of this offering (assuming
all 1,596,000 shares offered by the Company are sold, including the maximum
96,000 shares which may be issued to the Company's secondary placement agent in
this offering, and that the Company's primary placement agent in this offering
receives 54,000 shares and a Selling Shareholder exercises its warrant to
purchase the 50,000 shares which are currently vested under the warrant), the
Company will have 8,108,312 shares of Common Stock outstanding. Of these shares,
6,362,732 shares currently outstanding are, and all of the 1,596,000 shares
registered for sale hereby will be, eligible for resale in the public market by
persons other than "affiliates" of the Company (generally, a person who has a
control relationship with the Company) without regard to any resale limitations
under Rule 144 of the Securities Act. Further, the Company has issued options
and warrants to purchase an aggregate of 1,498,538 shares of Common Stock,
approximately 799,842 of which are exercisable within the next six months. The
Company has filed or intends to file registration statements under the
Securities Act to register the sale of the shares underlying these options and
warrants and, accordingly, any shares received upon exercise of these options or
warrants would also be freely tradeable without restriction by persons other
than affiliates. See "Shares Eligible for Future Sale."
14. Government Regulation. Reality is subject to regulation by the FDA,
pursuant to the federal Food, Drug, and Cosmetic Act (the "FDC Act"), and by
other state and foreign regulatory agencies. Under the FDC Act, medical devices
must receive FDA clearance before they can be sold. FDA regulations also require
the Company to adhere to certain "Good Manufacturing Practices" ("GMP"), which
include testing, quality control and documentation procedures. The Company's
compliance with applicable regulatory requirements is monitored through periodic
inspections by the FDA. The failure to comply with applicable regulations may
result in fines, delays or suspensions of clearances, seizures or recalls of
products, operating restrictions and criminal prosecutions and could have a
material adverse effect on the Company.
15. History of Losses; Sufficiency of Capital. The Company has incurred
net losses from continuing operations of $3,971,861, $5,501,767 and $8,446,958
in its fiscal years ended September 30, 1993, 1994 and 1995, respectively. The
Company has incurred a net loss from continuing operations of $2,439,492 for the
six months ended March 31, 1996. Chartex has incurred operating losses of
approximately $20,100,000, $3,500,000 and $5,900,000 for the years ended
December 31, 1993, 1994 and 1995, respectively, using a 1.5 U.S. dollar to U.K.
pound exchange rate.
11
<PAGE>
There can be no assurance that the Company will achieve a profitable level of
operations in the future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
16. Dilution. The net pro forma tangible book value of the Company at
March 31, 1996, as adjusted for the issuance of the 1,596,000 shares of Common
Stock offered by the Company hereby, the exercise by a Selling Shareholder of
the vested portion (50,000 shares) of its warrant to purchase 150,000 shares of
Common Stock at an exercise price of $3.50 per share, the issuance of 54,000
shares to the Company's primary placement agent in this offering and the
issuance of 15,580 shares to a Selling Shareholder was $10,066,752 or $1.24 per
share of Common Stock. See "Dilution." "Net tangible book value" is the book
value of the Company's tangible assets minus the Company's liabilities.
Investors who purchase Common Stock from the Company in this offering will
experience an immediate dilution of $3.16 per share. The foregoing discussion
assumes no exercise of any outstanding stock options, restricted stock or
warrants (other than the currently vested portion of the warrant held by the
Selling Shareholder). As of the date of this Prospectus, options and warrants
(other than the vested portion of the warrant held by the Selling Shareholder)
to purchase 1,498,538 shares of Common Stock are outstanding and exercisable as
to 799,842 shares. If any options or warrants with an exercise price of less
than the public offering price per share are exercised, there will be further
dilution to new investors. See "Dilution."
17. Competition. The Company believes that there is currently no other
female condom sold in the world. The Company is aware of at least one other
party that is currently developing an intravaginal pouch which could compete
with Reality. This party has obtained a patent on their device. Chartex
instituted a suit for patent infringement in December, 1990 against this other
company, its vice chairman and the alleged inventor of the competing
intravaginal pouch. The defendants brought a summary judgment motion alleging
that, regardless of the infringement or noninfringement of the Chartex patents
by the competing product, the defendants were entitled to exemption from
infringement litigation under 35 U.S.C. (S) 271(e)(1). This statute exempts
devices from patent infringement if the making or using of those devices is
"solely for uses reasonably related to the development and submission of
information" to the FDA. The summary judgment was granted based upon a review of
the statutory section expressed in a Northern District of California decision
which is pending under appeal to the U.S. Court of Appeals for the Federal
Circuit. The summary judgment motion against Chartex has been appealed by
Chartex to the U.S. Court of Appeals for the Federal Circuit. There can be no
assurance as to the breadth or degree of protection that the Chartex patents
will afford Chartex and the Company.
Other parties may also seek to develop an intravaginal pouch which
does not infringe Chartex's patents. These products, if developed, could be
distributed by companies with greater financial resources and customer contacts
than the Company.
There are a number of other products currently marketed which have a
higher degree of accepted efficacy for preventing conception. These products
include birth control pills, Norplant and Depo Provera. However, other than the
female condom, only the male condom is generally recognized as being efficacious
in preventing STDs. Companies manufacturing these products are generally larger
than the Company and have access to greater resources than the Company. In
addition, the female condom is generally sold at the retail level at between
$2.75 and $3.00 per device. This price is comparatively greater than the price
of the male condom. Accordingly, the female condom will not be able to compete
with the male condom solely on the basis of price.
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from its sale of 1,596,000 shares of Common
Stock hereunder (including the 96,000 shares which may be issued to the
Company's secondary placement agent in consideration of its services to the
Company) and the exercise of the portion of a Selling Shareholder's warrant
which is currently vested (50,000 shares) are estimated to be approximately
$6,410,000, based on the public offering price of $4.40 per share for the
1,500,000 shares to be sold by the Company for cash and the exercise price of
$3.50 per share for the 50,000 vested warrant shares and after deducting
underwriting commissions of $120,000 and estimated expenses of $245,000. If the
Selling Shareholder's warrant vests as to the remaining 100,000 shares and the
warrant is exercised by the Selling Shareholder for such shares, the Company
would receive an additional $350,000 in exercise price from this Selling
Shareholder. The Company will not receive any of the proceeds from the sale of
the shares of Common Stock by the Selling Shareholders.
The Company intends to use net proceeds from this offering, in order of
priority, as follows:
. $0.5 million to repay a (Pound)312,500 promissory note issued by the Company
as partial consideration for the Chartex acquisition. The note is due July 31,
1996 and bears interest at LIBOR plus 1-1/8%.
. $0.2 million to make a partial prepayment on a (Pound)520,000, noninterest
bearing promissory note issued by the Company as partial consideration for the
Chartex acquisition. The terms of the note require a partial prepayment upon the
Company's receipt of certain government grant funds which the Company received
in 1996.
. $1.3 million to fund the Company's operating and working capital needs
through July 31, 1996.
. $4.0 million (including amounts necessary for marketing the female condom in
the U.S., the U.K. and the global public sector market) to fund the Company's
operating and working capital needs from August 1, 1996 through September 30,
1997, the date when the Company currently anticipates achieving a positive cash
flow.
Any remaining net proceeds to repay a $1.0 million promissory note due on
November 21, 1996 and a $1.0 million promissory note due on March 25, 1997.
These notes each bear interest at 12% per year. The amounts borrowed under these
notes were used by the Company to make certain payments required in connection
with the Chartex acquisition and to provide working capital, respectively. See
"Certain Transactions."
Because the Shares are being offered by the Company on a "best efforts"
basis with no required minimum, the Company may sell less than all of the Shares
offered hereby. In such event, the Company would receive less proceeds from this
offering, which could have a material adverse effect on the Company. If the
Company receives less proceeds than would be necessary to accomplish all of the
above-specified uses of the proceeds, the Company will reduce or eliminate its
U.S. and U.K. marketing expenditures (approximately $3.4 million through
September 30, 1997) and use the proceeds otherwise in the order of priority
indicated above. This could result in a slower development of the business or
the Company's inability to continue operations.
CAPITALIZATION
The following table sets forth the unaudited short-term indebtedness and
capitalization of the Company as of March 31, 1996 and as adjusted to reflect
the issuance and sale by the Company of 1,500,000 shares of Common Stock offered
hereby and after deducting estimated offering expenses, and the application of
the net proceeds thereof, the issuance by the Company of 50,000 shares to a
Selling Shareholder upon its exercise of the vested portion of its warrant, the
issuance by the Company of 15,580 shares to a Selling Shareholder which occurred
in April 1996, the issuance by the Company of 54,000 shares to the Company's
primary placement agent and the issuance by the Company of 96,000 shares to the
Company's secondary placement agent in this offering.
13
<PAGE>
<TABLE>
<CAPTION>
March 31, 1996
-----------------------
Actual As Adjusted
--------- ------------
<S> <C> <C>
(in thousands)
Unaudited
Short-term indebtedness:
Current portion of long-term debt and
capital lease obligations............ $ 2,167 $ 2,167
Notes payable to shareholders.......... 2,160 2,160
-------- --------
$ 4,327 $ 4,327
======== ========
Long-term debt and capital lease
obligations, less current
maturities............................. $ 633 $ 633
Stockholders' equity:
Class A Preferred Stock, par value $.01
per share, 5,000,000 shares
authorized, no shares issued and
outstanding.......................... -- --
Common Stock, par value $.01 per share,
15,000,000 shares authorized
6,392,732 shares issued and
outstanding (8,108,312 shares as
adjusted)............................ 64 81
Additional paid-in capital............. 29,411 35,805
Foreign currency translation (loss).... (20) (20)
Accumulated deficit.................... (24,368) (24,368)
-------- --------
Total stockholders' equity............. 5,087 11,498
-------- --------
Total capitalization.................. $ 5,720 $ 12,131
======== ========
</TABLE>
14
<PAGE>
DILUTION
The net tangible book value of the Company at March 31, 1996 was $3,656,752
or $0.57 per share of Common Stock. Without taking into account any changes
after March 31, 1996, other than to give effect to the issuance of the 1,500,000
shares by the Company to the public in this offering, the issuance of 54,000
shares to the Company's primary placement agent in connection with this
offering, the issuance of 96,000 shares to the Company's secondary placement
agent in this offering, the issuance of 15,580 shares to a Selling Shareholder
in April 1996 and the issuance of 50,000 shares to a Selling Shareholder upon
exercise of the vested portion of its warrant to purchase 150,000 shares and
estimated offering expenses of $245,000 and underwriting discounts of $120,000,
the pro forma net tangible book value of the Company was $10,066,752 or $1.24
per share of Common Stock, representing an immediate dilution of $3.16 per share
to investors who purchase Common Stock from the Company in this offering and an
immediate increase of $0.67 per share to existing shareholders. "Net tangible
book value" is the book value of the Company's tangible assets minus the
Company's liabilities.
The following table illustrates the dilution in net tangible book value per
Share to investors in the offering:
<TABLE>
<CAPTION>
<S> <C>
Assumed public offering price.................... $4.40
Net tangible book value per share
at March 31, 1996(1)................. $0.57
Increase attributable to sales of
shares to new investors(2)........... 0.67
Pro forma net tangible book value
per share after offering(2)..................... 1.24
-----
Dilution per Share to new investors.............. $3.16
=====
</TABLE>
- ---------------------
(1) "Net tangible book value per share" represents the amount of total tangible
assets less total liabilities divided by the number of outstanding shares
of Common Stock.
(2) Includes the issuance of 15,580 shares of stock to John A. Wundrock and
assumes the issuance of 50,000 shares to C.C.R.I. Corporation upon exercise
of the currently vested portion of its warrant at the exercise price of
$3.50 per share. See "Principal and Selling Shareholders" and "Plan of
Distribution."
The following table sets forth as of March 31, 1996, the number of shares
of Common Stock purchased from the Company, the total consideration paid and the
average price per share of Common Stock paid by existing shareholders and new
investors purchasing shares of Common Stock in this offering, at the offering
price of $4.40 per share for the 1,500,000 shares, $3.50 per share for the
50,000 shares to be received upon exercise of the vested portion of the warrant
and $0 for the 15,580 shares to John A. Wundrock, the 54,000 shares to the
Company's primary placement agent and the 96,000 shares to the Company's
secondary placement agent.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
---------------- ------------------- Average Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders 6,392,732 79% $29,475,630 81% $4.61
New investors 1,715,580 21% 6,775,000 19% $3.95
--------- --- ----------- ---
TOTAL 8,108,312 100% $36,250,630 100%
========= === =========== ===
</TABLE>
15
<PAGE>
The foregoing discussion and tables assume no exercise of any outstanding
stock options, warrants (other than the vested portion of the warrant held by
the Selling Shareholder) or restricted stock grants. See "Plan of Distribution."
As of the date of this Prospectus, options and warrants (other than the vested
portion of the warrant held by a Selling Shareholder) to purchase 1,498,538
shares of Common Stock are outstanding and are currently exercisable as to
approximately 799,842 shares. To the extent any options with an exercise price
of less than the public offering price per share are exercised, there will be
further dilution to new investors.
DIVIDENDS
The Company has not paid any cash dividends on its Common Stock and does
not expect to pay any cash dividends in the foreseeable future. The Company
intends to reinvest its earnings in the continued development and expansion of
its business.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock trades on the American Stock Exchange under the
symbol FHC. As of May 20, 1996, there were approximately 491 holders of record
of the Common Stock.
The following table sets forth the historical high and low sale prices of a
share of the Common Stock. For the first quarter of fiscal 1994 through the
first quarter of fiscal 1995, the prices shown are actual sales prices as
reported on the Nasdaq Small-Cap Market. On January 26, 1995, the Common Stock
was listed for trading on the American Stock Exchange. Accordingly, for the
second quarter of fiscal 1995 and beyond, the prices shown are actual sales
prices as reported on the American Stock Exchange.
<TABLE>
<CAPTION>
Sale Price
-------------------
Fiscal Year High Low
----------- ------- -------
1994
----
<S> <C> <C>
First Quarter $16 $10-1/2
Second Quarter 15 9-1/2
Third Quarter 14-1/4 9-1/2
Fourth Quarter 12-1/2 9-1/2
1995
----
First Quarter 10-3/4 3-3/4
Second Quarter 6-3/4 3-3/4
Third Quarter 4-3/4 2-3/8
Fourth Quarter 4 2-1/2
1996
----
First Quarter 3-15/16 2-1/2
Second Quarter 5 2-9/16
</TABLE>
See the Cover Page of this Prospectus for a recent sale price for a share
of the Common Stock on the American Stock Exchange.
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data for the five years in the period
ended September 30, 1995 has been derived from the consolidated financial
statements of the Company as audited by Ernst & Young LLP, independent auditors,
whose report with respect to the September 30, 1993, 1994 and 1995 financial
statements appears elsewhere in this Prospectus. The selected consolidated
financial data as of March 31, 1996 and for the six months ended March 31, 1995
and 1996 has been derived from the unaudited condensed consolidated financial
statements of the Company appearing elsewhere in this Prospectus. The following
data are qualified by reference to and should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included elsewhere in this
Prospectus and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
Year Ended September 30 Six Months Ended
----------------------- March 31,
---------
1991 1992 1993 1994(1) 1995 1995 1996(2)
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands, Except Share and per Share Date)
OPERATING STATEMENT DATA:
Net Revenues:
Continuing Operations -- -- $ 25 $ 1,672 $ 2,179 $ 983 $ 731
========== ========== ========== ========== ========== ========== ==========
Discontinued Operations $ 13,350 $ 11,258 $ 12,484 $ 14,503 $ 13,488 $ 4,445 $ 3,258
========== ========== ========== ========== ========== ========== ==========
Income (Loss) from:
Continuing Operations $ (409) $ (4,195) $ (3,972) $ (5,502) $ (8,447) $ (5,215) $ (2,439)
Discontinued Operations (1,071) (126) 236 2,502 65 (620) (4)
---------- ---------- ---------- ---------- ---------- ---------- ----------
$ (1,480) $ (4,321) $ (3,736) $ (3,000) $ (8,382) $ (5,835) $ (2,443)
========== ========== ========== ========== ========== ========== ==========
Weighted Average Number of
Common Shares Outstanding 3,278,108 3,492,692 3,896,423 4,849,160 6,023,460 5,666,522 6,392,732
========== ========== ========== ========== ========== ========== ==========
Income (loss) per Common and
Common Equivalent Share:
Continuing Operations $ (.12) $ (1.20) $ (1.02) $ (1.13) $ (1.40) $ (0.92) $ (.38)
Discontinued Operations (0.33) (0.04) 0.06 0.51 0.01 (0.11) --
---------- ---------- ---------- ---------- ---------- ---------- ----------
$ (0.45) $ (1.24) $ (0.96) $ (0.62) $ (1.39) $ (1.03) $ (0.38)
========== ========== ========== ========== ========== ========== ==========
Cash Dividends Declared
per Share -- -- -- -- -- -- --
BALANCE SHEET DATA AT
END OF PERIOD:
Total Assets:
Continuing Operations $ 3,996 $ 2,444 $ 3,615 $ 9,246(3) $ 6,575 N/A(4) $ 11,518
Discontinued Operations:
Total 4,229 7,662 6,461 9,401 9,540 N/A(4) --
Less Liabilities and
Minority Interest (2,989) (4,399) (2,886) (2,363) (2,376) N/A(4) --
---------- ---------- ---------- ---------- ---------- ----------
1,240 3,263 3,575 7,038(5) 7,164 N/A(4) --
---------- ---------- ---------- ---------- ---------- ----------
$ 5,236 $ 5,707 $ 7,190 $ 16,284 $ 13,739 N/A(4) $ 11,518
========== ========== ========== ========== ========== ==========
Long-Term Indebtedness:(6)
Total $ 663 $ 1,933 $ 1,869 $ 1,827 $ 1,729 N/A(4) $ 2,800
Discontinued Operations 163 1,933 1,869 1,742 1,583 N/A(4) --
---------- ---------- ---------- ---------- ---------- ----------
Continuing Operations $ 500 $ -- $ -- $ 85 $ 146 N/A(4) $ 2,800
========== ========== ========== ========== ========== ==========
Stockholders' Equity:
Continuing Operations $ 3,470 $ 2,192 $ 763 $ 5,639 $ 388 N/A(4) $ 5,087
Discontinued Operations 1,240 3,263 3,575 7,038 7,163 N/A(4) --
========== ========== ---------- ---------- ---------- ----------
$ 4,710 5,455 4,338 12,677 7,551 N/A(4) 5,087
========== ========== ========== ========== ========== ==========
Book Value Per Share:
Continuing Operations $ 1.06 $ 0.59 $ 0.19 $ 1.04 $ 0.06 N/A(4) $ 0.80
Discontinued Operations 0.38 0.88 0.87 1.31 1.12 N/A(4) --
---------- ---------- ---------- ---------- ---------- ----------
$ 1.44 $ 1.47 $ 1.06 $ 2.35 $ 1.18 N/A(4) $ 0.80
========== ========== ========== ========== ========== ==========
</TABLE>
- ----------------------------------------
17
<PAGE>
(1) Includes results related to the commencement of the U.S. marketing and
distribution of Reality beginning in the fourth quarter of fiscal 1994.
(2) The Company completed the sale of its wholly-owned subsidiary, WPC
Holdings, Inc., on January 29, 1996. Accordingly, information on
discontinued operations applies for the period ended January 29,
1996.
(3) In February 1994, the Company received $10.8 million (net) from a
private placement of 1,250,000 shares of Common Stock. See Note 5 below
and "Note 10 to Notes to Consolidated Financial Statements."
(4) Balance sheet information as of March 31, 1994 was not deemed
necessary.
(5) In December 1993, Holdings received $2,299,787 from the Disposer Care
licensing litigation settlement. Also, approximately $1 million of the
proceeds from the February 1994 private placement of Common Stock was
allocated to Holdings.
(6) Includes current portion.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Net revenues by industry segment were as follows:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended September 30, March 31,
-------------------------------------------- -------------------------
1993 1994 1995 1995 1996
------------ --------------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
CONTINUING OPERATIONS
Consumer health care--Reality $ 25,379 $ 1,671,885 $ 2,179,155 $ 982,902 $ 730,508
=========== =========== =========== =========== ===========
DISCONTINUED OPERATIONS
Leisure time $10,204,600 $10,140,690 $11,059,196 $ 3,487,646 $ 2,429,428(1)
Institutional Health Care 1,620,924 1,447,890 1,236,685 594,082 410,643(1)
Other 658,455 2,914,595(2) 1,191,681 363,684 418,275(1)
----------- ----------- ----------- ----------- -----------
$12,483,979 $14,503,175 $13,487,562 $ 4,445,412 $ 3,258,346
=========== =========== =========== =========== ===========
Operating results were as follows for the periods indicated:
Six Months Ended
Year Ended September 30, March 31,
------------------------------------------- -------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
Continuing operations $(3,971,861) $(5,501,767) $(8,446,958) $(5,214,740) $(2,439,492)
Discontinued operations 235,861 2,501,633 64,599 (619,747) (4,461)
----------- ----------- ----------- ----------- -----------
TOTALS $(3,736,000) $(3,000,134) $(8,382,359) $(5,834,487) $(2,443,953)
=========== =========== =========== =========== ===========
</TABLE>
_____________________
(1) Net revenues are for the period October 1, 1995 through January 29, 1996,
the date Holdings was sold by the Company.
(2) Includes a $2,299,787 nonrecurring gain on settlement of a licensing
litigation matter.
On March 10, 1995 the Company's Board of Directors (the "Board") approved a
formal plan to dispose of its Holdings subsidiary which included the leisure-
time, institutional health care and other products segments. The Board believed
that the diverse product offerings by the Company lacked focus and synergy and
may have had a negative effect on the market value of the Company's Common
Stock. Accordingly, the Board believed that continuing with both businesses on
a consolidated or separate basis would detract from and weaken both businesses,
potentially reducing shareholder value. As a result of the Board's decision,
the Company reclassified financial information to reflect Holdings' operations
as a discontinued segment. Continuing operations reflect corporate and female
condom operations. On June 20, 1995, the Company entered into a definitive
agreement with a third party to sell Holdings for consideration valued at $8.285
million and, on January 29, 1996, completed the sale. See Notes 3 and 16 to the
Company's September 30, 1995 Consolidated Financial Statements and Note 5 to the
Company's March 31, 1996 Condensed Consolidated Financial Statements for further
information on the disposal of and presentation of Holdings.
19
<PAGE>
During the fourth quarter of fiscal 1995 the Company commenced discussions
regarding the possible acquisition of Chartex. Chartex is the owner of the
intellectual property and proprietary manufacturing technology for the female
condom, the Company's sole continuing product. The Company previously licensed
its rights to market and distribute Reality in its territories from Chartex. On
November 20, 1995, the Company signed a definitive agreement to purchase Chartex
and on February 1, 1996, consummated the Chartex Acquisition. See Note 18 to
the Company's September 30, 1995 Consolidated Financial Statements and Note 6 to
the Company's March 31, 1996 Condensed Consolidated Financial Statements for
further information on the acquisition of Chartex.
The purchase of Chartex provides the Company with certain worldwide
intellectual property relating to the female condom, including patents which
have been issued in the U.S., Japan and the European Union, proprietary
manufacturing technology and a state-of-the-art manufacturing facility. The
Chartex Acquisition also resulted in the elimination in consolidation of all
previously recorded and contingent liabilities, including royalties, from the
Company to Chartex, along with related prepaid royalties on the books of the
Company. The Chartex Acquisition also enables the Company to develop worldwide
strategies for the production and marketing of the female condom to consumers
and the public sector. In addition, the Chartex Acquisition permits the Company
to consider U.S. and worldwide partners on an unencumbered basis.
As a result of the Chartex Acquisition, the Company does not believe that
its historical results of operations are necessarily indicative of future
results.
The Company is a start-up female health company with a single, unique
product, the female condom. From 1987 through late fiscal 1994 the Company's
continuing operations were focused on developing and seeking FDA approval of the
female condom. As a result, the Company has incurred significant losses related
to the research and new product development expenses incurred. The Company has
also incurred significant expense related to minimum royalties under its prior
license agreement for the exclusive right to market the female condom in certain
territories.
The female condom is a revolutionary new product which is in the early
stages of commercialization. The female condom has been on retailers' shelves
in the United States since approximately September 1994 and has been launched in
the U.K. and 14 other countries between 1992 and 1995. Since such time, sales
have been substantially lower than management's expectations. Accordingly, the
ultimate level of consumer acceptance of the female condom is not yet known.
Although management believes that with additional marketing and consumer
education, sales will increase, if sales do not significantly increase, the
Company will continue to report operating losses and may experience significant
inventory write-downs in the future and, ultimately, the Company's viability may
be in jeopardy. For the period beginning with the commercial launch of Reality
in the United States in the fourth quarter of fiscal 1994 and ending on March
31, 1996, the Company sold approximately 3.4 million Reality devices. The
Company's average selling price during this period was $1.33 per device,
including 250,000 devices sold to Family Health International for a clinical
acceptability study (supported by the USAID) at a discounted priced. From 1992
through March 31, 1996, Chartex sold approximately 5.4 million devices
(exclusive of sales to the Company) at an average selling price of less than
$1.00 per device. The Company estimates that approximately 18.8 million female
condoms must be sold annually worldwide at an average selling price of $1.00 per
device to break even on a cash basis. (The $1.00 per device average selling
price is based on the Company's estimate of projected mix in sales of devices
based on current prices.) This is equivalent to annual worldwide use by
approximately 523,000 women three times per month.
20
<PAGE>
Female condoms sold by the Company were as follows for the periods
indicated:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended September 30, March 31,
---------------------------- -----------------
1993 1994 1995 1995 1996
------ --------- --------- ------- --------
<S> <C> <C> <C> <C> <C>
Number of female
condoms sold 19,860 1,173,750 1,647,958 666,588 597,128
======= ========= ========= ======= =======
</TABLE>
Because the female condom is a start-up business and the commercial
distribution of the female condom in the United States only began in July 1994,
with promotion beginning in mid-September 1994 management believes it is too
early to tell what level of sales the female condom will ultimately achieve.
Sales of the female condom since its commercial launch have been less than
management's expectations. Management believes that it will take longer and
require more resources than originally expected to be able to determine the
ultimate level of sales of the female condom.
The commercial launch of the female condom began late in fiscal 1994.
Fiscal 1994 operating results include the results of the national launch of the
female condom. Fiscal 1993 operating results reflect the significant level of
development associated with the female condom. As a result, fiscal 1993 and
fiscal 1994 are not indicative of future U.S. results.
While overall female condom sales have developed more slowly than
anticipated, there have been encouraging developments: 38 states covering
approximately 85% of the population have approved the female condom for
reimbursement under Medicaid or similar programs; in a survey of 4,500 OB/GYN
and family practice physicians, 55% indicated they would recommend the female
condom 6-21 times per week; in an independent acceptance study conducted in New
York City and published in the July 4, 1995 issue of "Family Planning
Perspectives," 66% of the women participants liked the female condom and 73%
reported they preferred it to the male condom. In a study conducted by Family
Health International and published in the December 1994 issue of the American
Journal of Public Health, 80% of the participants indicated they would recommend
the female condom to a friend, and in a study completed at Princeton University
it was estimated that proper use of the female condom with every sex act could
reduce the chance of a woman contracting AIDS from an infected partner by as
much as 90%.
To date, 23 state, 80 county, 27 city and 4 military agencies are female
condom users. The states include Indiana, Illinois, Maryland, Massachusetts,
Michigan, New York and Pennsylvania. In addition, county agencies in 24 states
have purchased the female condom, including counties in California, Colorado,
Florida, Maryland, Michigan, New York, Ohio, Texas and Virginia. The city
agencies purchasing the female condom include Jacksonville, Florida; Chicago,
Illinois; New Orleans, Louisiana; Baltimore, Maryland; Minneapolis, Minnesota;
Kansas City, Missouri; Newark, New Jersey; New York, New York; Columbus, Ohio;
and Philadelphia, Pennsylvania.
Currently, the U.S. Government is providing more than $8 million in
funding for female condom clinical studies which focus on behavior, use,
acceptability and efficacy and comparisons to the male condom. As discussed
below, the Company has employed an education-based approach to the introduction
of the female condom as a completely new consumer product. The Company believes
that this approach will ultimately result in the successful development of a
market for the female condom. However, there can be no assurances that the
female condom will ultimately be a commercially successful product for the
Company.
The Company is particularly dependent upon the services of O.B. Parrish,
Chairman of the Board and Chief Executive Officer of the Company, and Mary Ann
Leeper, Ph.D., President and Chief Operating Officer of the Company. The
Company has an employment agreement with Dr. Leeper (see
21
<PAGE>
Note 9 of the Notes to Consolidated Financial Statements). The loss of the
services of Mr. Parrish or Dr. Leeper could adversely impact the Company's
operations.
The manufacture, sale and distribution of the female condom is regulated
by a number of governmental agencies. The Company is not aware of any actions
by these regulating agencies which would adversely impact the Company's
financial condition or results of operations.
COMMERCIAL LAUNCH OF REALITY IN THE U.S.
The Company's launch of Reality began in September 1994 with a national
press conference in New York City. The program was designed to reach women
through public efforts, as well as through traditional marketing and promotional
programs. Roundtable discussions with leading women's health professionals and
advocates took place in late fiscal 1994 and early fiscal 1995 in seven major
U.S. cities and were followed in most cases by a press conference with intensive
pre- and post-event contact with local print and broadcast media. Print
advertising directed to the medical and health care provider community began in
early September and was followed by extensive consumer print advertising in the
November and December issues of major women's magazines. During a period from
September 1994 through January 1995, the Company engaged over 60 sales
representatives, through an independent sales organization, to call on and
"detail" Reality to OB/GYN practitioners and general practice physicians.
During this period, over 17,500 such calls were made. The launch effort also
included a direct mail campaign to over 30,000 physicians and 65,000 retail
pharmacists. In addition, the Company employed four area managers who made
direct calls on physicians and clinics and who have provided in-service
education to health care providers in public clinics. After January 1995, the
Company's promotional efforts have been reduced due to limited availability of
capital. The Company's efforts have been focused primarily on print and radio
consumer advertising together with retail trade support. Efforts have also been
directed towards getting the female condom approved for Medicaid reimbursement.
In addition, a new marketing campaign was initiated in March 1996. The program
continues to be education based but is more specific regarding use of the female
condom. It is directed to the private and public sectors and includes outreach
programs, seminars, workshops and advertising in young adult magazines and on
urban music radio stations. The educational components of this marketing
campaign answer the questions of what the female condom is, how it is used, how
it protects, why it is important to practice safer sex and who should try the
female condom. The marketing campaign also emphasizes that using the female
condom feels good. The outreach program has been augmented in several cities
and states by the respective departments of health. Examples are ongoing
programs in Philadelphia, Pennsylvania and Chicago, Illinois. These cities have
purchased large quantities of the female condom and use them for on-the-street
outreach programs in communities whose populace is at high risk to sexually
transmitted diseases. Currently, 38 states have listed the female condom in
state funded/Medicaid or similar programs. The female condom is distributed in
all 50 states, and is available in over 35,000 retail pharmacy and mass
merchandise outlets and is free or at a significantly discounted price in over
1,000 public clinics.
RESULTS OF OPERATIONS--CONTINUING OPERATIONS
SIX MONTHS ENDED MARCH 31, 1996 COMPARED TO SIX MONTHS ENDED MARCH 31, 1995
The Company reported a $252,394 decrease in net revenues to $730,508 for
the six months ended March 31, 1996 compared to the same period of the preceding
year. Net revenues pertain exclusively to sales of the female condom.
Approximately 63% of the female condom sales dollars for the six months ended
March 31, 1996 were sales to the public sector and 37% were trade sales compared
with 33% to the public sector and 67% trade sales for the same period in the
preceding year. Management believes the percentage changes in the mix between
public and trade sector sales resulted from several factors. Trade sales for the
1995 period included a portion of the initial stocking for the national launch
of the female condom in the U.S. In addition, 1996 net revenues to the trade
sector were negatively impacted due to reduced marketing and promotion of the
female condom due to limited capital available. Conversely, 1996 public sector
sales have increased over the 1995 period as additional public sector
governmental agencies approved the condom for distribution and began purchasing
in quantity. See "Risk Factors--Reliance on Product Line; Lower than Anticipated
Reality Sales; Operating Losses."
22
<PAGE>
Costs of products sold of $1,197,455 for the six months ended March 31,
1996 include a $300,000 inventory writedown and a $209,291 charge for Chartex
factory overhead costs (depreciation of $123,460 and indirect production labor
of $85,831) resulting from idle production capacity. After adjustment for the
above, the Company reported a 6% gross margin for the six month period ended
March 31, 1996 compared to a 30% gross margin for the same period of the
preceding year. These results reflect the significant change in the sales mix
which occurred between the "public" sector and "trade" sector. The average
selling price per device decreased from $1.47 per device to $1.22 per device.
This is reflective of the lower "public" sector pricing associated with bulk
purchases of the product by governmental agencies.
Sales and marketing expenses decreased $2,294,890 from $3,092,224 for the
six month period ended March 31, 1995 to $797,334 for the six month period ended
March 31, 1996. Prior year amounts included the marketing and promotion
associated with the national launch of the female condom in the U.S. Because of
the Company's limited working capital availability, marketing and promotion
activities were curtailed during the current period.
General and administrative expense totaled $930,918 for the six month
period ended March 31, 1996 compared to $603,575 for the same period of the
preceding year. The acquisition of Chartex and the addition of Chartex's general
and administrative expenses, including depreciation and amortization of $47,257
account for this increase.
Research and development expense increased $87,197 to $154,612 for the
six-month period ended March 31, 1996 compared to $67,415 for the same period of
the prior year. The increase relates to costs incurred in connection with on-
going government-funded clinical trials.
The Company has not recorded any exclusivity fees for the current year.
Prior year amounts totaled $1,727,390. The Company ceased accruing further
exclusivity fees under its licensing agreements with Chartex beginning with the
fourth quarter of fiscal 1995 due to events which occurred in the fourth quarter
which made payment of any exclusivity amounts unlikely. See Note 6 of the Notes
to Unaudited Condensed Consolidated Financial Statements for a discussion of the
treatment of the remaining accrued exclusivity amounts.
Nonoperating expenses increased $73,615 to $89,681 for the six month
period ended March 31, 1996 compared to the same period of the prior year. This
increase is due to interest on borrowings from shareholders incurred during the
current year in addition to the interest on Chartex debt obligations since the
acquisition.
23
<PAGE>
YEAR ENDED SEPTEMBER 30, 1995 COMPARED TO SEPTEMBER 30, 1994
The Company reported a $507,270 increase in net revenues to $2,179,155 for
the year ended September 30, 1995 compared to the preceding year. Net revenues
pertain exclusively to sales of the female condom. As previously indicated, the
nationwide commercial launch of Reality in the U.S. commenced in the fourth
quarter of fiscal 1994 and continued into the first quarter of fiscal 1995.
Approximately 46% of the Reality sales for the year ended September 30, 1995
were retail trade sales and 54% were sales to the public sector. In fiscal
1994, approximately 85% of Reality sales were to the retail trade and 15% were
to the public sector. Completion of the "pipeline" filling for the trade in
early 1995 followed by public sector sales to several larger cities in fiscal
1995 contribute to this change in mix. The Company reported lower than expected
sales of Reality. Management believes that sales of Reality have been less than
anticipated due to its revolutionary nature as the first female condom, the
seriousness of the consumer decision to use it and the understanding required to
use a new class of product.
The Company reported a $8,446,958 loss from continuing operations for the
year ended September 30, 1995 compared to a loss of $5,501,767 for fiscal 1994.
The $2,945,191 increase in loss
24
<PAGE>
from continuing operations in fiscal 1995 compared to fiscal 1994 is primarily
due to extensive marketing costs associated with the commercial launch and
national distribution of Reality in the U.S. and a $1,000,000 write-down related
to slow-moving inventory.
The Company reported a 28% gross margin in fiscal 1995 before the
$1,000,000 inventory write-down compared to 32% in fiscal 1994. The decrease in
gross margin percentage relates primarily to a shift in mix of sales between
trade and public sector, with public sector sales carrying reduced pricing. The
Company recorded a $1,000,000 inventory write-down due to the continued lower
than expected sales of Reality and considering the level of product inventory on
hand at September 30, 1995 and the product's shelf life. This inventory is
saleable and stability studies are underway which management believes will
further extend the shelf life of the inventory. Product purchases were impacted
by minimum purchase requirements under the Company's supply agreement with
Chartex. See Note 7 of the Notes to Consolidated Financial Statements for the
Company.
Selling expense, including the launch, aggregated $4,276,610 for fiscal
1995 compared to $1,774,754 for fiscal 1994. During much of the prior year
period, Reality was still being developed and as a result was not actively
marketed. Current period expense includes 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 Company's marketing program. Current period
expenses also included expenses of the sales and marketing organization
established by the Company during the third quarter of fiscal 1994.
General and administrative expense totalled $1,042,715 in fiscal 1995
compared to $925,876 in fiscal 1994. In May 1994 the Company formed The Female
Health Company as a division of the Company to fully capitalize on the
commercialization of Reality. Separate office space was leased, administrative
staff hired and accounting and reporting systems established. Fiscal 1995
results include a full year of expense related to this separate division.
Research and new product development expense decreased $354,535 to
$135,121 for fiscal 1995 compared to fiscal 1994, during most of which time
Reality was still being developed. Current year expense relates to costs
incurred in connection with on-going government-funded clinical trials. As a
condition of the FDA's approval of Reality, the Company agreed to provide
product and assistance (but not funding) in conjunction with these studies.
Reality exclusivity fees represents 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 $414,358 in fiscal 1995 compared to
fiscal 1994. Amounts were as follows:
25
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended
September 30,
------------------------
1994 1995
----------- -----------
<S> <C> <C>
U.S. $2,585,771 $2,289,727
Less reduction in prepaid royalties
based on actual product sales (156,388) (183,721)
---------- ----------
2,429,383 2,106,006
Canada 230,580 172,935
Mexico 333,336 300,000
---------- ----------
$2,993,299 $2,578,941
========== ==========
</TABLE>
The $3,000,000 minimum exclusivity fee for the U.S. royalty period
ended February 27, 1994 was for an 18-month period. Subsequent royalty periods
were for 12 months. As explained in Note 7 to the Notes to Consolidated
Financial Statements, the Company ceased accruing further exclusivity shortfall
amounts as of June 30, 1995.
Nonoperating expense for fiscal 1995 relates to interest on the
Company'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.
CONSUMER HEALTH CARE SEGMENT (REALITY): Because of the Company's
decision to sell Holdings, the Company's results from continuing operations
include only the Company's remaining segment (Consumer Health Care),
nonoperating expense and corporate charges. The Consumer Health Care segment's
operating loss (which excludes corporate charges and nonoperating expense)
increased from a loss of $5,417,562 in fiscal 1994 to a loss of $7,952,993 in
fiscal 1995. See above for a discussion of the factors resulting in the
increased loss.
YEAR ENDED SEPTEMBER 30, 1994 COMPARED TO YEAR ENDED SEPTEMBER 30, 1993
Net revenues increased from $25,379 in fiscal 1993 to $1,671,885 in
fiscal 1994 as the Company commenced the U.S. commercial launch of Reality
during the fourth quarter of fiscal 1994.
The Company's loss from continuing operations increased $1,529,906 to
a loss of $5,501,767 for fiscal 1994 compared to a loss of $3,971,861 for fiscal
1993. Extensive marketing costs associated with the U.S. commercial launch of
Reality and establishment of the separate Female Health Company division more
than offset reduced product development costs and increased revenues associated
with the commercial launch of Reality.
Selling expense was $1,774,754 for fiscal 1994 compared to $-0- in
fiscal 1993. Fiscal 1994 amounts included $650,525 of product sales expense,
consisting of commissions, freight, product royalties, travel, sales personnel
costs and overhead. Marketing expense totalled $1,124,229 and included costs of
developing the advertising, marketing and commercial roll-out campaign for
Reality. Also included are costs related to the initial "detailing" of Reality
to OB/GYN and general practice physicians through an independent sales force
engaged by the Company on a contract basis and costs associated with press
conferences announcing the introduction of Reality. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for a
discussion of the events comprising the commercial launch of Reality.
General and administrative expense totalled $925,876 in fiscal 1994
compared to $101,609 in fiscal 1993. Fiscal 1994 consumer health care results
include approximately $189,000 of nonrecurring expenses associated with
formation of the separate operating unit, The Female Health Company, including
costs of hiring division personnel, office space procurement and installation of
computer and accounting systems. The remainder of the increase in general and
administrative expense is due to on-
26
<PAGE>
going expenses of this new division, including personnel costs. The Female
Health Company division had 16 employees at September 30, 1994 compared to none
in fiscal 1993.
Research and new product development expense totalled $489,656 in
fiscal 1994 compared to $1,103,790 in fiscal 1993, a decrease of $614,134 as the
Company completed the development phase and began to commercialize Reality in
fiscal 1994.
Reality exclusivity fees increased $226,837 in fiscal 1994 compared to
fiscal 1993. Amounts included were as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
September 30,
------------------------
1993 1994
----------- -----------
<S> <C> <C>
U.S. $2,166,667 $2,429,383
Canada 249,795 230,580
Mexico 350,000 333,336
---------- ----------
$2,766,462 $2,993,299
========== ==========
</TABLE>
The $3,000,000 minimum exclusivity fee for Reality for the U.S. royalty
period ended February 27, 1994 was for an 18-month period. Subsequent royalty
periods are for 12-month periods.
Interest income of $139,483 in fiscal 1994 is due to invested proceeds
from the Company's private placement of common stock.
CONSUMER HEALTH CARE SEGMENT (REALITY): As noted above, with the
decision to sell Holdings, the Company has continuing operations in only one
segment--Consumer Health Care. Other than corporate charges of $220,176 in
fiscal 1994 and $101,609 in fiscal 1993 and nonoperating income of $135,971 in
fiscal 1994 and $-0- in fiscal 1993, the Company's continuing operations reflect
the operations of the Consumer Health segment.
CORPORATE CHARGES
Corporate charges increased $118,567 to $220,176 in fiscal 1994
compared to fiscal 1993. Corporate functions were previously performed by
Holdings personnel. The Company has added corporate personnel to assume these
responsibilities. In addition, the Company incurred increased legal and
investor relations expense related to the restructuring of the Company's
operations.
FINANCIAL CONDITION
- -------------------
THE FOLLOWING DISCUSSION COVERS SIGNIFICANT CHANGES IN CERTAIN BALANCE
SHEET ACCOUNTS BETWEEN SEPTEMBER 30, 1995 AND MARCH 31, 1996.
Cash used in operations totaled $3,275,376 and was offset as the result
of net proceeds from new borrowings of $2,003,158 and $1,108,024 of net cash
remaining after the sale of Holdings and acquisition of Chartex.
Trade accounts receivable increased $242,386 to $657,475 primarily as a
result of the acquisition of Chartex trade receivables.
The Chartex acquisition added $626,034 of inventory at March 31, 1996.
This increase was offset by the additional reserve of $300,000 which the Company
took in the quarter ended March 31, 1996, and the $598,639 reduction of U.S.
inventory as the Company continues to sell on-hand product, resulting in a net
inventory reduction of $272,605 at March 31, 1996.
27
<PAGE>
Intangibles and other assets increased $2,169,968 to $2,569,030 at
March 31, 1996 as a result of the acquisition of Chartex's intellectual property
rights and patents of $1,488,060 and the receipt of a long-term note and
warehousing credit with a combined fair value of $1,035,000 as part of the
Holdings sale. Capitalized expenses associated with the sale of Holdings
($157,945) and acquisition of Chartex ($150,000) were eliminated upon completion
of these transactions.
Furniture, fixtures and equipment, net of accumulated depreciation
increased $3,572,108 primarily as a result of the Chartex acquisition.
Net current assets of discontinued operations of $3,913,511 and net
noncurrent assets of discontinued operations of $1,952,269 were eliminated in
conjunction with the sale of Holdings. See Note 3 and Note 5 to the Notes to
Unaudited Condensed Consolidated Financial Statements.
Notes payable to shareholders increased by $2,160,000 as a result of
bridge financing incurred during the current fiscal year. Proceeds were used to
fund pre-closing and on-going funding commitments to Chartex; to pay certain
expenses associated with the sale of Holdings and the purchase of Chartex; and
to provide working capital for current operations.
THE FOLLOWING DISCUSSION COVERS SIGNIFICANT CHANGES IN CERTAIN BALANCE
SHEET ACCOUNTS BETWEEN SEPTEMBER 30, 1994 AND SEPTEMBER 30, 1995.
Trade accounts receivable decreased $0.9 million at September 30, 1995
compared to September 30, 1994. The prior year balances reflect the fourth
quarter fiscal 1994 commercial launch and sell-in of product to retailers and
wholesales in the U.S.
Inventory (before obsolescence reserve) increased $1.6 million at
September 30, 1995 to $4.2 million. Reality product is sourced from Chartex,
which is based in London, England and, as a result, product lead-time is
approximately 30 days. The Company previously purchased product in accordance
with agreed upon purchase requirements from Chartex. In December 1994 the
Company downwardly adjusted its purchase requirements for Reality to reflect the
more gradual demand for Reality product post-launch. The Company does not
currently have outstanding purchase orders for Reality product. Current
inventory levels are higher than the Company would like. Reality product is
currently labeled with a two-year shelf life. Current data supports a three-
year shelf life. The Company applied for and received approval from the FDA to
extend the shelf life to three years.
Since the initial launch period for Reality (fourth quarter of fiscal
1994 and first quarter of fiscal 1995) the Company has not had sufficient
capital to promote and market Reality to the level it believes is required. The
Company believes that the reduced marketing spend during the fourth quarter of
fiscal 1995
28
<PAGE>
and early fiscal 1996 has resulted in lower than expected sales. As a result,
the Company has made an evaluation that it may not be able to sell all of its
existing inventory before the revised expiration period and therefore has
recorded a fourth quarter provision of $1 million to reflect estimated inventory
obsolescence. This reserve includes the cost of inventory which the Company has
determined it may not be able to sell or sell in the normal course of business
plus the estimated cost of "stickering" existing inventory to reflect the
extended shelf life.
Prepaid expense decreased $0.6 million at September 30, 1995 compared
to September 30, 1994. Consumer and professional ad space cost (which ran
during the first quarter of fiscal 1995) and inventoried sales kits and aids
utilized since September 30, 1994 accounted for the decrease in prepaid expense.
Net current assets of discontinued operations (exclusive of cash)
increased $0.6 million at September 30, 1995 compared to September 30, 1994.
During the same period, cash of discontinued operations decreased $0.2 million.
The Company had recorded prepaid royalties of $1.9 million as of
September 30, 1995 that pertain to Reality. Royalties were expensed as used in
accordance with the prior licensing contract.
Accounts payable remained relatively constant at $1.1 million at
September 30, 1995 compared to $1.2 million at September 30, 1994. Of the $1.1
million in accounts payable at September 30, 1995, approximately $1.0 million
relates to past due amounts to vendors generally incurred in marketing and
promotion of Reality before it was determined that sales were going to be lower
than expectations.
The Company had accrued minimum royalties for amounts due Chartex under
the Reality license agreements for the U.S., Canada and Mexico. Amounts accrued
at September 30, 1995 include minimum amounts due based on the pro-rata straight
line accrual of the annual minimum royalty since the last royalty payment
through June 30, 1995, at which time further accruals ceased (see Note 7 to the
Notes to Consolidated Financial Statements) less any reduction for prepaid
royalties utilized (based on actual product sales). Due to the amount spent by
the Company on marketing Reality during fiscal 1994 and early fiscal 1995 and
the lower than anticipated sales volume, the Company did not have the capital
necessary to make the minimum royalty payments and therefore early in fiscal
1995, the Company informed Chartex that it would not make when due the required
minimum annual royalty payments for the U.S., Canada and Mexico.
On February 1, 1996, the Company acquired the outstanding stock of
Chartex--see Note 18 to the Consolidated Financial Statements.
LIQUIDITY AND SOURCES OF CAPITAL
CASH PROVIDED BY (USED IN) OPERATIONS WAS AS FOLLOWS FOR FISCAL 1993, 1994 AND
1995 AND THE SIX MONTHS ENDED MARCH 31, 1995 AND 1996:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended September 30, March 31,
---------------------------------------- ---------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Continuing operations $(1,306,810) $(9,357,528) $(4,887,110) $(4,937,564) $(3,275,376)
Discontinued operations 1,518,698 1,693,852 255,553 (334,590) --
----------- ----------- ----------- ----------- -----------
$ 211,888 $(7,663,676) $(4,631,557) $(5,272,154) $(3,275,376)
=========== =========== =========== =========== ===========
</TABLE>
CONTINUING OPERATIONS: Cash used in fiscal 1995 of approximately $4.9
million generally results from cash operating losses. Reductions in post-
commercial launch receivables and reductions in
29
<PAGE>
prepaid expense generally were offset by increases in pre-obsolescence reserve
inventories. The Consumer Health segment was in a developmental stage through
the first half of fiscal 1994. The Company has historically incurred cash
operating losses relating to developmental expenses incurred and royalties paid
in connection with the female condom. Cash used in operations in fiscal 1994
includes $3.3 million in payments to Chartex for "exclusivity fees." The
remainder of the fiscal 1994 cash used in operations results from funding
operating losses and inventory purchases. The principal source of cash for these
expenditures has been the sale of Common Stock.
The significant usage of operating cash in the six months ended March 31,
1995 reflects the substantial sales and marketing expenses incurred in the
commercial launch of Reality in the U.S. combined with the lower than expected
sales during this period. Due to a shortage of available cash, the Company was
able to spend only nominal amounts on marketing Reality in the six months ended
March 31, 1996. For the six-month period ended March 31, 1996, the Company
incurred substantial cash operating losses that include operating cash for
Chartex since February 1, 1996 of approximately $0.6 million to support the cost
at the Chartex facility.
Although female condom sales to date have been significantly lower than
management anticipated, management believes that with additional marketing and
consumer education, sales will increase. Accordingly, the Company expects that
it will need to incur a significant amount of marketing and promotion
expenditures related to the female condom in fiscal 1996. The Company's ability
to continue marketing and promoting the female condom is dependent upon the
Company sourcing additional cash to stimulate consumer sales. Initial marketing
efforts will be directed at encouraging consumer trial of the product. Because
the Company has a significant level of "paid-for" inventory, proceeds from
increased sales of the female condom are expected to be able to fund a
meaningful portion of the estimated $2 million marketing and promotion effort in
the U.S. in fiscal 1996. The ultimate level of marketing expenditures required
after fiscal 1996 will depend in large part on the results of the Company's
fiscal 1996 marketing effort. Management believes it will be able to reasonably
predict the probable ultimate potential level of future sales by the end of
fiscal 1996 or soon thereafter and will, accordingly, be able to make
appropriate adjustments to the Company's marketing budget thereafter. At
present, the Company believes that its sales and marketing budget in the U.S.
for fiscal years after 1996 will be approximately $2.5 million to $3.5 million
per year and will be primarily funded through sales of the female condom. The
increase in the marketing budget after fiscal 1996 reflects the Company's
current intention to expand the marketing effort after fiscal 1996 to include
television advertisements which are more costly then print and radio media and
to increase the exposure of the female condom as consumers become more educated
regarding its use.
In November 1995, the Company signed an agreement to purchase 100% of the
outstanding stock of Chartex for cash and notes payable. The Chartex Acquisition
was completed on February 1, 1996. See Note 18 of the Company's Notes to
Consolidated Financial Statements and Note 6 of the Company's Notes to Unaudited
Condensed Consolidated Financial Statements.
In October and November 1995, the Company received $1,160,000 in proceeds
from newly-issued notes payable. See Notes 17 and 19 to the Company's Notes to
Consolidated Financial Statements. In March 1996, the Company received an
additional $1 million in proceeds from a one-year term note payable from a
shareholder.
Historically, the Company's operations and liquidity have been
significantly impacted by the development and commercial, U.S. rollout of the
female condom. In addition, the seasonal operating results of the Company's
Holdings subsidiary (included as a discontinued operation) have impacted the
Company's quarterly results and liquidity.
Due to the Company's January 1996 sale of Holdings and its February 1996
acquisition of Chartex, the Company does not believe that its historical
liquidity and capital structure are necessarily representative of expected
future structure or requirements.
30
<PAGE>
On November 30, 1995 the Company's working capital credit facility with
its bank terminated. The Company did not have any borrowings outstanding under
the facility at termination. Until the Company sources additional working
capital, the Company's and Chartex's operations will be required to be funded
from operations and from cash generated from the sale of Holdings, less cash
used to purchase Chartex.
The Company realized approximately $6.1 million in cash from the sale of
Holdings (net of transaction expenses). The total cash cost of the Chartex
Acquisition (including expenses) was approximately $5.2 million. The Company
had paid transaction expenses and certain pre-closing funding commitments to
Chartex (which amounts have already been included in arriving at the above
amounts) totaling approximately $1.3 million as of March 31, 1996. The $6.1
million in cash from the sale of Holdings less the $5.2 million in cash used to
acquire Chartex plus $1.3 million of cash expenses already paid at March 31,
1996 results in approximately $2.2 million of net cash which the Company
generated during its second fiscal quarter as a result of these transactions.
This amount was used to pay current liabilities (which primarily consisted of
accounts payable of $1 million) and the remaining $1.2 million was used to fund
combined current operations of Chartex and the Company.
At May 31, 1996 the Company had current liabilities of approximately $5.8
million. This amount includes $1.16 million of notes payable to shareholders
which are due in November 1996, $1.0 million of notes payable to shareholders
which are due in March 1997, a mortgage note loan of $1.7 million due in October
1996 and a $0.7 million note payable due in July 1996 in connection with the
acquisition of Chartex.
The Company's operating plan for the 10 month-period ending March 31,
1997 calls for cash needs as follows:
<TABLE>
<CAPTION>
<S> <C>
. Cash used in operations $3.1 million
. Investing activities
--Chartex purchase of equipment from ring supplier 0.3 million
. Financing activities
--repay notes payable to shareholders and capital
lease amounts 2.2 million
--repay note from Chartex Acquisition 0.7 million
--repay mortgage on Chartex manufacturing plant 1.7 million
------------
EXPECTED CASH NEEDS $8.0 million
============
</TABLE>
Management's plans call for raising additional working capital within the
next 10 months. The combined company (Chartex and the Company) is expected to
have negative cash flows until the third quarter of fiscal 1997. The Company
believes that it will need at least $0.4 million in cash per month during the
first year to fund the Company's operations and as a result will need to source
approximately $8.0 million by March 31, 1997, with approximately $1.0 million
required by June 30, 1996 and an additional $1.0 million required within one
month thereafter.
31
<PAGE>
The Company intends to seek additional capital from the following sources:
refinance of the Chartex manufacturing facility (including refinancing an
approximately $1.7 million mortgage and extracting up to $1.0 million of cash
from equity (appraised value in excess of current loan value)); up to $0.6
million from a working capital credit facility which would be based on eligible
accounts receivable; and up to approximately $6.2 million from sales of Common
Stock in this offering.
However, there can be no assurance that the Company will be able to source
all or any portion of these funds or that funds so sourced will be sufficient to
operate the Company until sales of the female condom generate sufficient
revenues to fund operations. In addition, any such funds raised may be costly
to the Company and/or dilutive to existing shareholders. If the Company is not
able to source the funds, the future of the Company would be in substantial
jeopardy. Depending on the level of sales of the female condom and estimated
operating losses, it may initially be difficult to source accounts receivable
financing.
Management is not aware of any material outstanding product liability
claims or lawsuits which would have a material adverse effect on the Company's
results of operations, financial position or cash flow. See Note 12 to the
Company's September 30, 1995 Consolidated Financial Statements.
The Company's current level of expenditures has been established to support
a higher level of revenues associated with the female condom. The Company will
continue to report operating losses until such revenues significantly increase
or the Company significantly reduces its cost structure. 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 female condom inventory and to capitalize on the existing investments
in the female condom's development, FDA approval and marketing to date in the
normal course of business.
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 anticipates that a material portion of the Company's future
sales will be in foreign markets. Sales in such foreign markets will be 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 impair the
Company's future sales in those countries.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF CHARTEX
Historically, the principal activity of Chartex was to bring unique
health care products to the world market and to exploit associated trademarks
and patents. Chartex has been primarily involved in the development, manufacture
and marketing of the first female condom, for which it is the owner of the
32
<PAGE>
trademark Femidom and several patents. Chartex has worldwide rights for
production and marketing of the female condom and has licensed certain rights to
third party licensees/marketers/distributors.
The following discussion has been prepared by management of the Company
based on a review of the historical financial statements of Chartex included
herein and based upon certain financial information obtained from Chartex.
Chartex's historical results reflect a start-up company with a revolutionary new
product. Chartex's financial results have been impacted by the fact that it has
spent significant amounts of funds on the acquisition and development of
proprietary manufacturing technology and the development of markets in which to
sell the female condom. Historically, Chartex's operating results were largely
funded by debt financing.
Because the purchase of Chartex by the Company results in the elimination
of a significant amount of debt and because the purchase price consideration for
Chartex was less than the fair value of its net assets (i.e., the Chartex
Acquisition is a "bargain purchase" for accounting purposes), the Company does
not believe that the historical operating results of Chartex are necessarily
representative of expected future results. Please refer to the Unaudited Pro
Forma Financial Statements included elsewhere in this Prospectus for a
discussion of the types of adjustments which result from consummation of the
Chartex Acquisition.
Chartex Historical Operating Results
- ------------------------------------
The following chart reflects the amount of Chartex's historical revenues
from sales of the female condom and from product licensing activities:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1992 1993 1994 1995
----- ----- ----- -----
((Pounds)000)
<S> <C> <C> <C> <C>
Net product sales to:
The Company 0 0 3,390 208
----- ----- ----- -----
Others 609 823 222 220
----- ----- ----- -----
609 823 3,612 428
Product licensing revenue--
The Company 864* 387 2,001 0
----- ----- ----- -----
NET REVENUES 1,473 1,210 5,613 428
===== ===== ===== =====
(000)
-----
# of female condoms sold 1,578 2,366 7,777 1,109
===== ===== ===== =====
# of countries in which
product was being sold 4 11 14 14
===== ===== ===== =====
- ---------------
</TABLE>
* Includes (Pounds)1,550,000 of licensing revenue, less a (Pounds)686,000
adjustment in respect of a 1992 agreement to allow the licensee to treat
the 1991 licensing revenue as prepaid royalties.
Since 1992, approximately 66% of Chartex's revenue from product sales has
been generated from sales to the U.S. market (the Company) and approximately 17%
of its revenue from product sales has been generated from sales to the U.K.
market. No other individual market provided a significant amount of revenue.
. Year Ended December 31, 1995 Compared to December 31, 1994
----------------------------------------------------------
Revenues for the year ended December 31, 1994 were significantly
impacted by the U.S. launch and shipments into the U.S. market beginning
April 1994. Chartex reported
33
<PAGE>
a (Pounds)1.1 million gross profit for the year ended December 31, 1994
generally as a result of the revenues associated with the U.S. launch of
the female condom by the Company and licensing income. Chartex reported
costs of goods sold in excess of revenues of approximately (Pounds)1.4
million for the comparable period of 1995, generally as a result of
lower revenues and significant amounts of fixed costs. Marketing and
distribution costs decreased (from (Pounds)1.4 million in 1994 to
(Pounds)0.8 million in 1995) and administrative expenses decreased (from
(Pounds)2.0 million in 1994 to (Pounds)1.8 million in 1995) as Chartex
adjusted its organization and focus, concentrating on certain key
markets. Interest expense increased from (Pounds)1.8 million to
(Pounds)2.3 million, generally as a result of additional debt to fund
operating losses. Also, 1994 results include (Pounds)1.9 million in
income resulting from waiver of interest due to Chartex's parent for
both 1993 and 1994, whereas, interest waived in 1995 of (Pounds)1.4
million was for that year only. These factors contributed to the
(Pounds)2.6 million increase in net loss in 1995 compared to the same
period of the preceding year.
. Year Ended December 31, 1994 Compared to December 31, 1993
----------------------------------------------------------
1994 revenues were significantly impacted by net product sales and
licensing revenues paid to Chartex by the Company in connection with
North American territories and the 1994 commercial launch of Reality in
the U.S. Sales outside the U.S. decreased in 1994 compared to 1993.
During 1993, six new markets for the female condom were opened. In 1994,
only two new markets other than the U.S. were opened. Cost of goods sold
decreased approximately (Pounds)3.5 million in 1994 compared to 1993 in
spite of higher sales in 1994. 1993 cost of goods sold was adversely
affected by a (Pounds)2.8 million nonrecurring write-down of plant and
equipment as a result of a permanent reduction in value of the equipment
(see Note 3 to the Notes to Chartex's 1994 consolidated financial
statements) and a (Pounds)0.8 million increase in depreciation relative
to plant and equipment. Marketing and distribution costs decreased from
(Pounds)2.4 million in 1993 to (Pounds)1.4 million in 1994 as Chartex
began restructuring its operations late in 1993 to concentrate on
supporting its major markets and not on developing and opening other
markets. Administrative expenses decreased from (Pounds)4.2 million in
1993 to (Pounds)2.0 million in 1994 generally as a result of the
restructuring of the companies' operations noted above. 1993 results
also include a (Pounds)0.5 million charge related to vacating leased
premises in conjunction with the restructuring of Chartex's operations.
Interest expense was comparable at (Pounds)1.8 million in 1994 compared
to (Pounds)1.9 million in 1993. During 1994, (Pounds)1.9 million of
interest expense was waived by Chartex's parent. The waiver of interest
was recorded as income in Chartex's 1994 historical financial
statements. Chartex reported a net loss of (Pounds)2.1 million in 1994
compared to a net loss of (Pounds)15.3 million in 1993 generally as a
result of increased revenues, 1993 nonrecurring charges and
restructuring costs, and the waiver of interest.
. U.S./U.K. GAAP Differences
--------------------------
Chartex's historical financial statements are prepared in accordance
with U.K. generally accepted accounting principles (GAAP). Adjustments
required to reconcile Chartex's income and equity to results which would
be reported based on U.S. GAAP are disclosed in Note 28 of Chartex's
December 1995 consolidated financial statements. Chartex's 1994 reported
net loss of (Pounds)2.1 million would increase to (Pounds)4.1 million
under U.S. GAAP, generally because the waiver of (Pounds)1.9 million of
interest expense would be treated as a contribution of capital under
U.S. GAAP rather than as income. Similarly, Chartex's net loss of
(Pounds)4.7 million for the year ended December 31, 1995 under U.K. GAAP
would be a net loss of (Pounds)6.3 million under U.S. GAAP, generally
due to the treatment of waived interest expense.
34
<PAGE>
RESULTS OF OPERATIONS--DISCONTINUED OPERATIONS
SIX MONTHS ENDED MARCH 31, 1996 COMPARED TO SIX MONTHS ENDED MARCH 31, 1995
The loss from discontinued operations decreased from $619,747 for the six
month period ended March 31, 1995 to $4,461 for the six month period ended March
31, 1996. The Company has not included any of Holdings loss from operations for
the period from October 1, 1995 through January 29, 1996. The Company
recognized a loss of $4,461 on the sale of Holdings as a result of the January
1996 sale of Holdings (see Note 5 to the Notes to Unaudited Condensed
Consolidated Financial Statements).
On January 29, 1996 the Company concluded the sale of its Holdings
subsidiary. Net revenues for the four-month period from October 1, 1995 through
January 29, 1996 (date of sale) were $3,258,346. For the six-month period ended
March 31, 1995, net revenues were $4,445,412.
Holdings' gross margin for the four-month period from October 1, 1995
through January 29, 1996 was 46% of net sales. For the six-month period ended
March 31, 1995 Holdings' gross margin was 46% of net sales.
Operating expenses for the four-month period from October 1, 1995 through
January 29, 1996 were $1,623,101. For the six-month period ended March 31,
1995, Holdings' operating expenses were $2,399,521.
During the period from October 1, 1995 through January 29, 1996 the loss
from the discontinued Holdings' operations was $229,000. The Company deferred
recognition of its 100% share of the Holdings loss of $229,000 and included the
deferred loss with other expenses incurred in connection with the sale of
Holdings. During the six-month period ended March 31, 1996, the Company
recognized a loss on the sale of the discontinued Holdings' operations of $4,461
(see Note 5 to the Notes to Unaudited Condensed Consolidated Financial
Statements). For the six-month period ended March 31, 1995, the loss from
discontinued operations was $619,747.
YEAR ENDED SEPTEMBER 30, 1995 COMPARED TO YEAR ENDED SEPTEMBER 30, 1994
Net revenues of the Company's Holdings subsidiary decreased $1,015,613 to
$13,487,562 for the year ended September 30, 1995 compared to $14,503,175 for
the same period of the preceding year. Prior year results include nonrecurring
revenue of $2,299,787 in connection with a licensing litigation settlement.
Exclusive of this nonrecurring item, net revenues of Holdings increased
$1,284,174 or
35
<PAGE>
10.5% over the prior year amounts. Sales of products acquired in the Reflect,
Inc. acquisition in July 1994 resulted in increased revenues of $690,560. This
increase was offset by lower Baitmate sales due primarily to special one-time
product offerings to Holdings' two largest customers in fiscal 1994 which did
not reoccur in 1995.
Income from the discontinued Holdings' operations decreased from $2,501,633
for the year ended September 30, 1994 to $64,599 for the year ended September
30, 1995. Results for 1994 included a nonrecurring gain of $2,299,787 from the
licensing settlement. Results for 1995 include the $315,589 charge related to
the Reflect Settlement Agreement (See Notes 3 and 10 to the Notes to
Consolidated Financial Statements). Exclusive of these items, Holdings' income
increased $178,342 to $380,188 in fiscal 1995, generally as a result of
increased revenues.
YEAR ENDED SEPTEMBER 30, 1994 COMPARED TO YEAR ENDED SEPTEMBER 30, 1993
The Company reported $2,501,633 in income from discontinued operations in
fiscal 1994 compared to income of $235,861 in fiscal 1993. Fiscal 1994 results
included nonrecurring income of $2,299,787 related to the licensing litigation
settlement. See Note 7 to Notes to the Consolidated Financial Statements.
Fiscal 1993 results included a nonrecurring credit of $152,452 related to the
reversal of a fiscal 1992 overprovision in connection with a patent infringement
lawsuit involving Holdings' Baitmate products. Exclusive of these items, income
from discontinued operations increased from $83,409 in fiscal 1993 to $201,846
in fiscal 1994. Profit improvement was generally the result of reduced interest
expense ($162,890 reduction) due to the reduced working capital borrowing needs
as a result of proceeds received from the licensing litigation settlement.
Fiscal 1994 net revenues of the leisure time products segment decreased
0.6% ($63,910) to $10,140,690. Sales of leisure time products to the Company's
two largest customers represented 61% of gross leisure time product sales in
fiscal 1994 and 64% in fiscal 1993. Repel sales decreased $0.2 million
(including $0.4 million from the Company's two largest customers) and Baitmate
sales increased $0.2 million (all due to the Company's two largest customers) in
fiscal 1994 compared to fiscal 1993. Changes in leisure time product sales were
generally due to changes in volume of product sold.
Chlorazene sales in the Company's institutional health care segment
decreased $173,034 or 10.7% in fiscal 1994 compared to fiscal 1993. Management
believes that lower sales are due to reduced customer demand as a result of a
decreased number of treatments using products such as Chlorazene and, increased
competition. Segment gross margin percentages were comparable between years at
54% of net product sales.
Revenues from the Company's other product segments (less intersegment
revenues of $537,378) increased $2,256,140 in fiscal 1994 compared to fiscal
1993. The licensing litigation settlement proceeds of $2,299,787 was the major
reason for the increased revenue. Intersegment revenues related to the
manufacture and sale of lubricant for Reality to the Consumer Health segment
totalled $537,378.
36
<PAGE>
BUSINESS
The Company is engaged in the manufacture and marketing of the female
condom on a global basis. The Company's strategy is to focus on the three
highest priority markets: the U.S., the global public sector market and Japan.
PRODUCTS
CONSUMER HEALTH CARE PRODUCTS - REALITY
GENERAL. The Company received approval on May 7, 1993 to market and
distribute the female condom in the United States. On April 14, 1994, the FDA
approved the Chartex facility, allowing the Company to import large quantities
of the female condom manufactured by Chartex. The female condom is the first
and, to date, only female condom approved by the FDA. The Company's
acquisition of Chartex on February 1, 1996 gives the Company the rights to
manufacture and sell the female condom throughout the world.
The female condom is made of polyurethane, a thin but strong material
which is resistant to rips and tears during use. The female condom consists of
a soft, loose fitting sheath and two flexible rings. One of the rings is used
to insert the device and hold it in place. The other ring remains outside the
vagina after insertion. The female condom lines the vagina, preventing skin
from touching skin during intercourse. The female condom device is
prelubricated and disposable and is intended for use during only one sex act.
The female condom is sold over-the-counter, without prescription. It
is the only product approved by the FDA under a woman's control, which helps to
prevent unintended pregnancy and STDs, including AIDS.
HISTORY OF THE FEMALE CONDOM. The female condom was originally
created by Dr. Lasse Hessel, a Danish physician. Dr. Hessel acquired the first
U.S. patent for the female condom on April 5, 1988. The Company entered into a
license agreement (the "U.S. Agreement") with International Trade House Ltd.
("International"), an affiliate of Dr. Hessel, on October 14, 1987.
International's rights under the U.S. Agreement were subsequently assigned to
Chartex. The U.S. Agreement, pursuant to which the Company acquired the
exclusive license to market (and, under certain circumstances, manufacture) the
female condom in the United States, except for mail order sales, was amended by
Chartex and the Company on March 1, 1990, April 9, 1992 and April 20, 1993. The
Company had also entered into license agreements granting the Company the
exclusive right to manufacture and market, except for mail order sales, the
female condom in Canada (the "Canadian Agreement") and Mexico (the "Mexican
Agreement"). As a result of the Company's acquisition of Chartex, the effect of
these license agreements are eliminated in consolidation and the Company now
owns the worldwide rights to manufacture, market and sell the female condom.
It required approximately seven years of extensive research to obtain the
FDA's approval of the PMA for the female condom. It also required several years
to develop custom designed proprietary manufacturing technology and equipment
and secure FDA approval of Chartex's manufacturing facility in London, England.
The Company believes that, in addition to existing patents, this approval
process creates a significant barrier to the entry of competitive products.
MARKET/MARKETING. The Company believes the female condom has
significant global potential. WHO estimates there are 333 million new cases of
STDs each year on a global basis. In the U.S. alone, in 1993 the American
Journal of Obstetrics and Gynecology noted that one-half of all pregnancies in
women between the ages of 15 and 44 are unintended. The female condom is the
only product controlled by the woman that prevents unintended pregnancies and
STDs, including AIDS.
37
<PAGE>
In addition to eliminating human suffering, the use of the female
condom has the potential to significantly reduce health care costs by reducing
the spread of STDs and reducing the number of unintended pregnancies. As a
result, management believes there is a potential market for the female condom in
all developed and developing countries.
There are two basic markets which exist to varying degrees in all
countries:
Private Sector Trade: Women purchase the female condom in drug stores
or other distribution outlets. This market may be reached through education-
based marketing directed at consumers.
Public Sector: The World Health Organization, the U.S. Agency for
International Development and their affiliates and certain other organizations
purchase and distribute products to prevent STDs and unintended pregnancies in
developing countries throughout the world. In addition, corresponding entities
in the U.S. and U.S. city, county and state agencies purchase and distribute
such products on a local basis.
The Company believes the three largest markets for the female condom
are the U.S., the global public sector market and Japan. The Company's strategy
is to initially focus on these three markets. However, if the Company is unable
to raise sufficient capital in this offering to focus its marketing efforts on
all three markets, the Company will first focus on the global public sector
market since the Company believes the public sector market offers the greatest
potential to the Company and that sales in the public sector will also lead to
greater sales in the private sector. Accordingly, if the Company does not have
sufficient resources, it will reduce its marketing efforts to the U.S. private
sector. Such a reduction could adversely affect the Company.
United States: Promotion activities in the U.S. are divided into two
segments: efforts directed towards the public sector and efforts directed
toward the private, consumer sector. The Company's U.S. public sector efforts
are discussed below. In the U.S. private, consumer sector, the Company
initiated a new advertising campaign in March, 1996 directed towards sexually
active young adults. The focus of the campaign is to promote the concept that
protected sex, safer sex, can still be pleasurable. The campaign utilizes a
technique called advertorials and includes in the advertisement an attractive
color or black and white picture plus an editorial which discusses what the
female condom looks like, how to use it, who should use it, and how it protects.
This campaign is currently running in young adult magazines and will be
broadened to radio this summer. This campaign also includes a toll-free number
for consumers to call to receive promotional materials on the female condom and
a coupon for a free sample. Response to the new campaign has been very positive
with the Company receiving an average of 1,200 calls to this toll-free number
per day during the month of March. In addition, a strong public relations
effort has been initiated to try to get the female condom placed in various
entertainment media and scripts such as movies and TV programs which are popular
with young adults.
The Company anticipates that the cost of its planned promotional
campaign in the U.S. (which it believes will benefit both private sector and
public sector sales) will be approximately $2 million in fiscal year 1996 and,
depending on the results of the campaign and the Company's financial condition,
may be increased to approximately $2.5 million to $3.5 million in 1997 as the
Company expands its promotional efforts to include selected television
advertising. Currently, the Company has two employees who devote the majority of
their time to private sector marketing. In addition, two of the Company's other
employees devote a significant amount of their time to marketing in both the
public and private sectors.
Global Public Sector: The Company's public sector efforts are divided
into two programs--a global approach directed to public health organizations
around the world, in both developed and developing countries; and a U.S.
national approach directed to state, county, district and city public health
departments.
38
<PAGE>
Globally, the Company has formed a Scientific Advisory Group on
Education of the female condom, known as "SAGE." The objectives of this
international group of health educators and outreach clinical investigators
particularly interested in the prevention of unintended pregnancy and sexually
transmitted diseases including AIDS, is to help The Female Health Company
develop outreach materials which inform and assist both counselors/trainers and
patients/consumers to first try and then continue to use the female condom. The
first meeting of SAGE was held on May 16-17, 1996. To further the development
of sales to the global public sector, meetings have taken place with various
international organizations such as the World Health Organization (WHO), the
United Nations Program on AIDS (UNAIDS), and the United States Agency for
International Development (USAID). The goal of these meetings is to examine and
formulate various ways to develop large volume purchase programs for the female
condom for distribution into developing countries.
The Company's efforts toward the U.S. public sector include meetings,
in-service presentations and participation at exhibits and lectures involving
employees and volunteers of city, district and state public health departments
and their programs. Company representatives meet with not only the outreach
counselors and staff of these agencies but also the commodities purchasers. The
programs include discussions of the female condom and the training required for
its use as well as the behavioral component involved in using the female condom.
The Company's objective is to not only share enough information to encourage
purchase of the female condom but to include the educational information needed
for the city/district/state to implement with their respective communities to
foster use of the female condom. The states where these efforts have been
initiated include Texas, Florida, California, New York, Pennsylvania, Illinois,
Minnesota and New Jersey. The Company intends to expand the program to
additional states in 1997.
The Company believes that the cost of its public sector marketing
efforts will not be substantial since the bulk of such efforts involve meetings
between Company employees and public sector representatives rather than
advertising or other more conventional marketing methods. Accordingly, since
the employees who will perform the public sector marketing are currently on
staff at the Company, the Company's incremental cost will be comprised mostly of
travel-type expenses. Currently, the Company has two employees who devote the
majority of their time to public sector marketing. In addition, the Company has
two other employees who devote a significant amount of their time to marketing
in both the public and private sectors.
Japan: Chartex has entered into an exclusive distributor agreement
with a $1 billion division of a $5 billion Japanese consumer products company.
Pursuant to this agreement, this company will market the female condom in Japan.
The Japanese company has completed successful clinical and marketing studies and
hopes to receive Japanese regulatory approval to launch the product in Japan in
early 1997. Over 85% of contracepting couples in Japan use male condoms since
oral contraceptives are not available in the Japanese market. As such, the
market research shows that the concept of a female condom and its use are of
high interest to the Japanese. The agreement requires the Japanese company to
purchase product from Chartex and to fund marketing in Japan. Because of this
agreement, the Company anticipates that it will not need to expend significant
funds to market the female condom in Japan since this entity will perform such
marketing efforts.
PRODUCT ACCEPTANCE. Management believes that due to the revolutionary
nature of the female condom, it is necessary to educate the health care
community and women regarding the female condom and its use. Women want to know
the answers to the following questions: "Will it work?"; "How do I use it
correctly?"; and "How will my partner react?" Management believes a steady
education-based
39
<PAGE>
marketing approach will help consumers answer these questions. In addition,
broad public sector use will help to educate women regarding the female condom.
As women learn about the female condom, management believes they will use it.
Recent events suggest this is beginning to happen. A summary of 21
studies conducted by various independent investigators in 17 countries with
3,500 participants reflected the following acceptance response ranges:
50% to 90% like the female condom
30% to 97% would recommend its use
25% to 86% prefer it to the male condom
In addition, according to various studies, about 40% to 60% of women
who try the female condom indicate they would continue to use it. Significant
scientific support has developed with more than 20 studies underway in the U.S.
alone measuring effectiveness, acceptance, propensity to use and comparison with
the male condom. The U.S. government is providing more than $8 million to fund
certain of these studies. In addition, public sector support is significant and
growing. USAID is conducting a 22-country needs assessment study. WHO has
conducted studies and expressed a serious interest in the female condom. In the
U.S., the cities of Chicago and Philadelphia have initiated successful programs
using the female condom.
Management believes that marketing and increased public sector use
will accelerate the product's acceptability.
FDA APPROVAL PROCESS. The manufacture and marketing of medical
devices in the United States are regulated pursuant to the Federal Food, Drug
and Cosmetic Act, as amended (the "Food and Drug Act") which is administered by
the FDA. The Company was required to submit a Pre-Market Application ("PMA") to
the FDA prior to marketing Reality. The PMA contained detailed information to
establish the safety and effectiveness of the device and detailed information
regarding the manufacturing process. On May 7, 1993, the FDA granted approval
to the Company to manufacture and market the female condom in the United States.
The Chartex manufacturing facility (located in London, England) was
required to be inspected and approved by the FDA before product manufactured
there could be sold in the United States. On April 14, 1994, the Company's and
Chartex's PMA Supplement to the FDA for the Chartex Facility was approved by the
FDA.
PRODUCT LABELING. In obtaining final approval from the FDA to market
the female condom, the Company agreed to certain labeling requirements. These
labeling requirements resulted primarily from the fact that the female condom is
a new product and the number of participants in the Reality studies was small
when compared to the number of people who have used the latex male condoms over
many years. The Company agreed that until additional data is available, the
female condom will carry the following labeling information: (a) latex condoms
for men are highly effective at preventing STDs, including AIDS (HIV infection),
if used properly; (b) if you are not going to use a male latex condom, you can
use Reality to help protect yourself and your partner; (c) Reality only works
when you use it, use it every time you have sex; and (d) before you try Reality,
be sure to read the directions and learn how to use it properly. Additional
comparative studies analyzing the effectiveness of the female condom and other
contraceptive devices have been initiated which may result in changed labeling
for Reality.
RESEARCH RESULTS--REALITY EFFECTIVENESS. Because of the need for
contraceptives controlled by women that also protect against STDs, the FDA
modified the development program for Reality to accelerate its availability to
American women. Thus, the major use-effectiveness or key
40
<PAGE>
contraceptive study was not as long and did not include as many women as the
studies of other previously approved barrier contraceptives whose use is not
controlled by women.
The table below shows the pregnancy rates, including perfect use
failure and typical use failure, at 6 months and estimated at 12 months for
barrier contraceptives. The precise point estimates of failure rates during
perfect use cannot be obtained for the sponge, cap or diaphragm, however, rough
estimates have been published in health journals.*
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
6-MONTH AND ESTIMATED 12 MONTH FAILURE RATES
Pregnancies for 100 Women Using the Method
- -------------------------------------------------------------------------------
Typical Use Failure
(User Failure)
-------------------
Perfect Use
Failure* Six Estimated
(Method Failure) Months 12 Months
---------------- ------ ---------
<S> <C> <C> <C>
Reality 2.6 12 21
Male condom** NA 8 15
Cervical cap 4.3 - 5.8 10 18
Sponge 8.5 - 8.8 12 17
Diaphragm:
Sponge study 1.7 - 2.7 8 15
Cap study 3.1 - 4.7 8 15
Unprotected Sex - - 85
- -------------------------------------------------------------------------------
</TABLE>
* Based on clinical studies accepted for publication; Family Planning
Perspectives, 1993.
** 1988 National Survey of Family Growth; perfect use estimates are not
available.
The annualized failure rate among women who use Reality correctly
every time they have intercourse is 5%. Among typical users, the annualized
failure rates for the Reality female condom range from 21% to 26%. This means
that about one in four women who use Reality either incorrectly or
inconsistently (not every time they have intercourse) may become pregnant. The
critical prevention message is that in order to provide protection, the device
must be used correctly every time.
The studies of Reality also indicated the following:
. Across all studies, Reality rarely broke or tore during use.
. In two studies, direct examination of the vagina after multiple episodes
of intercourse using Reality showed: 0% sperm, no trauma to vaginal
canal, and no change in bacterial flora.
41
<PAGE>
. Laboratory testing established the Reality female condom is an effective
barrier in blocking HIV (the AIDS virus) and hepatitis B, the smallest
virus known to cause STDs.
. No significant allergic reactions or side effects have been reported.
LAUNCH OF REALITY
THE U.S. MARKETPLACE
Distribution to wholesalers, major drug store chains and supermarkets began
in July, 1994. In August, Reality began to appear in retail stores across the
country where family planning products are sold. Today, Reality is available in
the majority of major drug store chains and many mass merchandisers, supermarket
chains, and independent drug stores. Along with its retail launch, Reality
continues to be available through public health and family planning clinics.
THE U.S. LAUNCH
The marketing program for the launch of Reality began September 21, 1994
with a press conference in New York City and continued through 1995. The
program was designed to reach women through public education efforts, as well as
through traditional marketing and promotional programs. Roundtable discussions
with leading women's health professionals and advocates took place in seven
major cities, followed, in most cases, by a press conference with intensive pre-
and post-event contact with local print and broadcast media. A video news
release was produced for each market; local and national "TV Docs" were briefed
on a one-to-one basis; along with meetings with editorial boards of newspapers
in each city. Print advertising directed to the medical and health care
provider community and consumers began in early September and was followed by
extensive consumer print advertising in the November issue of major women's
magazines.
HEALTH PROFESSIONALS
Professional detailing representatives started calling on the country's top
10,000 physicians--OB/GYN family practitioners, general practitioners, plus AIDS
educators, counselors and therapists who see young, sexually active women
concerned about their health. In addition, another 30,000 physicians were
contacted through the mail about Reality's availability. Over 65,000 retail
pharmacists, nationwide, were also contacted.
DISTRIBUTION. Reality is currently being distributed in consumer
packaging directly to major drug and grocery chains, mass merchandisers and
private institutions and clinics. Product is distributed to independent drug
stores and other retail outlets through wholesalers. The retail price to
consumers ranges from $2.75-$3.00 per device. Reality is also being distributed
in bulk and at reduced prices to the public sector through not-for-profit
organizations, consistent with the Company's public sector contract with FHI.
The Company is currently marketing three different product offerings
to the retail and wholesale trade, including a three pack, a six pack and a
prepack counter display which includes eight three packs and two six packs in a
free-standing unit. Each three pack and six pack contains a 0.5 oz. bottle of
additional lubricant and a detailed instruction leaflet. Condoms are
individually wrapped in a packet and come pre-lubricated.
42
<PAGE>
The Company also provides Reality in bulk supply. Each case is
comprised of 60 bulk devices, 20 bottles of extra lubricant and 20 instruction
leaflets. Clinic packs are sold to public health clinics at reduced prices.
License for Reality Trademark. In fiscal 1992, the Company signed an
exclusive license (except for the 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 in the U.S. and Canada for the first seven years
and $0.01 per female condom sold thereafter or (b) a minimum annual royalty
equal to 50% of the average annual royalties paid during the period five years
immediately preceding the year for which the royalties are due or $4,500,
whichever is greater.
AGREEMENTS FOR PUBLIC-SECTOR PRICING AND ROYALTIES. On September 24,
1992, the Company entered into an agreement with Family Health International
("FHI"). FHI is a nonprofit organization, supported in part by USAID, created
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 for the Reality female condom to assess safety and efficacy.
USAID sponsored and funded the Reality study as part of its overall program on
population, family planning and AIDS awareness and prevention.
The agreement with FHI sets forth the terms and conditions regarding
future utilization of the pregnancy efficacy study results and provides that the
Company will sell Reality to certain "Public Sector" organizations at a price of
115% of the Company's cost of manufacture and distribution as defined in the
agreement (including cost of acquisition, unrecovered royalties and cost of
educational material), but not to exceed the best price given to any other
client ("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. Public Sector organizations are
defined in the agreement and include governmental organizations, nonprofit
agencies/organizations, public or private nonprofit facilities receiving federal
funds and USAID and USAID contractors whose principal functions include family
planning, female health and reproductive health services.
As additional consideration for FHI's funding and conducting the
contraceptive efficacy study, and unrelated to any future requirements on the
part of FHI, 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 manufacturers sales price for product sales
in excess of 10 million units to $.025/unit or 1.8% of the manufacturers sales
price for product sales in excess of 50 million units, all subject to a
cumulative maximum royalty of $10 million.
MARKET ACCEPTANCE AND COMPETITION. There is no other FDA approved
female condom sold in the United States and, accordingly, there is no model to
provide assurance of the ultimate level of consumer acceptance of Reality.
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.
43
<PAGE>
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.
GOVERNMENT REGULATION
As a manufacturer and marketer of a branded consumer product for the health
care market, the Company and the female condom are subject to regulation,
principally from the FDA, the EPA , the Federal Trade Commission (the "FTC"),
the Department of Transportation (the "DOT"), the Consumer Products Safety
Commission (the "CPSC"), the Occupational Safety and Health Agency ("OSHA") and
various states' health licensing agencies. Reality is regulated by the FDA.
Transportation of Reality is regulated by the DOT and marketing and sales of
Reality are regulated by the FTC.
Reality is specifically regulated by the 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 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.
RESEARCH AND DEVELOPMENT, PRODUCT DEVELOPMENT AND QUALITY ASSURANCE
In fiscal 1993, 1994 and 1995 and for the three months ended December 31,
1995, the Company incurred research and development and new product development
expenditures from continuing operations of $1,103,790, $489,656, $135,121 and
$71,717, respectively. These expenditures have primarily been related to
developing and conducting clinical trials for new products, including Reality,
and to developing new products and improving existing products.
EMPLOYEES
As of May 31, 1996, the Company had ten full-time employees and one part-
time employee. In addition, there are 30 full-time and part-time employees at
its Chartex subsidiary. No Company employees are represented by a labor union.
The Company believes that its employee relations are good. The Company's
success will partially depend upon its ability to attract and retain highly
qualified marketing and sales personnel.
FACILITIES AND MANUFACTURING
The Company leases approximately 4,504 square feet of office space in
downtown Chicago under a seven-year operating lease. The Company also leases
additional office space in downtown Chicago under an operating lease with a term
expiring on September 30, 2001. The Company utilizes warehouse space and sales
fulfillment services of an independent public warehouse located near
Minneapolis, MN for storage and distribution of the female condom. The Company
also stores certain equipment and product in the Jackson, Wisconsin facility of
its previously wholly owned subsidiary pursuant to a warehouse agreement with
the purchaser of the subsidiary. The Company's 40,000 square foot manufacturing
facility is located in London, England and is run by Chartex, the Company's
newly-acquired wholly owned subsidiary. Of Chartex's 30 total employees,
approximately 20 employees operate this facility (including 10 supervisory
factory employees). Chartex will employ additional employees as production
levels warrant. The manufacturing operation involves proprietary equipment
44
<PAGE>
and processes to manufacture the polyurethane female condom. The facility
utilizes machinery averaging approximately three years of age and capable of
producing approximately 60 million units of the female condom per year. The
facility has produced approximately 500,000 devices year to date. The Company
believes production will increase dramatically when the Company begins to supply
product for the launch in Japan (anticipated to occur in early 1997) and as the
Company's U.S. and public sector sales increase. The facility is an FDA-
registered establishment. The Company believes that its manufacturing and
packaging procedures are performed in accordance with the FDA's
requirements.
BACKLOG
The backlog of unfilled orders was $144,100 at April 15, 1996 compared to
$9,300 at the same date in the prior year. Of the orders contained in the
Company's current backlog, all are expected to be filled during fiscal 1996.
The increase in backlog is due primarily to the backlog of $115,300 at Chartex.
The backlog consists primarily of product for which the customers' sales order
specified a delayed delivery date.
PATENTS AND TRADEMARKS
The Company holds patents on the female condom in the United States, the
European Union, Japan, Canada, Australia and 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
"femidon" and "femy" in certain foreign countries.
LEGAL PROCEEDINGS
The Company is not involved in any material pending legal proceedings.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's directors and executive officers are as follows:
<TABLE>
<CAPTION>
Name Title Age
---- ----- ---
<S> <C> <C>
O.B. Parrish Chairman of the Board, Chief
Executive Officer, active Chief Financial
Officer and Director 62
William R. Gargiulo, Jr. Vice President, Secretary
and Director 67
Mary Ann Leeper, Ph.D. President, Chief Operating Officer
and Director 55
Jack Weissman Vice President-Trade Sales 47
Michael Pope Vice President of the Company,
director of Chartex
Resources Limited, director of Chartex
International, Plc and General Manager
of Chartex International, Plc 38
David R. Bethune Director 55
Stephen M. Dearholt Director 49
</TABLE>
45
<PAGE>
O.B. Parrish has served as Chief Executive Officer of the Company since
1994, as active Chief Financial Officer since February 1996 and as the Chairman
of the Board and a Director of the Company since 1987. Mr. Parrish is 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 of Illinois
is a general partner of Phoenix Health Care Group, Limited Partnership ("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. See "Principal and Selling
Shareholders."
William R. Gargiulo, Jr. has served as Vice President and Secretary of the
Company from 1996 to present, as Assistant Secretary of the Company from 1989 to
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 shareholder 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.
Dr. Leeper has served as the President and Chief Operating Officer of the
Company since 1996 and as President and Chief Executive Officer of The Female
Health Company Division from May 1994 until January 1996, as Senior Vice
President - Development of the Company from 1989 until January 1996 and as a
Director of the Company since 1987. 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.
Mr. Weissman has served as Vice President - Trade Sales of The Female
Health Company since June 1995. From 1992 until 1994, Mr. Weissman was Vice
President - Sales for Capital Spouts, Inc., a small manufacturing company.
During the period from 1989 to 1992, Mr. Weissman 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 to 1989. Mr. Weissman was Account Manager - Retail Business
Development, for the NutraSweet Company, a Searle subsidiary. Prior to Searle,
Mr. Weissman worked in the consumer field as Account Manager and Territory
Manager for Norfolk Thayer & Whitehall Laboratories.
Mr. Pope has served as Vice President of the Company since 1996 and as
General Manager of Chartex International, Plc since the Company's 1996
acquisition of Chartex. Mr. Pope has also served as a Director of Chartex
Resources Limited and Chartex International, Plc since 1995. Previously, Mr.
Pope was Director of Technical Operations for Chartex which included
responsibility for manufacturing, engineering, process development and quality
assurance. Mr. Pope was responsible for the development of the high speed
proprietary manufacturing technology 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
46
<PAGE>
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.
Mr. Bethune has served as a Director of the Company since January 1996.
Mr. Bethune is currently President and Chief Executive Officer of Asgen, Inc., a
private pharmaceutical company founded in 1994 and dedicated to the development
of high quality generic pharmaceuticals and orphan drugs. Investors and
collaborators in the venture include Applied Analytical Industries, Inc., the
Mova Pharmaceutical Corporation and the Mayo Biostudies Unit. Mayo Biostudies
will utilize resources within the Mayo clinic system to conduct biostudies for
Asgen. Mr. Bethune was Group Vice President of American Cyanamid Company from
September 1992 and a member of its Executive Committee from April 1993 until the
recent sale of the company to American Home Products. For American Cyanamid
Company, Mr. Bethune had global executive authority for human biologicals,
consumer health products, pharmaceuticals and ophthalmics as well as medical
research. Previously, he was President of the Lederle Laboratories Division of
American Cyanamid Company. Mr. Bethune rejoined Lederle from Searle, where he
was President of Operations in the United States, Canada and the Caribbean since
1986. From 1984 until 1986, Mr. Bethune served as Vice President and General
Manager, United States Pharmaceuticals. Mr. Bethune is a past member of the
Board of Directors of the American Foundation for Pharmaceutical Education and
Partnership for Prevention and is a founding Trustee of the American Cancer
Society Foundation.
Mr. Dearholt has served as a Director of the Company since April 1996. Mr.
Dearholt is a co-founder and partner in Response Marketing, one of the largest
privately owned life insurance marketing organizations in the United States. He
has over 23 years of experience in direct response advertising and data based
marketing of niche products. Since 1985, he has been a 50% owner of R.T. of
Milwaukee, a private investment holding company which operates a stock brokerage
business in Milwaukee, Wisconsin. In late 1995, Mr. Dearholt arranged, on very
short notice, the $1 million bridge loan which assisted the Company in the
purchase of Chartex.
The Company has an Audit Committee and a Compensation Committee. The
Board's Audit Committee is comprised of Messrs. Bethune and Dearholt. The
responsibilities of the Audit Committee, in addition to such other duties as may
be specified by the Board of Directors, include the following: (1)
recommendation to the Board of Directors of independent auditors for the
Company; (2) review of the timing, scope and results of the independent
auditors' audit examination; (3) review of periodic comments and recommendations
by the auditors and of the Company's response thereto; and (4) review of the
scope and adequacy of internal accounting controls. The Audit Committee did not
meet during the fiscal year ended September 30, 1995.
The Board's Compensation Committee is comprised of Messrs. Gargiulo and
Bethune. The responsibility of the Compensation Committee, in addition to such
other duties as may be specified by the Board of Directors, is to make
recommendations to the Board of Directors with respect to compensation for the
executive officers and to administer the Company's 1989, 1990, 1994 and Outside
Director Stock Option Plans. The Compensation Committee met once during the
fiscal year ended September 30, 1995.
There is no standing nominating or similar committee of the Board of
Directors.
All directors serve until the next annual meeting of the Company's
shareholders and until his or her successor has been duly elected or until his
or her prior death, resignation or removal. Each executive officer holds office
until his or her successor has been duly elected or until his or her prior
death, resignation or removal.
47
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The Summary Compensation Table below sets forth certain information
concerning compensation paid to, earned by or awarded to: (i) the Chief
Executive Officer of the Company and (ii) the four other most highly compensated
executive officers of the Company, or its previously wholly owned subsidiary,
WPC Holdings, Inc. (which was sold effective January 29, 1996), during the
fiscal years ended September 30, 1995, 1994 and 1993. The foregoing individuals
are referred to herein as the "named executive officers." John A. Wundrock,
Thomas J. Bonesho and Charles J. Nevsimal all ceased to be employed by the
Company after the sale of Holdings on January 29, 1996.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation Payouts
----------------------------------------- ---------------------- ------------
Awards
----------------------
Other Securities
Name and Annual Underlying LTIP All
Principal Fiscal Salary Bonus Compensation Options/SARs Payouts Other
Position Year ($) ($) ($) (#) ($) Compensation
- ----------------------- ------ -------- ---------- ------------- ------------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
O.B. Parrish 1995 90,000 -- -- 44,000 -- --
Chairman and 1994 37,500(1) -- -- -- -- --
Chief Executive 1993 -- -- -- -- -- --
Officer
John A. Wundrock 1995 252,641(2)(3) -- 67,816(4) 44,000 -- 15,511(5)
Former President 1994 186,291(3) -- -- -- -- 12,640(5)
and Chief Executive 1993 174,775(3) -- -- -- -- 11,984(5)
of WPC Holdings
and former Chief
Executive Officer
of the Company
Mary Ann Leeper, 1995 175,000 -- -- 200,000 -- --
Ph.D. President and 1994 72,917(1) -- 9,047(6) -- -- --
Chief Operating 1993 -- -- -- -- 93,100 --
Officer
Thomas J. Bonesho 1995 119,031(2)(3) 1,083 -- -- -- 1,019(7)
Former Executive 1994 89,706(3) 3,428 -- 7,500 -- 989(7)
Vice President- 1993 83,625(3) 1,015 -- -- -- 1,172(7)
WPC Holdings and
former Executive
Vice President
of the Company
Charles J. Nevsimal 1995 77,900(3) 41,353(8) -- -- -- --
Former Executive 1994 74,902(3) 37,200 -- 5,000 -- --
Vice President- 1993 73,002(3) 1,015 -- -- -- --
Sales and Marketing
of WPC Holdings
</TABLE>
48
<PAGE>
______________________________
(1) Salary began in May 1994 following the formation of the Female Health
Division.
(2) Represents payments of $56,267 to Mr. Wundrock and $24,897 to Mr. Bonesho
in settlement of disputed salary amounts which were not previously paid to
these named executive officers pursuant to a Company-wide salary freeze in
fiscal 1992 but which these officers were entitled to pursuant to their
employment agreements. Messrs. Wundrock and Bonesho are no longer officers
of the Company.
(3) Represents non-accountable automobile allowance of $3,960 per year for Mr.
Wundrock, $3,000 per year for Mr. Bonesho and $5,400, $4,900 and $3,000 for
fiscal 1995, 1994 and 1993, respectively for Mr. Nevsimal. Mr. Nevsimal is
no longer an officer of the Company.
(4) Includes $50,920 representing the cash surrender value of a split-dollar
life insurance policy transferred to Mr. Wundrock and $16,896 of financial
and legal counseling.
(5) Includes matching Company contributions of $1,875, $2,329, and $2,182 to
the Company's 401(k) Plan and the dollar value of the benefit to Mr.
Wundrock of the remainder of the life insurance premiums paid by the
Company of $13,636, $10,311 and $9,802 for fiscal years 1995, 1994 and
1993, respectively.
(6) Includes $9,047 of legal fees incurred by Dr. Leeper in connection with the
drafting and negotiating of her employment agreement with the Company and
in connection with general tax and financial planning for Dr. Leeper.
Pursuant to Dr. Leeper's employment agreement, the Company was required to
reimburse Dr. Leeper for up to $15,000 of legal fees incurred by her in the
first year of her employment term for the cost of her personal financial,
legal and tax counseling, including the cost for the preparation of her
personal tax returns and professional estate planning services and up to
$10,000 for legal fees for such services for each year of her employment
term thereafter.
(7) Includes matching Company contributions of $867, $837 and $1,058 to the
Company's 401(k) Plan and the dollar value of the benefit to Mr. Bonesho of
the remainder of the life insurance premiums paid by the Company of $152,
$152 and $114 for fiscal 1995, 1994 and 1993, respectively.
(8) Includes $23,633 in settlement of disputed bonus payments for fiscal 1991
through 1994.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning options/SARs
granted during fiscal 1995 to the named executive officers:
<TABLE>
<CAPTION>
Individual Grants
- -----------------------------------------------------------------------------------
Number of % of Total Potential Realizable Value at Assumed Annual
Securities Options/SARs Rates of Stock Price Appreciation for
Underlying Granted to Exercise or Option Term
Options/SARs Employees in Base Price Expiration --------------------------------------------
Name Granted (#) Fiscal Year ($/Share) Date 5%$ 10% ($)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
O.B. Parrish 44,000 10.29% 6.00 4/5/05 166,028 420,748
John A. Wundrock 44,000 10.29% 6.00 4/5/05 166,028 420,748
Mary Ann Leeper, Ph.D. 200,000 46.78% 6.00 4/5/05 754,674 1,912,491
</TABLE>
EMPLOYMENT AGREEMENTS
Dr. Leeper entered into an employment agreement with the Company
effective May 1, 1994. The original term of Dr. Leeper's employment extends to
April 30, 1997 and thereafter renews automatically for additional three-year
terms unless notice of termination is given. The employment agreement is
terminable by the Company at any time if such termination is for cause (as
defined in the employment agreement). If Dr. Leeper is terminated without
cause, the Company is obligated to continue to pay Dr. Leeper her base salary
and any bonus to which she would otherwise have been entitled for a period equal
to the longer of two years from date of termination or the remainder of the then
applicable term of the employment agreement. In addition, the Company is
obligated to continue
49
<PAGE>
Dr. Leeper's participation in any health, life insurance or disability plan
sponsored by the Company and in which Dr. Leeper participated prior to her
termination of employment. Dr. Leeper's employment agreement provides for a base
salary of $175,000, $195,000 and $225,000, respectively, for each of the first
three years of her employment term, subject to the achievement of certain
performance goals established by Dr. Leeper and the Company. If the employment
agreement is renewed beyond the initial three-year term, the base salary will be
increased annually by the Board of Directors based upon Dr. Leeper's performance
and such other factors as the Board of Directors deems appropriate. The
employment agreement also provides Dr. Leeper with certain fringe benefits
including an annual cash bonus of up to 100% of her base salary if certain
performance goals to be established by the Board of Directors are achieved.
Prior to the sale of WPC Holdings, the Company had entered into
employment agreements with each of Messrs. Wundrock, Bonesho and Nevsimal. Each
of these agreements was assigned to WPC Holdings and assumed by the buyer of
Holdings. Accordingly, Messrs. Wundrock, Bonesho and Nevsimal are no longer
officers of the Company. However, because these prior officers did not release
the Company from any future liability under these employment agreements at the
time of their assignment, the Company remains contingently liable on these
employment agreements if WPC Holdings defaults in making any payments under the
agreements.
Mr. Wundrock's employment agreement extends through October 1, 1999 and
Mr. Bonesho's employment agreement extends through October 1, 1996. Mr.
Wundrock's and Mr. Bonesho's employment agreements renew automatically for
successive five-year and one-year periods, respectively, unless notice of
termination is given. The employment agreement is terminable by the Company
before expiration if such termination is for cause (as defined in the employment
agreement). If Mr. Wundrock or Mr. Bonesho is terminated without cause, the
Company is obligated to continue their salary and bonus payments for the
remaining terms of their agreements. Mr. Wundrock's employment agreement
provides for an annual salary of $212,186, in fiscal 1995 and a minimum 7.5%
annual increase thereafter. Mr. Bonesho's employment agreement provides for an
annual salary of $99,489 in fiscal 1995 and a minimum 7.5% annual increase
thereafter.
Mr. Nevsimal's employment and noncompetition agreement may be terminated
at any time with 60 days' written notice or immediately if for cause (as defined
in the employment agreement). Mr. Nevsimal's employment agreement provides for
an annual base salary of $70,000, a sales commission based on sales to key
national accounts providing a minimum operating margin and participation in the
1990 Stock Option Plan. As part of the agreement, upon termination, Mr.
Nevsimal agrees not to compete with the Company for nine months if he is
terminated without cause or 24 months if he voluntarily terminates his
employment or is terminated for cause.
Messrs. Wundrock, Bonesho and Nevsimal are no longer employees of the
Company.
AGGREGATED OPTION VALUES AT SEPTEMBER 30, 1995
The following table presents the value of unexercised options held by the
named executive officers at September 30, 1995:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Number of Securities Underlying Value of Unexercised
Unexercised Options at In-The-Money Options at
September 30, 1995 September 30, 1995*
Name Exercisable/Unexercisable Exercisable/Unexercisable
- ------------------------------------------------------------------------------------
<S> <C> <C>
O.B. Parrish 0/44,000 $0/$0
John A. Wundrock 20,000/174,000 $0/$0
Mary Ann Leeper, Ph.D. 0/200,000 $0/$0
Charles J. Nevsimal 8,750/4,250 $0/$0
Thomas J. Bonesho 14,375/8,125 $0/$0
- ------------------------------------------------------------------------------------
</TABLE>
50
<PAGE>
* Values are calculated by subtracting the exercise price from the $3.50 per
share closing price of the Company's Common Stock on September 30, 1995.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1995, the Board's compensation committee (the "Compensation
Committee") was comprised of Mr. Gargiulo. The Board has appointed Messrs.
Gargiulo and Bethune to the Compensation Committee for fiscal 1996. The
responsibility of the Compensation Committee, in addition to such other duties
as may be specified by the Board of Directors, is to make recommendations to the
Board of Directors with respect to compensation for the executive officers and
to administer the 1989, 1990, 1994 and Outside Director Stock Option Plans and
the Cash and Performance Share Plan and any other compensation, performance or
long-term incentive plans established by the Company. Mr. Gargiulo is currently
the Vice President and Secretary of the Company and, during the 1995 fiscal
year, served as the Assistant Secretary of the Company, the Vice President-
International for The Female Health Company Division and as a director of WPC
Holdings, Inc.
In May 1994, the Company and Phoenix of Illinois entered into a five-year
consulting and noncompetition agreement (the "Consulting Agreement"). Under the
Consulting Agreement, Phoenix of Illinois agreed to provide specific corporate
services to the Company in connection with the establishment of The Female
Health Company, commercial launch of Reality, identification and licensing or
acquisition of additional female health products, capital formation and certain
other corporate services, including contract negotiations, mergers and
acquisitions and restructurings. Phoenix of Illinois agrees not to compete with
the Company's product categories during the term of the Consulting Agreement and
for the two years after termination of the agreement. In fiscal 1994, Phoenix of
Illinois received $91,667 in consulting fees as consideration for services
provided under the Consulting Agreement. The consulting fee was cancelled
effective October 1994. In addition, on January 27, 1995 the Company awarded to
Phoenix of Illinois options to purchase 90,000 shares of the Company's Common
Stock at $6.00 per share. Mr. Gargiulo is the trustee of a trust which is a
minority shareholder of Phoenix of Illinois. See "Certain Transactions."
COMPENSATION OF DIRECTORS
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 meeting of a committee of
which he or she is a member. In addition, pursuant to the terms of the Company's
Outside Director Stock Option Plan, 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 "Grant Date," as listed on the American Stock
Exchange or such other exchange or over-the-counter market on which the
Company's Common Stock is traded on the Grant Date. The "Grant Date" is
generally the 90th day after the director's initial appointment to the Board.
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 such dates. The director may exercise any vested options at any
time while the director serves on the Company's Board and for a period of six
months thereafter. Any options which the director does not exercise within six
months after the date the director ceases to serve on the Board are forfeited.
51
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information known to the Company
regarding the beneficial ownership of Common Stock as of May 31, 1996 by (i)
each shareholder known by the Company to be the beneficial owner of more than 5%
of the Common Stock; (ii) each Selling Shareholder; (iii) each director; (iv)
each named executive officer; and (v) all directors and executive officers as a
group.
<TABLE>
<CAPTION>
Shares Shares
Beneficially Owned Beneficially Owned
Prior to Offering Shares Being Sold After Offering
------------------- ----------------- -------------------
Name Number Percent Number Percent
- ------------------------------ --------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
O.B. Parrish (1) 521,052 7.83% 0 521,052 6.28%
John A. Wundrock (2) 70,246 1.10% 15,580 54,666 *
William R. Gargiulo, Jr. (1) 460,385 6.98% 0 460,385 5.58%
Mary Ann Leeper, Ph.D. (1) 532,052 7.98% 0 532,052 6.40%
David R. Bethune (3) 10,000 * 0 10,000 *
Phoenix Health Care of
Illinois, Inc.(4) 459,885 6.97% 0 459,885 5.58%
Stephen M. Dearholt (5) 607,817 9.18% 0 607,817 7.35%
State of Wisconsin
Investment Board 635,000 9.91% 0 635,000 7.88%
Heartland Advisors, Inc. (6) 395,000 6.16% 0 395,000 4.90%
Wisconsin Pharmacal
Company, Inc. (f/k/a WPC
Holdings, Inc.) 15,000 * 15,000 0 0
C.C.R.I. Corporation (7) 150,000 2.29% 150,000 0 0
All directors, nominees
and executive officers,
as a group (seven persons)
(1)(3)(5) 1,179,599 17.02% 0 1,179,599 13.75%
</TABLE>
_____________________________
* Less than 1%.
(1) Includes 160,384 shares under option to Phoenix Health Care Group Limited
Partnership ("Phoenix Partnership") and 269,501 shares owned by and 30,000
shares under option to Phoenix Health Care of Illinois, Inc. ("Phoenix of
Illinois"), the general partner of Phoenix Partnership. Messrs. Parrish
and Gargiulo and Dr. Leeper may be deemed to share voting and dispositive
power as to such shares since Mr. Gargiulo is a trustee of a trust which is
a shareholder, and Mr. Parrish and Dr. Leeper are officers, directors and
shareholders, of Phoenix of Illinois. For Dr. Leeper, also includes 5,500
shares owned by and 66,667 shares under option to her (which options are
exercisable within 60 days); for Mr. Parrish, also includes 6,500 shares
owned by and 54,667 shares under option to him (which options are
exercisable within 60 days); and for Mr. Gargiulo, also includes 500 shares
owned by a trust of which he is a trustee.
(2) Includes 20,000 shares which Mr. Wundrock has the right to acquire pursuant
to the terms of the Company's 1989 Stock Option Plan and 34,666 shares
which Mr. Wundrock has the right to acquire pursuant to the terms of the
1994 Stock Option Plan (which options are exercisable within 60 days).
(3) Represents options which are currently exercisable.
(4) Includes 30,000 shares under options. Also includes 160,384 shares under
option to Phoenix Partnership, for which Phoenix of Illinois is the general
partner.
(5) Includes 156,848 shares owned directly by Mr. Dearholt and 3,689 shares
under option to Phoenix Partnership. Mr. Dearholt is a trustee of certain
trusts which collectively own
52
<PAGE>
three units (2.3%) of the total Phoenix Partnership Units. As a result, Mr.
Dearholt may be deemed to have voting and dispositive power as to the
trusts' pro rata portions of the options held by Phoenix Partnership (2.3%
of 160,384 shares under options). Also includes 69,500 shares held by the
Dearholt, Inc. Profit Sharing Plan, 9,680 shares held by Response Marketing
Money Purchase Plan, 113,000 shares held by the Mary C. Dearholt Trust Act.
B (of which Mr. Dearholt is a trustee) and 45,100 shares held by Mr.
Dearholt's minor children. Also includes warrants to purchase 210,000
shares of Common Stock.
(6) Heartland Advisors, Inc. may be deemed the beneficial owner of the above
shares which are held in the Heartland Value Fund, which is a series of a
registered investment company for which Heartland Advisors, Inc. serves as
the investment adviser.
(7) Represents the maximum number of shares which the shareholder would have
the right to receive upon exercise of a warrant and assuming the warrant
becomes fully exercisable. The warrant is currently exercisable as to
50,000 shares. The warrant, as amended in April 1996, 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 not be exercisable and the warrants shall
terminate as to such unvested shares after March 13, 1997.
The Company has agreed to pay the fees and expenses of the Selling
Shareholders in connection with the offering other than underwriting discounts
and commissions and certain expenses of approximately $1,000 associated with the
sale of Common Stock by Wisconsin Pharmacal Company, Inc. (f/k/a WPC Holdings,
Inc.)
53
<PAGE>
CERTAIN TRANSACTIONS
On October 2, 1995, the Company borrowed $160,000 from Mr. Parrish. 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 secured by a stock issuance agreement which provides that,
upon default, Mr. Parrish may require the Company to issue up to 68,572 shares
of Company Common Stock (with demand registration rights) to be used by him to
reimburse himself for any amounts due under the note.
On November 21, 1995, the Company borrowed $1 million from an affiliate of
Mr. Dearholt ("Lender") under a one-year note payable in full on November 20,
1996 with interest at 12% per year payable monthly. Funds were used by the
Company to make certain nonrefundable preclosing payments for the benefit of
Chartex. See Note 6 to Notes to Unaudited Condensed Consolidated Financial
Statements. The transaction was effected in the form of a promissory note
(the "Note") from the Company to the Lender and a related Note Purchase and
Warrant Agreement ("Note and Warrant Agreement"). The Note and Warrant
Agreement is between the Company, Lender and Mr. Dearholt as guarantor and
provides that Mr. Dearholt personally guarantees repayment of the Note. In
addition, it provides for the issuance of a warrant ("Warrants") to each of
Mr. Dearholt and the Lender which entitles each of them to purchase 10,000
shares of the Company's Common Stock at $3.00 per share. The Warrants expire
upon the earlier of the exercise of the Warrant or November 20, 2000.
As consideration for Mr. Dearholt's guarantee, in addition to the Warrants
granted to Mr. Dearholt, the Company has entered into a Stock Issuance Agreement
("Stock Agreement") pursuant to which the Company agreed to issue 666,667 shares
of the Company's Common Stock to Mr. Dearholt if the Company defaults in its
obligation to pay interest or principal on the Note and Mr. Dearholt
subsequently is required to make any payments under the guarantee. The Company
also granted Lender and Mr. Dearholt certain securities registration rights in
connection with any Common Stock they receive under the Warrants or the Stock
Agreement. Mr. Parrish, Mr. Gargiulo, Jr. and Dr. Leeper have also personally
guaranteed repayment of any obligations incurred by Mr. Dearholt under his
guaranty.
On March 25, 1996, the Company borrowed $1 million from Mr. Dearholt under
a one-year note payable in full on April 25, 1997 with interest at 12% per year
payable monthly. Note proceeds were used to provide working capital needed to
fund the initial stages of the new U.S. marketing campaign ($0.2 million) and to
fund current operating losses ($0.8 million). The transaction was effected in
the form of a promissory note from the Company to Mr. Dearholt and a related
Note Purchase and Warrant Agreement and a Stock Issuance Agreement. Under this
Note Purchase and Warrant Agreement, 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. The warrants expire upon the
earlier of their exercise or March 25, 2001. Under the Stock Issuance
Agreement, if the Company fails to pay the $1 million under the note when due,
the Company must issue 200,000 shares of its Common Stock to Mr. Dearholt.
This issuance will not, however, alleviate the Company from its liability under
the note. The Company also granted Mr. Dearholt and his affiliate certain
securities registration rights with respect to any Common Stock they receive
from the Company under these warrants or the Stock Issuance Agreement.
On March 19, 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 for any ten
consecutive trading days is at least $7.50 per share and (iii) the date when the
Company and its subsidiaries, on a consolidated financial 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.
On March 19, 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
54
<PAGE>
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
financial 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.
Messrs. Parrish and Gargiulo work out of office space at 919 North Michigan
Avenue, Chicago, Illinois which is leased by Phoenix of Illinois from a third
party. The Company has paid the monthly lease payments (totaling $57,640 in
fiscal 1995) for this lease.
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.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 15,000,000 shares
of Common Stock, $.01 par value per share and 5,000,000 shares of Class A
Preferred Stock, $.01 par value per share (the "Class A Preferred Stock"). At
the date of this Prospectus, the Company has outstanding 6,408,312 shares of
Common Stock. No shares of Class A Preferred Stock are issued and outstanding.
COMMON STOCK
- ------------
Holders of Common Stock are entitled to one vote for each share held of
record on all matters to be voted on by the shareholders. Subject to the prior
rights of the holders of Class A Preferred Stock, as described below, holders of
Common Stock are entitled to receive dividends when and as declared by the Board
of Directors out of funds legally available therefor. Upon liquidation or
dissolution of the Company, holders of Common Stock are entitled to share
ratably in the remaining assets of the Company which may be available for
distribution after payment of the Company's creditors and satisfaction of any
accrued but unpaid dividends on, and the liquidation preferences, if any, of,
the Class A Preferred Stock. Holders of Common Stock have no preemptive,
subscription or redemption rights. The Common Stock has no cumulative voting
rights. As a result, holders of more than 50% of the outstanding shares of
Common Stock can elect all of the directors of the Company.
All outstanding shares of Common Stock, including the Shares to be sold in
this offering, are, or upon payment therefor, will be, fully paid and
nonassessable. Wisconsin law, however, may make shareholders of the Company
personally liable for unpaid wages due employees for up to six months' services,
but not in an amount greater than the consideration paid for such shares.
CLASS A PREFERRED STOCK
- -----------------------
The Company's Board of Directors is authorized, subject to the limitations
described below, to issue from time to time, without shareholder authorization,
in one or more designated series, shares of Class A Preferred Stock and to
determine the dividend, redemption, liquidation, sinking fund and
55
<PAGE>
conversion rights of each particular series. No dividends or other distributions
will be payable on the Common Stock unless dividends are paid in full on the
Class A Preferred Stock and all sinking fund obligations for the Class A
Preferred Stock, if any, are fully funded. Dividends on the Class A Preferred
Stock will be cumulative from the date of issuance. In the event of a
liquidation or dissolution of the Company, the Class A Preferred Stock would
have priority over the Common Stock to receive the amount of the liquidation
preference as specified in each particular series, together with any accrued but
unpaid dividends thereon out of the remaining assets of the Company. Holders of
shares of Class A Preferred Stock will have the right, at any time on or before
the redemption of such shares, to surrender the certificate evidencing the
shares of Class A Preferred Stock and receive upon conversion thereof, a
certificate evidencing one share of Common Stock for each share of Class A
Preferred Stock so surrendered. The holders of Class A Preferred Stock shall be
entitled to cast one vote per share held of record by them at all meetings of
the shareholders of the Company.
The issuance of one or more series of Class A Preferred Stock could have an
adverse effect on certain rights, including voting rights, of the holders of
Common Stock. Such shares are also available for issuance to defend against the
threat of a takeover, if the Board of Directors deems such takeover not to be in
the best interests of the Company or its shareholders. This could occur even if
such a takeover of the Company was favored by a majority of shareholders and was
at a premium to the market price of the Common Stock. The Company has no
current plans or intention to issue shares of Class A Preferred Stock.
TRANSFER AGENT
- --------------
The transfer agent and registrar for the Common Stock is Firstar Trust
Company, Milwaukee, Wisconsin.
CERTAIN STATUTORY PROVISIONS
- ----------------------------
Section 180.1150 of the Wisconsin Business Corporation Law provides that
the voting power of shares of public corporations, such as the Company, which
are held by any person holding in excess of 20% of the voting power of such
Company shall be limited to 10% of the full voting power of such shares. This
statutory voting restriction is not applicable to shares acquired directly from
the Company, acquired in a transaction incident to which the shareholders of the
Company vote to restore the full voting power of such shares and under certain
other circumstances more fully described in section 180.1150. In addition, this
statutory voting restriction is not applicable to shares of Common Stock
acquired before April 22, 1986.
Section 180.1141 of the Wisconsin Business Corporation Law provides that a
"resident domestic corporation," such as the Company, may not engage in a
"business combination" with an "interested shareholder" (a person beneficially
owning 10% or more of the aggregate voting power of the stock of the Company)
for three years after the date (the "stock acquisition date") the interested
shareholder acquired his 10% or greater interest, unless the business
combination (or the acquisition of the 10% or greater interest) was approved
before the stock acquisition date by the Company's Board of Directors. After
the three-year period, a business combination that was not so approved can be
consummated only if it is approved by a majority of the outstanding voting
shares not held by the interested shareholder or is made at a specified price
intended to provide a fair price for the shares held by noninterested
shareholders. Section 180.1141 is not applicable to shares of Common Stock
acquired by a shareholder prior to the registration of the Common Stock under
the Exchange Act and shares acquired before September 10, 1987.
INDEMNIFICATION
- ---------------
The Company's directors and officers are entitled to certain statutory
rights to be indemnified by the Company against certain litigation-related
liabilities and expenses, provided the director or officer is
56
<PAGE>
either successful in the defense of such litigation or is otherwise determined
not to have engaged in willful misconduct, knowingly violated the law, failed to
deal fairly with the Company or its shareholders or derived an improper personal
benefit in the performance of his duties to the Company. These rights are
incorporated in the Company's By-Laws.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering (assuming all 1,596,000 shares offered by
the Company hereby are sold, including the maximum 96,000 shares which may be
issued to the Company's secondary placement agent in this offering, that a
Selling Shareholder exercises its warrant to purchase the 50,000 shares
currently vested under the warrant and that the Company issues 54,000 shares of
Common Stock to the Company's primary placement agent in this offering), the
Company will have 8,108,312 shares of Common Stock outstanding. Of these shares,
6,362,732 shares currently outstanding are, and all of the shares registered for
sale hereby will be, freely tradable without restriction or further registration
under the Securities Act, except for any shares held by an "affiliate" of the
Company (in general, a person who has a control relationship with the Company)
which are subject to the resale limitations of Rule 144 promulgated under the
Securities Act. The remaining shares are eligible for public sale if registered
under the Act or sold in accordance with Rule 144 thereunder.
In general, under Rule 144 a person (or persons whose shares are
aggregated) who has beneficially owned his shares for at least two years,
including persons who may be deemed "affiliates" (as defined in the Securities
Act) of the Company, will be entitled to sell within any three-month period a
number of shares that does not exceed the greater of (a) 1% of the then
outstanding shares of Common Stock (approximately 81,000 shares) or (b) the
average weekly trading volume during the four calendar weeks preceding the date
on which notice of such sale is filed with the Securities and Exchange
Commission. In addition, sales under Rule 144 are subject to certain other
restrictions regarding the manner of sale, required notice and availability of
public information concerning the Company. A person (or persons whose shares are
aggregated) who is not deemed an "affiliate" of the Company and who has
beneficially owned his shares for at least three years would be entitled to sell
such shares under Rule 144 without regard to the volume limitations and certain
other restrictions. The Securities and Exchange Commission has proposed
revisions to Rule 144 which would reduce the above-referenced two-year holding
period to one year and would reduce the three-year holding period to two years.
Although these revisions have not yet been adopted, the Company believes they
will likely be adopted in the near future.
The Company has a number of stock option plans outstanding. All options
issuable under these plans are required to have an exercise price of no less
than 85% of the fair market value of the stock on the date of option grant.
Shares issuable upon exercise of options pursuant to the Company's 1990 Option
Plan, 1992 Restricted Stock Plan, 1994 Stock Option Plan, the Affiliate Stock
Option Plan and Outside Director Stock Option Plan, have been or will be
registered so that shares received upon exercise of outstanding options under
the Plans may be sold immediately upon exercise (subject to the volume and other
limitations of Rule 144 for sales by affiliates). In addition, the Company has
issued a number of warrants to purchase Common Stock to a shareholder and
director and certain other parties in connection with the $2 million bridge
loans made by these parties to the Company in November 1995 and March 1996.
Options and warrants to purchase an aggregate of 1,498,538 shares of Common
Stock are presently outstanding pursuant to these option plans and warrants
(including 100,000 shares representing the unvested portion of a Selling
Shareholder's warrant), 799,842 of which are exercisable within the next six
months.
57
<PAGE>
No prediction can be made as to the effect, if any, that market sales of
shares of Common Stock or the availability of such shares for sale will have on
the market prices prevailing from time to time. Nevertheless, the possibility
that substantial amounts of Common Stock may be sold in the public market may
adversely effect prevailing market prices for the Common Stock and could impair
the Company's ability to raise capital through the sale of equity securities.
PLAN OF DISTRIBUTION
Sales by the Company
- --------------------
The Company has entered into an agreement with GS/2/ Securities, Inc.
("GS/2/") pursuant to which GS/2/ will act as the Company's primary placement
agent with respect to the 1,500,000 shares of Common Stock being offered by the
Company to the public hereby (the "Shares"). The Shares are being offered by
the Company, with the assistance of GS/2/, on a "best efforts" basis for a
period terminating 30 days after the date of this Prospectus (the "Offering
Period"). Accordingly, the Company may sell all, none or some portion of the
Shares in this offering. The Shares are not being underwritten by GS/2/. Rather,
GS/2/ has and will assist the Company in the identification of prospective
purchasers and will counsel the Company as to strategy and tactics for
negotiations with prospective purchasers and, if the Company requests, will
participate in such negotiations. Certain directors and officers of the Company
may participate in the sale of the Shares by the Company. Such officers and
directors will rely on the exemption from broker-dealer registration contained
in Rule 3a4-1 of the Securities Exchange Act of 1934, as amended and sales of
the Shares by the Company will be conducted within the requirements of Rule
3a4-1, so as to permit such officers and directors (all of whom may be deemed to
be associates within the meaning of Rule 3a4-1) to participate in the sale of
the Shares. No directors or officers of the Company will be compensated in
connection with his or her participation in the offering by the payment of
commissions or other renumeration based either directly or indirectly on the
sales of the Shares.
The Shares will be sold by the Company from time to time during the
Offering Period at the public offering price set forth on the cover page of this
Prospectus. The Company believes that it may sell many of the Shares to various
institutional investors who will purchase large blocks of the Shares. However,
the Company may also sell some of the Shares in transactions (which may include
block transactions) on the American Stock Exchange. The Company may also sell a
portion of the Shares directly to market makers acting as principals and/or to
broker-dealers acting as principals or as agents for their customers. Market
makers and block purchasers purchasing the Shares will do so for their account
and at their own risk.
Because the Shares are being offered on a "best efforts" basis with no
required minimum to be sold by the Company, the Company may sell Shares from
time to time and receive and retain the proceeds from such Shares during the
Offering Period. No arrangements have been made to place any of such proceeds in
escrow pending the completion of the offering. There can be no assurance that
the proceeds raised by the Company in this offering, whether all or less than
all of the Shares are sold, will provide the Company with sufficient capital to
achieve its plans.
The public offering price for the Common Stock to be sold by the Company
was determined by the Company after consultation with the Company's placement
agents. The public offering price was determined in large part based on the
Company's and the placement agents' belief that a substantial portion of the
Shares will be sold in large blocks to various institutional investors who will
only be willing to purchase the Shares at a discount off the market price of the
Common Stock in light of the low trading volume in the Company's Common Stock
and the purchasers resulting inability to quickly sell all of the shares
purchased if they so desire. In addition, in establishing the public offering
price the Company and the placement agents also considered the Company's results
of operations, current financial condition, future prospects, the experience of
its management, the market price and trading history of the Common Stock and the
general condition of the equity securities markets.
The Company has agreed to pay GS/2/ commissions of $.08 per share for each
of the Shares sold by the Company in this offering. In addition, the Company has
agreed to issue to GS/2/, 9,000 shares of Common Stock (or, in the Company's
discretion, cash at the public offering price per share in lieu of some or all
of such shares) for each $1 million of gross proceeds raised by the Company in
this offering, up to a maximum of 54,000 shares. GS2 has agreed with the Company
that it will not sell any of such shares for a period of at least one year from
the date of its receipt of such shares.
58
<PAGE>
Whether or not the offering is consummated, the Company has agreed to
reimburse GS/2/ for all reasonable out-of-pocket expenses incurred by it in
connection with this offering. At present, the Company believes that such out-
of-pocket expenses will not exceed $5,000. In addition, the Company has agreed
to indemnify GS/2/ against certain liabilities in connection with the
Registration Statement, including liabilities under the Securities Act.
The Company has also entered into a consulting agreement with Collopy &
Company, Inc. ("Collopy") pursuant to which Collopy will provide certain
consulting services to the Company in connection with raising capital. Collopy
has agreed to consult with the advise and make recommendations to the Company
regarding such requirements and, upon the Company's request, assist the Company
in obtaining and consummating funding transactions in accordance with the
Company's needs. In consideration of such services, the Company has agreed to
issue to Collopy 60,000 shares of the Company's Common Stock upon the effective
date of this Registration Statement and an additional 10,000 shares of Common
Stock for each $1 million of proceeds received by the Company in this offering
due to the efforts of Collopy, up to a maximum of 36,000 additional shares of
Common Stock. Notwithstanding the foregoing, the Company will not issue to GS/2/
and Collopy shares in consideration of their services in this offering which, in
the aggregate, exceed an amount equal to 10% of the number of shares sold by the
Company in this offering. The shares to be issued to Collopy are being
registered by the Company pursuant to this Registration Statement. Collopy has,
however, agreed with the Company that it will not sell any of such shares for a
period of at least one year from the effective date of the Registration
Statement. The Company may, in its discretion, elect to pay the secondary
placement agent cash, at the public offering price per share, in lieu of some or
all of the shares to which the secondary placement agent is or becomes entitled
to receive.
Sales by the Selling Shareholders
- ---------------------------------
The Company's primary and secondary placement agents are not assisting the
Selling Shareholders in the sale of their shares. The shares being offered by
the Selling Shareholders will be sold, in the Selling Shareholders' discretion,
on the American Stock Exchange or in privately negotiated transactions. The
sale price to the public may be the market price prevailing at the time of sale,
a price related to such prevailing market price or such other price as the
Selling Shareholders determine from time to time. The Selling Shareholders
have the sole and absolute discretion not to accept any purchase offer or make
any sale if they deem the purchase price to be unsatisfactory at any particular
time. The shares to be offered and sold by the Selling Shareholders may be
offered and sold on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, as amended.
The Selling Shareholders may also sell the shares of Common Stock directly
to market makers acting as principals and/or to broker-dealers acting as
principals or as agents for their customers. Brokers acting as agents for the
Selling Shareholders will receive usual and customary commissions for brokerage
transactions, and market makers and block purchasers purchasing the shares will
do so for their own account and at their own risk. It is possible that the
Selling Shareholders will attempt to sell shares of Common Stock in block
transactions to market makers or other purchasers at a price per share which may
be below the then market price. There can be no assurance that all or any of the
shares of Common Stock offered by the Selling Shareholders hereby will be sold.
Since the Selling Shareholders will sell the shares of Common Stock without the
benefit of an
59
<PAGE>
underwriter, the Company has advised them that they, and any broker or others
who may be deemed statutory underwriters, must comply with the prospectus
delivery requirements of the Securities Act and with certain provisions under
the Exchange Act. The provisions of the Exchange Act are designed to prevent
sellers of securities from artificially bidding up, stabilizing or pegging the
market prices for the securities which they are selling.
The Selling Shareholders have agreed that they will not pay more than the
usual brokerage compensation and that they will not enter into arrangements for
special selling efforts except as described herein, without first advising the
Company and cooperating in the disclosure of the same in a revised or
supplemental prospectus. The Selling Shareholders may also be deemed to be
statutory underwriters with respect to the shares being sold by them.
The Selling Shareholders, alternatively, may sell all or any part of the
shares offered hereby through an underwriter. None of the Selling Shareholders
has entered into any agreement with a prospective underwriter and there is no
assurance that any such agreement will be entered into in the future. If any
Selling Shareholder enters into such an agreement or agreements, the relevant
details will be set forth in a supplement or revisions to this Prospectus.
General
- -------
Broker-dealers, market makers, block purchasers and specialists purchasing
shares of Common Stock pursuant to this Prospectus are cautioned that Rule 10b-6
promulgated under the Exchange Act may be applicable if they engage in any
special selling efforts to dispose of shares to which this Prospectus pertains.
60
<PAGE>
EXPERTS
The consolidated financial statements of The Female Health Company
(formerly known as Wisconsin Pharmacal Company, Inc.) at September 30, 1994 and
1995, and for each of the three years in the period ended September 30, 1995,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their reports thereon
(which contains an explanatory paragraph with respect to conditions which raise
substantial doubt about the Company's ability to continue as a going concern)
appearing elsewhere herein and in the Registration Statement, and are included
in reliance upon such reports given upon the authority of such firm as experts
in accounting and auditing. The consolidated financial statements of Chartex
and its subsidiary as of December 31, 1994 and 1995, and for each of the three
years in the period ended December 31, 1995, have been included in this
Prospectus and Registration Statement in reliance upon the report of KPMG,
independent auditors, included herein, and upon the authority of such firm as
experts in accounting and auditing. The report of KPMG covering the December
31, 1995 consolidated financial statements contains an explanatory paragraph
that states that Chartex and its subsidiary's recurring losses from operations
and net capital deficiency raise substantial doubt about the entity's ability to
continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of that uncertainty.
LEGAL OPINION
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Reinhart, Boerner, Van Deuren, Norris & Rieselbach,
s.c., 1000 North Water Street, Suite 2100, Milwaukee, Wisconsin 53202.
61
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
THE FEMALE HEALTH COMPANY
-------------------------
<TABLE>
<CAPTION>
Document Page No.
----------
<S> <C>
Audited Consolidated Financial Statements. A
Report of Ernst & Young LLP, Independent Auditors. A-1
Consolidated Balance Sheets as of September 30, 1994 and 1995. A-2
Consolidated Statements of Operations for the years ended
September 30, 1993, 1994 and 1995. A-4
Consolidated Statements of Stockholders' Equity for the years
ended September 30, 1993, 1994 and 1995. A-5
Consolidated Statements of Cash Flows for the years ended
September 30, 1993, 1994 and 1995. A-6
Notes to Consolidated Financial Statements. A-8
Audited Consolidated Financial Statement Schedules. B
Report of Ernst & Young LLP, Independent Auditors,
on Schedules. B-1
Schedule I--Condensed Financial Information of Registrant
(as of September 30, 1994 and 1995 and for each of the three
years in the period ended September 30, 1995). B-2
Schedule II--Valuation and Qualifying Accounts (for each
of the three years in the period ended September 30, 1995). B-5
Unaudited Condensed Interim Consolidated Financial Statements. C
Condensed Consolidated Balance Sheets as of September 30, 1995
and March 31, 1996. C-1
Condensed Consolidated Statements of Operations for the six
months ended March 31, 1995 and 1996. C-2
Condensed Consolidated Statements of Cash Flows for the six
months ended March 31, 1995 and 1996. C-3
Notes to Condensed Consolidated Financial Statements. C-4
Unaudited Pro Forma Condensed Consolidated Financial Information. D
Description of Pro Forma Financial Information. D-1
</TABLE>
62
<PAGE>
Pro Forma Condensed Statement of Operations for the Year Ended
September 30, 1995. D-2
Notes to Unaudited Pro Forma Statement of Operations D-3
Pro Forma Condensed Statement of Operations for the six D-5
months ended March 31, 1996.
Notes to Unaudited Pro Forma Statement of Operations for the six months D-6
ended March 31, 1996
CHARTEX RESOURCES LIMITED AND SUBSIDIARY
----------------------------------------
<TABLE>
<CAPTION>
Document Page No.
----------
<S> <C>
Audited Consolidated Financial Statements. E-i
Independent Auditors Report. E-2
Consolidated Profit and Loss Account for the years ended
December 31, 1993, 1994 and 1995. E-3
Consolidated Balance Sheets as of December 31, 1994 and 1995. E-4
Consolidated Cash Flow Statement for the years ended September
30, 1993, 1994 and 1995. E-5
Notes to Consolidated Financial Statements. E-6
</TABLE>
63
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
Wisconsin Pharmacal Company, Inc.
We have audited the accompanying consolidated balance sheets of Wisconsin
Pharmacal Company, Inc. and subsidiaries as of September 30, 1994 and 1995, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended September 30, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Wisconsin
Pharmacal Company, Inc. and subsidiaries at September 30, 1994 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 1995, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that Wisconsin
Pharmacal Company, Inc. will continue as a going concern. As more fully
described in Note 15, the Company's Female Health Company division (FHC) 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 18, the Company has entered into an
agreement to acquire all of the issued and outstanding stock of Chartex
Resources Limited, the parent corporation of Chartex International PLC
(Chartex), FHC's sole supplier, subject to the Company completing the sale of
its subsidiary, WPC Holdings, Inc. as discussed in Note 16. Chartex itself has
reported recurring operating losses and currently 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.
As discussed in Note 6 to the consolidated financial statements, effective
October 1, 1993, the Company changed its method of accounting for income taxes.
Milwaukee, Wisconsin
November 10, 1995, except as to
Note 18, and Note 19, the date of
which is November 21, 1995
ERNST & YOUNG LLP
A-1
<PAGE>
CONSOLIDATED BALANCE SHEETS
WISCONSIN PHARMACAL COMPANY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
September 30
1994 1995
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,525,145 $ 1,521,344
Trade accounts receivable, less
allowances for doubtful accounts
and returns (1994--$67,200;
1995-- $51,024) 1,338,809 415,089
Inventories:
Work-in-progress 624,443 ---
Finished goods (less allowance for
obsolescence of $1,000,000 in
1995) 1,957,016 3,192,570
----------- -----------
2,581,459 3,192,570
Prepaid expenses and other
current assets 819,862 233,095
Net current assets of discontinued
operations--Note 3 3,322,114 3,913,511
----------- -----------
TOTAL CURRENT ASSETS 11,587,389 9,275,609
OTHER ASSETS
Prepaid royalties 2,059,212 1,875,491
Other 230,308 399,062
----------- -----------
2,289,520 2,274,553
FURNITURE, FIXTURES AND
EQUIPMENT 245,984 351,784
Less: accumulated depreciation (49,152) (115,644)
----------- -----------
196,832 236,140
NET NONCURRENT ASSETS OF
DISCONTINUED OPERATIONS 2,210,206 1,952,269
----------- -----------
$16,283,947 $13,738,571
=========== ===========
</TABLE>
See notes to consolidated financial statements.
A-2
<PAGE>
CONSOLIDATED BALANCE SHEETS--CONTINUED
WISCONSIN PHARMACAL COMPANY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
September 30
1994 1995
---- ----
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS'
EQUITY
CURRENT LIABILITIES
Notes payable $ --- $ 109,503
Trade accounts payable 1,247,576 1,121,549
Accrued royalty and exclusivity
fees-Note 7 2,182,257 4,761,198
Accrued expenses and other current
liabilities 92,099 29,648
Due to Stockholder --- 19,795
Current maturities of capital lease
obligations--Notes 4 and 5 20,521 56,703
------------ ------------
TOTAL CURRENT LIABILITIES 3,542,453 6,098,396
LONG TERM DEBT TO
STOCKHOLDER AND CAPITAL
LEASE OBLIGATIONS, less
current maturities--Notes 4 and 5 64,866 89,017
COMMITMENTS AND
CONTINGENCIES--Notes 4, 7, 9
and 12
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; 5,392,432 in
1994; and 6,392,732 shares in 1995 53,925 63,928
Additional paid in capital 26,164,816 29,411,702
Accumulated deficit (13,542,113) (21,924,472)
------------ ------------
12,676,628 7,551,158
------------ ------------
$ 16,283,947 $ 13,738,571
============ ============
</TABLE>
See notes to consolidated financial statements.
A-3
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
WISCONSIN PHARMACAL COMPANY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
NET REVENUES $ 25,379 $ 1,671,885 $ 2,179,155
COST OF PRODUCTS SOLD 25,379 1,138,905 2,558,420
----------- ----------- -----------
--- 532,980 (379,265)
OPERATING EXPENSES
Selling --- 1,774,754 4,276,610
General and administrative 101,609 925,876 1,042,715
New product development
and marketing 532,950 324,779 ---
Research and development 570,840 164,877 135,121
Reality exclusivity fees 2,766,462 2,993,299 2,578,941
----------- ----------- -----------
3,971,861 6,183,585 8,033,387
----------- ----------- -----------
LOSS FROM OPERATIONS (3,971,861) (5,650,605) (8,412,652)
NON OPERATING INCOME
(EXPENSE)
Interest expense --- (3,512) (48,775)
Interest income --- 139,483 13,508
Other --- 12,867 961
----------- ----------- -----------
--- 148,838 (34,306)
----------- ----------- -----------
LOSS FROM CONTINUING
OPERATIONS (3,971,861) (5,501,767) (8,446,958)
DISCONTINUED OPERATIONS--
Income (loss) from
operations net of
applicable income tax
expense (benefit) of
$0, $30,050, and
($13,469) 235,861 2,501,633 64,599
----------- ----------- -----------
NET LOSS $(3,736,000) $(3,000,134) $(8,382,359)
=========== =========== ===========
Weighted average number
of common and common
equivalent shares
outstanding 3,896,423 4,849,160 6,023,460
=========== =========== ===========
Net income (loss) per
common and common
equivalent share:
Continuing operations $ (1.02) $ (1.13) $ (1.40)
Discontinued operations 0.06 0.51 0.01
----------- ----------- -----------
$ (0.96) $ (0.62) $ (1.39)
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
A-4
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
WISCONSIN PHARMACAL COMPANY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C>
BALANCE,
SEPTEMBER 30, 1992 3,722,201 $37,223 $12,223,817 $ (6,805,979) $ 5,455,061
Issuance of Common Stock in
payment of Reality exclusivity 51,800 518 (518) --- ---
Issuance of Common Stock (net
of offering costs of $217,958) 250,000 2,500 2,257,042 --- 2,259,542
Issuance of Common Stock upon
exercise of stock options and
vesting of restricted stock award
(net of expenses of $3,250) 63,077 631 358,287 --- 358,918
Net loss --- --- --- (3,736,000) (3,736,000)
--------- ------- ----------- ------------ -----------
BALANCE,
SEPTEMBER 30, 1993 4,087,078 40,872 14,838,628 (10,541,979) 4,337,521
Issuance of Common Stock (net
of offering costs of $1,087,137) 1,250,000 12,500 10,775,363 --- 10,787,863
Issuance of Common Stock in
acquisition (net of costs of
$7,832)--Note 10 52,942 529 538,689 --- 539,218
Issuance of Common Stock upon
exercise of stock options 2,412 24 12,136 --- 12,160
Net loss --- --- --- (3,000,134) (3,000,134)
--------- ------- ----------- ------------ -----------
BALANCE
SEPTEMBER 30, 1994 5,392,432 53,925 26,164,816 (13,542,113) 12,676,628
Issuance of Common Stock (net
of offering costs of $25,200)
--Note 10 970,000 9,700 3,129,240 --- 3,138,940
Issuance of Common Stock in
Reflect settlement--
Note 10 30,000 300 114,075 --- 114,375
Other 300 3 3,571 --- 3,574
Net loss --- --- --- (8,382,359) (8,382,359)
--------- ------- ----------- ------------ -----------
BALANCE
SEPTEMBER 30, 1995 6,392,732 $63,928 $29,411,702 $(21,924,472) $ 7,551,158
========= ======= =========== ============= ===========
</TABLE>
See notes to consolidated financial statements.
A-5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
WISCONSIN PHARMACAL COMPANY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(3,736,000) $(3,000,134) $(8,382,359)
Adjustments to reconcile net
loss to net cash
provided by (used in)
operating activities:
Depreciation and amortization 10,248 20,112 66,493
Provision for doubtful accounts
and returns --- 140,891 145,202
Provision for vesting of
restricted stock award 93,100 --- ---
Changes in operating assets
and liabilities of continuing
operations:
Receivables (13,999) (1,465,701) 778,518
Inventories (24,007) (2,557,452) (611,111)
Prepaid expenses
and other --- (819,862) 770,488
Accounts payable (85,249) 1,171,969 (126,027)
Reality exclusivity
fees 2,535,882 (197,237) 2,578,941
Due to Stockholder 230,580 (230,580) 19,795
Other current liabilities (81,504) 82,099 (62,451)
Discontinued operations--
non-cash charges and
working capital changes 1,282,837 (807,781) 190,954
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 211,888 (7,663,676) (4,631,557)
</TABLE>
A-6
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS--CONTINUED
WISCONSIN PHARMACAL COMPANY, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
INVESTING ACTIVITIES
Purchases of furniture, fixtures
and equipment $ (3,024) $ (51,584) $ (2,064)
Increase in other assets (43,356) (78,364) (168,754)
Investing activities of
discontinued operations (377,411) (411,121) (289,575)
----------- ----------- -----------
NET CASH USED IN INVESTING
ACTIVITIES (423,791) (541,069) (460,393)
FINANCING ACTIVITIES
Proceeds from issuance of
of Common Stock 1,274,609 12,984,135 3,164,140
Costs of Common Stock
issuance (9,401) (1,053,557) (25,200)
Other --- --- 3,574
Increase in notes payable --- --- 109,503
Payments of capital lease
obligations --- (8,768) (43,404)
Increase (decrease) in
amounts due to Stockholder 156,967 (114,905) ---
Financing activities of
discontinued operations (1,260,935) (97,987) (120,464)
----------- ----------- -----------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 161,240 11,708,918 3,088,149
----------- ----------- -----------
INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (50,663) 3,504,173 (2,003,801)
Cash and cash equivalents at
beginning of period 71,635 20,972 3,525,145
----------- ----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 20,972 $ 3,525,145 $ 1,521,344
=========== =========== ===========
SUPPLEMENTAL INFORMATION
Interest paid $ 506,535 $ 329,514 $ 423,226
Income taxes paid --- 68,310 5,531
NONCASH TRANSACTIONS
Common Stock issued:
In Reflect settlement --- --- 114,375
Proceeds (net of offering
expenses of $211,817)
not received until
October 1993 1,096,975 --- ---
Capital lease obligations
incurred for equipment 24,071 179,733 103,737
Obligations to stockholders
cancelled as consideration
for exercise of Common
Stock under option 163,177 --- ---
Reduction of capital lease
obligation as consideration
for landlord sale of portion
of leasehold --- --- 38,291
</TABLE>
See notes to consolidated financial statements.
A-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WISCONSIN PHARMACAL COMPANY, INC. AND SUBSIDIARIES
NOTE 1--BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
The Company's Business: Wisconsin Pharmacal Company, Inc. (the Company) is
currently engaged in the marketing and distribution of a consumer health care
product (licensed from a third party) known as the Reality female condom
("Reality") through its female health division, The Female Health Company
("FHC"). The Company's wholly-owned subsidiary, WPC Holdings, Inc. ("Holdings")
and Holdings' controlled joint venture (both reflected as discontinued
operations-see Note 3) are engaged in the development, manufacture and
distribution of products under its and others' labels in the leisure-time,
institutional health care and other products segments.
Principles of Consolidation: The consolidated financial statements include the
accounts of the Company, FHC, Holdings and its controlled joint venture
investment.
Cash Equivalents: The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents. Cash and
cash equivalents are comprised of deposits at a commercial bank.
Inventories: Inventories are stated at the lower of cost (first-in, first-out
method) or market.
Advertising: Payments for advertising expenditures and product sales brochures
and aids are expensed no later than the period in which initial advertisements
are run or, as materials are used, respectively, for expenditures not directly
related to product sales. Any seasonal advertising expenditures related to
Holdings' operations not expensed during the selling season are expensed prior
to the end of the current fiscal year. Media advertising expenditures incurred
for specific customers are fully amortized no later than the date such
advertisements are initially broadcast. The cost of advertising space or airtime
is expensed in the related period in which the advertisement is run.
Effective October 1, 1994 the Company adopted provisions of AICPA Statement of
Position No. 93-7, "Reporting on Advertising Costs" ("SOP 93-7"). SOP 93-7
requires annual disclosure of capitalized and expense amounts incurred for
advertising and requires that production costs of advertising be either expensed
as incurred, or the first time the advertising takes place, except for direct
response advertisements. The Company's policy is to expense advertising
production costs the first time the advertising takes place. Because the Company
already followed provisions of SOP 93-7, its adoption did not have any effect on
the Company's reported operations. The Company (exclusive of Holdings) incurred
advertising costs of $-0-, $971,281 and $2,996,350 in fiscal 1993, 1994 and
1995, respectively. Holdings incurred advertising costs of $1,127,837,
$1,203,311 and $762,303 in fiscal 1993, 1994 and 1995, respectively. The Company
(exclusive of Holdings) had prepaid advertising costs relating to supplies and
future advertising space of $731,031 and $182,683 and Holdings had prepaid
advertising costs of $68,000 and $89,030, as of September 30, 1994 and 1995,
respectively.
Furniture, Fixtures and Equipment: Furniture, fixtures and equipment is stated
at cost. Provisions for depreciation and amortization are computed by the
straight-line method over the shorter of the remaining lease period or the
estimated useful lives of the respective assets which range from three to
fifteen years. Amortization of assets under capital lease is included with
depreciation expense.
Product License Options: Amounts paid to acquire the right or option to acquire
the license to manufacture, market and sell products are capitalized and
amortized on a straight-line basis over the shorter of the economic lives of the
products or in accordance with the respective licensing agreement.
Patent: The cost of the patented fish attractant technology is being amortized
by the straight-line method over its estimated useful life of ten years.
A-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WISCONSIN PHARMACAL COMPANY, INC. AND SUBSIDIARIES
NOTE 1--BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Cost in Excess of Assets Acquired: Cost in excess of assets acquired is being
amortized to expense over 15 years using the straight-line method.
Income Taxes: Investment tax credits and research and development credits are
recorded using the flow-through method.
Effective October 1, 1993 the Company adopted Statement of Financial Accounting
Standard ("SFAS") No. 109 "Accounting for Income Taxes". Prior to fiscal 1994
the Company accounted for income taxes under SFAS No. 96. There was no
cumulative effect adjustment as a result of the change in accounting.
Research and Development Costs: Research and development costs are expensed as
incurred.
Royalties, Prepaid Royalties and Exclusivity Fees: The Company is obligated to
pay royalties based on Reality product sales, with annual minimum amounts due in
order to maintain exclusive marketing and distribution rights in each respective
territory. During the developmental phase of the Reality product, the Company
expensed any minimum annual royalty amounts ("exclusivity fees") when the
Company made the election to retain exclusivity or paid the required exclusivity
fees. Beginning in the fourth quarter of fiscal 1993, the Company substantially
completed the developmental phase for the Reality product. Since that time, and
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. As described in Note 7,
the Company ceased recording a ratable minimum accrual at June 30, 1995.
Contractually-obligated royalties paid by the Company in advance of sales on new
products for which the Company has acquired the licensing, marketing or
manufacturing rights and for which the Company is entitled to future benefit are
recorded as prepaid royalties. Prepaid royalties are being expensed as used in
accordance with the respective licensing contract. Prepaid royalties are
utilized (and accrued royalties reduced) on a quarterly basis to the extent of
royalties due based on actual product sales at the contractual royalty rate.
Revenue Recognition: Revenues from product sales are recognized as the products
are shipped to the customers. The estimated cost of product returns are accrued
for when the initial sale is recorded. Revenues from royalties are recognized as
earned in accordance with the provisions of the respective agreements.
Net Loss Per Common and Common Equivalent Share: Net loss per common and common
equivalent share is computed using the weighted average number of shares of
Common Stock outstanding.
NOTE 2--JOINT VENTURE AND ACQUISITION
Holdings has a joint venture with a third party that was formed to facilitate
sales of Chlorazene, one of Holdings products. Holdings is a general partner in
the venture and receives 50% of the venture's profits/losses. Holdings controls
the venture through a majority of the members of the venture's management
committee and therefore consolidates the financial statements of the venture and
records the outside 50% venture partner's interest as minority interest.
A-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
WISCONSIN PHARMACAL COMPANY, INC. AND SUBSIDIARIES
NOTE 2--JOINT VENTURE AND ACQUISITION--CONTINUED
On July 26, 1994 Holdings acquired certain assets and the business of Reflect,
Inc. (Reflect--a California-based manufacturer and distributor of insect
repellents, sunscreen and combination insect repellent and sunscreen products)
for cash of $15,450 and 52,942 shares of newly-issued Company Common Stock with
a market value of $547,050, for total consideration of $562,500. The acquisition
agreement also provides that Holdings will pay royalties ranging from 3% to 8%
on future sales of Reflect products, up to a maximum cumulative royalty of
$290,000.
The acquisition of Reflect has been accounted for as a purchase; accordingly,
the excess of the consideration paid over the fair market value of the assets
acquired ($354,349) is being amortized to expense over 15 years. The results of
operations of Reflect have been included with those of the Company commencing
August 1994. The impact of the acquisition is not material to the Company and,
as a result, pro forma historical financial information including the Reflect
acquisition has not been presented. See Note 3 for subsequent developments.
NOTE 3--DISCONTINUED OPERATIONS
On March 10, 1995, the Company's Board of Directors approved a formal plan to
sell Holdings. On June 20, 1995, the Company entered into a definitive agreement
with a third party to sell Holdings for consideration valued at $8.285 million.
The definitive agreement (as amended) provides that the sale of Holdings close
early in 1996. The Company expects the sale to close in early fiscal 1996. See
Note 16. The Company plans to focus on the development of its FHC division.
As a result of adopting a formal plan of disposition of Holdings (which contains
the leisure time, institutional health care and other products segments), the
Company has accounted for Holdings as a discontinued operation, using a March
10, 1995 measurement date and, accordingly, prior period financial statements
have been reclassified to reflect the discontinuation of these segments. The
Company expects to report income from discontinued operations during the period
from the measurement date (March 10, 1995) through the date of disposal
(estimated to be December 1995) and expects to report a gain on the sale of
Holdings. Since the measurement date, the Company has recorded income from
discontinued operations of $684,346.
Net revenues of Holdings were as follows:
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Net revenues $12,483,979 $14,503,175 (a) $13,487,562
Gross margin 5,180,244 7,624,161 (a) 5,735,846
Operating expenses 4,111,539 4,545,826 5,187,762 (b)
----------- ----------- -----------
Operating income 1,068,705 3,078,335 548,084
Non operating (477,526) (284,486) (318,285)
Income taxes --- (30,050) 13,469
Minority interest (355,318) (262,166) (178,669)
----------- ----------- -----------
Income $ 235,861 $ 2,501,633 $ 64,599 (b)
=========== =========== ===========
</TABLE>
- ------------------
(a) Includes $2,299,787 of non-recurring revenue related to the Disposer Care
licensing litigation settlement.
(b) Includes a $315,589 charge to earnings in connection with the Reflect
settlement.
A-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
WISCONSIN PHARMACAL COMPANY, INC. AND SUBSIDIARIES
NOTE 3--DISCONTINUED OPERATIONS--CONTINUED
Net assets of Holdings have been segregated in the consolidated balance sheets
from their historic classifications. Details of such amounts (exclusive of cash
of $1,505,852 and $1,297,766 as of September 30, 1994 and September 30, 1995,
respectively) were as follows:
<TABLE>
<CAPTION>
September 30,
-----------------------
1994 1995
---- ----
<S> <C> <C>
Accounts receivable--net $ 1,381,916 $ 1,436,736
Inventories:
Raw materials and packaging 1,240,711 1,189,564
Work-in-process 91,596 72,838
Finished goods 1,075,344 1,768,081
----------- -----------
2,407,651 3,030,483
Prepaid expense and other 253,400 339,310
Trade accounts payable (463,361) (439,640)
Accrued expenses (136,886) (328,715)
Current maturities of capital
lease obligations (120,606) (124,663)
----------- -----------
Net current assets of
discontinued operations $ 3,322,114 $ 3,913,511
=========== ===========
Plant and leasehold improvements $ 2,836,922 $ 2,798,631
Machinery and equipment 1,433,136 1,553,805
Office furniture and equipment 528,568 562,478
----------- -----------
4,798,626 4,914,914
Less accumulated depreciation (2,060,204) (2,445,016)
----------- -----------
2,738,422 2,469,898
Intangibles--net of amortization of
$220,952 in 1994 and $329,506 in
1995 1,004,546 890,843
Other assets 109,754 75,340
Long-term portion of capital
lease obligations (1,621,016) (1,458,204)
Minority interest (21,500) (25,608)
----------- -----------
Net noncurrent assets of
discontinued operations $ 2,210,206 $ 1,952,269
=========== ===========
</TABLE>
It is the Company's policy to allocate interest on debt (which is to be assumed
by the buyer) to the related discontinued operations. In reclassifying the
Company's financial statements for presentation of discontinued operations, the
Company has included interest expense related to debt of Holdings which is to be
assumed by the buyer of Holdings. Interest expense included in discontinued
operations totaled $487,199, $324,309 and $374,451 for the fiscal years ended
September 30, 1993, 1994 and 1995, respectively, including $201,259 subsequent
to the measurement date through September 30, 1995.
In connection with Holding's July 1994 acquisition of Reflect, the Company
issued 52,942 shares of Common Stock. The Company was required to use reasonable
efforts to cause the shares of Common Stock to be registered with the Securities
and Exchange Commission (SEC) as soon as practicable after the closing of the
acquisition to allow the former owners of Reflect to sell the shares in the
market.
A-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
WISCONSIN PHARMACAL COMPANY, INC. AND SUBSIDIARIES
NOTE 3--DISCONTINUED OPERATIONS--CONTINUED
On September 28, 1994 the Company filed a registration statement with the SEC
and on October 7, 1994 the registration statement was declared effective.
Shortly after this date, the price of the Company's Common Stock dropped
significantly. Following an extended period during which the Company's Common
Stock price never regained its original value and following the Company's March
1995 announcement that it intended to sell Holdings, the former owners of
Reflect advised the Company and Holdings in April 1995 that it intended to
commence litigation against Holdings, the Company and certain officers and
directors, to recoup losses the former owners of Reflect claimed they sustained
by reason of the alleged failure of Holdings and the Company to timely register
for immediate resale the Common Stock which was part of the original Reflect
purchase transaction.
In March 1995 Holdings recorded a $315,589 charge to earnings for the estimated
settlement amount (plus expenses) of the above dispute. The Company and Holdings
agreed to settle the matter with Reflect rather than litigate which potentially
would have delayed the pending sale of Holdings. (See Note 10 for discussion of
the final settlement).
NOTE 4--LEASES
Effective in 1992, upon completion by the lessor (a partnership--one partner of
which is an officer and stockholder of the Company) of a 30,000 sq. ft.
warehouse expansion at the Company's leased manufacturing facility, the Company
entered into a 15 year lease with the lessor which provided for current monthly
rental payments of $25,105 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% 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.
The building lease and certain other equipment leases qualify as capital leases.
At the inception of the lease, the assets and liabilities under capital leases
were recorded at the lower of the present value of the minimum lease payments or
the fair value of the assets. Assets under capital lease are amortized over the
lower of their related lease terms or their estimated productive lives.
Amortization is included in the provision for depreciation and amortization.
In March 1995 the Company agreed to consent to the lessor's proposed sale of a
small parcel of land which was contained in the Company's lease of its
manufacturing facility. The parcel adjoined the Company's leased manufacturing
facility and was available for future plant expansion. As consideration for this
consent, the Company's contractual monthly lease payments were reduced by $350
for the remainder of the lease term. Because the change would not have resulted
in a different lease classification, both the capitalized asset and the lease
obligation were reduced by the present value of the future monthly rental
reduction ($38,291).
A-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
WISCONSIN PHARMACAL COMPANY, INC. AND SUBSIDIARIES
NOTE 4--LEASES--CONTINUED
Property, plant and equipment include the following amounts for leases which
have been capitalized:
September 30
------------
1994 1995
---- ----
Building and improvements $1,656,783 $1,618,492
Machinery, furniture and
equipment 427,287 478,986
---------- ----------
2,084,070 2,097,478
Less allowance for
amortization (443,309) (620,344)
---------- ----------
1,640,761 1,477,134
Discontinued operations 1,552,883 1,333,166
---------- ----------
$ 87,878 $ 143,968
========== ==========
Details of lease rent expense and payments on capital leases in total and
separately for transactions with related parties is as follows:
Year Ended September 30
-----------------------
1993 1994 1995
---- ---- ----
Operating lease
expense:
Building lease
with officer/
stockholder $ 39,102 $ 89,803 $ 86,224
Other 11,249 64,856 128,835
-------- -------- --------
50,351 154,659 215,059
Discontinued
operations 50,351 101,178 93,416
-------- -------- --------
Continuing
operations $ --- $ 53,481 $121,643
======== ======== ========
Year Ended September 30
-----------------------
1993 1994 1995
---- ---- ----
Capital lease
payments:
Building lease
with officer/
stockholder $301,259 $301,260 $299,160
Recorded as:
Interest expense 271,620 266,296 258,895
-------- -------- --------
Principal
payments 29,639 34,964 40,265
Other lease
principal
payments 52,296 71,791 123,603
-------- -------- --------
TOTALS 81,935 106,755 163,868
Discontinued
operations 81,935 97,987 120,464
-------- -------- --------
Continuing
operations $ --- $ 8,768 $ 43,404
======== ======== ========
A-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued
WISCONSIN PHARMACAL COMPANY, INC. AND SUBSIDIARIES
NOTE 4--LEASES--CONTINUED
Future minimum payments under capital and operating leases consisted of the
following at September 30, 1995:
<TABLE>
<CAPTION>
Discontinued Operations Continuing Operations Capital
----------------------------------------------------------- -------------------------
Building Equipment Total Operating Capital Operating
-------- --------- ----- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
1996 $ 297,060 $ 69,398 $ 366,458 $ 33,624 $ 70,428 $ 78,820
1997 297,060 16,249 313,309 33,624 70,428 81,072
1998 297,060 297,060 33,624 26,374 83,324
1999 297,060 297,060 33,624 85,576
2000 297,060 297,060 33,624 87,828
Thereafter 1,930,949 1,930,949 221,358 90,080
Total ----------- ----------- ----------- ----------- ----------- -----------
minimum
payments 3,416,249 85,647 3,501,896 $ 389,478 167,230 $ 506,700
=========== ===========
Amounts
representing
interest (1,913,601) (5,428) (1,919,029) (21,510)
----------- ----------- ----------- -----------
$ 1,502,648 $ 80,219 $ 1,582,867 $ 145,720
=========== =========== =========== ===========
</TABLE>
The effective interest rates on the building lease (16.7%) and equipment leases
are imputed based on the lower of the Company's incremental borrowing rate at
the inception of each lease or the lessor's implicit rate of return, each
limited by the respective assets fair value.
The Company's Female Health division entered into a seven year operating lease
with a third party for office space effective September 12, 1994. The lease
requires monthly payments ranging from $6,381 in 1995 to $7,507 in 2002 and
requires additional rent based on certain increases in building operating costs.
The lease is cancellable 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.
A-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
WISCONSIN PHARMACAL COMPANY, INC. AND SUBSIDIARIES
NOTE 5--NOTES PAYABLE, LONG-TERM OBLIGATIONS TO STOCKHOLDER AND CAPITAL LEASE
OBLIGATIONS
Long-term obligations to stockholder and capital lease obligations are
summarized as follows:
<TABLE>
<CAPTION>
September 30
------------
1994 1995
---------- ----------
<S> <C> <C>
With officer/stockholder
for building. Maturing
April 2007. $1,581,204 $1,502,648
Equipment leases.
Maturities from
January 1996 to
June 1998. 245,805 225,938
---------- ----------
1,827,009 1,728,586
Less current maturities:
Continuing operations 20,521 56,703
Discontinued operations 120,606 111,150
---------- ----------
141,127 167,853
---------- ----------
Discontinued operations $1,621,016 $1,471,716
========== ==========
Continuing operations $ 64,866 $ 89,017
========== ==========
</TABLE>
On July 23, 1994, Holdings, entered into a two year revolving credit agreement
with a bank which provides Holdings with a credit facility for borrowings of up
to a maximum of $3,000,000. The credit agreement provides for borrowings based
on percentages of qualifying inventory and accounts receivable. Interest on
outstanding borrowings is at a bank's reference rate. Substantially all of
Holdings assets are pledged as security under the credit agreement. As of
September 30, 1994 and 1995 Holdings had borrowings available under this
agreement of approximately $1,900,000 and $1,700,000, respectively.
On November 2, 1994 the Company entered into a revolving credit agreement with a
bank which provides a credit facility for borrowings of up to a maximum of
$5,000,000 for the Company's FHC division. Borrowings ($109,503 outstanding at
September 30, 1995) are based on percentages of qualifying receivables. Interest
on borrowings is calculated at a bank's reference rate plus 1.6%. Substantially
all of the Company's assets are pledged as security under the credit agreement.
At September 30, 1995 the Company had borrowings available under this agreement
of approximately $44,000. Subsequent to September 30, 1995, FHC repaid all
amounts outstanding under the credit agreement. The Company has been notified
that the lender intends on terminating this credit facility on November 30,
1995.
Terms of the Company's credit agreement require bank approval of the sale of
Holdings. The bank has indicated that it does not intend to consent to the sale
of Holdings. As a result, the Company expects that it will repay outstanding
borrowings under the credit agreement, if any, from the proceeds of the sale of
Holdings. Following the sale of Holdings, the Company will be without a credit
facility for working capital purposes.
Holdings bank credit agreement prohibits loans, dividends and payments to the
Company. At September 30, 1994 and 1995, restricted net assets of Holdings were
$7,340,000 and $7,450,000, respectively.
A-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
WISCONSIN PHARMACAL COMPANY, INC. AND SUBSIDIARIES
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 is as follows:
<TABLE>
Year Ended September 30
-----------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Tax credit at statutory
rates $(1,350,433) $(1,870,601) $(2,871,966)
Benefit of net operating
loss not recognized 1,350,433 1,870,601 2,871,966
----------- ----------- -----------
$ -0- $ -0- $ -0-
=========== =========== ===========
</TABLE>
As of September 30, 1995, the Company had federal net operating loss
carryforwards of approximately $15,750,000 and state net operating loss
carryforwards of $14,000,000, respectively, for income tax purposes expiring in
years 2005 to 2010. 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, 1994 and 1995 expiring in
years 1996 to 2008.
Effective October 1, 1993, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes." The adoption of SFAS
No. 109 changed the Company's method of accounting for income taxes. Deferred
tax assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities, and are measured using
enacted tax rates and laws that will be in effect when the differences are
expected to reverse. As permitted under SFAS No. 109, the new rules were
adopted prospectively by the Company and, thus, prior years' financial
statements have not been restated.
The adoption of SFAS No. 109 did not result in any changes to the Company's
Consolidated Balance Sheet, did not result in a cumulative effect adjustment nor
will it affect the actual amount of income tax that the Company pays. Due to
cumulative losses in recent years the Company has recorded a valuation allowance
for substantially all deferred tax assets.
A-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
WISCONSIN PHARMACAL COMPANY, INC. AND SUBSIDIARIES
NOTE 6--INCOME TAXES--CONTINUED
Significant components of the Company's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
September 30,
1994 1995
---- ----
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation $ (48,810) $ (17,084)
Prepaid advertising (162,744) ---
----------- -----------
Total gross deferred tax liabilities (211,554) (17,084)
Deferred tax assets:
Federal net operating loss carryforwards 4,025,923 5,364,007
State net operating loss carryforwards 495,000 594,641
Tax credit carryforwards 200,000 181,210
Accrued Reality exclusivity fees 872,903 1,904,479
Inventory obsolescence and accounts
receivable bad debt, co-op
advertising and returns accrual 368,979 903,516
Package design costs, capital
leases and other 232,601 232,048
----------- -----------
Total gross deferred tax assets 6,195,406 9,179,901
Valuation allowance for deferred tax assets (5,945,592) (9,109,557)
----------- -----------
Deferred tax assets net of valuation allowance 249,814 70,344
----------- -----------
Net deferred tax asset (included in other assets) $ 38,260 $ 53,260
=========== ===========
</TABLE>
NOTE 7--LICENSING/ROYALTY AGREEMENTS
The Company is involved in several licensing/royalty agreements which have an
impact on the Company's financial statements. Each of these license agreements
is identified herein by product.
DISPOSER CARE
The Company had an agreement with Colgate-Palmolive Company and its subsidiary,
Softsoap Enterprises, Inc., (collectively "Colgate") whereby it licensed to that
organization the worldwide rights (except in New Zealand and Australia) to
manufacture, use the trademark and sell the Company's patented cleaning and
deodorizing garbage disposer cleanser (Disposer Care).
Upon full payment of royalties aggregating $4,500,000, the Company was to
relinquish all of its rights, title and interest in and to the product and the
related patent, trademark and intellectual knowledge. In addition, the Company
(for a period of five years thereafter) agreed not to manufacture or sell a
product which competed directly with this product except to the extent that it
would continue as a subcontractor of the licensee.
In fiscal 1992, the Company was notified by the licensee of its intention to
terminate the license agreement effective December 31, 1991. Beginning January
1, 1992, the Company resumed sales and marketing of Disposer Care. The Company
instituted legal action against the licensee seeking damages for lost royalties
under the license agreement and lost profits based upon a requirements purchase
agreement which was part of the license. On December 17, 1993, the Company
entered into a Settlement Agreement and Mutual Release ("Agreement") with
Colgate as third party licensee of the Company's Disposer Care product.
As part of the Agreement, Colgate paid the Company $3,400,000 (of which the
Company received $2,299,787 in cash after payment of fees and expenses) and
relinquished and assigned exclusively to the Company all rights, title, and
interest in Disposer Care and related trademark in exchange for dismissal of the
lawsuit and mutual release of claims. The net licensing litigation settlement
amount was included as revenue in the Company's fiscal 1994 statement of
operations and has been reclassified as part of discontinued operations.
A-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
WISCONSIN PHARMACAL COMPANY, INC. AND SUBSIDIARIES
NOTE 7--LICENSING/ROYALTY AGREEMENTS--CONTINUED
PERMANONE
On January 26, 1995 Holdings entered into an agreement with the brother of the
President of Holdings ("Seller") in connection with the purchase of Seller's
Permanone business, including inventory, account information, sales materials
and related information. Permanone is the trade name for an insect repellent
designed to be used on clothing. Holdings agreed to pay Seller an 8% royalty on
Holdings' future sales of Permanone for a period of three years and to purchase
outstanding inventory held by Seller for $36,310. Holdings has paid Seller
$14,528 in accrued royalties related to fiscal 1995 sales of Permanone.
FEMALE CONDOM (REALITY)
The Company has acquired the rights to market a contraceptive device which has
been referred to as a "female condom" or "Reality." The female condom was
designed by a Danish physician who acquired a United States patent in April
1988. Through a series of licensing agreements with an affiliate of the
physician (who owns a patent on the product) and the subsequent purchaser of the
female condom rights, the Company has acquired the exclusive rights to market
the female condom in the United States (U.S. Agreement), Canada (Canada
Agreement) and Mexico (Mexican Agreement), collectively referred to as the
Agreements, except for certain mail order sales. The term of each of the
Agreements is for the period equal to the longer of the life of any patent on
Reality or through the year 2,012.
The Agreements will automatically renew for an additional 25 years unless the
Company or the licensor gives appropriate notice that it does not wish to renew
the Agreements or the Company is in default of the Agreements.
Royalties on the sale of Reality during the initial 24 month periods (as defined
for the respective territories) are equal to the greater of $.11 per unit sold
or 9.2% of the net sales price, and 9.2% of the net selling price thereafter.
The Company also agreed to pay a fee in consideration of the license of the
patent on Reality equal to $.01 per unit of Reality sold.
Under the Reality Agreements, the Company must fulfill the following obligations
(noncompliance with any of the following except item 1 will result in
termination of the Agreements):
1. Pay to the licensor gross royalties of at least $300,000 Canadian (Canada
Agreement) during the 12-month period ended August 31, 1994 (subsequently
deferred--see below) and for each subsequent 12-month period thereafter,
adjusted for inflation. To retain exclusivity, the Company is obligated to
pay gross royalties of $3,000,000 (U.S. Agreement) within 15 days of the
12-month royalty period ending February 27, 1995 and for each 12-month
period thereafter (adjusted for inflation). The Company has prepaid
royalties of $1,875,491 which will be offset against royalties due on
future sales of the product. The Mexico Agreement provides for payments
of at least $400,000 of gross royalties on or before November 30, 1994
(subsequently deferred--see below) and $400,000 (adjusted for inflation)
for each subsequent 12-month period thereafter. The Company has accrued a
pro-rata portion ($4,761,198) of such fees as of September 30, 1995. See
Note 1. See discussion below with respect to nonpayment of amounts due in
early fiscal 1995.
2. Spend a minimum amount on the development of medical endorsements and
other marketing and promotion of Reality of $500,000 (Canadian) during the
period up to and including December 23, 1994 (the first year following the
HPB date under the Canada Agreement--subsequently deferred, see below) and
$450,000 during the period up to and including the 12 months ending
February 7, 1995 (Mexico Agreement) and a cumulative amount of $10,000,000
(which minimum was met in fiscal 1995) (U.S. Agreement), $1,400,000
Canadian (Canada Agreement) and $1,200,000 (Mexico
A-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
WISCONSIN PHARMACAL COMPANY, INC. AND SUBSIDIARIES
NOTE 7--LICENSING/ROYALTY AGREEMENTS--CONTINUED
Agreement) in the period ending May 7, 1995 (U.S. Agreement), the period
ending December 23, 1995 (Canada Agreement), and the period ending
February 7, 1996 (Mexico Agreement), respectively. Such expenditures must
be at least 20% of net Reality sales for each year thereafter under the
Agreements.
3. Order from the licensor 6,000,000, 500,000 and 750,000 packaged units
(under the U.S., Canada and Mexico Agreements, respectively) of Reality as
soon as practicable and on or before October 23, 1994 (Canada) and
December 7, 1994 (Mexico), ship 800,000 or 1,400,000 packaged units under
the Canada or Mexico Agreements, respectively. See below for changes.
On September 26, 1994, the Company and Chartex agreed to delay resolution of
minimum royalty requirements for Canada and Mexico and related obligations until
January 1, 1995. For the U.S., the Company was obligated to ship a minimum of
10,000,000 units within 10 months of U.S. FDA approval of Reality. On November
1, 1994, the Company and Chartex agreed that if the Company purchased and paid
for 8,000,000 units (subsequently reduced to 7,500,000 units) of Reality on or
before December 31, 1994, it would be considered in compliance with the minimum
order and shipment provisions for the U.S. The Company completed the purchase of
7,500,000 units in January 1995.
The licenses will become nonexclusive if the Company does not meet the
requirements of item 1 above. The Company may also elect to retain its license
on a nonexclusive basis for the remaining terms of the U.S. and Canada
Agreements if it delivers a notice to the licensor during the 30-day period
prior to each anniversary date of FDA (U.S. Agreement) or HPB (Canada Agreement)
approval. If the Company elects to retain its U.S. or Canada licenses on a
nonexclusive basis, or the license otherwise becomes nonexclusive, the Company's
U.S. and Canada obligations under items 1 and 2 above are eliminated and its
U.S. and Canada obligations under item 3 are reduced by 50% for the U.S.
Agreement and reduced to 300,000 and 500,000 units, respectively under the
Canada Agreement.
The Company may also elect to retain its Mexico license on a nonexclusive basis
if it delivers notice to the licensor during the 30-day period prior to (a)
February 7, 1995, or (b) each subsequent 12-month period. If the Company elects
to retain its license on a nonexclusive basis, or if the license otherwise
becomes nonexclusive, the Company's obligations for Mexico under items 1, 2 and
3 above are eliminated.
During fiscal 1995 the Company and its U.K.-based supplier (Chartex) entered
into discussions regarding the possible creation of an alliance to concentrate
their joint resources on the development of the female condom and other female
health products with the objective of joining resources and eliminating
obligations between the parties to concentrate on global marketing. Due to the
amount spent by the Company on marketing Reality during fiscal 1994 and early
fiscal 1995 and the lower than anticipated sales volume, the Company did not
have the capital necessary to make the minimum royalty payments and therefore
informed Chartex that it would not make minimum payments required to retain its
exclusive rights to market and distribute Reality in the U.S., Canada and Mexico
when due. However, because Chartex and the Company were discussing how the two
companies could more closely collaborate to better realize the opportunities
presented by Reality, Chartex extended the Company's exclusivity, subject to
revocation at any time at Chartex' sole discretion. See Note 18 regarding
pending acquisition of Chartex. Should the Chartex acquisition not be
successful, the Company's right to distribute Reality in the U.S., Canada and
Mexico may, at Chartex' discretion, become nonexclusive. The Company owns the
U.S. Food and Drug Administration Pre-Market Approval ("PMA") for Reality, which
PMA is necessary to market Reality in the U.S. The Company believes that its
ownership of the PMA is an impediment to other companies entry into the United
States market.
A-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
WISCONSIN PHARMACAL COMPANY, INC. AND SUBSIDIARIES
NOTE 7--LICENSING/ROYALTY AGREEMENTS--CONTINUED
The Company continued to accrue minimum royalties under its license agreement
with Chartex consistent with its continued exclusive rights through June 30,
1995. In the fourth quarter of fiscal 1995 the Company discontinued accrual of
minimum royalties due to events that occurred in the fourth quarter which made
payment unlikely.
However, the accrued balance as of June 30, 1995 was not reversed, pending final
resolution of the Chartex transaction. The Company's prepaid royalties and
accrued exclusivity amounts will be eliminated upon completion of the Chartex
acquisition as part of the accounting for such transaction. See Note 18.
The Company has incurred aggregate product development and research and
development costs of $4,425,730 through September 30, 1995 related to Reality.
The Company has an exclusive license, except for the licensor's rights, with a
third party to use the trademark "Reality" in the U.S. and Canada. For this
exclusive license to the Reality trademark, the Company is obligated to pay the
third party the greater of (a) $0.015 per female condom sold in the territories
for the first seven years and $0.01 per female condom sold thereafter or (b) a
minimum annual royalty equal to 50% of the average annual royalties paid during
the period five years immediately preceding the year for which the royalties are
due or $4,500, whichever is greater.
The Company has 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.
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.
On April 14, 1995, the FDA approved a Chartex PMA for the female condom. This
approval was based, in part, on Chartex's reliance on the Effectiveness Study
conducted and owned by FHI. To protect its rights in the Effectiveness Study,
FHI submitted a letter to the FDA dated September 2, 1993, that specifically
prohibited any party other than the Company from utilizing the Data. The
Chartex PMA was filed on September 30, 1994. At the time of this filing, the
FDA did not advise Chartex of the restrictions on the
A-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
WISCONSIN PHARMACAL COMPANY, INC. AND SUBSIDIARIES
NOTE 7--LICENSING/ROYALTY AGREEMENTS--CONTINUED
use of the Data and, thereafter, approved the PMA without FHI's consent to
Chartex's use of the FHI Data.
To protect its ownership of the Data, on July 10, 1995, FHI submitted a petition
to the FDA requesting that the FDA stay its approval of the Chartex PMA until
FHI grants Chartex permission to use the Data, Chartex conducts its own study or
the FDA conducts an administrative hearing to resolve the issue. The Company
has filed a similar petition indicating that it could not and did not grant
rights to Chartex in property the Company did not own.
The Company believes that unless Chartex obtains the permission of FHI and the
Company to use the Data or, conducts its own study, the Chartex PMA will
ultimately be rescinded. However, there can be no assurance that the FDA will
so rescind the Chartex PMA. If the FDA does not rescind the PMA, Chartex, or
perhaps another party which it licenses, could sell the female condom in the
United States in competition with the Company which could have a material
adverse effect on the Company.
NOTE 8--RETIREMENT BENEFIT PLANS
The Company maintains a profit-sharing plan covering substantially all eligible
employees of Holdings. The Company may make contributions to the plan based on
income before income taxes (as defined) or out of accumulated earnings in an
amount determined by resolution of the Company's Board of Directors. The
Company is not required to make a contribution for any year in which there are
no earnings or for any year in which business reasons indicate a contribution is
not advisable. There were no profit-sharing contributions during fiscal 1993,
1994 or 1995.
The Company has a retirement savings plan which is available to all employees of
Holdings meeting certain minimum age and service requirements. Participants in
the plan may make direct contributions or may contribute amounts through payroll
deduction of up to 15% of their cash compensation (subject to certain
limitations). The Company is required to make matching contributions equal to
25% of the participant's eligible contributions, not to exceed 5% of the
participant's total cash compensation for the year. The Company may, at its
discretion, make additional contributions to the retirement savings plan. The
Company has recorded charges of $22,930, $24,230 and $25,457 in fiscal 1993,
1994, and 1995, respectively, for matching contributions and expenses of plan
administration.
NOTE 9--BONUS, STOCK OPTIONS AND OTHER COMPENSATION
The Company has an employment agreement with an officer/stockholder which
extends through October 1, 1999 and renews automatically for successive five
year periods. If the officer is terminated without cause, the Company is
obligated to continue this officer's salary and bonus payments for the remaining
term of the agreement. The agreement provided at inception (1989) for an
initial base salary subject to a 7.5% annual increase ($212,186 at September 30,
1995).
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 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 cancelled. 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 officer/stockholder. Under the agreement, the Company granted the
officer/stockholder 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 options are 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. At September 30, 1995,
A-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
WISCONSIN PHARMACAL COMPANY, INC. AND SUBSIDIARIES
NOTE 9--BONUS, STOCK OPTIONS AND OTHER COMPENSATION--CONTINUED
options to purchase 130,000 shares of Common Stock were outstanding under this
agreement.
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 131,254 shares were outstanding under the plan at
September 30, 1995, including options for 74,791 shares which are exercisable.
In 1991, the Company entered into a management services, non-competition 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 cancelled 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 options outstanding under the
agreement total 160,384 and were currently exercisable at September 30, 1995, at
the option price of $4.75 per share.
On May 5, 1994 the Company agreed to compensate Phoenix Health Care of Illinois,
Inc. ("PHC"), the general partner of PHCLP, and separately an officer of PHC and
the Company under five year consulting and noncompetition agreements
("Consulting Agreements"). The Consulting Agreements provide for annual
compensation of $220,000 ($55,000 payable each quarter) to PHC (subsequently
cancelled effective October 1, 1994) and $90,000 per year to the officer,
participation in the 1994 Stock Option Plan (see below) and reimbursement for
reasonable out-of-pocket expenses. The Company recorded $129,167 and $90,000 of
compensation expense in fiscal 1994 and 1995, respectively under the Consulting
Agreements.
On September 10, 1994, the Company entered into an employment contract with an
officer of the Company's Female Health division. 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.
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.
A-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
WISCONSIN PHARMACAL COMPANY, INC. AND SUBSIDIARIES
NOTE 9--BONUS, STOCK OPTIONS AND OTHER COMPENSATION--CONTINUED
(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 the Company awarded to PHC, subject to shareholder approval,
options to purchase 90,000 shares of Company 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.
At September 30, 1995 396,000 options were outstanding under the 1994 Plan and
the 1994 PHC Option Plan, none of which were exercisable.
Transactions regarding stock options and warrants in fiscal 1993, 1994 and 1995
were as follows:
<TABLE>
<CAPTION>
Number of Weighted Average
Shares Option Price/Share
---------- ------------------
<S> <C> <C>
Outstanding at September 30, 1992 485,727 $ 5.60
======== ======
Exercisable at September 30, 1992 309,685 $ 5.45
======== ======
Granted 28,850 $10.50
Exercised (56,077) 4.80
Forfeited/Cancelled (17,450) 9.57
--------
Outstanding at September 30, 1993 441,050 $ 5.86
======== ======
Exercisable at September 30, 1993 321,641 $ 5.50
======== ======
Granted 47,500 $ 9.50
Exercised (2,412) 5.04
Forfeited/Cancelled (7,300) 9.48
--------
Outstanding at September 30, 1994 478,838 $ 6.17
======== ======
Exercisable at September 30, 1994 388,011 $ 5.51
======== ======
Granted 667,500 $ 5.78
Exercised (300) 4.00
Forfeited/Cancelled (158,400) 6.32
--------
Outstanding at September 30, 1995 987,638 $ 5.88
======== ======
Exercisable at September 30, 1995 272,675 $ 5.84
======== ======
</TABLE>
A-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
WISCONSIN PHARMACAL COMPANY, INC. AND SUBSIDIARIES
NOTE 9--BONUS, STOCK OPTIONS AND OTHER COMPENSATION--CONTINUED
In fiscal 1992 the Compensation Committee of the Board granted an officer and
director of the Company 16,000 shares of restricted Company Common Stock.
Issuance of the restricted stock was contingent upon the realization of certain
future events regarding the success of Reality. On May 7, 1993 the contingency
relating to 7,000 shares of restricted Company Common Stock was met, and on
September 30, 1993, these shares were issued to this officer/director. The
remaining 9,000 share restricted stock award was cancelled. Fiscal 1993
operating results include a $93,100 charge to earnings to reflect the vesting of
the restricted shares.
NOTE 10--STOCKHOLDERS' EQUITY
As part of the Company's agreement with Chartex, the Company registered for sale
200,000 shares of its Common Stock that were issued to Chartex. Chartex
subsequently sold all 200,000 shares for net proceeds of $2,139,967. The
difference between the net proceeds realized and $2,878,110 or $738,143 was
known as the "Shortfall Amount." On January 12, 1993, in accordance with the
agreement with Chartex, the Company issued 51,800 shares of Common Stock in
settlement of the Shortfall Amount. These shares were registered by the Company
for subsequent resale by Chartex.
In November 1992, the Company issued 100,000 shares of registered Common Stock
in a private transaction for proceeds of $1,212,042 (net of expenses of $5,458).
On September 30, 1993 the Company issued 150,000 shares of Common Stock in a
private transaction for proceeds of $1,047,500 (net of expenses of $212,500).
On February 23, 1994 the Company completed a private placement of 1,250,000
shares of Company Common Stock. Proceeds, net of offering expenses of
$1,087,137, were $10,787,863 and primarily used to support the nation-wide
marketing and commercial distribution of Reality.
On July 26, 1994 the Company issued 52,942 shares of Company Common Stock valued
at $547,050 in connection with the acquisition of Reflect, Inc. See Note 2 of
Notes to Consolidated Financial Statements.
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. (see Note 2). Holdings recorded a $315,589 charge to earnings in
connection with the settlement. 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. As of September 30, 1995 Holdings had $204,400
accrued to cover remaining obligations under the Settlement Agreement.
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
A-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
WISCONSIN PHARMACAL COMPANY, INC. AND SUBSIDIARIES
NOTE 10--STOCKHOLDERS' EQUITY--CONTINUED
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. Shares issuable under the warrants vest and become exercisable with
respect to Company Common Stock as follows:
<TABLE>
<CAPTION>
Event Number of Shares
--------- ----------------
<S> <C>
. Upon execution of the Consulting agreement 37,500
. On June 1, 1995 if the closing stock price is $8.50 per
share or higher* 37,500
. On September 1, 1995 if the closing stock price is $10.50
per share or higher* 37,500
. On December 1, 1995 if the closing stock price is $13.00
per share or higher 37,500
-------
150,000
=======
</TABLE>
- ----------------------
* Any shares issuable under warrants which did not vest in accordance with a
prior vesting criteria will vest if a subsequent vesting criteria is achieved.
Nonvested shares terminate as of December 1, 1995. Unexercised vested shares
terminate on March 13, 2000. Shares issuable under the warrants are subject to
registration rights.
At September 30, 1995 the Company has reserved a total of 1,171,088 shares of
its Common Stock for the exercise of options under the management agreement, the
agreement with the officer/stockholder, the 1994, 1990 and 1989 stock option
plans the 1994 PHC Option Plan and warrants outstanding. See Note 19 for
additional shares reserved in November 1995.
NOTE 11--MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
Holdings' leisure-time product sales to two major customers aggregated 36% and
19%, 34% and 19%, and 32% and 10%, of Holdings' net product sales in fiscal
1993, 1994, and 1995, respectively.
The Company manufactures and sells products primarily to distributors, national
and regional mass merchandisers and independent grocery, drug and general
retailers primarily throughout the United States. The Company performs periodic
credit evaluations of its customers' financial condition and generally does not
require collateral. At September 30, 1994 and 1995, aggregate accounts
receivable from independent retailers were approximately $464,000 and $717,768
and from distributors were $588,000 and $340,634, respectively.
Receivables are generally due within 30 days, however, dating programs are
utilized on sales of certain products.
NOTE 12--CONTINGENCIES
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. Coverage amounts are currently
$5,000,000 for FHC's consumer health care products and $2,500,000 for Holdings'
products. Coverage amounts for all products was $2,500,000 from May 1993 to May
1994 and $1,000,000 in fiscal 1993 prior to May.
A-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
WISCONSIN PHARMACAL COMPANY, INC. AND SUBSIDIARIES
NOTE 12--CONTINGENCIES--CONTINUED
In September 1994 the Company and Holdings were notified of a potential claim
against it by the estate of an individual arising from his death (the
"deceased") in 1994 due to choking, allegedly caused by an adverse reaction to
one of Holdings' insect repellent products. No claim for damages was made at
that time and the Company referred the correspondence to its insurance carrier.
In January 1995 legal counsel for the family of the deceased asserted damages in
the matter and demanded $7.5 million from the Company to settle. In February
1995 legal counsel for the family of the deceased filed suit against the
Company. The Company believes it will have legitimate defenses to the claim and
intends to contest the matter vigorously. This matter is included under the
Company's product liability insurance coverage. The Company believes the
potential liability will not have a material impact on the Company's financial
position. Management of the Company is not aware of any other material
outstanding product liability claims or lawsuits which would have a material
effect on the Company's results of operations or financial position.
NOTE 13--INDUSTRY SEGMENTS
The Company has operated in three principal segments--leisure time products,
institutional health care and consumer health care products. The Company's
leisure time products are primarily marketed by Holdings 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 are primarily marketed through
Holdings' joint venture partner's sales force, which includes a dealer network.
The Company's consumer health care products are 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.
A-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
WISCONSIN PHARMACAL COMPANY, INC. AND SUBSIDIARIES
NOTE 13--INDUSTRY SEGMENTS--CONTINUED
<TABLE>
<CAPTION>
Years Ended September 30,
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Net Revenues
Continuing operations--
Consumer Health Care $ 25,379 $ 1,671,885 (a) $ 2,179,155
=========== =========== ===========
Discontinued Operations:
Leisure Time $10,204,600 $10,140,690 $11,059,196
Institutional Health Care 1,620,924 1,447,890 1,236,685
Other:
Total 658,455 3,451,973 (b) 1,356,807
Intersegment ( ---) (537,378) (165,126)
----------- ----------- -----------
Unaffiliated customers 658,455 2,914,595 1,191,681
----------- ----------- -----------
$12,483,979 $14,503,175 $13,487,562
=========== =========== ===========
Loss from Continuing Operations:
Consumer Health Care $(3,870,252) $(5,417,562) $(7,952,993)
Corporate (101,609) (220,176) (458,698)
----------- ----------- -----------
TOTAL (3,971,861) (5,637,738)(a) (8,411,691)
Interest Income --- 139,483 13,508
Interest Expense --- (3,512) (48,775)
----------- ----------- -----------
LOSS FROM CONTINUING
OPERATIONS $(3,971,861) $(5,501,767) $(8,446,958)
=========== =========== ===========
Depreciation and Amortization
Expense:
Continuing operations--
Consumer Health Care $ 10,248 $ 20,112 $ 66,493
Discontinued operations:
Leisure Time 372,078 377,056 393,925
Institutional Health Care 44,386 40,426 32,433
Other 19,682 42,816 67,006
----------- ----------- -----------
436,146 460,298 493,364
----------- ----------- -----------
TOTAL DEPRECIATION AND
AMORTIZATION $ 446,394 $ 480,410 $ 559,857
=========== =========== ===========
Capital expenditures:
Continuing operations--
Consumer Health Care $ 3,024 $ 145,739 $ 105,801
Discontinued operations:
Leisure Time 62,817 116,281 125,589
Institutional Health Care 7,115 14,987 13,732
Other 2,894 136,039 15,257
----------- ----------- -----------
72,826 267,307 154,578
----------- ----------- -----------
TOTAL CAPITAL EXPENDITURES $ 75,850 $ 413,045 $ 260,379
=========== =========== ===========
Identifiable Totals Assets:
Continuing operations--
Consumer Health Care $ 3,615,142 $ 9,245,775 (c) $ 6,575,025
Discontinued operations
Leisure Time 5,553,874 8,413,455 8,301,794
Institutional Health Care 571,562 415,669 482,512
Other 334,786 572,417 756,070
----------- ----------- -----------
6,460,222 9,401,541 9,540,376
Liabilities of discontinued
operations (2,885,774) (2,363,369) (2,376,830)
----------- ----------- -----------
3,574,448 7,038,172 7,163,546
----------- ----------- -----------
TOTAL IDENTIFIABLE ASSETS $ 7,189,590 $16,283,947 $13,738,571
=========== =========== ===========
</TABLE>
- --------------------
(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.
A-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
WISCONSIN PHARMACAL COMPANY, INC. AND SUBSIDIARIES
NOTE 13--INDUSTRY SEGMENTS--CONTINUED
(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 been reclassified and now is included with amounts
reported as discontinued operations. Also, interest on debt related to
the discontinued operations aggregating $487,199, $324,309 and $374,451
for fiscal 1993, 1994 and 1995 has been included in discontinued
operations.
NOTE 14--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The Company has accounted for Holdings as a discontinued operation (see Note 3
to Notes to Consolidated Financial Statements) beginning with the Company's
March 31, 1995 interim financial statements. Quarterly financial statements
prior to March 31, 1995 have been restated to reflect Holdings as a discontinued
segment for all periods. A reconciliation of amounts as previously reported and
as restated, follows:
A-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
WISCONSIN PHARMACAL COMPANY, INC. AND SUBSIDIARIES
NOTE 14--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)--CONTINUED
<TABLE>
<CAPTION>
Three Month Periods Ended
---------------------------------------------------------------------------------
Fiscal 1994 December 31 March 31 June 30 September 30
- ------------ ----------- -------- ------- ------------
<S> <C> <C> <C> <C>
Net revenues:
As previously reported $ 3,467,670 $ 3,952,429 $ 5,356,578 $ 3,398,383
Discontinued operations 3,434,930 (a) 3,920,121 5,260,006 1,888,118
As restated ----------- ----------- ----------- -----------
$ 32,740 $ 32,308 $ 96,572 $ 1,510,265 (b)
=========== =========== =========== ===========
Gross profit:
As previously reported $ 2,924,938 $ 1,637,920 $ 2,118,861 $ 1,475,422
Discontinued operations 2,924,938 (a) 1,637,920 2,091,919 969,383
----------- ----------- ----------- -----------
As restated $ --- $ --- $ 26,942 $ 506,039 (b)
=========== =========== =========== ===========
Net income (loss):
As restated:
Continuing operations $ (770,426) $(1,073,136) $(1,415,768) $(2,242,437)(b)
Discontinued operations 1,985,338 (a) 219,140 287,171 9,984
----------- ----------- ----------- -----------
TOTALS $ 1,214,912 $ (853,996) $(1,128,597) $(2,232,453)
=========== =========== =========== ===========
As previously reported $ 1,214,912 $ (853,996) $(1,128,597) $(2,232,453)
=========== =========== =========== ===========
Net income (loss) per share:
As restated:
Continuing operations $ (0.18) $ (0.23) $ (0.26) $ (0.42)
Discontinued operations 0.46 0.04 0.05 0.00
----------- ------------ ----------- -----------
TOTALS $ 0.28 $ (0.19) $ (0.21) $ (0.42)
=========== ============ =========== ===========
As previously reported $ 0.28 $ (0.19) $ (0.21) $ (0.42)
=========== ============ =========== ===========
Fiscal 1995
- -----------
Net revenues:
As previously reported $ 2,068,642 N/A N/A N/A
Discontinued operations 1,509,174 N/A N/A N/A
-----------
As restated $ 556,468 (b) $ 426,434 $ 598,862 $ 597,391
=========== =========== =========== ==========
Gross profit:
As previously reported $ 850,893 N/A N/A
Discontinued operations 691,716 N/A N/A
-----------
As restated $ 159,177 $ 132,753 $ 161,838 $ (833,033)(d)
=========== =========== =========== ==========
Net income (loss):
As restated:
Continuing operations $(3,125,015)(b) $(2,089,725)(b) $(1,660,980) $(1,571,238)(d)
Discontinued operations (303,934) (315,813) 544,954 139,392
----------- ----------- ----------- -----------
TOTALS $(3,428,949) $(2,405,538) $(1,116,026) $(1,431,846)(d)
=========== =========== =========== ===========
As previously reported $(3,428,949) N/A N/A N/A
=========== =========== =========== ===========
Net income (loss) per share:
As restated:
Continuing operations $ (0.58) $ (0.35)(c) $ (0.26) $ (0.24)(d)
Discontinued operations (0.06 (0.05)(c) 0.09 0.02
----------- ----------- ----------- -----------
TOTALS $ (0.64) $ (0.40)(c) $ (0.17) $ (0.22)(d)
=========== =========== =========== ===========
As previously reported $ (0.64) N/A N/A N/A
============ =========== =========== ===========
</TABLE>
A-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
WISCONSIN PHARMACAL COMPANY, INC. AND SUBSIDIARIES
NOTE 14--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)--CONTINUED
- -----------------
(a) Includes income of $2,299,787 related to the settlement of the Disposer
Care license litigation.
(b) Includes results related to the commencement of nation-wide marketing and
distribution of Reality.
(c) Net loss per share from continuing operations, discontinued operations and
total net loss per share were incorrectly reported in the Company's second
quarter Form 10-Q as $(0.39), $(0.06) and $(0.45), respectively.
(d) The Company discontinued accrual for minimum royalties at the beginning of
the fourth quarter of fiscal 1995--see Note 7. Fiscal 1994 fourth quarter
results include a $753,694 provision for minimum royalties ($0.14 per
share). Fourth quarter fiscal 1995 results include a $1,000,000 or $0.16
per share charge for estimated obsolete inventory.
NOTE 15--FINANCIAL CONDITION
Since fiscal 1991, the Company and its FHC division have experienced operating
losses due principally to expenses related to obtaining FDA approval to market
Reality in the U.S. and payments of minimum royalties ("exclusivity fees") to
maintain exclusive marketing and distribution rights to Reality in the U.S.,
Canada and Mexico.
FHC initiated operations in the fourth quarter of fiscal 1994 to launch Reality
as a flagship product. Initial pipeline trade stocking occurred during the
fourth quarter of fiscal 1994 and in the first quarter of fiscal 1995. The
first quarter of fiscal 1995 (ending December 31, 1994) was the initial launch
quarter of Reality. It includes start-up costs for the division and the launch
costs associated with establishing initial Reality awareness and familiarity as
the basis for future sales.
As discussed in Note 5, Holdings has a credit facility with a bank which
significantly restricts transfer of funds from Holdings to FHC. Holdings had
cash and unused borrowing capacity under this line of approximately $3,040,000
at September 30, 1995.
As discussed in Notes 3, 16 and 18, the Company has initiated a plan to dispose
of Holdings and to utilize the proceeds from the sale of Holdings to purchase
the manufacturer and the Company's supplier of Reality, Chartex. The purchase
of Chartex is contingent on completion of the sale of Holdings. The Company
expects to generate approximately $6.3 million in cash at closing from the sale
of Holdings, net of transaction expenses. Approximately $1,000,000 of these
proceeds will be used to pay extended payables at FHC. The remainder of the
sale proceeds ($5.3 million) along with the $0.1 million proceeds from the note
payable to an officer/stockholder received in October 1995 and the $1 million
proceeds from the November 1995 loan from a stockholder (total of $6.4 million)
will be used to pay pre-closing operating expenses of Chartex and the cash
portion of the purchase consideration estimated at $5.3 million, including
estimated transaction expenses of $0.5 million and a $0.1 million payment at
closing to a supplier of Chartex. Remaining net cash proceeds of $1.2 million
will be used to fund expected operating losses of the combined companies,
including early marketing and promotion efforts for Reality in the U.S.
The Company has been Chartex' largest customer to date. The Company does not
expect that it will need to purchase additional inventory from Chartex for at
least one year due to existing stock levels at the Company. As a result, the
Company expects that Chartex and the Company will continue to report operating
losses and experience negative cash flows for the foreseeable future.
A-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
WISCONSIN PHARMACAL COMPANY, INC. AND SUBSIDIARIES
NOTE 15--FINANCIAL CONDITION--CONTINUED
Given the fact that FHC is (and the combined companies will continue to be) a
start-up business and has recorded historical operating losses and given that
the Company's only product is a revolutionary, first-of-its-kind product, the
continued viability of the Company is dependent upon its ability to generate
sufficient cash flow from operations, financing, or other sources that will meet
the significant future cash commitments required to develop Reality market share
and in part to identify and acquire additional products related to female
health. Management believes that revenues from sales of Reality will eventually
be sufficient to meet operating expenses. But there can be no assurance that
such level of operations will be achieved either ultimately or on a timely
basis. The Company's ability to continue marketing and promotion of Reality is
dependent in part on the availability of sufficient capital.
Management believes that additional capital for the combined businesses may come
from a number of sources, including: (a) U.K. economic development grant of
approximately $960,000 (the Company is required to utilize 50% of any amounts
from its grant to prepay a portion of the (Pounds)520,000 note which the Company
will issue to the nonprofit foundation as part of the Chartex Acquisition--see
Note 18), (b) potentially $1.0 million from the refinancing (or sale/leaseback)
Chartex' manufacturing facility which has an appraised value of approximately
$3.5 million with existing encumbrances of approximately $1.7 million, (c)
obtaining a working capital borrowing facility based on eligible accounts
receivable and (d) up to $5 million from a debt or equity securities offering.
NOTE 16--SALE OF HOLDINGS
On June 20, 1995 the Company entered into a stock purchase agreement (The
"Purchase Agreement") with WPC Acquisition Corporation ("Buyer"), an affiliate
of JLS Investment Group, Inc. and M & I Ventures Corporation for the sale of
100% of the issued and outstanding common stock of its wholly-owned subsidiary,
Holdings.
The Purchase Agreement is subject to the approval of the Company's shareholders.
Fair value of aggregate consideration to the Company in connection with the sale
is as follows:
<TABLE>
<CAPTION>
<S> <C>
Cash at closing $7,000,000
Credit for intercompany
payables 250,000
Long-term note receivable of
$1,000,000 with interest at 8%
--discounted at 15% 785,000
Warehousing credit--of
$500,000, valued at $250,000 250,000
----------
TOTAL CONSIDERATION $8,285,000
==========
</TABLE>
The excess of the fair value of consideration to be received over the Company's
investment in Holdings at September 30, 1995 (adjusted for intercompany amounts
and the reimbursement to Holdings of certain expenses) is $156,249.
In connection with the Sale and except as specifically indicated in the Purchase
Agreement, Buyer will automatically assume all of the liabilities of Holdings.
However, the Company will remain contingently liable for any obligations of the
Company incurred in connection with Holdings if the Company is not able to get a
release of such liability from the third-party creditor (the "Contingent
Liabilities"). These Contingent Liabilities are expected to include the lease
of Holdings' facilities (approximately $3,800,000 of future payments) and the
employment agreements (with future payments of approximately $1,300,000) for
certain officers of Holdings and the Company. Accordingly, if Buyer fails to
pay any of the Contingent Liabilities, the Company would be required to pay them
and then seek to collect from Buyer the amount paid by the Company.
A-31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
WISCONSIN PHARMACAL COMPANY, INC. AND SUBSIDIARIES
NOTE 17--RELATED PARTY BORROWINGS
On October 2, 1995 the Company borrowed approximately $0.2 million from an
officer and stockholder of the Company. Funds were used to make a nonrefundable
deposit in connection with the Chartex acquisition. (See Note 18.) 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 secured 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 Company 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.
NOTE 18--ACQUISITION OF CHARTEX
On November 20, 1995 the Company entered into an agreement (the "Agreement") to
purchase all of the issued and outstanding share capital of Chartex Resources
Limited ("Resources") the parent company and sole owner of stock in Chartex
International, PLC ("Chartex") from Stamina Investments Limited ("Stamina"), a
company incorporated in the British Virgin Islands. The Agreement is subject to
the Company's completion of its sale of Holdings (sale of Holdings is subject to
Company shareholder approval--see Note 16).
Chartex and Resources are based in London and together own the world-wide
intellectual property and proprietary manufacturing technology for the female
condom. Chartex licenses the rights to sell the female condom to marketing
partners throughout the world, including the Company in the U.S., Canada and
Mexico and owns a manufacturing facility in London to supply the world-wide
needs of the female condom.
The Agreement provides for total consideration estimated at (Pounds)3.8 million
($6.0 million) with a fair value of $5.8 million. Consideration includes a
nonrefundable deposit of (Pounds)100,000 made on October 2, 1995, nonrefundable
pre-close payments to fund Chartex operating losses of (Pounds)50,000 on both
November 22, 1995 and November 27, 1995, (Pounds)150,000 on December 15, 1995
and (Pounds)50,000 each week thereafter until the transaction closes (total
estimated at (Pounds)150,000 subsequent to December 15, 1995), (Pounds)2.45
million ($3.9 million) in cash at closing plus interest on (Pounds)2.45 million
at LIBOR plus 1% from December 1, 1995 through closing. In addition, the
Company agreed to issue notes payable of (Pounds)312,500 ($0.5 million) due 6
months after close with interest at LIBOR plus 1 1/8%, and to issue a non-
interest bearing note payable of (Pounds)520,000 ($0.8 million) with a
discontinued present value of (Pounds)375,000 or $0.6 million due three years
after closing.
The U.S. dollar amounts disclosed parenthetically are based on an exchange rate
of 1.5805 dollars to the pound. Transaction amounts are payable in pounds
sterling. As a result, the Company assumes any currency exchange risk until
amounts are paid.
Prior to closing, Stamina and a nonprofit foundation which has provided Stamina
and Chartex with debt funding have agreed to waive repayment of approximately
(Pounds)20 million ($31.6 million) in notes payable by Chartex to them and have
agreed to pay (Pounds)10 million ($15.8 million) in outstanding notes payable
from Chartex to a third party bank which were guaranteed by this nonprofit
foundation.
If consummated, the acquisition of Chartex will be accounted for as a purchase.
The Company expects that the estimated fair value of total consideration paid
for Chartex (plus transaction expenses estimated to be approximately $0.5
million) will be less than the estimated fair value of net assets purchased by
$9.1 million ("bargain purchase"). The Company will reduce the fair value of
Chartex's long-term assets by the amount of the bargain purchase on a pro-rata
basis.
The results of Resources and Chartex will be combined with the Company upon the
closing of the transaction which is estimated to occur early in fiscal 1996.
A-32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
WISCONSIN PHARMACAL COMPANY, INC. AND SUBSIDIARIES
NOTE 19--NOTE PAYABLE, NOTE PURCHASE AND WARRANT AGREEMENT, GUARANTEE AND
STOCK ISSUANCE AGREEMENT
On November 21, 1995 the Company borrowed $1,000,000 from a third party lender
("Lender") under a one year note payable due in full November 20, 1996 with
interest at 12% payable monthly. The transaction was effected in the form of a
promissory note (the "Note") from the Company to the Lender and a related Note
Purchase and Warrant Agreement ("Note and Warrant Agreement"). The Note and
Warrant Agreement is between the Company, Lender and a non-employee shareholder
guarantor ("Guarantor") and provides that Guarantor personally guarantees
repayment of the Company's note payable to Lender in the event of a default by
the Company on repayment of the Note. In addition, it provides for the issuance
of a warrant ("Warrant") to both the Guarantor and the Lender which entitles
each of them to purchase 10,000 shares of Company Common Stock at $3.00 per
share. Warrants expire upon the earlier of the exercise of the warrant rights
or November 20, 2000.
As consideration for the Guarantor's guarantee, in addition to the Warrants
granted to Guarantor, the Company has entered into a Stock Issuance Agreement
("Stock Agreement") wherein the Company has agreed to issue 666,667 shares of
Company Common Stock to Guarantor if the Company defaults in its obligation to
pay interest or principal on the Note to Lender and Guarantor subsequently is
required to make any payments under the guarantee. The Company has reserved
666,667 shares of Common Stock for issuance under the Stock Agreement.
Three officers of the Company (who are also directors and shareholders of the
Company) have agreed to personally guarantee repayment of any obligations
arising to Guarantor as a result of nonpayment by the Company of any amounts
owed to Guarantor.
The recipients of Common Stock issued by the Company under the Warrant Agreement
and the Stock Agreement have demand registration rights relative to such shares.
A-33
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS, ON SCHEDULES
We have audited the consolidated financial statements of Wisconsin Pharmacal
Company, Inc. as of September 30, 1995 and 1994, and for each of the three years
in the period ended September 30, 1995, and have issued our report thereon dated
November 10, 1995, except as to Notes 18 and 19, the date of which is November
21, 1995, included elsewhere in this Registration Statement. Our audits also
included the financial statement schedules listed in Item 16(b) of this
Registration Statement. These schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Milwaukee, Wisconsin
November 10, 1995
B-1
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL
INFORMATION OF REGISTRANT
WISCONSIN PHARMACAL COMPANY, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
ASSETS 1994 1995
---- ----
<S> <C> <C>
Current assets:
Cash $ 2,019,293 $ 223,578
Accounts receivable, less allowances--$67,200
in 1994 and $51,024 in 1995 1,338,809 415,089
Inventories 2,581,459 3,192,570
Prepaid expenses and other 819,862 233,095
----------- -----------
Total current assets 6,759,423 4,064,332
Other assets:
Prepaid royalties 2,059,212 1,875,491
Other 230,308 399,062
Investment in and advances to wholly-owned
subsidiary 7,290,387 7,425,751
----------- -----------
9,579,907 9,700,304
Equipment and leasehold improvements, cost 245,984 351,784
Less allowances for depreciation (49,152) (115,644)
----------- -----------
196,832 236,140
----------- -----------
$16,536,162 $14,000,776
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable - bank $ -- $ 109,503
Accounts payable 1,499,791 1,383,754
Accrued minimum royalties 2,182,257 4,761,198
Other 112,620 106,146
----------- -----------
Total current liabilities 3,794,668 6,360,601
Long-term debt 64,866 89,017
Stockholders' equity 12,676,628 7,551,158
----------- -----------
$16,536,162 $14,000,776
=========== ===========
</TABLE>
B-2
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL
INFORMATION OF REGISTRANT (CONTINUED)
WISCONSIN PHARMACAL COMPANY, INC.
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF OPERATION
YEAR ENDED SEPTEMBER 30,
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Net sales and other revenue $ 25,379 $ 1,671,885 $ 2,179,155
Management fees from wholly-owned,
discontinued subsidiary -0- 12,500 ---
----------- ----------- -----------
25,379 1,684,385 2,179,155
Cost and expenses:
Cost of products sold 25,379 1,138,905 2,558,420
Selling and administrative expenses 101,609 2,700,630 5,319,325
Reality exclusivity fees 2,766,462 2,993,299 2,578,941
Research and new product
development expense 1,103,790 489,656 135,121
Net interest expense (income) -0- (148,838) 34,306
----------- ----------- -----------
3,997,240 7,173,652 10,626,113
----------- ----------- -----------
Loss from continuing operations (3,971,861) (5,489,267) (8,446,958)
Discontinued operations -- Note A 235,861 2,489,133 64,599
----------- ----------- -----------
Net loss $(3,736,000) $(3,000,134) $(8,382,359)
=========== =========== ===========
CONDENSED STATEMENTS OF CASH FLOW
Cash provided by (used in) operating activities $ (480,654) $(8,749,316) $(4,887,110)
INVESTING ACTIVITIES
Cash contributed to wholly-owned
discontinued subsidiary --- (1,100,249) 53,600
Distributions from controlled joint
venture 346,271 203,449 ---
Other (77,520) (117,582) (170,818)
----------- ----------- -----------
268,751 (1,014,382) (117,218)
FINANCING ACTIVITIES
Proceeds from issuance of common
stock 1,274,609 12,984,135 3,164,140
Cost of issuing common stock (9,401) (1,045,725) (25,200)
Net increase (decrease) in notes
payable (1,179,000) --- 109,503
Other 75,032 (176,391) (39,830)
----------- ----------- -----------
161,240 11,762,019 3,208,613
----------- ----------- ===========
Increase (decrease) in cash $ (50,663) $ 1,998,321 $(1,795,715)
=========== =========== ===========
</TABLE>
B-3
<PAGE>
SCHEDULE I--CONDENSED FINANCIAL
INFORMATION OF REGISTRANT (CONTINUED)
WISCONSIN PHARMACAL COMPANY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE A--BASIS OF PRESENTATION
Wisconsin Pharmacal Company, Inc. (Parent Company) owns 100% of WPC Holdings,
Inc. (Holdings), which in-turn controls a joint venture investment. 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 sheets, 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, 1994 and 1995:
<TABLE>
<CAPTION>
September 30
1994 1995
---- ----
<S> <C> <C>
Equipment leases due at various dates bearing
interest at rates ranging from 5% to 18% $85,387 $145,720
Less current maturities 20,521 56,703
------- --------
64,866 $ 89,017
======= ========
</TABLE>
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.
B-4
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Wisconsin Pharmacal Company, Inc. and Subsidiaries
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
ADDITIONS
Description Balance at Beginning Charged to Costs Charged to Other Deductions--Describe Balance at
DEDUCTIONS FROM ASSET ACCOUNTS of Period and Expenses Accounts--Described End of
(1) Period
<S> <C> <C> <C> <C> <C>
Year Ended September 30, 1995:
Continuing Operations:
Allowance for doubtful accounts
and returns $ 67,200 $ 145,202 $(161,378) $ 51,024
Co-op advertising allowance $ - $ - $ - $ -
-------- ---------- ------------ --------- --------
$ 67,200 $ 145,202 $ - $(161,378) $ 51,024
Discontinued Operations:
Allowance for doubtful accounts
and returns $280,000 $ 682,272 $(597,771) $364,501
Co-op advertising allowance $515,531 $ (5,376) $(220,155) $290,000
-------- ---------- ------------ --------- --------
$795,531 $ 676,896 $ - $(817,926) $654,501
-------- ---------- ------------ --------- --------
$852,731 $ 822,098 $ - $(979,304) $705,525
======== ========== ============ ========= ========
Year Ended September 30, 1994:
Continuing Operations:
Allowance for doubtful accounts
and returns $ - $ 140,891 $ (73,691) $ 67,200
Co-op advertising allowance $ - $ - $ -
-------- ---------- ------------ --------- --------
$ - $ 140,891 $ - $ (73,691) $ 67,200
Discontinued Operations:
Allowance for doubtful accounts
and returns $522,243 $ 399,151 $(641,394) $280,000
Co-op advertising allowance $220,626 $ 426,905 $(132,000) $515,531
-------- ---------- ------------ --------- --------
$742,869 $ 826,056 $ - $(773,394) $795,531
-------- ---------- ------------ --------- --------
$742,869 $ 966,947 $ - $(847,085) $862,731
======== ========== ============ ========= ========
Year Ended September 30, 1993:
Continuing Operations:
Allowance for doubtful accounts
and returns $ -
Co-op advertising allowance $ -
-------- ---------- ------------ --------- --------
$ - $ - $ - $ - $ -
Discontinued Operations:
Allowance for doubtful accounts
and returns $137,840 $ 427,895 $ (43,492) $522,243
Co-op advertising allowance $280,045 $ 656,701 $(716,120) $220,626
-------- ---------- ------------ --------- --------
$417,885 $1,084,596 $ - $(759,612) $742,869
-------- ---------- ------------ --------- --------
$417,885 $1,084,596 $ - $(759,612) $742,869
======== ========== ============ ========= ========
</TABLE>
- ------------------
(1) Includes returns of inventory, write-offs of uncollectible receivable
amounts and application of co-op advertising credits.
B-5
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, September 30,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,357,150 $ 1,521,344
Trade accounts receivable, net 657,475 415,089
Finished goods inventories, net of allowance for
obsolescence of $1,300,000 and $1,000,000 at March 31,
1996 and September 30, 1995, respectively 2,919,965 3,192,570
Prepaid expenses and other current assets 206,183 233,095
Net current assets of discontinued operations -- Note 3 --- 3,913,511
------------ ------------
Total Current Assets 5,140,773 9,275,609
Prepaid royalties --- 1,875,491
Intangibles and other assets 2,569,030 399,062
Furniture, fixtures and equipment 4,026,220 351,784
Less accumulated depreciation and amortization (217,972) (115,644)
------------ ------------
3,808,248 236,140
Net noncurrent assets of discontinued operations -- Note 3 --- 1,952,269
------------ ------------
$ 11,518,051 $ 13,738,571
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable to bank $ --- $ 109,503
Notes payable to stockholders 2,160,000 ---
Trade accounts payable 1,080,042 1,121,549
Accrued royalty and exclusivity fees --- 4,761,198
Accrued expenses and other current liabilities 391,130 29,648
Due to stockholder --- 19,795
Current portion of long-term debt and capital lease
obligations 2,166,513 56,703
------------ ------------
Total Current Liabilities 5,797,685 6,098,396
Long-term debt and capital lease obligations, less current
maturities 633,144 89,017
Stockholders' Equity:
Convertible preferred stock --- ---
Common stock 63,928 63,928
Paid-in-capital 29,411,702 29,411,702
Translation (loss) (19,983) ---
Accumulated deficit (24,368,425) (21,924,472)
------------ ------------
Total Stockholders' Equity 5,087,222 7,551,158
$ 11,518,051 $ 13,738,571
============ ============
</TABLE>
See notes to unaudited condensed consolidated financial statements.
C-1
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
March 31,
------------------------------------
1996 1995
----------- -----------
<S> <C> <C>
Net revenues $ 730,508 $ 982,902
Cost of products sold 1,197,455 690,972
----------- -----------
(466,947) 291,930
Expenses:
Selling 797,334 3,092,224
General and administrative 930,918 603,575
Research and new product
development 154,612 67,415
Reality exclusivity fees --- 1,727,390
----------- -----------
1,882,864 5,490,604
----------- -----------
Operating loss (2,349,811) (5,198,674)
Non operating expense (89,681) (16,066)
----------- -----------
Loss from continuing operations (2,439,492) (5,214,740)
Discontinued operations (Note 3):
Loss from operations, net of applicable
income tax benefit of $0 and $15,000 (4,461) (619,747)
----------- -----------
Net Loss $(2,443,953) $(5,834,487)
=========== ===========
Net loss per common and dilutive common
equivalent shares outstanding:
Continuing operations $ (0.38) $ (0.92)
Discontinued operations --- (0.11)
----------- -----------
$ (0.38) $ (1.03)
=========== ===========
Weighted average number of common and
dilutive common equivalent shares
outstanding 6,392,732 5,666,522
=========== ===========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
C-2
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months ended March 31,
1996 1995
------------ ------------
<S> <C> <C>
Operating Activities:
Net (loss) $(2,443,953) $(5,834,487)
Adjustments to reconcile net (loss) to net cash used in
operating activities:
Provision for Reality exclusivity fees --- 1,727,390
Depreciation and amortization 217,185 30,193
Provision for doubtful accounts and returns 83,168 46,857
Provision for inventory obsolescence 300,000 ---
Changes in operating assets and liabilities of
continuing operations (1,431,776) (907,517)
Discontinued operations -- noncash charges and working
capital changes --- (334,590)
----------- -----------
Net cash provided by (used in) operating activities (3,275,376) (5,272,154)
Investing Activities:
Equipment purchases, net of disposals (268,803) (2,064)
Purchase of Chartex (5,191,565) ---
Other --- (8,448)
Investing activities of discontinued operations --- (176,687)
Sale of WPC Holdings 7,250,000 ---
Expenses incurred with sale of WPC Holdings (681,608) ---
----------- -----------
Net cash provided by (used in) investing activities 1,108,024 (187,199)
Financing Activities:
Proceeds from issuance of Common Stock and other --- 3,167,715
Costs of Common Stock issuance --- (25,200)
Proceeds from issuance of notes to stockholders 2,160,000 ---
Decrease in notes payable (109,503) ---
Payments of long-term capital lease obligations (27,544) (17,386)
Payment to shareholder (19,795)
Financing activities of discontinued operations --- (3,379)
----------- -----------
Net cash provided by financing activities 2,003,158 3,121,750
----------- -----------
Increase (decrease) in cash and cash equivalents (164,194) (2,337,603)
Cash and cash equivalents at beginning of period 1,521,344 3,525,145
----------- -----------
Cash and cash equivalents at end of period $ 1,357,150 $ 1,187,542
=========== ===========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
C-3
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
NOTE 1 - BASIS OF PRESENTATION
---------------------
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the six months ended March 31, 1996
are not necessarily indicative of the results that may be expected for the
fiscal year ended September 30, 1996. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the fiscal year ended September 30,
1995.
NOTE 2 - NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
--------------------------------------------------------
Income (loss) per Common and Common Equivalent share is based on the
weighted average number of shares of Common Stock and common stock equivalents,
if dilutive, outstanding during the period.
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 June 20, 1995, the Company entered
into a definitive agreement with a third party to sell Holdings for total
consideration of $8.75 million, valued for accounting purposes at $8.285
million. The definitive agreement (as amended) required that the sale of
Holdings close in early 1996. The Company completed the sale of Holdings on
January 29, 1996. See Note 5.
As a result of adopting a formal plan of disposition of Holdings (which
contained the leisure time, institutional health care and other products
segments), the Company has accounted for Holdings as a discontinued operation,
using a March 10, 1995 measurement date and, accordingly, prior period financial
statements have been reclassified to reflect the discontinuation of these
segments. The Company has realized income from discontinued operations during
the period from the measurement date (March 10, 1995) through the date of
disposal (January 29, 1996) and ultimately realized a loss on the sale of
Holdings. Since the measurement date and through September 30, 1995, the Company
has recorded income from discontinued operations of $684,346. The Company
deferred recognition of its 100% share of Holdings loss of $(229,000)
C-4
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
NOTE 3 - DISCONTINUED OPERATIONS - CONTINUED
-----------------------------------
for the period from October 1, 1995 through January 29, 1996. The deferred loss
has been included with other expenses incurred and in connection with the sale
of Holdings.
Net revenues of the discontinued operations were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
----------------------- -----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenues $1,167,396 $2,933,238 $3,258,346 $4,445,412
</TABLE>
Net assets of Holdings have been segregated on the consolidated balance
sheets from their historic classifications to separately identify them. Details
of such amounts (exclusive of cash of $1,297,766 as of September 30, 1995) were
as follows:
<TABLE>
<CAPTION>
September 30
1995
------------
<S> <C>
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
===========
Property, plant and equipment-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
===========
</TABLE>
C-5
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
NOTE 4 - FINANCIAL CONDITION
-------------------
Historically, the Company has utilized capital to: a) fund losses from
continuing operations due principally to paying minimum royalties ("exclusivity
fees"), initiating the product launch of the female condom and obtaining FDA
approval; and b) purchase finished goods inventory related to the
licensing/royalty agreements with Chartex.
As discussed in Notes 3, 5 and 6, the Company has recently completed the
sale of Holdings and utilized the proceeds from the sale to purchase the
manufacturer and the Company's supplier of the female condom, Chartex
International, PLC and its parent, Chartex Resources Limited (collectively --
"Chartex"). The Company together with Chartex have fixed cash expenses of
approximately $400,000 per month before capital expenditures and debt repayment.
The Company had approximately $2.4 million of cash available for working capital
purposes immediately following the Chartex Acquisition on February 1, 1996. If
the Company meets its operating plans, it will need to source at least
approximately $2 million within the 4 months following March 31, 1996 and a
cumulative amount of approximately $8.1 million by March 31, 1997.
The Company intends to seek to source the foregoing amounts from one or
more of the following sources: refinance of the Chartex manufacturing facility
(including extraction of $1 million of cash from equity (appraised value in
excess of current loan value) totaling up to $2.7 million; up to $768,000 from
an economic development grant from the U.K. Regional Selective Assistance
Program (the "Program") which has been awarded to the Company. It is anticipated
that $300,000 will be received under this grant in 1996 and the remainder in
future years based on the achievement of certain employment, operational and
investment goals. The Company is required to utilize 50% of any amounts it
receives from this grant to prepay a portion of the (Pounds)520,000 note which
the Company issued as part of the consideration of the Chartex Acquisition; in
addition, the grant is repayable by the Company to the Program if certain
conditions to the grant are not satisfied; up to $0.6 million from a working
capital credit facility which would be based on eligible accounts receivable;
and approximately $6.0 million from sales of Common Stock. However, there can be
no assurance that the Company will be able to source all or any portion of this
required capital through these or other sources or that such amount, if raised,
will be sufficient to operate the Company until sales of the female condom
generate sufficient revenues to fund operations. In addition, any such funds
raised may be costly to the Company and/or dilutive to existing shareholders.
C-6
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
NOTE 4 - FINANCIAL CONDITION - CONTINUED
-------------------------------
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 has had preliminary contacts
with two possible sources for a refinancing of the Chartex facility. Based on
these discussions, management believes that the Company will be able to complete
a refinancing before the end of 1996. The Company does not currently have in
place any accounts receivable financing or other line of credit financing.
NOTE 5 - SALE OF HOLDINGS
----------------
On June 20, 1995 the Company entered into a stock purchase agreement (the
"Purchase Agreement") with WPC Acquisition Corporation ("Buyer"), an affiliate
of JLS Investment Group, Inc. and M & I Ventures Corporation for the sale of
100% of the issued and outstanding common stock of its wholly-owned subsidiary,
Holdings.
The Company believed the Holdings and Female Health businesses were
disparate in nature and that selling Holdings and concentrating on the Female
Health business represented the best long term opportunity.
The sale of Holdings was approved by the Company's shareholders on January
18, 1996. The total consideration received was $8.75 million and the fair value
of the aggregate consideration to the Company in connection with the sale was
$8.285 million. On January 29, 1996 the sale was completed. The excess of the
Company's investment in Holdings at closing (adjusted for intercompany amounts
and the reimbursement to Holdings of certain expenses and after deducting the
net deferred operating losses of Holdings for the period October 1, 1995 through
the date of sale) over the fair value of the consideration received was $4,461.
The Company recorded the excess as a loss on sale of discontinued operations
during the quarter ended March 31, 1996.
In connection with the Sale and except as specifically indicated in the
Purchase Agreement, Buyer automatically assumed all of the liabilities of
Holdings. However, the Company remains contingently liable for any obligations
of the Company incurred in connection with Holdings if the Company is not able
to get a release of such liability from the third-party creditor (the
"Contingent Liabilities"). These Contingent Liabilities include the lease of
Holdings' facilities (approximately $3.6 million of future payments) and
employment agreements (with future payments of approximately $1.1 million) for
C-7
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
NOTE 5 - SALE OF HOLDINGS - CONTINUED
----------------------------
certain officers of Holdings. Accordingly, if Buyer fails to pay any of the
Contingent Liabilities, the Company would be required to pay them and then seek
to collect from Buyer the amount paid by the Company.
NOTE 6 - ACQUISITION OF CHARTEX
----------------------
On November 20, 1995 the Company entered into an agreement (the
"Agreement") to purchase all of the issued and outstanding share capital of
Chartex Resources Limited the parent company and sole owner of stock in Chartex
International, PLC from Stamina Investments Limited ("Stamina"), a company
incorporated in the British Virgin Islands. Completion of the acquisition of
Chartex was conditioned on the Company's completion of its sale of Holdings (see
Note 5). The acquisition of Chartex closed on February 1, 1996.
Chartex is based in London, England and owns certain world-wide
intellectual property and proprietary manufacturing technology for the female
condom. Chartex licenses the rights to sell the female condom to marketing
partners throughout the world, including the Company in the U.S., Canada and
Mexico and owns a manufacturing facility in London to supply the world-wide
needs of the female condom.
The Agreement provided for total consideration of (Pounds)4.0 million ($6.1
million) with a fair value of $5.9 million. Consideration included nonrefundable
payments to fund Chartex's operating losses (Pounds)0.7 million ($1.1 million),
(Pounds)2.45 million ($3.7 million) in cash at closing plus interest on
(Pounds)2.45 million at LIBOR plus 1% from December 1, 1995 through closing
($0.05 million). In addition, the Company agreed to issue notes payable of
(Pounds)312,500 ($0.5 million) due 6 months after closing with interest at LIBOR
plus 1 1/8%, and a non-interest bearing note payable of (Pounds)520,000 ($0.8
million) with a discounted present value of (Pounds)375,000 or $0.6 million due
three years after closing.
Prior to closing, Stamina and a nonprofit foundation which has provided
Stamina and Chartex with debt funding waived repayment of approximately
(Pounds)20 million ($30 million) in notes payable by Chartex to them and paid
(Pounds)10 million ($15 million) in outstanding notes payable from Chartex to a
third party bank which were guaranteed by this nonprofit foundation.
C-8
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
NOTE 6 - ACQUISITION OF CHARTEX - CONTINUED
----------------------------------
The Company had the following recorded assets and (liabilities) at
September 30, 1995 which arose in connection with transactions with Chartex
before its purchase by the Company:
Prepaid royalty asset............ $ 1,830,578
Capitalized option fee (included in other assets $ 150,000
Accrued minimum royalties....................... $(4,761,198)
------------
Net liability $(2,780,620)
============
These assets and liabilities were eliminated at the date of purchase of
Chartex (February 1, 1996) and effectively reduced the aggregate fair value of
consideration paid for Chartex (including expenses) from $6.3 million to $3.5
million. The fair value of the net assets purchased was $11.7 million.
The acquisition of Chartex is accounted for as a purchase. The fair value
of total consideration paid for Chartex (plus transaction expenses of $0.35
million) is less than the fair value of net assets purchased by $8.2 million
("bargain purchase"). The Company reduced the fair value of Chartex's long-term
assets by the amount of the bargain purchase on a pro-rata basis. Costs incurred
in connection with the acquisition of Chartex and payments for pre-close funding
of Chartex's operating losses have included as part of the total cost of the
Chartex acquisition.
At December 31, 1995, Chartex had tax losses of approximately (Pounds)39
million ($59.2 million) that may be available to be carried forward and set off
against future taxable profits.
The results of Resources and Chartex are combined with the Company after
the February 1, 1996 acquisition date.
C-9
<PAGE>
THE FEMALE HEALTH COMPANY AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
Unaudited proforma consolidated results of operations for the three months
ended March 31, 1996 and 1995 and for the six months ended March 31, 1996 and
1995 as though Chartex had been acquired as of October 1, 1994 follow:
<TABLE>
<CAPTION>
Three Months Ended March 31, Six Months Ended March 31,
---------------------------- ---------------------------
1996 1995 1996 1995
---------------------------- ---------------------------
<S> <C> <C> <C> <C>
Net revenues $ 287,000 $ 791,000 $ 786,000 $ 1,466,000
Net loss (2,522,000) (5,392,000) (3,828,000) (8,977,000)
Net loss per share $ (0.39) $ (1.00) $ (0.60) $ (1.58)
=========== =========== =========== ===========
Weighted average number of
common and dilutive common
equivalent shares outstanding 6,392,732 5,392,693 6,392,732 5,666,522
=========== =========== =========== ===========
</TABLE>
The above amounts reflect adjustments for amortization of intangibles, and
depreciation based upon revalued purchased assets, imputed interest on borrowed
funds, and elimination of intercompany transactions.
NOTE 7 - INVENTORIES
-----------
The components of inventory consist of the following:
<TABLE>
<CAPTION>
March 31, September 30,
1996 1995
---------- -------------
<S> <C> <C>
Raw Material $ 617,590 $ ---
Finished Goods 2,302,375 3,192,570
---------- ----------
$2,919,965 $3,192,570
========== ==========
</TABLE>
C-10
<PAGE>
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
The following unaudited pro forma statements of operations for the year ended
September 30, 1995 and for the six month period ended March 31, 1996,
(collectively--"Pro Forma Financial Statements") give effect to the sale of 100%
of the outstanding stock of WPC Holdings, Inc., a wholly-owned subsidiary of The
Female Health Company ("FHC" or "Company"). The sale was completed on January
29, 1996.
The Pro Forma Financial Statements also give effect to the purchase of all the
issued and outstanding share capital of Chartex Resources Limited and Subsidiary
("Chartex") in accordance with the terms of the Chartex Acquisition agreement
dated November 20, 1995 (See Note 18 to FHC's Notes to Consolidated Financial
Statements). The acquisition was completed on February 1, 1996.
The unaudited condensed consolidated statements of operations of Chartex
presented herein for the twelve month period ended September 30, 1995 was
derived from the unaudited condensed consolidated profit and loss account of
Chartex for the nine month periods ended September 30, 1995 and 1994, and
Chartex's audited historical consolidated profit and loss account for the year
ended December 31, 1994. The unaudited condensed consolidated statement of
operations of Chartex for the four month period ended January 31, 1996 was
derived from the unaudited condensed consolidated profit and loss account of
Chartex for the nine month period ended September 30, 1995; Chartex's audited
historical consolidated profit and loss account for the year ended December 31,
1995 and the unaudited condensed consolidated profit and loss account of Chartex
for the one month period ended January 31, 1996. For the two month period ended
March 31, 1996, the Chartex operating results are consolidated within The Female
Health Company Historical unaudited interim condensed consolidated operating
results.
Because the operations of Holdings has been reclassified as discontinued
operations in FHC's historical financial statements and because the pro forma
statement of operations for the year ended September 30, 1995 and for the six
month period ended March 31, 1996 only reflect continuing operations, there is
no separate pro forma adjustment to remove Holdings operations. However, the
operating results of Holdings has historically had a significant impact on the
Company's revenues, net income and cash flows. See the Company's Consolidated
Financial Statements (including the notes thereto) appearing elsewhere in this
Registration Statement. Also, refer to "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Liquidity and Sources of
Capital" appearing elsewhere in this Registration Statement.
The sale of Holdings resulted in a nonrecurring loss on the sale of discontinued
operations of $4,461 which is net of transaction costs of $725,853. Because this
loss is nonrecurring, it has not been included as a pro forma adjustment in the
Company's unaudited pro forma statement of operations.
The unaudited condensed consolidated statements of operations for Chartex for
the 12 month period ended September 30, 1995 and for the six month period ended
March 31, 1996, as adjusted for US/UK GAAP differences, have been translated to
U.S. dollars, in accordance with Article 3-20(b) of Regulation S-X, and
reclassified to the FHC reporting format. An exchange rate of 1.5843 dollars per
pound and 1.5460 dollars per pound were used, respectively. The pro forma
adjustments have been computed assuming the transactions were consummated at the
beginning of each fiscal year (October 1, 1994 and October 1, 1995;
respectively) and include adjustments which give effect to events that are
attributable to the transaction and that are expected to have a continuing
impact.
The Pro Forma Financial Statements have been prepared by FHC management in part
based on financial information obtained from Chartex. These Pro Forma Financial
Statements may not be indicative of the results that actually would have
occurred if the transactions had occurred on the dates indicated or which may be
obtained in the future. The Pro Forma Financial Statements give effect to the
proposed transactions under the assumptions and adjustments in the accompanying
notes to the unaudited pro forma statement of operations. The Pro Forma
Financial Statements should be read in conjunction with the audited financial
statements and notes of FHC and Chartex contained elsewhere in this Registration
Statement.
D-1
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
YEAR ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
The Female
Health US/UK US GAAP
Company Chartex GAAP Chartex
Historical Historical Differences As Adjusted Historical
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Pounds) (Pounds) (Pounds)
(a) (b) (a) + (b)
Net revenues $ 2,179,155 1,835,000 0 1,835,000 $ 2,907,191
Cost of sales $ 2,558,420 3,153,000 10,000 3,163,000 $ 5,011,141
-------------------------------------------------------------------------
$ (379,265) (1,318,000) (10,000) (1,328,000) $ (2,103,950)
Operating expenses: $ -
Selling and distribution $ 4,276,610 1,122,000 0 1,122,000 $ 1,777,585
General and administrative $ 1,042,715 1,611,000 24,000 1,635,000 $ 2,590,331
Research and product
development $ 135,121 0 0 0 $ -
Reality exclusivity fees $ 2,578,941 0 0 0 $ -
-------------------------------------------------------------------------
$ 8,033,387 2,733,000 24,000 2,757,000 $ 4,367,915
-------------------------------------------------------------------------
LOSS FROM OPERATIONS $(8,412,652) (4,051,000) (34,000) (4,085,000) $ (6,471,866)
Interest expense net of other non-
operating income (expense) $ (34,306) (1,931,000) (350,000) (2,281,000) $ (3,613,788)
-------------------------------------------------------------------------
LOSS FROM CONTINUING
OPERATIONS $(8,446,958) (5,982,000) (384,000) (6,366,000) $(10,085,654)
=========================================================================
Weighted average number of
common shares outstanding 6,023,460
===========
Loss per common share from
continuing operations S (1.40)
===========
</TABLE>
<TABLE>
<CAPTION>
Eliminate
Pro Forma Intercompany As Adjusted
Adjustments Transactions Combined
--------------------------- ------------
(c) (d)
<S> <C> <C> <C>
Net revenues $ - $(2,522,065) $ 2,564,281
Cost of sales $(1,594,000) $(2,522,065) $ 3,453,496
-------------------------- ------------
$ 1,594,000 $ - $ (889,215)
Operating expenses:
Selling and distribution $ - $ (183,721) $ 5,870,474
General and administrative $ (424,000) $ - $ 3,209,046
Research and product
development $ 135,121
Reality exclusivity fees $ - $(2,578,941) $ -
-------------------------- ------------
$ (424,000) $(2,762,662) $ 9,214,640
-------------------------- ------------
LOSS FROM OPERATIONS $ 2,018,000 $ 2,762,662 $(10,103,856)
Interest expense net of other non-
operating income (expense) $ 3,178,000 $ - $ (470,094)
-------------------------- ------------
LOSS FROM CONTINUING
OPERATIONS $ 5,196,000 $ 2,762,662 $(10,573,950)
========================== ============
Weighted average number of
common shares outstanding 6,023,460
============
Loss per common share from
continuing operations $ (1.76)
============
</TABLE>
D-2
<PAGE>
NOTES TO UNAUDITED PRO FORMA
STATEMENT OF OPERATIONS
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
YEAR ENDED SEPTEMBER 30, 1995
Following are the pro forma adjustments which have been reflected in the
accompanying unaudited pro forma statement of operations related to the
acquisition of Chartex:
(a) Chartex historical amounts have been derived from the unaudited condensed
consolidated profit and loss account of Chartex for the nine month period
ended September 30, 1995 and 1994, and Chartex's audited historical
consolidated profit and loss account for the year ended December 31, 1994.
(b) Chartex Historical amounts included herein reflect adjustments to conform
amounts to US GAAP. The differences between UK and US GAAP which give rise
to these adjustments in income are as follows:
<TABLE>
<CAPTION>
General Interest
and Expense and
Cost of Sales Administrative Other
-------------- -------------- ---------------
<S> <C> <C> <C>
Additional depreciation and amortization (Pound) 10,000 (Pound) 24,000
Increase in interest expense on borrowings (Pound) 85,000
Eliminate interest income recorded upon waiver 265,000
-------------- -------------- ---------------
TOTALS (Pound) 10,000 (Pound) 24,000 (Pound) 350,000
-------------- -------------- ---------------
</TABLE>
See Note 28 to Chartex's Consolidated Financial Statements as of and for the
year ended December 31, 1994 for further description of these items.
(c) Adjustments resulting from reduction of depreciation and amortization of
property, plant and equipment and intellectual property rights due to
revised basis in these assets as a result of application of purchase
accounting. Depreciation is calculated on a straight-line basis over the
estimated remaining life of the related asset, including 25 years for the
manufacturing facility, 8 years for machinery and equipment, 3 years for
furniture and fixtures and the remaining average life of the intellectual
property (12 1/4 years). Adjustments also include depreciation on equipment
purchased from supplier.
Elimination of net interest expense, including interest expense on Chartex's
recorded debt which is being waived/repaid by Stamina and the nonprofit
foundation as part of the Chartex acquisition transaction ($3,380,000) net
of annual interest expense on debt incurred as part of the purchase price
consideration ($60,000) and interest on notes payable issued to a
stockholder and an officer/stockholder annual ($260,000) which issuance was,
in part, a prerequisite to the Chartex acquisition. Also, includes a
reduction in net interest expense as a result of additional interest income
of $118,000 on the long-term discounted note receivable which is part of the
consideration received in the sale of Holdings.
D-3
<PAGE>
NOTES TO UNAUDITED PRO FORMA
STATEMENT OF OPERATIONS--Continued
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
YEAR ENDED SEPTEMBER 30, 1995
Adjustments are as follows:
<TABLE>
<CAPTION>
Depreciation and Amortization
-------------------------------
General Interest
and Expense and
Cost of Sales Administrative Other
------------- -------------- -----------
Increase (Decrease)
<S> <C> <C> <C>
Reduction in depreciation and amortization due to
application of purchase accounting:
Building $ (77,000) $ (14,000)
Machinery and equipment (1,440,000) (304,000)
Furniture, fixtures and automobiles (77,000) (14,000)
Intellectual Property rights -- (92,000)
Adjustments to interest expense:
Elimination of interest on debt being repaid/waived
at date of acquisition $(3,380,000)
Interest expense on acquisition debt at 10% 60,000
Interest expense on notes to stockholder and officer
at 12% 260,000
Interest income on note receivable at 15%. The note is
part of the consideration in the sale of Holdings (118,000)
----------- --------- -----------
TOTALS $(1,594,000) $(424,000) $(3,178,000)
=========== ========= ===========
</TABLE>
(d) Eliminate intercompany sales and costs of sales of $2,522,065. The cost of
sales elimination does not include any adjustment to defer intercompany
profits or losses on sales of product from Chartex to FHC to the extent that
product has not been sold to FHC's customers. Any such deferral would only
result in an equal and offsetting decrease or increase in FHC's provision
for inventory obsolescence reserve.
Eliminate FHC's accrual of minimum royalties due to Chartex ($2,578,941) and
expensing of the prepaid royalty asset ($183,721). The prepaid royalties
originated from prior year payments to Chartex and the previous owner of the
rights to the female condom. FHC's policy was to expense a pro rata portion
of the annual minimum royalty amount until a positive election was made that
it no longer wished to remain exclusive or until it was declared
nonexclusive by Chartex. There is no corresponding and offsetting
elimination of income on Chartex's unaudited historical financial statements
for the 12 months ended September 30, 1995 as no income related to minimum
and prepaid royalties was recorded.
D-4
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
SIX MONTHS ENDED MARCH 31,1996
<TABLE>
<CAPTION>
The Female
Health US/UK US GAAP
Company Chartex GAAP Chartex
Historical Historical Differences As Adjusted Historical
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Pounds) (Pounds) (Pounds)
(a) (b) (a) + (b)
Net revenues $ 730,508 (Pounds)36,000 (Pounds)0 (Pounds)36,000 $ 55,656
Cost of sales $ 1,197,455 (Pounds)590,000 (Pounds)3,000 (Pounds)593,000 $ 916,778
--------------------------------------------------------------------------------------------
$ (466,947) ((Pounds)554,000) ((Pounds)3,000) ((Pounds)557,000) $ (861,122)
Operating expenses:
Selling and distribution $ 797,334 (Pounds)133,000 (Pounds)0 (Pounds)133,000 $ 205,618
General and administrative $ 930,918 (Pounds)437,000 (Pounds)8,000 (Pounds)445,000 $ 687,970
Research and product
development $ 154,612 (Pounds)2,000 (Pounds)0 (Pounds)2,000 $ 3,092
Reality exclusivity fees $ - (Pounds)0 (Pounds)0 (Pounds)0 $ -
--------------------------------------------------------------------------------------------
$ 1,882,864 (Pounds)572,000 (Pounds)8,000 (Pounds)580,000 $ 896,680
--------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS $(2,349,811) ((Pounds)1,126,000) ((Pounds)11,000) ((Pounds)1,137,000) $(1,757,802)
Interest expense net of other non-
operating income (expense) $ (89,681) (Pounds)792,000 ((Pounds)1,600,000) ((Pounds)808,000) $(1,249,168
--------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS $(2,439,492) ((Pounds)334,000) ((Pounds)1,611,000) ((Pounds)1,945,000) $(3,006,970)
============================================================================================
Weighted average number of
common shares outstanding 6,392,732
===========
Loss per common share from
continuing operations S (0.38)
===========
</TABLE>
<TABLE>
<CAPTION>
Pro Forma As Adjusted
Adjustments Combined
----------- -----------
(c)
<S> <C> <C>
Net revenues $ - $ 786,164
Cost of sales $ (513,200) $ 1,601,033
----------- -----------
$ 513,200 $ (814,869)
Operating expenses:
Selling and distribution $ - $ 1,002,952
General and administrative $ (110,200) $ 1,508,688
Research and product
development $ 157,704
Reality exclusivity fees $ - $ -
----------- -----------
$ (110,200) $ 2,669,344
----------- -----------
LOSS FROM OPERATIONS $ 623,400 $(3,484,213)
Interest expense net of other non-
operating income (expense) $ 995,000 $ (343,849)
----------- -----------
INCOME (LOSS) FROM CONTINUING
OPERATIONS $ 1,618,400 $(3,828,062)
=========== ===========
Weighted average number of
common shares outstanding 6,392,732
===========
Loss per common share from
continuing operations $ (0.60)
===========
</TABLE>
D-5
<PAGE>
NOTES TO UNAUDITED PRO FORMA
STATEMENT OF OPERATIONS
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
SIX MONTHS ENDED MARCH 31, 1996
Following are the pro forma adjustments which have been reflected in the
accompanying unaudited pro forma statement of operations related to the
acquisition of Chartex:
(a) Chartex historical amounts include the operating results for the four month
period ended January 31, 1996 and have been derived from the unaudited
condensed consolidated profit and loss account of Chartex for the nine month
period ended September 30, 1995; Chartex's audited historical consolidated
profit and loss account for the year ended December 31, 1995; and the
unaudited condensed consolidated profit and loss account of Chartex for the
one month period ended January 31, 1996. Chartex's operating results for the
two month period ended March 31, 1996 are consolidated within The Female
Health Company Historical unaudited interim operating results.
(b) Chartex Historical amounts included herein reflect adjustments to conform
amounts to US GAAP. The differences between UK and US GAAP which give rise
to these adjustments in income are as follows:
<TABLE>
<CAPTION>
General Interest
and Expense and
Cost of Sales Administrative Other
--------------- -------------- -----------------
<S> <C> <C> <C>
Additional depreciation and amortization (Pounds) 3,000 (Pounds)8,000
Increase in interest expense on borrowings (Pounds) 29,000
Eliminate interest income recorded upon waiver 1,571,000
--------------- ------------- -----------------
TOTALS (Pounds) 3,000 (Pounds)8,000 (Pounds)1,600,000
=============== ============= =================
</TABLE>
See Note 28 to Chartex's Consolidated Financial Statements as of and for the
year ended December 31, 1995 for further description of these items.
(c) Adjustments resulting from reduction of depreciation and amortization of
property, plant and equipment and intellectual property rights due to
revised basis in these assets as a result of application of purchase
accounting. Depreciation is calculated on a straight-line basis over the
estimated remaining life of the related asset, including 25 years for the
manufacturing facility, 8 years for machinery and equipment, 3 years for
furniture and fixtures and the remaining average life of the intellectual
property (12 1/4 years). Adjustments also include depreciation on equipment
purchased from supplier.
Elimination of net interest expense, including interest expense on Chartex's
recorded debt which is being waived/repaid by Stamina and the nonprofit
foundation as part of the Chartex acquisition transaction ($1,095,000) net
of interest expense for six months on debt incurred as part of the purchase
price consideration ($30,000) and interest on notes payable issued to a
stockholder and an officer/stockholder ($130,000) which issuance was, in
part, a prerequisite to the Chartex acquisition. Also, includes a reduction
in net interest expense as a result of additional interest income of $60,000
on the long-term discounted note receivable which is part of the
consideration received in the sale of Holdings.
D-6
<PAGE>
NOTES TO UNAUDITED PRO FORMA
STATEMENT OF OPERATIONS--Continued
THE FEMALE HEALTH COMPANY AND SUBSIDIARIES
SIX MONTHS ENDED MARCH 31, 1996
Adjustments are as follows:
<TABLE>
<CAPTION>
Depreciation and Amortization
------------------------------
General Interest
and Expense and
Cost of Sales Administrative Other
------------- -------------- -----------
Increase (Decrease)
<S> <C> <C> <C>
Reduction in depreciation and amortization due to
application of purchase accounting:
Building $ -- $ (35,600)
Machinery and equipment (513,200) (43,300)
Furniture, fixtures and automobiles -- (11,700)
Intellectual Property Rights -- (19,600)
Adjustments to interest expense:
Elimination of interest on debt being repaid/waived
at date of acquisition $(1,095,000)
Interest expense on acquisition debt at 10% 30,000
Interest expense on notes to stockholder and officer
at 12% 130,000
Interest income on note receivable at 15%. The note is
part of the consideration in the sale of Holdings (60,000)
--------- --------- -----------
TOTALS $(513,200) $(110,200) $ (995,000)
========= ========= ===========
</TABLE>
D-7
<PAGE>
CHARTEX RESOURCES LIMITED
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
E-i
<PAGE>
CHARTEX RESOURCES LIMITED AND SUBSIDIARY
Consolidated financial statements
<TABLE>
<CAPTION>
Contents Page
<S> <C>
Statement of directors' responsibilities 1
Independent auditors' report 2
Consolidated profit and loss account 3
Consolidated balance sheet 4
Consolidated cash flow statement 5
Notes 6-32
</TABLE>
E-ii
<PAGE>
CHARTEX RESOURCES LIMITED AND SUBSIDIARY
Statement of directors' responsibilities
United Kingdom company law requires the directors to prepare financial
statements for each financial year which give a true and fair view of the state
of affairs of the company and of the group, and of the profit or loss for that
period. In preparing those financial statements the directors are required to
. select suitable accounting policies and then apply them consistently;
. make judgements and estimates that are reasonable and prudent;
. state whether applicable accounting standards have been followed,
subject to any material departures disclosed and explained in the
financial statements.
The directors are responsible for keeping proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
company and to enable them to ensure that the financial statements comply with
the Companies Act 1985. They have general responsibility for taking such
steps as are reasonably open to them to safeguard the assets of the group and
to prevent and detect fraud and other irregularities. The directors are also
responsible for preparing the financial statements in accordance with the
assumptions made regarding the appropriateness of the going concern basis,
which is referred to in the basis of preparation note on pages 6 and 7.
E-1
<PAGE>
Independent auditors' report
The Board of Directors and Shareholders of Chartex Resources Limited
We have audited the accompanying consolidated balance sheets of Chartex
Resources Limited and its subsidiary ("the group") as of 31 December 1995 and
1994, and the related consolidated profit and loss accounts and statements of
cash flows for each of the years in the three year period ended 31 December
1995. These consolidated 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.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the group
as of 31 December 1995 and 1994, and the results of its operations and its
cash flows for each of the years in the three year period ended 31 December
1995, in conformity with generally accepted accounting principles in the
United Kingdom.
The accompanying consolidated financial statements have been prepared assuming
that the group will continue as a going concern. As discussed in Note 1, the
group has suffered recurring losses from operations and has a net capital
deficiency that raises substantial doubt about its ability to continue as a
going concern. Note 1 also provides details of the directors' plans in regard
to these matters. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Accounting principles generally accepted in the United Kingdom vary in certain
significant respects from accounting principles generally accepted in the
United States. Application of accounting principles generally accepted in the
United States would have affected results from operations for each of the
years in the three year period ended 31 December 1995 and shareholders' equity
as of 31 December 1995 and 1994, to the extent summarised in Note 28 to the
consolidated financial statements.
KPMG 18 April 1996
Chartered Accountants
Registered Auditors
London
England
E-2
<PAGE>
CHARTEX RESOURCES LIMITED AND SUBSIDIARY
Consolidated profit and loss account
for the years ended 31 December 1995, 1994 and 1993
<TABLE>
<CAPTION>
Note 1995 1994 1993
(Pounds)000 (Pounds)000 (Pounds)000
<S> <C> <C> <C> <C>
TURNOVER 2 428 5,613 1,210
Cost of sales 3 (1,805) (4,539) (8,065)
------- ------- -------
GROSS (LOSS)/PROFIT (1,377) 1,074 (6,855)
Marketing and distribution costs 3 (753) (1,436) (2,418)
Administrative expenses 3 (1,792) (1,954) (4,157)
Other operating income - - 25
------- ------- -------
OPERATING LOSS (3,922) (2,316) (13,405)
Interest receivable and similar income 6 17 66 36
Interest payable and similar charges 7 (2,286) (1,808) (1,912)
Interest waived 7 1,446 1,909 -
------- ------- -------
LOSS ON ORDINARY ACTIVITIES BEFORE AND AFTER
TAXATION 2-8 (4,745) (2,149) (15,281)
======= ======= =======
</TABLE>
A statement of movements on reserves is given in note 18.
The results for the three years all arise from continuing operations. There are
no recognised gains or losses in either the current or prior years other than
those included in the profit and loss account.
E-3
<PAGE>
CHARTEX RESOURCES LIMITED AND SUBSIDIARY
Consolidated balance sheet
at 31 December 1995 and at 31 December 1994
<TABLE>
<CAPTION>
Note 1995 1994
(Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000
<S> <C> <C> <C> <C> <C>
FIXED ASSETS
Intangible assets 9 1,593 1,725
Tangible assets 10 6,522 7,999
-------- --------
8,115 9,724
CURRENT ASSETS
Stocks 11 428 509
Debtors 12 161 896
Cash at bank and in hand 224 875
-------- --------
813 2,280
CREDITORS: amounts falling
due within one year 13 (26,530) (23,548)
-------- --------
NET CURRENT LIABILITIES (25,717) (21,268)
-------- --------
TOTAL ASSETS LESS CURRENT LIABILITIES (17,602) (11,544)
CREDITORS: amounts falling
due after more than one year 14 (7,000) (8,375)
PROVISIONS FOR LIABILITIES AND CHARGES 15 (162) (200)
-------- --------
NET LIABILITIES (24,764) (20,119)
======== ========
CAPITAL AND RESERVES
Called up share capital 17 6,000 6,000
Share premium 18 11,575 11,575
Capital contribution reserve 18 735 635
Profit and loss account 18 (43,074) (38,329)
-------- --------
SHAREHOLDERS' DEFICIT 19 (24,764) (20,119)
======== ========
</TABLE>
These financial statements were approved by the board of directors on 18 April
1996, and signed on its behalf by:
M POPE
Director
E-4
<PAGE>
CHARTEX RESOURCES LIMITED AND SUBSIDIARY
Consolidated cash flow statement
for the years ended 31 December 1995, 1994 and 1993
<TABLE>
<CAPTION>
Note 1995 1994 1993
(Pounds)000 (Pounds)000 (Pounds)000
<S> <C> <C> <C> <C>
NET CASH OUTFLOW FROM OPERATING ACTIVITIES 22 (2,098) (1,219) (9,726)
RETURN ON INVESTMENTS AND SERVICING OF FINANCE
Interest received 17 32 36
Interest paid (986) (741) (1,494)
------- ------- -------
NET CASH OUTFLOW FROM RETURNS ON INVESTMENT AND
SERVICING OF FINANCE (969) (709) (1,458)
INVESTING ACTIVITIES
Purchase of tangible fixed assets (7) (116) (744)
Purchase of intangible fixed assets - (1) (177)
Disposal of tangible fixed assets 18 545 29
------- ------- -------
NET CASH INFLOW/(OUTFLOW) FROM INVESTING ACTIVITIES 11 428 (892)
------- ------- -------
NET CASH OUTFLOW BEFORE FINANCING (3,056) (1,500) (12,076)
FINANCING
Proceeds from rights issue 23 - - 2,000
Capital contributions received 23 100 635 -
Subordinated and other loans 23 2,206 2,554 9,200
Repayment of long-term loans 23 - (1,125) (2,000)
------- ------- -------
NET CASH INFLOW FROM FINANCING 2,306 2,064 9,200
------- ------- -------
(DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS 24 (750) 564 (2,876)
======= ======= =======
</TABLE>
E-5
<PAGE>
CHARTEX RESOURCES LIMITED AND SUBSIDIARY
NOTES
(forming part of the consolidated financial statements)
1 ACCOUNTING POLICIES
The following accounting policies have been applied consistently in
dealing with items which are considered material in relation to the
consolidated financial statements of Chartex Resources Limited ("the
company") and subsidiary (together referred to as "the group").
BASIS OF PREPARATION
The consolidated balance sheets of the group as of 31 December 1995 and
1994 and the related consolidated profit and loss account and cash flow
statement for each of the three years ended 31 December 1995, 1994 and
1993, are not the company's statutory accounts for these financial
years. Statutory accounts for the years ended 31 December 1995, 1994
and 1993 have been delivered to the registrar of companies for England
and Wales. The auditors, KPMG, have reported on the statutory accounts
for these financial years; these reports were unqualified and did not
contain a statement under section 237(2) or (3) of the Companies Act
1985.
The consolidated financial statements have been prepared in accordance
with applicable accounting standards generally accepted in the United
Kingdom and under the historical cost accounting rules.
The financial statements have been prepared on the going concern basis
which assumes that the company and its subsidiary will continue to
trade. The validity of this assumption is dependant upon future sales
of the group's product generating positive cash flows and, in the
meantime, on the company's ability to obtain adequate funding to enable
the company and its subsidiary to pay their debts as they fall due. The
going concern assumption is subject to considerable uncertainty because:
. the group has yet to trade profitably and has incurred significant
recurring losses resulting in a net capital deficiency;
. current liabilities exceed current assets by (Pounds)25,717,000 as
at 31 December 1995;
. the group was acquired with effect from 1 February 1996 by its new
parent company, The Female Health Company ("FHC"). Although
completion of this transaction resulted in the elimination of
approximately (Pounds)31 million of the group's borrowings, the
enlarged group currently has insufficient financial resources to
enable it to meet its estimated working capital requirements for
the foreseeable future;
. until such time as positive cash flows are generated from sales, FHC
is considering a number of proposed actions in order to raise the
finance required to enable the enlarged group to continue trading
in the meantime. In order to secure the required finance, it is
anticipated that any combination of potential actions to raise
finance would need to include the raising of new equity capital by
FHC;
E-6
<PAGE>
CHARTEX RESOURCES LIMITED AND SUBSIDIARY
Notes (continued)
1 ACCOUNTING POLICIES (continued)
BASIS OF PREPARATION (continued)
. FHC has raised $1 million through the issue of debt securities
since 1 February 1996 and the group has received an offer of a
regional assistance development grant in the amount of
(Pounds)480,000, the receipt of which is subject to the fulfilment
of certain conditions. FHC is currently seeking to raise
approximately $5 million from a proposed offering of new equity
shares. FHC may also need to extend a $1 million bridging loan from
a stockholder which is due for repayment on 20 November 1996 and
the company may need to refinance the mortgage loan of
(Pounds)1,062,500 (refer to note 13) which is repayable by 31
October 1996. Another potential source of finance would include the
discounting of trade debtors by FHC;
. the directors have prepared projections of future cash flows.
Although the margin shown by these projections is not large, on the
basis of these projections, and on the assumption that the proposed
offering raises approximately $5 million and that the loans
referred to above can be renewed or replaced, the directors
consider it appropriate to adopt the going concern basis in
preparing the financial statements; and
. the directors of both the company and FHC believe that the group
will be able to trade profitably in the future and, in the
meantime, are confident that FHC will be able to raise the finance
required to provide the group with the necessary funds to enable it
to continue trading for the foreseeable future. However, in the
event that it becomes clear that this will not be possible, and in
the absence of the possibility of securing adequate funds from
alternative sources at that time, the directors would have to
consider winding up the group.
If the group were to be wound up, adjustments would have to be made in
the consolidated financial statements to reduce the value of assets to
their recoverable amount, to provide for any further liabilities that
may arise and to reclassify fixed assets and long term liabilities as
current assets and liabilities.
BASIS OF CONSOLIDATION
The financial statements for the group consolidate the accounts of
Chartex Resources Limited and its subsidiary, Chartex International PLC.
Transactions between the company and its subsidiary have been eliminated
in arriving at the consolidated financial statements.
The group's parent company during the year, Stamina Investments Limited
("Stamina"), does not prepare consolidated financial statements (refer
to note 26).
E-7
<PAGE>
CHARTEX RESOURCES LIMITED AND SUBSIDIARY
Notes (continued)
1 ACCOUNTING POLICIES (continued)
TANGIBLE FIXED ASSETS AND DEPRECIATION
Depreciation is provided by the group to write off the cost less the
estimated residual value of tangible fixed assets by equal instalments
over their estimated useful economic lives as follows:
<TABLE>
<CAPTION>
<S> <C><C>
Freehold buildings - 2% straight line
Leasehold buildings - life of lease
Leasehold improvements - 10% straight line
Furniture, fixtures and
fittings - 10% straight line
Office equipment - 25% straight line
Motor vehicles - 25% reducing balance
Plant and machinery - 10% to 20% straight line from the date of becoming
operational
</TABLE>
INTELLECTUAL PROPERTY RIGHTS
Intellectual property rights purchased by the group are capitalised and
amortised in equal instalments over the remaining unexpired average life
of the relevant patents. The remaining unexpired average life of the
intellectual property rights as at 31 December 1995 was 12 years (1994:
13 years; 1993: 14 years).
FOREIGN CURRENCIES
Transactions in foreign currencies are recorded using the rate of
exchange ruling at the date of the transaction. Monetary assets and
liabilities denominated in foreign currencies are translated using the
rate of exchange ruling at the balance sheet date and the gains or
losses on translation are included in the profit and loss account.
OPERATING LEASES
Rentals paid under operating leases are charged to the profit and loss
account on a straight line basis over the life of the lease.
RESEARCH AND DEVELOPMENT EXPENDITURE
Expenditure on research and development is written off against profits
in the year in which it is incurred, with the exception of costs which
had been incurred in the development of production equipment (refer to
note 10).
STOCKS
Stocks are stated at the lower of cost and net realisable value.
TAXATION
The charge for taxation is based on the result for the year and takes
into account taxation deferred because of timing differences between the
treatment of certain items for taxation and accounting purposes.
Provision is made for deferred tax only to the extent that it is
probable that an actual liability will crystallise.
E-8
<PAGE>
CHARTEX RESOURCES LIMITED AND SUBSIDIARY
Notes (continued)
1 ACCOUNTING POLICIES (continued)
TURNOVER
Turnover includes amounts (excluding valued added tax) derived from the
provision of goods and services to third party customers during the year
and amounts receivable under licensing agreements.
DEFERRED INCOME
Deferred income represents those amounts, paid by the group's US
distributor, FHC, to secure their exclusive distribution rights in
certain countries, which can be treated as prepaid against royalty
payments that may arise in the future. Deferred income is released to
the profit and loss account as and when sales in the countries concerned
exceed a specified level and royalty income becomes due. Deferred
income included in the balance sheet is revalued in accordance with the
accounting policy on foreign currencies.
2 TURNOVER AND RESULTS
Turnover consists of the following:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1995 1994 1993
(Pounds)000 (Pounds)000 (Pounds)000
Sales of product 428 3,612 823
Amounts receivable under licence agreements - 2,001 387
------- ------- -------
428 5,613 1,210
======= ======= =======
</TABLE>
A geographical analysis of turnover and results has not been provided
because in the opinion of the directors such disclosure would be
seriously prejudicial to the interests of the group.
Sales of product relate to sales of female condoms marketed under the
trademarks femidom(R), femy(R) and reality(R).
The amounts receivable under licence agreements represent payments made
by FHC in order to secure and maintain exclusive rights to distribute
the group's products in certain countries including the US, Canada and
Mexico. In 1995, FHC opted not to renew its exclusive distribution
rights.
E-9
<PAGE>
CHARTEX RESOURCES LIMITED AND SUBSIDIARY
NOTES (CONTINUED)
3 LOSS ON ORDINARY ACTIVITIES BEFORE AND AFTER TAXATION
Loss on ordinary activities before and after taxation is stated after
charging/(crediting):
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1995 1994 1993
(Pounds)000 (Pounds)000 (Pounds)000
Auditors' remuneration:
Audit 40 65 92
Other services 12 75 184
Depreciation of tangible fixed assets 1,464 1,483 2,294
Loss on disposal of fixed assets 2 10 3
Exchange (gains)/losses 23 (34) 48
Amortisation of intangible fixed assets 132 132 127
Hire of plant and machinery - operating leases 13 20 21
Hire of other assets - operating leases - - 207
Research and development costs - - -
Exceptional items
- waiver of interest payable (1,446) (1,909) -
- write down of plant and machinery - 75 2,776
- costs associated with the vacation of
leasehold premises - - 565
======= ======= =======
</TABLE>
EXCEPTIONAL ITEMS
The waiver of interest payable is included in net interest payable and
similar charges (refer to note 7).
The write down of plant and machinery in 1993 was in respect of a
permanent diminution in the carrying value of production equipment.
This arose from the fact that once the development of certain production
facilities had been completed, the directors reassessed the future
economic benefit to be derived from these assets by the business with
reference to the cost of the equipment purchased, the productive
capacity thus acquired, its expected useful life and the then current
sales forecast.
The write down of plant and machinery in 1993 is included in the profit
and loss account under cost of sales (see over).
The costs associated with the vacation of leasehold premises in 1993
consisted of a provision of (Pounds)450,000 in respect of the estimated
future net cost arising from the group's obligations under the relevant
leases, together with an amount of (Pounds)115,000 which represented the
net book value of leasehold improvements and certain items classified
under furniture and office equipment which were no longer of use to the
business following the decision to vacate its leasehold premises. These
items have been included under administrative expenses in the profit and
loss account.
E-10
<PAGE>
CHARTEX RESOURCES LIMITED AND SUBSIDIARY
Notes (continued)
3 LOSS ON ORDINARY ACTIVITIES BEFORE AND AFTER TAXATION (continued)
COST OF SALES
The cost of sales figure includes both expenditure related to sales made
during the year and non sales related production expenditure.
In 1993 the group was at an early stage of development, therefore
significant direct and indirect costs were incurred in relation to the
production process which were not attributable to the cost of sales made
during the year. Typically such costs were incurred in connection with
the manufacture of products not for sale, the development and testing of
production equipment and the provision of production facilities which
were not fully utilised. In 1994 and 1995, such expenditure continued
to be incurred, particularly as a result of idle production capacity.
In the circumstances, the only way in which cost of sales could be
analysed into these two categories of expenditure would be to
necessarily adopt an arbitrary basis of allocation. Accordingly, the
cost of sales figure has not been analysed between expenditure related
to sales and non sales related production expenditure as to do so is
neither practical nor meaningful.
4 REMUNERATION OF DIRECTORS
<TABLE>
<CAPTION>
1995 1994 1993
(Pounds)000 (Pounds)000 (Pounds)000
<S> <C> <C> <C>
Directors' emoluments 389 287 250
======= ======= ======
</TABLE>
There were no pension contributions made on behalf of directors.
Included in directors' emoluments for 1993 is (Pounds)66,680 paid to
Pagac & Associates, in which Mr Pagac, a director during 1993, had an
interest.
The emoluments of the chairman and highest paid director were
(Pounds)186,443 (1994:(Pounds)185,502 1993:(Pounds)67,822 chairman, of
which (Pounds)36,834 related to the chairman appointed for the period 1
January 1993 to 31 October 1993 and (Pounds)30,988 related to the
chairman appointed for the period 1 November 1993 to 31 December 1993;
(Pounds)76,756 highest paid director).
E-11
<PAGE>
Chartex Resources Limited and Subsidiary
Notes (continued)
4 REMUNERATION OF DIRECTORS (continued)
The emoluments of the directors of the company (including the chairman and
highest paid director) were within the following ranges:
<TABLE>
<CAPTION>
Number of Directors
1995 1994 1993
<S> <C> <C> <C>
(Pounds)5,001 - (Pounds)10,000 - 1 -
(Pounds)10,000 - (Pounds)15,000 1 - -
(Pounds)15,001 - (Pounds)20,000 - 1 -
(Pounds)25,001 - (Pounds)30,000 - - 1
(Pounds)30,001 - (Pounds)35,000 - - 1
(Pounds)40,001 - (Pounds)45,000 1 - 1
(Pounds)70,001 - (Pounds)75,000 1 - 1
(Pounds)75,001 - (Pounds)80,000 1 1 1
(Pounds)185,001 - (Pounds)190,000 1 1 -
5 Staff numbers and costs
The average number of persons employed by the group (including directors)
during the year, analysed by category, was as follows:
NUMBER OF EMPLOYEES
1995 1994 1993
Management 5 3 5
Administration 8 9 13
Marketing 2 5 8
Production 25 108 92
_______ _______ _______
40 125 118
======= ======= =======
The aggregate payroll costs of these persons were as follows:
1995 1994 1993
(Pounds)000 (Pounds)000 (Pounds)000
Wages and salaries 706 2,017 2,133
Social security costs 126 232 261
_______ _______ _______
832 2,249 2,394
======= ======= =======
</TABLE>
E-12
<PAGE>
CHARTEX RESOURCES LIMITED AND SUBSIDIARY
Notes (continued)
6 INTEREST RECEIVABLE AND SIMILAR INCOME
<TABLE>
<CAPTION>
1995 1994 1993
(Pounds)000 (Pounds)000 (Pounds)000
<S> <C> <C> <C>
Interest on short term bank deposits 17 32 36
Exchange gains (net) - 34 -
------- ------- -------
17 66 36
======= ======= =======
7 NET INTEREST PAYABLE AND SIMILAR CHARGES
1995 1994 1993
(Pounds)000 (Pounds)000 (Pounds)000
On bank loans, and other loans wholly
repayable within five years 840 619 835
On all other loans - 115 194
Interest on subordinated loan stock 1,446 1,074 835
------ ------ ------
2,286 1,808 1,864
Less interest on subordinated loan stock
waived by Stamina (1,446) (1,909) -
Exchange losses (net) - - 48
------- ------- -------
840 (101) 1,912
======= ======= =======
</TABLE>
On 1 February 1996 and on 1 March 1995, Stamina agreed to waive the
repayment of all interest payable by the group on the subordinated loan
stock accruing to 31 December 1995 and 31 December 1994 respectively.
8 TAXATION
There is no charge to taxation as the group has tax losses amounting to
approximately (Pounds)39 million (1994: (Pounds)35 million;
1993: (Pounds)31 million) available to be carried forward and set off
against future taxable profits.
E-13
<PAGE>
CHARTEX RESOURCES LIMITED AND SUBSIDIARY
Notes (continued)
9 INTANGIBLE FIXED ASSETS
<TABLE>
<CAPTION>
INTELLECTUAL
PROPERTY RIGHTS
(Pounds)000
<S> <C>
COST
At 31 December 1993 2,293
Additions 1
_______
At 31 December 1994 2,294
Additions -
_______
At 31 December 1995 2,294
_______
AMORTISATION
At 31 December 1993 437
Charged in year 132
_______
At 31 December 1994 569
Charged in year 132
_______
At 31 December 1995 701
_______
NET BOOK VALUE
AT 31 DECEMBER 1995 1,593
=======
At 31 December 1994 1,725
=======
At 31 December 1993 1,856
=======
</TABLE>
The additions to intellectual property rights are costs in respect of legal
and professional fees incurred in connection with filing and registering
patents and trademarks.
E-14
<PAGE>
Chartex Resources Limited and Subsidiary
Notes (continued)
10 TANGIBLE FIXED ASSETS
<TABLE>
<CAPTION>
LAND AND PLANT AND MOTOR IMPROVEMENTS TOTAL
BUILDINGS MACHINERY VEHICLES, TO OFFICE
FURNITURE AND LEASEHOLD
OFFICE PREMISES
EQUIPMENT
(Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000
<S> <C> <C> <C> <C> <C>
COST OR VALUATION
At 31 December 1993 5,398 10,109 998 140 16,645
Additions -- 102 14 -- 116
Disposals (508) -- (124) -- (624)
Fully depreciated
assets written off -- (3,807) (138) (140) (4,085)
----- ------ ------ ----- ------
At 31 December 1994 4,898 6,404 750 -- 12,052
Additions -- -- 7 -- 7
Disposals -- -- (45) -- (45)
----- ------ ------ ----- ------
At 31 December 1995 4,898 6,404 712 -- 12,014
----- ------ ------ ----- ------
DEPRECIATION AND
DIMINUTION IN VALUE
At 31 December 1993 299 5,705 580 140 6,724
Charge for year 98 1,265 120 -- 1,483
On disposals -- -- (69) -- (69)
Fully depreciated
assets written off -- (3,807) (138) (140) (4,085)
----- ------ ------ ----- ------
At 31 December 1994 397 3,163 493 -- 4,053
Charge for year 98 1,270 96 -- 1,464
On disposals -- -- (25) -- (25)
----- ------ ------ ----- ------
At 31 December 1995 495 4,433 564 -- 5,492
----- ------ ------ ----- ------
NET BOOK VALUE
AT 31 DECEMBER 1995 4,403 1,971 148 -- 6,522
===== ====== ====== ===== ======
At 31 December 1994 4,501 3,241 257 -- 7,999
===== ====== ====== ===== ======
At 31 December 1993 5,099 4,404 418 -- 9,921
===== ====== ====== ===== ======
</TABLE>
Included in plant and machinery at cost as at 31 December 1994 and 1995 is
(Pounds)49,000 (1993: (Pounds)nil); which relates to assets in the course of
construction which have not yet been depreciated.
Included in the cost of plant and machinery above are amounts in respect of the
design and development of production equipment.
Details of the exceptional write down in 1993 are provided in note 3.
E-15
<PAGE>
CHARTEX RESOURCES LIMITED AND SUBSIDIARY
Notes (continued)
<TABLE>
<CAPTION>
11 STOCKS
1995 1994
(Pounds)000 (Pounds)000
<S> <C> <C>
Raw materials and consumables 418 413
Work in progress 7 88
Finished goods and goods for resale 3 8
------- -------
428 509
======= =======
12 DEBTORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
1995 1994
(Pounds)000 (Pounds)000
Trade debtors 50 572
Amounts owed by Stamina - 62
Other debtors 63 156
Prepayments and accrued income 48 106
------- -------
161 896
======= =======
</TABLE>
E-16
<PAGE>
CHARTEX RESOURCES LIMITED AND SUBSIDIARY
Notes (continued)
13 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
<TABLE>
<CAPTION>
1995 1994
(Pounds)000 (Pounds)000
<S> <C> <C>
Bank loans and overdrafts (refer also to note 14) 4,474 3,000
Subordinated loan stock and other loans from Stamina 20,895 18,689
Trade creditors 202 346
Other creditors including taxation and
social security:
Other taxes & social security 28 66
Other creditors 8 5
Accruals and deferred income 923 1,442
------ ------
26,530 23,548
====== ======
</TABLE>
BANK LOANS AND OVERDRAFTS
Included above is a bank loan of (Pounds)3,000,000 which was secured by
a fixed charge over the freehold premises and by a floating charge over
the undertakings and assets of the company and which was guaranteed by
the subsidiary. The repayment date for this loan had been 31 December
1994, but the bank had agreed in principle to extend the repayment date
pending completion of the acquisition of the group. This loan was repaid
in full on 1 February 1996 on the company's behalf by the provider of
finance ("the third party provider of finance") to Stamina in accordance
with the conditions relating to completion of the acquisition of the
group.
Included in the above figure as at 31 December 1995, is an amount of
(Pounds)1,375,500 being a mortgage loan secured on the group's freehold
premises which incurred interest at a rate equivalent to LIBOR plus
1.125%. During 1995, the bank notified the company that it was in breach
of certain conditions to the loan, such that the loan became repayable
in full on demand. However, this was subject to negotiations in respect
of a new mortgage facility, which were concluded on 1 February 1996 when
the group was acquired by FHC. A scheduled repayment of (Pounds)312,500
was made in January 1996. Under the new facility, the balance of this
loan of (Pounds)1,062,500 is repayable in full on 31 October 1996 and
interest is payable at a rate equivalent to LIBOR plus 2.25%. As at 31
December 1994, all of this loan was disclosed as being due after more
than one year in accordance with the repayment terms of the original
mortgage facility.
E-17
<PAGE>
CHARTEX RESOURCES LIMITED AND SUBSIDIARY
Notes (continued)
13 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR (continued)
LOANS FROM STAMINA
As at 31 December 1995, this amount included (Pounds)20,515,552 in
respect of subordinated loan stock and (Pounds)379,000 in respect of
other loans (1994:(Pounds)18,689,000 of subordinated loan stock). The
subordinated loan stock was unsecured and subordinated only to the bank
loans. Interest on the subordinated loans accrued at a rate equivalent
to LIBOR plus 1% but has been waived by Stamina (refer to note 7). No
interest accrued on the other loans.
On 1 February 1996 the company was released from any liability in
respect of these loans from Stamina as part of the conditions relating
to completion of the acquisition of the group.
ACCRUALS AND DEFERRED INCOME
Included in accruals and deferred income is an amount in respect of
prepaid royalties of approximately (Pounds)750,000
(1994:(Pounds)750,000) which would be amortised and released to the
profit and loss account in future years, as and when sales in certain
countries exceed a specified level (refer to note 1). At present it is
not possible to determine how much would be amortised within one year
and how much after more than one year.
The deferred income arose from payments made by FHC, under licence
agreements to distribute the group's products in certain countries.
Following the acquisition of the group by FHC, it is unclear as to
whether these licence agreements will be continued.
14 CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
<TABLE>
<CAPTION>
1995 1994
(Pounds)000 (Pounds)000
<S> <C> <C>
Bank loans and overdrafts 7,000 8,375
===== =====
</TABLE>
The above loan of (Pounds)7,000,000 was secured by a fixed charge over
the freehold premises and by a floating charge over the assets and
undertakings of the company, and was secured by the subsidiary. It was
due for repayment on 30 May 1997 and interest accrued at a rate
equivalent to 0.5% over the bank's cost of funding.
On 1 February 1996 this loan was repaid on the group's behalf by the
third party provider of finance in accordance with the conditions
relating to completion of the acquisition of the group.
E-18
<PAGE>
CHARTEX RESOURCES LIMITED AND SUBSIDIARY
Notes (continued)
15 PROVISIONS FOR LIABILITIES AND CHARGES
Analysis of movement on the provision in respect of vacated leasehold
premises:
<TABLE>
<CAPTION>
(Pounds)000
<S> <C>
At 31 December 1993 450
Utilised during the year (202)
Released during the year (48)
----
At 31 December 1994 200
Utilised during 1995 (38)
----
At 31 December 1995 162
====
</TABLE>
16 DEFERRED TAXATION
No amounts have been provided for deferred taxation. The extent of
potential unprovided deferred tax assets/(liabilities) is as follows:
<TABLE>
<CAPTION>
1995 1994
Unprovided Unprovided
asset/ asset/
(liability) (liability)
(Pounds)000 (Pounds)000
<S> <C> <C>
Difference between
accumulated depreciation
and amortisation and
capital allowances 219 231
Other timing differences (101) (38)
---- ---
118 193
Unrelieved losses - -
---- ---
118 193
==== ===
</TABLE>
In addition to the above timing differences, for which no asset has been
recognised in the financial statements, the group has significant tax
losses (refer note 8).
E-19
<PAGE>
CHARTEX RESOURCES LIMITED AND SUBSIDIARY
Notes (continued)
17 CALLED UP SHARE CAPITAL
<TABLE>
<CAPTION>
1995 1994
(Pounds)000 (Pounds)000
<S> <C> <C>
Authorised
Ordinary shares of (Pounds)1 each 13,000 13,000
====== ======
Allotted, called up and fully paid
6,000,200 (1994:6,000,200) ordinary shares of (Pounds)1 each 6,000 6,000
====== ======
</TABLE>
As at 31 December 1994 and 1995, the third party provider of finance to
Stamina held an option to subscribe for a number of new shares in the
company for a maximum aggregate consideration of (Pounds)7 million
exercisable at any time up to 31 May 1998. The number of shares would
have been such that upon exercise of the option, together with an
existing option for the purchase from Stamina of 240,000 shares, the
provider of finance would own 54% of the total enlarged share capital of
the company.
On 1 February 1996 the third party provider of finance relinquished its
rights to subscribe for, and acquire, shares in the company under the
above options in accordance with the conditions relating to completion
of the acquisition of the group.
E-20
<PAGE>
CHARTEX RESOURCES LIMITED AND SUBSIDIARY
Notes (continued)
18 RESERVES
<TABLE>
<CAPTION>
Profit and loss Share Capital
premium contribution
(Pounds)000 (Pounds)000 (Pounds)000
<S> <C> <C> <C>
At 31 December 1993 (36,180) 11,575 -
Retained loss for the year (2,149) - -
Issue of shares during the year - - 635
------- ------ ---
At 31 December 1994 (38,329) 11,575 635
Retained loss for the year (4,745) - -
Capital contributions received from the
third party provider of finance - - 100
------- ------ ---
At 31 December 1995 (43,074) 11,575 735
======= ====== ===
</TABLE>
The capital contribution reserve is a distributable reserve.
19 RECONCILIATION OF MOVEMENT IN SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
1995 1994
(Pounds)000 (Pounds)000
<S> <C> <C>
LOSS FOR THE FINANCIAL YEAR (4,745) (2,149)
Capital contributions received from the
provider of finance 100 635
New share capital subscribed
(refer to note 17) - -
------- -------
NET INCREASE IN SHAREHOLDERS'
DEFICIT (4,645) (1,514)
Opening shareholders' deficit (20,119) (18,605)
------- -------
CLOSING SHAREHOLDERS' DEFICIT (24,764) (20,119)
======= =======
</TABLE>
E-21
<PAGE>
CHARTEX RESOURCES LIMITED AND SUBSIDIARY
Notes (continued)
20 COMMITMENTS
<TABLE>
<CAPTION>
1995 1994
(Pounds)000 (Pounds)000
<S> <C> <C>
Capital expenditure authorized but
not yet contracted for - -
===== =====
1995 1994
(Pounds)000 (Pounds)000
At the year end the group had annual commitments under
non-cancellable operating leases as follows:
Land and buildings
Operating leases which expire:
within one year - -
from two to five years 80 80
----- -----
80 80
===== =====
Other
Operating leases which expire:
within one year 2 3
from two to five years 2 5
----- -----
4 8
===== =====
</TABLE>
The above disclosure includes gross rentals payable in respect of
leasehold premises which have been sublet. Full provision has been made
for future net rentals payable in respect of these premises (refer to
note 15).
21 CONTINGENT LIABILITIES
The group has guaranteed the repayment of loans made to Stamina. Details
are provided in note 27.
The group was in breach of an agreement with a third party ("the
supplier") for the supply of raw materials in so far as it has failed to
purchase the minimum volume of materials as stipulated by the terms of
the agreement.
Subsequent to the year end, a termination agreement has been negotiated,
which was confirmed on 1 February 1996. As a result of this agreement
the existing agreement has been terminated and new arrangements are in
place under which the group is committed to acquire plant and equipment
from the supplier for total consideration of (Pounds)430,000. The
equipment is to be purchased in two stages, on 1 April 1996 and on 1
January 1997. Payment will be made in three instalments. The first
payment of (Pounds)100,000 was made on 1 February 1996, with payments of
(Pounds)200,000 and (Pounds)130,000 to be made on 29 April 1996 and 1
January 1997 respectively.
E-22
<PAGE>
CHARTEX RESOURCES LIMITED AND SUBSIDIARY
Notes (continued)
22 RECONCILIATION OF OPERATING LOSS TO NET CASH OUTFLOW FROM OPERATING
ACTIVITIES
<TABLE>
<CAPTION>
1995 1994 1993
(Pounds)000 (Pounds)000 (Pounds)000
<S> <C> <C> <C>
Operating loss (3,922) (2,316) (13,405)
Depreciation charge 1,464 1,483 2,294
Amortisation charge 132 132 127
Write-down of fixed assets (refer to note 3) - - 2,891
Loss on disposal of tangible fixed assets 2 10 3
Decrease/(increase) in stocks 81 83 (23)
Decrease/(increase) in debtors:
- gross increase 673 (481) 1,330
- debtor assigned to parent
undertaking (refer to note 27) - - (390)
(Decrease)/increase in creditors (552) 84 (2,775)
(Increase)/decrease in balance due from
Stamina 62 2 (180)
(Decrease)/increase in provisions (38) (250) 450
Exchange gain/(loss) - 34 (48)
------- ------- -------
Net cash outflow from operating activities (2,098) (1,219) (9,726)
======= ======= =======
</TABLE>
E-23
<PAGE>
CHARTEX RESOURCES LIMITED AND SUBSIDIARY
Notes (continued)
23 ANALYSIS OF CHANGES IN FINANCING DURING THE YEAR
<TABLE>
<CAPTION>
Share capital Subordinated Bank Capital
(inc share loan stock loans contributions
premium) and other loans
from Stamina
(Pounds)000 (Pounds)000 (Pounds)000 (Pounds)000
<S> <C> <C> <C> <C>
Balance at 1 January 1993 6,000 16,900 14,500 -
Subordinated loan stock issued - 9,200 - -
Subordinated loan stock
cancelled on the assignment
of a debtor (refer to note 22) - (390) - -
Rights issue 2,000 - - -
Repayment of long-term loan
out of proceeds of rights
issued - - (2,000) -
Conversion of subordinated
loans to share capital 9,575 (9,575) - -
------ ------ ------ ------
Balance at 31 December 1993 17,575 16,135 12,500
Subordinated loan stock issued - 2,554 - -
Capital contributions received
from the third party provider
of finance - - - 635
Repayment of mortgage loan - - (1,125) -
------ ------ ------ ------
Balance at 31 December 1994 17,575 18,689 11,375 635
Subordinated loan stock issued - 1,827 - -
Other loans from Stamina - 379 - -
Capital contributions received
from the third party provider of
finance - - - 100
------ ------ ------ ------
Balance at 31 December 1995 17,575 20,895 11,375 735
====== ====== ====== ======
</TABLE>
E-24
<PAGE>
CHARTEX RESOURCES LIMITED AND SUBSIDIARY
Notes (continued)
23 ANALYSIS OF CHANGES IN FINANCING DURING THE YEAR (continued)
<TABLE>
<CAPTION>
1995 1994 1993
(Pounds)000 (Pounds)000 (Pounds)000
<S> <C> <C> <C>
Financing is represented by:
Share capital (inc share premium) 17,575 17,575 17,575
Subordinated loan stock and other loans
from stamina 20,895 18,689 16,135
Bank loans 11,375 11,375 12,500
Capital contributions 735 635 -
------ ------ ------
50,580 48,274 46,210
====== ====== ======
</TABLE>
24 ANALYSIS OF CHANGES IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Cash Overdraft Net
(Pounds)000 (Pounds)000 (Pounds)000
<S> <C> <C> <C>
Balance at 1 January 1993 3,196 (9) 3,187
Net cash outflow (2,755) (121) (2,876)
------ ------ ------
Balance at 31 December 1993 441 (130) 311
Net cash inflow 434 130 564
------ ------ ------
Balance at 31 December 1994 875 - 875
Net cash outflow (651) (99) (750)
------ ------ ------
Balance at 31 December 1995 224 (99) 125
====== ====== ======
</TABLE>
E-25
<PAGE>
CHARTEX RESOURCES LIMITED AND SUBSIDIARY
Notes (continued)
25 SUBSEQUENT EVENTS
On 1 February 1996, The Female Health Company ("FHC") acquired the whole
of the issued share capital of the company. The following matters
occurred on completion of this transaction, or immediately following
completion:
. the (Pounds)7 million and (Pounds)3 million bank loans were repaid on
the company's behalf by the third party provider of finance to
Stamina;
. the mortgage repayment of (Pounds)312,500 due in January 1996 was
paid on behalf of the company by the third party provider of finance
in consideration for which the company issued a loan in the same
amount (see below);
. the company was released from any obligation to repay the
subordinated loans and other loans provided by Stamina, being an
amount of (Pounds)21,188,000 as at 1 February 1996, together with
interest accrued thereon. This amount includes (Pounds)293,563 of
additional funding provided subsequent to 31 December 1995;
. the company issued two loan notes to the third party provider of
finance. A loan of (Pounds)312,500 is repayable by 31 July 1996 with
interest accruing at a rate equivalent to LIBOR plus 1.125%, and a
loan of (Pounds)520,000 is repayable by 31 January 1999 which is
interest free and guaranteed by FHC and the subsidiary;
. a new mortgage facility of (Pounds)1,062,500 was agreed which is
repayable by 31 October 1996 and accrues interest at a rate
equivalent to LIBOR plus 2.25%; and
. the group concluded a termination agreement with a supplier of raw
materials under which the group will acquire certain plant and
equipment for a total purchase price of (Pounds)430,000, of which
(Pounds)100,000 was paid on 1 February 1996 and funded by FHC, and
further amounts of (Pounds)200,000 and (Pounds)130,000 are payable on
29 April 1996 and 1 January 1997 respectively.
In addition to the above subsequent events, FHC has provided funding to
the group since 1 February 1996 at a rate of approximately
(Pounds)40,000 per week.
The group has also applied for and been offered a regional assistance
development grant in the amount of (Pounds)480,000, the receipt of which
is subject to the fulfilment of certain conditions.
26 ULTIMATE PARENT COMPANY AND PARENT UNDERTAKING OF LARGER GROUP
During the year the company's ultimate parent company was Stamina
Investments Limited, incorporated in The British Virgin Islands. The
largest and smallest group in which the results of the company have been
consolidated was that headed by Chartex Resources Limited.
As noted above, with effect from 1 February 1996 the company's ultimate
parent company was The Female Health Company.
E-26
<PAGE>
CHARTEX RESOURCES LIMITED AND SUBSIDIARY
Notes (continued)
27 RELATED PARTY TRANSACTIONS
Details of certain transactions undertaken by the group, where the other
party to the transaction is a related party, are referred to below.
STAMINA INVESTMENTS LIMITED ("STAMINA")
Stamina was the company's parent company. Stamina is owned by a
discretionary trust, of which Mr V Frantzen, was the settlor. Stamina
has entered into the following transactions with the group:
i) pursuant to an agreement dated 21 October 1993 whereby a third
party provided additional loan facilities to Stamina, the company
and its subsidiary guaranteed the repayment of loans totalling
(Pounds)19,356,000 (1994: (Pounds)18,129,000; 1993:
(Pounds)14,975,000) on behalf of Stamina. In addition, the company
and its subsidiary had pledged as security all of their assets to
the third party provider of finance in respect of these loans to
Stamina. This pledge was subordinated to the security pledged in
respect of bank loans (refer to note 14). These guarantees and
pledges were released on 1 February 1996;
ii) the group agreed to reimburse legal fees incurred by Stamina and
the third party provider of finance in connection with loan
agreements between Stamina and the third party. The group is the
principal beneficiary of the loans advanced to Stamina by means of
additional subordinated loan facilities from Stamina. The value of
such fees incurred during 1995 were (Pounds)nil (1994:
(Pounds)nil; 1993:(Pounds)25,765) and (Pounds)nil
(1994:(Pounds)3,528; 1993:(Pounds)174,231) respectively. This
arrangement ceased with effect from 1 February 1996;
iii) pursuant to an agreement dated 24 June 1992, the group agreed to
incur the cost of consultancy fees payable by Stamina pursuant to
a separate agreement dated 28 January 1992 between Herald Limited
(see over) and Stamina, whereby Dr Hessel, the inventor of
femidom(R), provides consultancy services to the group until 31
January 1997. A provision of (Pounds)196,000 was charged to the
profit and loss account in 1993 in respect of this agreement,
which is released as the costs are incurred; and
iv) prior to October 1993 the group from time to time collected income
and settled expenses on behalf of Stamina in connection with that
company's trading activities. No charge was made by the group for
this service as the additional costs involved were considered by
the directors not to be significant. In addition, in connection
with these trading activities, the group had provided a guarantee
to a third party in the sum of Danish Kroner 40,000 (approximately
equivalent to (Pounds)4,200) on behalf of Stamina. This guarantee
was withdrawn in January 1994.
E-27
<PAGE>
CHARTEX RESOURCES LIMITED AND SUBSIDIARY
Notes (continued)
28 SUMMARY OF DIFFERENCES BETWEEN UK AND US GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
The company's consolidated financial statements are prepared in
accordance with generally accepted accounting principles in the United
Kingdom ("UK GAAP"), which differ in certain respects from generally
accepted accounting principles in the United States ("US GAAP").
Differences which have a significant effect on the consolidated net loss
of the company in each of the years in the three year period ended 31
December 1995 and on shareholders' equity for the years ended 31
December 1995 and 1994, respectively, are set out below. While this is
not a comprehensive summary of all differences between UK and US GAAP,
other differences would not have a significant effect on the
consolidated net loss or shareholders' equity of the company.
WAIVER OF INTEREST PAYABLE
In 1996 and 1995, Stamina agreed to waive the repayment of all interest
payable by the group on the subordinated loan stock to 31 December 1995
and 31 December 1994. The interest waived of (Pounds)1,446,000 and
(Pounds)1,909,000 respectively was included in the consolidated profit
and loss account prepared under UK GAAP, as a reduction of interest
expense. Under US GAAP the waiver of interest payable by the group would
be recorded as additional capital contributed.
INTEREST ON BORROWINGS
Prior to 12 February 1993, the subordinated loan notes issued to Stamina
were interest free. Subsequent to that date, interest accrued on all the
subordinated loan notes with the exception of an amount of
(Pounds)11,125,000 outstanding at that time, of which (Pounds)1,098,000
remained outstanding as at 31 December 1995. Accordingly, the
consolidated financial statements prepared in accordance with UK GAAP
did not include an interest expense on any of these loans prior to that
date, or subsequently on the amount of (Pounds)11,125,000, reducing to
(Pounds)1,098,000. In addition no interest has been charged on the other
loans provided by Stamina. Under US GAAP the consolidated financial
statements are required to include an interest charge to reflect an
appropriate interest expense on borrowings which was not charged to the
group. Under US GAAP interest expense charged for which no payment is
made would be recorded as additional capital contributed.
CAPITALISATION OF INTEREST
The consolidated financial statements prepared in accordance with UK
GAAP exclude from the cost of fixed assets the cost of interest arising
on the funds expended to construct those assets. Under US GAAP, the cost
of interest incurred on funds borrowed to construct certain fixed
assets, up to the date when those assets become operational, would be
capitalised and included in the recorded cost of such assets. The assets
upon which interest would be capitalised include buildings and their
related construction and conversion costs, and items of plant and
equipment which were constructed by the group. Note that for this
purpose the interest incurred on borrowed funds includes the imputed
interest on borrowings referred to above.
To the extent that interest capitalised in this way increases the
carrying value of assets which have been subject to write down due to
impairment in value, then the extent of such write downs would be
increased accordingly.
DEVELOPMENT COSTS
The consolidated financial statements prepared in accordance with UK
GAAP include, in the original cost of plant and equipment, costs
incurred in the design and development of the production process. Under
US GAAP such development costs would be expensed as incurred. By not
capitalising these costs the extent of the write down of the value of
fixed assets made in 1993 would be reduced.
E-28
<PAGE>
CHARTEX RESOURCES LIMITED AND SUBSIDIARY
Notes (continued)
28 SUMMARY OF DIFFERENCES BETWEEN UK AND US GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (continued)
INTELLECTUAL PROPERTY RIGHTS
The consolidated financial statements prepared in accordance with UK
GAAP include in the value of intangible fixed assets, all costs incurred
by the group to acquire and retain the intellectual property rights
("IPR") relating to the product femidom(R). In addition, pursuant to the
agreement under which the IPR were acquired, Stamina granted Herald
Limited, a company connected with the inventor of femidom(R), an option
to acquire shares in, and loan stock issued by the group. The cost of
granting this option was not recorded in the consolidated financial
statements prepared in accordance with UK GAAP. Under US GAAP, the cost
of granting this option would be capitalised as part of the cost to the
group of the IPR. The amount capitalised would be recorded as additional
capital contributed. The increased cost of the IPR would be amortised
over the economic life of the IPR.
DEPRECIATION OF INVESTMENT PROPERTIES
Depreciation is not provided on property held for investment purposes in
the company's consolidated financial statements prepared under UK GAAP,
as it is the group's policy to maintain its properties in a state of
good repair. Under US GAAP depreciation is required on the building and
improvements element of the investment properties. The investment
properties would be depreciated over a period of 50 years for the
building, and 10 years for improvements, in equal annual depreciated
instalments. The investment properties were sold during 1994, and as a
result the additional depreciation which would arise under US GAAP would
generate a profit on disposal.
LOANS
Where the repayment date stated in loan agreements is more than twelve
months after the balance sheet date, the consolidated financial
statements prepared in accordance with UK GAAP have included such loans
within amounts falling due after more than one year. Under US GAAP,
where loans are technically in default of certain contractual
conditions, regardless of whether or not as a result of such a default
the lender has exercised its rights to demand repayment, such loans are
disclosed as amounts falling due within one year. The group was
technically in default of certain contractual conditions in respect of
both of the loans which comprise the balance of (Pounds)7,000,000 and
(Pounds)8,375,000 disclosed as amounts falling due after more than one
year as at 31 December 1995 and 31 December 1994 respectively (refer to
note 14), and therefore all loans would be classified as current
liabilities under US GAAP.
CASH FLOWS
Under UK GAAP the group complies with Financial Reporting Standard No. 1
"Cash Flow Statements" ("FRS 1"). Its objective and principles are
similar to those set out in SFAS No. 95 "Statement of Cash Flows". The
principal difference between the standards is in respect of
classification. Under FRS 1, the group presents its cash flows for (a)
operating activities; (b) returns on investments and servicing of
finance; (c) taxation; (d) investing activities; and (e) financing
activities. SFAS No. 95 requires only three categories of cash flow
activity (a) operating; (b) investing; and (c) financing.
Cash flows arising from taxation and returns on investments and
servicing of finance under FRS 1 would be included as operating
activities under SFAS No. 95. In addition, under FRS 1, cash and cash
equivalents include short term borrowings with original maturities of
less then 90 days. SFAS No. 95 requires movements on such short term
borrowings to be included in financing activities.
E-29
<PAGE>
CHARTEX RESOURCES LIMITED AND SUBSIDIARY
Notes (continued)
28 SUMMARY OF DIFFERENCES BETWEEN UK AND US GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (continued)
DEFERRED TAXATION
Deferred corporate taxes have, in accordance with UK GAAP, been provided
under the liability method to the extent that it is probable that a
liability will crystallise in the foreseeable future. Under US GAAP,
deferred taxes are provided fully under the liability method in respect
of the tax consequences of all temporary differences between carrying
values for financial reporting purposes and the tax bases of assets and
liabilities.
The tax effects of temporary differences under UK GAAP that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
(Pounds)000 (Pounds)000
<S> <C> <C>
Deferred tax assets:
Financial provisions not deducted
for tax purposes 53 66
Net operating loss carry forwards 12,870 11,550
Other 236 312
------- -------
Gross deferred tax assets 13,159 11,928
Less valuation allowance (12,988) (11,743)
------- -------
171 185
Deferred tax liabilities:
Other (171) (185)
------- -------
Net deferred tax liability - -
======= =======
</TABLE>
E-30
<PAGE>
CHARTEX RESOURCES LIMITED AND SUBSIDIARY
Notes (continued)
28 SUMMARY OF DIFFERENCES BETWEEN UK AND US GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (continued)
Details of the effect on the Company's consolidated net loss and
shareholders' equity of differences between UK GAAP and US GAAP are as
follows:
Effect on net loss of differences between UK and US GAAP
<TABLE>
<CAPTION>
1995 1994 1993
(Pounds)000 (Pounds)000 (Pounds)000
<S> <C> <C> <C>
Net loss in accordance with UK GAAP (4,745) (2,149) (15,281)
====== ====== =======
US GAAP adjustments:
Waiver of interest payable (1,446) (1,909) -
Interest on borrowings (88) (75) (591)
Development costs - - (239)
Depreciation adjustments arising from
the capitalisation of interest and
development costs (10) (10) 613
Amortisation of additional IPR costs (24) (24) (24)
Profit on the disposal of investment
properties - 46 -
Adjustment to the write down of
fixed assets - - 1,931
Depreciation of investment properties - - (19)
------ ------ -------
US GAAP adjustments before taxation (1,568) (1,972) 1,671
Taxation - - -
------ ------ -------
US GAAP adjustments after taxation (1,568) (1,972) 1,671
------ ------ -------
Net loss in accordance with US GAAP (6,313) (4,121) (13,610)
====== ====== =======
</TABLE>
E-31
<PAGE>
CHARTEX RESOURCES LIMITED AND SUBSIDIARY
Notes (continued)
28 SUMMARY OF DIFFERENCES BETWEEN UK AND US GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (continued)
Cumulative effect on shareholders' deficit of differences between UK and
US GAAP
<TABLE>
<CAPTION>
1995 1994
(Pounds)000 (Pounds)000
<S> <C> <C>
Shareholders' deficit in accordance with UK GAAP (24,764) (20,119)
======= =======
US GAAP adjustments:
Waiver of interest payable (3,355) (1,909)
Interest on borrowings (2,804) (2,716)
Additional capital contributed 6,159 4,625
Capitalised interest 266 266
Depreciation adjustment arising from the
capitalisation of interest (47) (37)
Additional cost of IPR 400 400
Amortisation of additional IPR costs (119) (95)
------- -------
US GAAP adjustments before taxation 500 534
Taxation - -
------- -------
US GAAP adjustments after taxation 500 534
======= =======
Shareholders' deficit in accordance with US GAAP (24,264) (19,585)
======= =======
Shareholders' deficit in accordance with US GAAP at
beginning of fiscal year (19,585) (18,083)
Net loss in accordance with US GAAP (6,313) (4,121)
Capital contribution under UK GAAP 100 635
Additional capital contributed under US GAAP 1,534 1,984
------- -------
Shareholders' deficit in accordance with US GAAP at
end of fiscal year (24,264) (19,585)
======= =======
</TABLE>
E-32
<PAGE>
No person is authorized to give any information or to make any
representations not contained in this Prospectus in connection with the offer
contained herein, and, if given or made, such information or representation must
not be relied upon as having been authorized by the Company. This Prospectus
does not constitute an offer to sell or the solicitation of an offer to buy any
security other than the shares of Common Stock offered by this Prospectus, nor
does it constitute an offer to sell or a solicitation of an offer to buy shares
of Common Stock in any jurisdiction where such offer or solicitation would be
unlawful. Neither the delivery of this Prospectus nor any sales made hereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of the Company since the date hereof.
<TABLE>
<CAPTION>
TABLE OF CONTENTS Page
----
<S> <C>
Available Information........................................ 4
The Company.................................................. 4
The Offering................................................. 6
Summary Financial Information................................ 7
Risk Factors................................................. 8
Use of Proceeds.............................................. 13
Capitalization............................................... 13
Dilution..................................................... 15
Dividends.................................................... 16
Price Range of Common Stock.................................. 16
Selected Consolidated Financial Data......................... 17
Management's Discussion and Analysis of Financial Condition
and Results of Operations Business........................... 19
Business..................................................... 37
Management................................................... 45
Principal and Selling Shareholders........................... 52
Certain Transactions......................................... 54
Description of Capital Stock................................. 55
Shares Eligible for Future Sale.............................. 57
Plan of Distribution......................................... 58
Experts...................................................... 61
Legal Opinion................................................ 61
Index to Financial Statements and Schedules.................. 62
</TABLE>
1,776,580 Shares
THE FEMALE
HEALTH COMPANY
COMMON STOCK
PROSPECTUS
----------
June 18, 1996
