SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal year ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission file number 0-18849
THE FEMALE HEALTH COMPANY
(Name of Small Business Issuer in Its Charter)
Wisconsin 39-1144397
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
919 N. Michigan Ave., Suite 2208, Chicago, Illinois 60611
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code
(312) 280-2281
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
(Title of class)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes [ X ] No [
]
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B in this form, and will not be contained, to the best of the
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendments to
this Form 10-KSB. [ ]
As of December 26, 1997, 9,546,930 shares of Common stock were outstanding.
As of December 26, 1997, the aggregate market value of shares of Common stock
held by non-affiliates was approximately $30 million (based upon the last
reported sale price of $3.4375 on that date on the American Stock Exchange).
Documents Incorporated by Reference<PAGE>
Document Part of Form 10-KSB Into Which Incorporated
- ------------- ------------------------------------------
The Company's Notice of
Annual Meeting of Shareholders
and Proxy Statement for the 1998 Part III, Items 10, 11, 12
and 13 Annual Meeting of Shareholders<PAGE>
FORM 10-KSB INDEX
PART I
Item 1. Description of Business
Item 2. Description of Property
Item 3. Legal Proceedings
Item 4. Submission of Matters To A Vote Of Security Holders
Supplemental Item. Executive Officers Of Registrant
Part II
Item 5. Market For Common Equity and Related
Stockholder Matters
Item 6. Management's Discussion and Analysis or Plan of Operation
Item 7. Financial Statements
Item 8. Changes in and Disagreements With Accountants On
Accounting and Financial Disclosure
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Item 10. Executive Compensation
Item 11. Security Ownership Of Certain Beneficial Owners and
Management
Item 12. Certain Relationships and Related Transactions
Item 13. Exhibits, List and Reports on Form 8-K<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
Certain statements included in this Annual Report on Form 10-KSB which are not
statements of historical fact are intended to be, and are hereby identified
as, "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company cautions readers that
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements
of the Company to be materially different from any future results, performance
or achievement expressed or implied by such forward-looking statements. Such
factors include, among others, the following: the Company's inability to
secure adequate capital to fund operating losses, working capital
requirements, advertising and promotional expenditures and principal and
interest payments on debt obligations, factors related to increased
competition from existing and new competitors including new product
introduction, price reduction and increased spending on marketing, limitations
on the Company's opportunities to enter into and/or renew agreements with
international partners, the failure of the Company or its partners to
successfully market, sell, and deliver its product in international markets;
and risks inherent in doing business on an international level, such as laws
governing medical devices that differ from those in the U.S., unexpected
changes in the regulatory requirements, political risks, export restrictions,
tariffs, and other trade barriers, and fluctuations in currency exchange
rates. the disruption of production at the Company's manufacturing facility
due to raw material shortages, labor shortages, and/or physical damage to the
Company's facilities, the Company's inability to manage its growth and to
adapt its administrative, operational and financial control systems to the
needs of the expanded entity and the failure of management to anticipate,
respond to and manage changing business conditions, the loss of the services
of executive officers and other key employees and the Company's continued
ability to attract and retain highly-skilled and qualified personnel, the
costs and other effects of litigation, governmental investigations, legal and
administrative cases and proceedings, settlements and investigations, and
developments or assertions by or against the Company relating to intellectual
property rights. <PAGE>
PART I
Item 1. Description of Business
General
The Female Health Company ("FHC" or the "Company") markets, manufactures and
sells the Female Condom, the only FDA-approved product under a woman's control
which can prevent unintended pregnancy and sexually transmitted diseases
("STDs"), including HIV/AIDS.
The Female Condom has undergone extensive testing for efficacy, safety and
acceptability, not only in the United States but also in over 25 additional
countries. Certain of these studies show that having the Female Condom
available allows women to have more options, resulting in an approximately 30%
increase in protected sex acts. Furthermore, the studies showed that when the
Female Condom is available as a choice, there is an approximately 35% decrease
in STDs, including HIV/AIDS.
The Product is currently sold to both commercial (private sector) and public
sector markets in ten countries. It is commercially marketed directly by the
Company in the United States and the United Kingdom and through marketing
partners in Canada, Holland, Brazil, Venezuela, South Korea and Taiwan. The
Company has signed distribution agreements in Japan and Bangladesh, and the
Company anticipates that the product will be marketed in these countries in
the coming months. The Company's partner in Japan, Taiho Pharmaceutical Co.,
Ltd. ("Taiho"), submitted a formal application for regulatory approval with
Koseisho, the Japanese regulatory agency in October 1997 and expects to
receive approval to begin marketing the Female Condom during 1998. The
Company is currently in discussions with potential distributors for India and
The People's Republic of China and other countries.
In addition to the commercial market, the Female Condom is sold to the global
public sector. In particular, the Product is marketed to city and state
public health clinics as well as not-for-profit organizations such as Planned
Parenthood in the United States. Following several years of testing the
efficacy and acceptability of the Female Condom, the Product received a formal
endorsement by The World Health Organization (WHO) and the Joint United
Nations Programme on AIDS (UNAIDS). In 1996, the Company entered into a
three-year agreement with UNAIDS, whereby UNAIDS will facilitate the
availability and distribution of the Female Condom in the developing world and
the Company will sell the Product to developing countries at a reduced price
based on the total number of units purchased. Pursuant to this agreement, the
Product is currently being marketed in Zambia and Zimbabwe with plans for 1998
market introductions in South Africa, Uganda, Tanzania, Cote d' Ivoire and
other countries. As part of the UNAIDS agreement, the South African
government recently ordered one and one-half million Female Condoms which are
fully funded for delivery in fiscal year 1998.
Global Market
WHO estimates there are more than 300 million new cases of STDs worldwide each
year, excluding HIV, and most of those diseases are more easily transmitted to
women than to men. Women are currently the fastest growing group infected
with HIV and are expected to comprise the majority of new cases by the year
2000. Although it is estimated the annual global male condom market now
exceeds four and one-half billion units, the majority of all sex acts are<PAGE>
still completed without protection, resulting in the rapidly increasing
incidence of STDs. A study conducted by UNAIDS showed that having the Female
Condom available, as compared to only having male condoms available, increased
the incidence of protected sex by 25% and, correspondingly, caused a 34%
decrease in STDs. A study conducted by the Philadelphia Department of Public
Health showed similar results with a 30% decrease in unprotected sex. The
Company believes that the Product is positioned to gain market share from the
male condom as well as to achieve substantial sales volume from people who,
because there is now an alternative to the male condom, will use the Product
instead of having unprotected sex.
Advantages vs. the Male Condom
The Female Condom is currently the only available barrier method controlled by
women which allows them to protect themselves from STDs, including HIV/AIDS
and unintended pregnancy. Although latex male condoms also offer protection
against STDs, the Female Condom possesses a certain number of advantages. The
most important advantage is that a woman can control whether or not she is
protected. Many men do not like to wear male condoms and may refuse to do so.
The material that is used for the Female Condom, polyurethane, offers a number
of benefits over latex, the material that is most commonly used in male
condoms. Polyurethane is 40% stronger than latex, reducing the probability
that the Female Condom sheath will tear during use. Clinical studies and
everyday use have shown that latex male condoms can tear between 4% to 8% of
the times they are used, while studies show that the Female Condom tears in
less than 1% of uses. Unlike latex, polyurethane quickly transfers heat, so
the Female Condom immediately warms to body temperature when it is inserted,
which may result in increased pleasure and sensation during use. The Product
offers an additional benefit to the 7% to 20% of the population that is
allergic to latex and who, as a result, may be irritated by latex male
condoms. There is no reported allergy to date to polyurethane. The Female
Condom is also more convenient, providing the option of insertion hours before
sexual arousal and as a result is less disruptive during sex than the male
condom which requires sexual arousal for application.
Safety and Efficacy
Based on use of the Product in clinical trials and four years of worldwide
marketing, the Female Condom has been proven to be safe and effective. There
have been no safety issues or side effects noted with the Female Condom.
Current studies show that the Female Condom is 95% efficacious in protecting
against pregnancy when used correctly and consistently, comparable to male
condoms and other barrier methods like diaphragms and cervical caps. Studies
that were conducted in Japan as part of the regulatory approval process
indicate that the efficacy of the Product may be even higher. As a preventive
measure against STDs, the Female Condom has also proven to be highly
effective, as has been documented by several studies, including the UNAIDS
study.
Worldwide Regulatory Approvals
The Female Condom received PMA approval as a Class III Medical Device from the
FDA in 1993. The extensive clinical testing and scientific data required for
FDA approval laid the foundation for approvals throughout the rest of the
world, including receipt of a CE Mark in 1997 which allows the Company to
market the Female Condom throughout the European Union. In addition to the<PAGE>
United States and the European Union, several other countries have approved
the Female Condom for sale, including Canada, Russia, Australia, South Korea
and Taiwan. The Company expects the Female Condom to receive approval in
Japan in 1998.
The Company believes that the Female Condom's PMA approval and FDA
classification as a Class III Medical Device create a significant barrier to
entry. The Company estimates that it would take a minimum of four to six
years to implement, execute and receive FDA approval of a PMA to market
another type of Female Condom.
The Company believes there are no material issues or material costs associated
with the Company's compliance with environmental laws related to the
manufacture and distribution of the Female Condom.
Japanese Market Opportunity
In Japan, the market for male condoms exceeds 600 million units. Oral
contraceptives have never been approved in Japan and, as a result, 85% of
Japanese couples seeking protection use condoms. The Female Health Company's
partner in Japan is Taiho Pharmaceuticals, a $1 billion subsidiary of Otsuka
Pharmaceutical Co., Ltd., which is a $5 billion Japanese health care company.
The agreement between the Company and Taiho provides that Taiho perform
clinical testing of the Product in Japan and obtain necessary regulatory
approvals. After approval, expected in 1998, the Company will manufacture the
Product and supply it to Taiho, which will have responsibility for marketing
and distributing the Female Condom in Japan. Results of the clinical tests in
Japan show that the Female Condom may be more effective in preventing
pregnancy than the male condom and has a high acceptance rate of 70% among
Japanese women. Taiho plans to market the Female Condom under the name
"Mylura Femy."
Relationships and Agreements with Public Sector Organizations
Currently, it is estimated more than one billion male condoms are distributed
worldwide by the public sector each year. The Female Condom is seen as an
important addition to prevention strategies by the public sector because
studies show that the availability of the Female Condom decreases the amount
of unprotected sex by as much as a third over male condoms alone.
In the U.S. currently, city and state governments in New York, Pennsylvania,
Washington, Illinois, Chicago, Philadelphia, New York, San Francisco and
Florida, have purchased Female Condoms for distribution, with a number of
others expressing interest.
In November 1996, FHC signed an agreement with UNAIDS regarding the sale of
Female Condoms to developing countries. UNAIDS solicited interest levels from
approximately 180 countries in order to gauge their potential demand for
Female Condoms. To date, more than 80 countries have expressed interest,
indicating a near-term demand for approximately eight million Female Condoms.
Several countries have commenced, or are about to commence, introduction of
the Product under the UNAIDS agreement, including Zambia, Zimbabwe, South
Africa, Uganda, Tanzania and Cote d' Ivoire.
State-of-the-Art Manufacturing Facility<PAGE>
The Company manufactures the Female Condom in a 40,000 square-foot leased
facility in London, England. The facility is currently capable of producing
60 million units per year. With additional equipment, this capacity can be
significantly increased.
Government Regulation
In the U.S., the Female Condom is regulated by the U.S. Food and Drug
Administration ("FDA"). Pursuant to section 515(a)(3) of the Safe Medical
Amendments Act of 1990 (the "SMA Act"), the FDA may temporarily suspend
approval and initiate withdrawal of the Pre-Market Approval ("PMA") if the FDA
finds that the Female Condom 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 reasonable
assurance that the device is safe or effective under the conditions of use
prescribed, recommended, or suggested in the labeling. Failure to comply with
the conditions of FDA approval invalidates the approval order. Commercial
distribution of a device that is not in compliance with these conditions is a
violation of the SMA Act.
Competition
The Company's Female Condom competes in part with male condoms. Male condoms
typically cost less and have brand names that are more widely recognized than
the Female Condom. Further, male condoms are generally manufactured and
marketed by companies with significantly greater financial resources than The
Female Health Company.
Further, other parties may develop a Female Condom. These competing products
could be manufactured, marketed and sold by companies with significantly
greater financial resources than those of the Company.
Employees
As of November 30, 1997, the Company's operations had 65 full-time employees
within the U.S. and the U.K. and 1 part-time employee. No Company employees
are represented by a labor union. The Company believes that its employee
relations are good.
Backlog
At November 30, 1997, the Company had unfilled orders of $1,130,134.
Comparable amount as of November 30, 1996 was $155,307. All of these unfilled
orders are expected to be filled during Fiscal 1998.
Patents And Trademarks
The Company currently holds product and technology patents in the United
States, Japan, the United Kingdom, France, Italy, Germany, Spain, the European
Patent Convention, Canada, The People's Republic of China, New Zealand,
Singapore, Hong Kong and Australia. Additional product and technology patents
are pending in Brazil, South Korea, Germany, Japan and several other
countries. The patents cover the key aspects of the Female Condom, including
its overall design and manufacturing process. The Company licenses the
trademark "Reality" in the United States and has trademarks on the names
"femidom" and "femy" in certain foreign countries. The Company has also
secured, or applied for, 27 trademarks in 14 countries to protect the various<PAGE>
names and symbols used in marketing the Product around the world. In
addition, the experience that has been gained through years of manufacturing
the Female Condom has allowed the Company to develop trade secrets and
know-how, including certain proprietary production technologies, that further
secure its competitive position.
Research And Development
In 1997 and 1996, the Company incurred research and development costs from
continuing operations of $60,811 and $361,094, respectively. These
expenditures have primarily been related to conducting clinical trials of the
Female Condom.
Industry Segments And Financial Information About Foreign And Domestic
Operations
See Note 11 in financial statements included herein at Part II, Item 7.
History
The Female Condom was invented by a Danish physician who obtained a U.S.
patent for the product in 1988. The physician subsequently sold certain
rights to the condom to Chartex Resources Limited. In the years that
followed, Chartex, with resources provided by a nonprofit Danish foundation,
developed the manufacturing processes and completed other activities
associated with bringing the Female Condom to market in certain non-U.S.
countries. Wisconsin Pharmacal Company, Inc., which then owned certain rights
to the Female Condom in the U.S., Canada, and Mexico, pursued the pre-clinical
and clinical studies and overall development of the product for worldwide use
and U.S. FDA approval of the product.
The Female Health Company is the successor to Wisconsin Pharmacal Company,
Inc., a company which previously manufactured and marketed a wide variety of
disparate specialty chemical and branded consumer products in addition to
owning certain rights to the Female Condom described above. A summary of the
Company's origins follows.
In fiscal 1995, the Company's Board of Directors approved a plan to complete a
series of actions designed, in part, to maximize the potential of the female
condom. First, the Company restructured and transferred all of the assets and
liabilities of the Company other than those related primarily to the female
condom to a newly formed, wholly-owned subsidiary of the Company, WPC
Holdings, Inc. ("Holdings"). In January 1996, the Company sold Holdings to an
unrelated third party. Then, in February 1996, the Company acquired Chartex
(renamed The Female Health Company - UK in 1997), the manufacturer and owner
of certain worldwide rights to, and the Company's sole supplier of, the female
condom. As a result of the sale of Holdings and the acquisition of Chartex,
The Female Health Company evolved to its current state with its sole business
consisting of the manufacture, marketing and sale of the Female Condom.
The FDA approved the Female Condom for distribution in 1993 and the Company's
manufacturing facility in 1994. Since that time the Company has sold over
eight million Female Condoms and expanded distribution of the Female Condom to
10 countries around the world.
<PAGE>
Item 2. Description of Property
The Company leases approximately 4,500 square feet of office space at 875
North Michigan Avenue, Suite 3660, Chicago, IL 60611. The lease expires in
2001. The Company also leases approximately 1,900 square feet for corporate
offices at 919 North Michigan Avenue, Suite 2208, Chicago, Illinois, 60611.
The lease expires January 31, 2001. The Company utilizes warehouse space and
sales fulfillment services of an independent public warehouse located near
Minneapolis, Minnesota for storage and distribution of the Female Condom. The
Company manufactures the Female Condom in a 40,000 square foot leased facility
located in London, England. The FDA-approved manufacturing process is subject
to periodic inspections by the FDA. Current capacity at the manufacturing
facility is approximately 60 million Female Condoms per year. Management
believes the properties are adequately insured.
Item 3. Legal Proceedings.
The Company is not involved in any material pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth
quarter of the Fiscal year ended September 30, 1997.
Supplemental Item. Executive Officers Of Registrant
Certain information about the Company's executive officers as of December 31,
1997, is as follows:
NAME POSITION AGE
- ------------------------------------------------------------------------------
O.B. Parrish Chairman, Chief Executive Officer, Director 64
Mary Ann Leeper, Ph.D. President, Chief Operating Officer, Director 57
William R. Gargiulo, Jr. Vice President - International, Secretary,
Director 69
Jack Weissman Vice President - Trade Sales 49
Michael Pope Vice President - UK Operations 40
Mr. Parrish has served as Chief Executive Officer since 1994 and as Chairman
of the Board and director of the Company since 1987. He is currently acting as
the Chief Financial and Accounting Officer of the Company. Mr. Parrish has
been a shareholder and a director of Phoenix Health Care of Illinois, Inc.
("Phoenix") since 1987. Phoenix is the owner of approximately 2.83% of the
outstanding common stock of the Company. Mr. Parrish also was the Co-Chairman
and a director of Inhalon Pharmaceuticals, Inc. and is Chairman and a director
of ViatiCare LTD Financial Services LLC. Mr. Parrish is also a Trustee of
Lawrence University. 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. Prior to
Searle, Mr. Parrish was Executive Vice President of Pfizer's International
Division.
Dr. Leeper has served as the President and Chief Operating Officer of the
Company since 1996 and as an officer and director of the Company since 1987.
From 1994 until 1996, Dr. Leeper served as President and Chief Executive
Officer of The Female Health Company Division, and, from 1989 until 1994, as
Senior Vice President - Development of the Company. Dr. Leeper is a
shareholder and has served as a Vice President and director of Phoenix since
1987. Previously, Dr. Leeper served as Vice President - Market Development<PAGE>
and in other management positions for Searle. As Vice President - Market
Development, Dr. Leeper was responsible for worldwide licensing and
acquisition, marketing and market research.
Mr. Gargiulo 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 stockholder of Phoenix. 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.
Mr. Weissman has served as Vice President-Trade Sales since June 1995. From
1992 to 1994, Mr. Weissman was Vice President-Sales for Capitol Spouts, Inc.
From 1989-1992, he acted as General Manager-HTV Group, an investment group
involved in the development of retail stores. From 1979 to 1989, Mr. Weissman
held various management positions at Searle's Consumer Products Group and at
The NutraSweet Company, a Searle subsidiary.
Mr. Pope has served as Vice President of the Company since 1996 and as General
Manager of The Female Health Company - UK since its acquisition by FHC in
1996. Mr. Pope has also served as a director of The Female Health Company -
UK since 1995. Previously, Mr. Pope was Director of Technical of Operations
for Chartex which included responsibility for manufacturing, engineering,
process development and quality assurance. Prior to joining Chartex, Mr. Pope
was Production Manager and Technical Manager for Franklin Medical, a
manufacturer of disposable medical devices. <PAGE>
PART II
Item 5. Market For Common Equity and Related Stockholder Matters.
The Company's common stock is traded on the American Stock Exchange under the
symbol "FHC". Prior to January 26, 1995, the Company's common stock traded
over-the-counter on the NASDAQ Small-Cap Market (symbol "WPCI"). The
approximate number of record holders of the Company's common stock at December
9, 1997 was 502. The Company has paid no cash dividends on its common stock
and does not expect to pay cash dividends in the foreseeable future. The
Company anticipates that for the foreseeable future it will retain any
earnings for use in the operation of its business. Information regarding the
Company's high and low reported quarterly closing prices for its common stock
is set forth in the table below.
1997 FIRST SECOND THIRD FOURTH
- ------------ ------ ------- ------- ------
Price per common share - High $6 1/4 $4 1/8 $3 3/8 $4
Price per common share - Low $3 3/4 $1 13/16 $1 11/16 $2 7/8
1996 *
- -------------
Price per common share - High $3 15/16 $4 15/16 $6 1/2 $6 9/16
Price per common share - Low $2 5/8 $2 11/16 $3 15/16 $4 3/8
* Continuing Operations
Item 6. Management's Discussion and Analysis or Plan of Operation
Overview
Over the past few years, the Company completed significant aspects of the
development and commercialization of the Female Condom. These initiatives
have resulted in the attainment of proprietary manufacturing technology and
product design patents, necessary regulatory approvals, endorsements from
various organizations within the world medical community, and the development
of significant manufacturing capacity. These steps, taken as part of the
Company's plan to develop and sell a product with global commercial and
humanitarian value, have required the expenditure of significant amounts of
capital and resulted in significant operating losses including the period 1996
through 1997.
The Company has begun the process of developing the commercial market for the
Female Condom around the world. As part of this plan, the Company has
completed a number of distribution agreements and is pursing other
arrangements for the marketing and sale of the Female Condom. Management
believes that as the number of markets in which the Female Condom is sold
increase, sales will grow and at certain levels the Company will become
profitable. However, there can be no assurance that such level of sales will
be achieved in the near term or at all.
Results Of Operations
Fiscal Year Ended September 30, 1997 ("1997") Compared to Fiscal Year Ended
September 30, 1996 ("1996")<PAGE>
The Company had revenues of $2.9 million and a net loss of $(5.6) million
(($0.67) per share) in 1997 compared to net revenues of $2.1 million and a net
loss of $(8.7) million (($1.31) per share) in 1996.
As discussed more fully below, the 1997 loss principally resulted from fixed
manufacturing overhead and administrative costs, configured to support
significantly greater volume levels. Over the past two years, the Company has
acquired manufacturing capacity and created an organizational structure which
management believes will enable it to increase the sales of the Female Condom
and manage the accompanying growth.
Revenues increased $0.8 million (41%) in 1997 over the prior year. The
increase in revenues principally related to initial shipments to developing
countries under the Company's agreement with UNAIDS and increased US trade
sales, partially offset by a decline in US public sector sales due, in part,
to a reduction in selling price.
In 1997, cost of goods sold declined $1.2 million from $4.7 million in 1996 to
$3.5 million in 1997 principally due to a $1.1 million favorable adjustment to
the Company's inventory reserves in the fourth quarter, a direct result of the
FDA's approval of an extension in the product's useful life to 5 years from 3
years. In 1996, based on the then existing three-year useful life, cost of
goods sold included a $1.0 million charge for a reduction in the expected
realizable value of the Company's inventory.
Excluding the effects of the inventory reserves, cost of goods sold increased
$0.9 million (23%) in 1997 due to both increased sales and the inclusion of a
full year of costs from the Company's manufacturing operations compared to
eight months in 1996. During 1997 and 1996, gross margins were negatively
affected by excess capacity at the Company's UK-based manufacturing facility.
For both 1997 and 1996, output at its manufacturing facility was less than 5%
of the facility's annual capacity.
Advertising and promotion expenditures decreased 17% to $1.6 million in 1997
compared to $2.0 million in 1996. Advertising and promotion relates almost
exclusively to the US market and includes the costs of print advertising,
trade and consumer promotions, product samples and other marketing costs
incurred to increase consumer awareness and purchases of the Female Condom.
The Company's decision to secure a marketing and distribution partner for the
US and European markets limited such spending in the second half of 1997.
Selling, general and administrative expenses totaled $3.0 million for 1997
compared to $3.3 million for 1996 representing a 8% reduction. Research and
development expenditures decreased by $0.3 million (83%) from $0.4 million in
1996 to $0.1 million in 1997 while reductions in selling expenses were offset
by increased expenditures for investor relations, legal and compensation.
Nonoperating expense for 1997 decreased $0.3 million (49%) to $0.4 million
from $0.7 million in 1996. Additional nonoperating income of $0.1 million for
1997 and a 1996 charge of $0.2 million to reduce the estimated value of
warehouse space provided as part of the consideration for the sale of Holdings
accounted for the overall decrease.
Factors That May Affect Operating Results and Financial Condition
<PAGE>
The Company's future operating results and financial condition are dependent
on the Company's ability to increase consumer demand for and to
cost-effectively manufacture sufficient quantities of the Female Condom.
Inherent in this process are a number of factors that the Company must
successfully manage in order to achieve favorable future results and improve
its financial condition.
Reliance on a Single Product
The Company expects to derive the vast majority, if not all, of its future
revenues from the Female Condom, its sole current product. While management
believes the global potential for the Female Condom is significant, the
product is in the early stages of commercialization and, as a result, the
ultimate level of consumer demand around the world is not yet known. To date,
sales of the Female Condom have not been sufficient to cover the Company's
fixed operating costs.
Distribution Network
The Company's strategy is to act as a manufacturer and to develop a global
distribution network for the product by completing partnership arrangements
with companies with the necessary marketing and financial resources and local
market expertise. To date, this strategy has resulted in 7 such agreements.
The Company believes this strategy will accelerate the commercialization of
the Female Condom around the world. However, the Company is dependent on
finding appropriate partners in markets around the world and, once an
agreement is completed, reliant on the effectiveness of its partners to market
and distribute the product. While such arrangements typically include minimum
order quantities necessary for the partner to retain the rights afforded it
under the agreement, failure by the Company's partner to successfully market
and distribute the Female Condom or an inability of the Company to secure
additional agreements for new markets could adversely effect the Company's
financial condition and results of operations.
Inventory and Supply
Although certain components essential to the Company's business are generally
available from multiple sources, other key components are currently obtained
from single sources. If the supply of key single-sourced components to the
Company were to be delayed or curtailed, the Company's ability to ship product
in desired quantities in a timely manner could be adversely affected,
depending on the time required to obtain sufficient quantities from the
current source or to obtain sufficient quantities from an alternative source
or alternative sources.
Global Market Risks
The Company manufactures the Female Condom in a leased facility located in
London, England. Further, a material portion of the Company's future sales
are likely to be in foreign markets. Manufacturing costs and sales to foreign
markets are subject to normal currency risks associated with changes in the
exchange rate of foreign currencies relative to the United States Dollar. In
addition, some of the Company's future international sales may be in
developing nations where dramatic political or economic changes are possible.
Such factors may adversely affect the Company's results of operations and
financial condition. <PAGE>
Other Factors
The manufacture and marketing of the Female Condom is regulated by the FDA.
Failure to comply with the conditions of FDA approval invalidates the approval
order. Under certain circumstances, failure to comply with the conditions of
FDA approval could result in fines or suspension or withdrawal of FDA
approval. The Company's operating results and financial condition could be
materially adversely affected in the event of a withdrawal of approval from
the FDA.
For the Company to begin generating cash from operations, sales of the Female
Condom will have to increase significantly from current levels. The Company's
business and financial condition could be adversely effected by an inability
of the Company to effectively manage its growth and to adapt its
administrative, operational and financial control systems to the needs of the
expanded entity and/or the failure of management to anticipate, respond to,
and manage changing business conditions.
Liquidity and Sources of Capital
Historically, the Company has incurred significant operating losses. Cash
used in continuing operations was $5.0 million and $4.1 million for 1997 and
1996, respectively. Historically, the Company has funded operating losses and
capital costs, in large part, through the sale of common stock or debt
securities convertible into common stock.
During 1997, the Company received approximately $1.0 million in proceeds from
newly-issued notes payable, $1.9 million (net of transaction costs) from the
issuance of convertible debentures and warrants, and $1.6 million (net of
transaction costs) from the sale of convertible preferred stock and $.2
million from the issuance of common stock upon exercise of options. The
Company also sold its UK manufacturing building for $3.4 million in a sale
leaseback transaction. FHC used these amounts to fund current operations of
the Company and to repay existing liabilities.
In the near term, FHC management expects operating and capital costs to
continue to exceed funds generated from operations due principally to the
Company's fixed manufacturing costs relative to current production volumes and
the ongoing need to commercialize the Female Condom around the world.
On September 29, 1997, the Company entered into an agreement with Vector
Securities International, Inc. (Vector), an investment banking firm
specializing in providing advice to healthcare and life companies. Pursuant to
this agreement, for a one-year period, Vector will act as the Company's
exclusive financial advisor for the purposes of identifying and evaluating
opportunities available to the Company for increasing shareholder value.
These opportunities may include selling all or a portion of the business,
assets or stock of the Company or entering into one or more distribution
arrangements relating to the Company's product. However, no specific
opportunity has yet been identified and there can be no assurance that any
such opportunities will be available to the Company or, if so available, that
the Company will ultimately elect or be able to consummate any such
transaction.
In 1998, management will pursue other avenues to obtain financing including
pursuing strategies to secure additional capital from a debt or equity
securities offering. Until internally generated funds are sufficient to meet
cash requirements, FHC will remain dependent upon its ability to generate
sufficient capital from outside sources. While management believes that
revenue from sales of the Female Condom will eventually exceed operating costs<PAGE>
and that ultimately operations will generate sufficient funds to meet capital
requirements, there can be no assurance that such level of operations will
ultimately be achieved, or be achieved in the near term. Likewise, there can
be no assurance that the Company will be able to source all or any portion of
its required capital through the sale of debt or equity or, if raised, the
amount will be sufficient to operate the Company until sales of the Female
Condom generate sufficient revenues to fund operations. In addition, any
funds raised may be costly to the Company and/or dilutive to stockholders. If
the Company is not able to source the required funds or any future capital
which becomes required, the Company may be forced to sell certain of its
assets or rights or cease operations. Further, 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 sale of such
assets or rights or otherwise capitalize on the investments made in the Female
Condom.
As of November 30, 1997, the Company had approximately $1.3 million in cash,
net trade accounts receivable of $0.4 million and current trade accounts
payable of $1.0 million. It is estimated that the Company's cash burn rate,
without revenues, is approximately $0.4 million per month.
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.
Historically, the Company has abosrobed increased costs and expenses without
increasing selling prices.
New Accounting Pronouncements
Please see "Current Accounting Pronouncements" in Note 14 in financial
statements included herein at Part II Item 7.<PAGE>
ITEM 7. Financial Statements
INDEX TO FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT: McGladrey & Pullen, LLP
Consolidated Balance Sheet -September 30, 1997
Consolidated Statements of Operations for each of the two years in the period
ended September 30, 1997
Consolidated Statements of Stockholders' Equity for each of the two years in
the period ended September 30, 1997
Consolidated Statements of Cash Flows for each of the two years in the period
ended September 30, 1997
Notes to Consolidated Financial Statements<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
The Female Health Company and Subsidiaries
Chicago, Illinois
We have audited the accompanying consolidated balance sheet of The Female
Health Company and subsidiaries, as of September 30, 1997, and the related
statements of operations, stockholders' equity, and cash flows for the years
ended September 30, 1997 and 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Female
Health Company and subsidiaries as of September 30, 1997, and the results of
their operations and their cash flows for the years ended September 30, 1997
and 1996, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been presented
assuming that the Female Health Company will continue as a going concern. As
more fully described in Note 15, the Company has experienced slower than
expected growth in revenues from its sole product, which has adversely
affected the Company's current results of operations and liquidity. These
conditions raise substantial doubt about the Company's ability to continue as
a going concern. Management's plans in regard to these matters are also
described in Note 15. The consolidated financial statements do not include
any adjustments to reflect the possible future effects on the recoverability
and classification of assets or the amounts of classification of liabilities
that may result from the outcome of this uncertainty.
McGLADREY & PULLEN, LLP
Schaumburg, Illinois
November 20, 1997<PAGE>
Consolidated Balance Sheet
September 30
1997
------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $1,633,467
Accounts receivable, net of allowances of
$292,000 610,951
Inventories, net of allowances of $894,000 947,081
Prepaid expenses and other current assets 293,590
-----------
TOTAL CURRENT ASSETS 3,485,089
OTHER ASSETS
Note receivable 750,000
Intellectual property, net of accumulated
amortization of $199,248 996,360
Other assets 243,782
PROPERTY, PLANT AND EQUIPMENT
Equipment, furniture and fixtures 3,863,859
Less: accumulated depreciation (999,735)
-----------
2,864,124
-----------
$8,339,355
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable, related party, net of unamortized
discount of $133,209 $866,791
Current maturities of long-term debt and
capital lease obligations 43,996
Accounts payable 874,908
Accrued expenses and other current liabilities 372,323
Preferred dividends payable 14,965
----------
TOTAL CURRENT LIABILITIES 2,172,983
LONG-TERM LIABILITIES
Long term debt and capital lease obligations,
less current maturities 538,969
Deferred gain on sale of facility 1,767,612
Other long term liabilities 305,153
----------
4,784,717
STOCKHOLDERS' EQUITY
Convertible Preferred Stock, par value $.01
per share. Authorized 5,000,000 shares; issued
and outstanding 680,000 shares 6,800
Common Stock, par value $.01 per share.
Authorized 15,000,000 shares; issued and
outstanding 9,514,430 shares 95,145
Additional paid-in capital 39,458,387
Foreign currency translation gain 203,195<PAGE>
Accumulated deficit (36,208,889)
------------
3,554,638
------------
$8,339,355
============
See notes to consolidated financial statements.<PAGE>
Consolidated Statements of Operations
Years ended September 30
1997 1996
----------- ----------
NET REVENUES $2,916,408 $2,064,258
COST OF PRODUCTS SOLD 3,475,709 4,719,979
----------- ----------
GROSS PROFIT (LOSS) (559,301) (2,655,721)
OPERATING EXPENSES
Advertising and promotion 1,642,347 1,976,289
Selling, general and administrative 3,036,765 3,303,717
----------- ----------
Total Operating Expenses 4,679,112 5,280,006
----------- ----------
Operating (loss) (5,238,413) (7,935,727)
NONOPERATING INCOME (EXPENSE)
Interest expense (626,980) (524,916)
Interest income 176,717 106,708
Nonoperating income/(expense) 79,527 (301,907)
----------- -----------
(370,736) (720,115)
----------- -----------
(LOSS) FROM CONTINUING OPERATIONS (5,609,149) (8,655,842)
Income (loss) from discontinued
operations and gain on sale, net of
applicable income tax expense --- (4,461)
----------- -----------
Net (loss) (5,609,149) (8,660,303)
Preferred dividends 14,965 ---
----------- -----------
Net (loss) attributable to common
stockholders (5,624,114) (8,660,303)
Net (loss) per common share outstanding
Continuing Operations ($0.67) ($1.31)
Discontinued Operations .00 .00
----------- ----------
($0.67) ($1.31)
Weighted average common shares
outstanding 8,453,266 6,611,796
See notes to consolidated financial statements.<PAGE>
Consolidated Statements of Stockholders' Equity
Additional
Preferred Common Paid-in
Stock Stock Capital
------- ------- -------
Balance at September 30, 1995 $ --- $63,928$29,411,702
Net loss --- --- ---
Issuance of 700,000 shares of Common Stock
(net of offering costs of $293,313) --- 7,000 2,779,417
Issuance of 13,350 shares of Common Stock
upon exercise of stock options --- 133 46,741
Issuance of 105,580 shares of Common Stock
for consulting and other services --- 1,056 626,712
Issuance of warrants with convertible
debentures --- --- 90,000
Issuance of warrants with short-term
notes payable --- --- 340,000
Issuance of warrants for consulting and
other services --- --- 78,500
Translation adjustment --- --- ---
-------- --------------------
Balance at September 30, 1996 --- $72,117$33,373,072
Net loss --- --- ---
Issuance of 2,128,371 shares of Common Stock
upon conversion of debt --- 21,284 3,670,281
Issuance of 39,833 shares of Common Stock
upon exercise of stock options --- 398 178,268
Issuance of 124,564 shares of Common Stock
for consulting services --- 1,246 206,617
Issuance of 10,000 shares of Common Stock
under Stock Bonus Plan --- 100 53,025
Issuance of warrants with convertible
debentures --- --- 30,176
Issuance of warrants with short-term
notes payable --- --- 250,000
Issuance of 680,000 shares of Preferred
Stock (net of offering costs of $96,252) 6,800 --- 1,596,948
Issuance of warrants for consulting services --- --- 89,500
Revaluation of options for legal services --- --- 10,500
Preferred stock dividends --- --- ---
Translation adjustment --- --- ---
------ -------- ---------
Balance at September 30, 1997 $6,800 $95,145$39,458,387
======== ==================<PAGE>
Consolidated Statements of Stockholders' Equity
Foreign
Currency
Accumulated Translation
Deficit Gain (Loss) Total
------- ------- -------
Balance at September 30, 1995 $(21,924,472) --- $7,551,158
Net loss (8,660,303) ---(8,660,303)
Issuance of 700,000 shares of Common Stock
(net of offering costs of $293,313) --- --- 2,786,417
Issuance of 13,350 shares of Common Stock
upon exercise of stock options --- --- 46,874
Issuance of 105,580 shares of Common Stock
for consulting and other services --- --- 627,768
Issuance of warrants with convertible
debentures --- --- 90,000
Issuance of warrants with short-term
notes payable --- --- 340,000
Issuance of warrants for consulting and
other services --- --- 78,500
Translation adjustment --- 83,858 83,858
------------- ---------- ----------
Balance at September 30, 1996 $(30,584,775) $83,858 $2,944,272
Net loss (5,609,149) ---(5,609,149)
Issuance of 2,128,371 shares of Common Stock
upon conversion --- --- 3,691,565
Issuance of 39,833 shares of Common Stock
upon exercise of stock options --- --- 178,666
Issuance of 124,564 shares of Common Stock
for consulting services --- --- 207,863
Issuance of 10,000 shares of Common Stock
under Stock Bonus Plan --- --- 53,125
Issuance of warrants with convertible
debentures --- --- 30,176
Issuance of warrants with short-term
notes payable --- --- 250,000
Issuance of 680,000 shares of Preferred
Stock (net of offering costs of $96,252) --- --- 1,603,748
Revaluation of warrants for consulting services --- --- 89,500
Revaluation of options for legal services --- --- 10,500
Preferred stock dividends (14,965) --- (14,965)
Preferred stock dividends --- --- ---
Translation adjustment --- 119,337 119,337
------------- -------- ----------
Balance at September 30, 1997 $(36,208,889) $203,195 $3,554,638
============= ======= ==========
See notes to consolidated financial statements.<PAGE>
Consolidated Statements of Cash Flows
Years ended September 30
1997 1996
---------- ----------
OPERATING ACTIVITIES
Net (loss) ($5,609,149)($8,660,303)
Adjustments to reconcile net (loss) to
net cash (used in) operating activities:
Depreciation 553,298 349,061
Amortization of intellectual
property rights 121,741 76,023
Provision for (recovery of) inventory
obsolescence (1,054,476) 950,000
Provision for doubtful accounts, returns
and discounts 119,274 120,126
Gain on sale of Holdings --- (224,538)
(Gain) loss on disposal of equipment (84,646) 37,576
Issuance and revaluation of warrants
and options 360,988 706,268
Amortization of debenture issuance costs 27,507 4,278
Amortization of discount on note receivable
and interest earned on lease deposit (29,140) (29,703)
Amortization of discounts on notes payable
and convertible debentures 312,820 166,570
Amortization of other assets --- 250,000
Write down of note receivable to
realizable value 92,471 ---
Amortization of deferred gain on sale and
leaseback of building (70,119) ---
Changes in operating assets and liabilities
of continuing operations, excluding effect
of purchase of Chartex in 1996:
Accounts receivable (271,173) 47,269
Inventories 1,086,999 1,935,923
Prepaid expenses and other current assets 28,260 177
Accounts payable 138,532 (914,876)
Accrued expenses and other current
liabilities (730,929) 1,133,407
Due to stockholder --- (19,795)
---------- ----------
NET CASH (USED IN) OPERATING ACTIVITIES (5,007,742) (4,072,537)<PAGE>
Consolidated Statements of Cash Flows
Years ended September 30
1997 1996
---------- ----------
INVESTING ACTIVITIES
Capital expenditures (24,597) (596,402)
Purchase of Chartex, less $71,417
cash received --- (5,103,088)
Sale of Holdings, net of expenses and
cash sold --- 5,213,263
Proceeds from sale of property and
equipment 3,376,056 ---
Proceeds from return of lease deposits 91,171 ---
Payments for lease deposits (245,953) ---
---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES 3,196,677 (486,227)
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock 1,603,748 ---
Proceeds from issuance of common stock --- 3,080,000
Proceeds from issuance of common stock
upon exercise of options 178,666 46,874
Costs of common stock issuance --- (293,583)
Proceeds from related party notes issued 1,000,000 2,160,000
Proceeds from convertible debentures
issued 2,020,000 2,000,000
Payments on notes payable, related party (2,160,000) ---
Costs to issue convertible debentures (155,400) (154,000)
Increase (decrease) in notes payable --- (109,503)
Payments on long-term debt and capital
lease obligations (1,912,430) (768,613)
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 574,584 5,961,175
Effect of exchange rate changes on
cash and equivalents (44,132) (9,675)
---------- ----------
Increase (decrease) in cash and
cash equivalents (1,280,613) 1,392,736
Cash and cash equivalents at
beginning of year 2,914,080 1,521,344
---------- ----------
Cash and cash equivalents at
end of year $1,633,467 $2,914,080
========== ==========
See notes to consolidated financial statements. <PAGE>
Consolidated Statements of Cash Flows
Years ended September 30
1997 1996
---------- ----------
Supplemental cash flow disclosures:
Interest paid $273,714 $457,280
Supplemental schedule of noncash investing and financing activities:
Convertible debentures converted to
common stock, net of unamortized discounts
and issuance costs 3,691,565
Issuance of warrants on convertible
debentures and notes payable 280,176 430,000
Capital lease obligations incurred for
equipment 56,588
Preferred dividends declared 14,965
Sale of manufacturing facility:
Proceeds from sale 3,365,000
Depreciated cost of property (1,398,819)
-----------
Deferred gain on sale 1,966,181
Sale of WPC Holdings, Inc.:
Selling price 8,285,000
Liabilities assumed by buyer (916,060)
Note receivable taken (785,000)
Other assets received (250,000)
----------
Cash received 6,333,940
Expenses on sale and cash sold (1,120,677)
-----------
$5,213,263
Purchase of Chartex:
Assets acquired:
Trade receivables 203,613
Inventories 644,268
Other current assets 82,053
Property and equipment 3,870,167
Intellectual property rights 1,127,469
----------
5,927,570
Liabilities assumed:
Accounts payable and accrued expenses (835,725)
Bank debt (1,615,229)
Other long-term debt (1,109,235)
----------
3,560,189
Net assets acquired, net of cash
received of $71,417 2,367,381<PAGE>
Settlement of intercompany assets
and liabilities:
Prepaid royalties (1,875,491)
Accrued royalties 4,761,198
Option fee paid (150,000)
----------
Cash paid in 1996 $5,103,088
==========
See notes to consolidated financial statements.<PAGE>
Note 1. Nature Of Business and Significant Accounting Policies
Principles of consolidation and nature of operations: The consolidated
financial statements include the accounts of the Company and its wholly-owned
subsidiaries, The Female Health Company - UK and The Female Health Company -
UK, plc, previously Chartex Resources Limited and Chartex International, plc
("Chartex"), respectively. All significant intercompany transactions and
accounts have been eliminated in consolidation. The Female Health Company
("FHC" or the "Company") is currently engaged in the marketing, manufacture
and distribution of a consumer health care product known as the Reality female
condom, "Reality," in the U.S. and "femidom" or "femy" outside the U.S. The
Female Health Company - UK, is the holding company of The Female Health
Company - UK, plc, which operates a 40,000 sq. ft. leased manufacturing
facility located in London, England.
The Company changed its name from Wisconsin Pharmacal, Inc. to The Female
Health Company concurrently with the sale of WPC Holdings, Inc. on January 29,
1996.
The Company sells primarily to public sector institutions, wholesalers,
distributors, and drug, general merchandise, and grocery retailers in the U.S.
and United Kingdom.
Use of estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and use assumptions that affect certain reported amounts and disclosures.
Actual results may differ from those estimates. Significant accounting
estimates include the following:
Allowances for price discounts and product returns: Receivables include a
provision for sales returns and trade allowances, which is based on
management's estimate of future product returns from customers in connection
with unsold product which has expired or is expected to expire before it is
sold. The estimated cost for product returns, price discounts and trade
allowances are accrued when the initial sale is recorded.
Allowances against inventories: The market value of inventory is based on
management's best estimate of future sales and the time remaining before the
existing inventories reach their expiration dates.
Intellectual property: The Company evaluates intellectual property rights for
impairment by comparing the net present value of the asset's estimated future
income stream to the asset's carrying value.
Although management uses the best information available, it is reasonably
possible that the estimates used by the Company will be materially different
from the actual results. These differences could have a material effect on
the Company's future results of operations and financial condition.
Cash equivalents: The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.
Substantially all of the Company's cash was on deposit with one financial
institution.
Inventories: Inventories are valued at the lower of cost or market. The cost
is determined using the first-in, first-out (FIFO) method.<PAGE>
Foreign currency translation: In accordance with Financial Accounting
Standards No. 52, "Foreign Currency Translation", the financial statements of
the Company's international subsidiaries are translated into U.S. dollars
using the exchange rate at each balance sheet date for assets and liabilities,
the historical exchange rate for stockholders' equity and a weighted average
exchange rate for each period for revenues, expenses, and gains and losses.
Translation adjustments are recorded as a separate component of stockholders'
equity as the local currency is the functional currency.
Building, equipment, furniture and fixtures and assets under capital leases:
Depreciation and amortization is computed by the estimated useful lives of the
respective assets which range as follows:
Equipment 5 - 10 years
Furniture and fixtures 3 years
Amortization of assets under capital lease is included with depreciation and
amortization for owned assets.
Intellectual property rights: The Company holds patents on the Female Condom
in the United States, the European Union, Japan, Canada, Australia and The
People's Republic of China and holds patents on the manufacturing technology
in various countries. The Company also licenses the trademark "Reality" in
the United States and has trademarks on the names "femidom" and "femy" in
certain foreign countries. Intellectual property rights are amortized on a
straight-line basis over their estimated useful life of twelve years.
Financial instruments: The Company has no financial instruments for which the
carrying value materially differs from fair value.
Revenue Recognition: Revenues from product sales are recognized as the
products are shipped to the customers.
Research and Development Costs: Research and development costs are expensed
as incurred. The amount of costs expensed for the years ended September 1997
and 1996 was $60,811 and $361,094, respectively.
Stock-Based Compensation: The value of stock options awarded to employees is
measured using the intrinsic value method prescribed by Accounting Principles
Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees."
The Company has provided pro forma disclosures of net income as if the fair
value-based method prescribed by Financial Accounting Standard No. 123,
"Accounting for Stock-Based Compensation", ("FAS 123"). was used in measuring
compensation expense in Note 7.
Income Taxes: The Company files separate income tax returns for its foreign
subsidiaries. Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (FAS 109) requires recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the
differences between the financial statements and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Deferred tax assets are also provided for
carryforwards for income tax purposes. In addition, the amount of any future
tax benefits is reduced by a valuation allowance to the extent such benefits
are not expected to be realized.<PAGE>
Advertising: The Company's policy is to expense production costs in the
period in which the advertisement is initially presented to consumers.
Net (Loss) Per Common Share: Net (loss) per common share is computed using
the weighted average number of shares of common stock outstanding. Fully
diluted income per share is not presented for each of the periods since the
effect of including common equivalent shares would be anti-dilutive.
Reclassifications: Certain prior year amounts have been reclassified on the
Consolidated Statements of Operations and the Consolidated Statements of Cash
Flows to conform to the 1997 presentation.
Note 2. Inventories
The components of inventory consist of the following at September 30, 1997:
Raw material $ 237,315
Work in process 60,879
Finished goods 1,542,887
Less allowance for obsolescence (894,000)
---------
Net Inventory $ 947,081
=========
Note 3. Leases
Property, plant and equipment include the following amounts for leases which
have been capitalized at September 30, 1997:
Leasehold interest in equipment, furniture
and fixtures $189,124
Less accumulated amortization 148,478
--------
$ 40,646
========
The Company entered into a seven year operating lease with a third party for
office space effective September 12, 1994. The lease is cancelable at the end
of the 60th month of the term of the lease upon payment of a termination fee
of $63,867. The Company also has an informal agreement to reimburse an
affiliate for office space used by the officers of the Company. The
affiliate's lease is with an unrelated third party which expires January 31,
2001.
On December 10, 1996, the Company entered into what is in essence a sale and
leaseback agreement with respect to its 40,000 square foot manufacturing
facility located in London, England. The Company received $3,365,000 (Pounds)
1,950,000 for leasing the facility to a third party for a nominal annual
rental charge and for providing the third party with an option to purchase the
facility for one pound during the period December 2006 to December 2027.
As part of the same transaction, the Company entered into an agreement to
lease the facility back from the third party for base rents of $336,000
(Pounds) 195,000 per year payable quarterly until 2016. The lease is renewable
through December 2027. The Company was also required to make a security
deposit of $336,000 (Pounds) 195,000 to be reduced in subsequent years. The
facility had a net book value of $1,398,819 (Pounds) 810,845 on the date of<PAGE>
the transaction. The $1,966,181 (Pounds) 1,139,155 gain which resulted from
this transaction will be recognized ratably over the initial term of the
lease. Unamortized deferred gain as of September 30, 1997 was $1,767,612
(Pounds) 1,096,441. Concurrent with this transaction, the Company repaid the
mortgage loan on this property of $1,834,000 (Pounds) 1,062,500.
In 1987, a subsidiary entered into a lease for office space expiring March 3,
1999. In 1993, these offices were vacated and subsequently this space was
subleased to a third party for a period expiring February 28, 1999. At the
time the sublease was entered into a liability was established for all future
costs to the end of the lease, net of expected sublease receipts. Details of
lease rent expense in total and separately for transactions with related
parties is as follows:
September 30
1997 1996
-------- --------
Operating lease expense:
Factory and office leases $579,197 $ --
Office space used by officers 51,255 57,640
Other 88,772 114,684
-------- --------
Total lease expense 719,224 172,324
Discontinued operations --- 32,035
-------- --------
Continuing operations $719,224 $140,289
======== ========
Future minimum payments under capital and operating leases, including planned
reimbursement of affiliate for office space used by officers, consisted of the
following at September 30, 1997:
Rentals
Receivable
Under
Capital Operating Subleases
-------- ---------- --------
1998 $44,897 $ 592,741 $65,664
1999 23,156 485,201 12,038
2000 --- 459,607 ---
2001 --- 431,983 ---
2002 --- 320,110 ---
Thereafter --- 4,401,513 ---
-------- ---------- --------
Total minimum payments 68,053 $6,691,155 $77,702
========== ========
Amount representing interest (901)
--------
$67,152
========
Note 4. Notes Payable and Long-Term Debt
During 1997, the Company repaid and then subsequently borrowed $1,000,000 from
Mr. Dearholt, a current director of the Company. The outstanding note payable
bears interest at 12% and is payable in full in 1998. As part of the
transaction, the Company issued Mr. Dearholt warrants to purchase 200,000
shares of the Company's common stock at $1.848 per share, which represented<PAGE>
the average trading price for the five trading days prior to the closing date
for the transaction and resulted in an initial discount on the note of
$250,000. Any stock issued under the warrants carry certain registration
rights. The warrants expire in 2004. In addition, if the Company defaults on
its obligation under the note, the Company is required to issue an additional
200,000 shares of its common stock to Mr. Dearholt in addition to all other
remedies to which Mr. Dearholt may be entitled. The note is recorded at
September 30, 1997, net of unamortized discount of $133,209. The discount in
combination with the note's 12% coupon resulted in an effective interest rate
of 53 percent on the note.
During 1997, the Company repaid $1,000,000 borrowed from an affiliate of Mr.
Dearholt, and $160,000 borrowed from Mr. Parrish, a current officer and
director of the Company.
Long-term debt and capital lease obligations at September 30, 1997, consisted
of the following:
Foundation note, noninterest bearing, due 1999,
net of unamortized discount of $80,676,
interest imputed at 11% $ 515,813
Capital lease obligations 67,152
---------
Total long-term debt and capital leases 582,965
Less current maturities 43,996
---------
Long-term portion $ 538,969
=========
The Foundation note for $515,813 (Pounds) 319,957 is a noninterest bearing
Economic Development Grant provided by the United Kingdom Regional Selective
Assistance Program. The grant is repayable by the Company if certain
conditions of the grant are not satisfied.
On February 20, 1997, the Company issued convertible debentures for $1,989,824
which is net of $30,176 in unamortized discount; (the Debentures) at 8%
maturing in 1999. These Debentures are convertible in the Company's common
stock at the lesser of $2.875 (representing the average market price for the
five days preceding the date the Debentures were sold) or 80% of the market
price at the time the debentures are converted into FHC common stock. The
discount relates to the valuation of the detachable warrants for 67,333 shares
of common stock. During fiscal 1997, the debentures were all converted into
1,364,625 shares of common stock.
At September 30, 1996, there were convertible debentures of $1,910,000 (net of
$90,000 in unamortized discount) with detachable warrants for 40,201 shares of
common stock (the Debentures) at 8% maturing in 1999. These Debentures were
convertible into the Company's common stock at the lesser of $5.275
(representing the average market price for the five days preceding the date
the Debentures were sold) or 80% of the market price at the time the
debentures are converted into FHC common stock. All of these debentures were
converted in 763,746 shares of common stock in fiscal 1997.
Upon conversion of the debentures, $277,610 of issuance costs and $110,007 of
unamortized discount were charged to equity and $59,182 of accrued interest
was credited to equity.
<PAGE>
Note 5. Income Taxes
A reconciliation of income tax expense and the amount computed by applying the
statutory Federal income tax rate to loss from continuing operations before
income taxes as of September 30, 1997 and 1996, are as follows:
September 30
1997 1996
---------- ----------
Tax credit statutory rates $(1,907,111) $(2,942,986)
State income tax, net of federal benefits (241,660) (231,219)
Benefit of net operating loss not
recognized, increase in valuation
allowance 2,073,129 3,153,062
Other 75,642 (21,143)
---------- ----------
$ --- $ ---
========== ==========
As of September 30, 1997, the Company had federal net operating loss
carryforwards of approximately $25,700,000 and state net operating loss
carryforwards of $28,400,000, respectively, for income tax purposes expiring
in years 2005 to 2013. The benefit relating to $1,489,218 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, 1997,
expiring in years 1998 to 2008. The Company's Chartex subsidiary has U.K. net
operating loss carryforwards of approximately $68,900,000 as of September 30,
1997. These U.K. net operating loss carryforwards can be carried forward
indefinitely to be used to offset future U.K. taxable income. Significant
components of the Company's deferred tax assets and liabilities are as follows
at September 30, 1997:
Deferred tax assets:
Federal net operating loss carryforwards $8,727,724
State net operating loss carryforwards 1,843,911
Foreign net operating loss carryforwards 22,752,873
Tax credit carryforwards 181,210
Inventory obsolescence 328,043
Accounts receivable allowances 90,373
Other 22,330
----------
Total gross deferred tax assets 33,946,464
Valuation allowance for deferred tax assets (33,930,605)
----------
Deferred tax assets net of valuation allowance 15,859
Deferred tax liabilities: Equipment, furniture
and fixtures (15,859)
---------
Net deferred tax assets $ ---
=========
Reconciliations of the valuation allowance for deferred tax assets for the
year ended September 30, 1997, is as follows:
<PAGE>
Balance, beginning $(31,857,476)
Increase in valuation allowance charged
to current operations (2,073,129)
------------
Balance, ending $(33,930,605)
============
The valuation allowance reported in the financial statements for the year
ended September 30, 1996, was decreased by approximately $559,000 due
primarily to changes in the deferred tax asset related to net operating loss
carryforwards acquired in the purchase of Chartex.
Note 6. Royalty and Licensing Agreements
The Company has an exclusive license (except for licenser'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
licenser the greater of (a) $0.015 per Female Condom sold in the U.S.
thereafter or (b) a minimum annual royalty equal to 50% of the average annual
royalties paid during the period beginning five years immediately preceding
the year for which the royalties are due or $4,500 whichever is greater. The
amount of trademark royalty expense was approximately $5,700 and $8,900 for
1997 and 1996, respectively.
Effective September 24, 1992, the Company entered into an agreement with
Family Health International ("FHI"), a nonprofit organization. FHI, in
conjunction with the Contraceptive Research and Development Program
("CONRAD"), conducted a major study to assess the safety and efficacy of the
Female Condom. The agreement with FHI provides that FHI may not use, or
permit the use of, the data supporting the study in connection with any
company competitive with the Company or product competitive with the Female
Condom. The agreement also provides that FHI will be paid a royalty on U.S.
private sector sales of the Female Condom. The royalty is calculated on a
sliding scale based on the number of units sold beginning with quantities sold
over 10 million units and subject to a cumulative maximum royalty of $10
million. Since less than 10 million units have been sold to date no royalties
have been incurred.
Prior to the 1996 acquisition of Chartex, the Company paid royalties under a
series of licensing agreements to market the Female Condom in the United
States, Canada and Mexico. These royalty agreements have ceased upon the
acquisition and unpaid royalties were settled at the acquisition date.
Note 7. Common Stock
Stock Option Plans
In October 1989, in conjunction with an amendment of the officer/stockholder's
employment agreement, the Company adopted the 1989 Stock Option Plan which
granted the officer/stockholder (now "former officer") options to purchase up
to 50,000 shares of Common Stock at the price per share in the Company's
initial public offering ($6.00). During a previous year, 30,000 of these
options were canceled. The remaining options for 20,000 shares are currently
exercisable.
On April 6, 1991 the Company entered into a stock option agreement with this
same former officer. Under the agreement, the Company granted the former
officer the option to purchase up to 130,000 shares of Common Stock at the
market price at the date of the grant ($4.75 per share). Exercise of the<PAGE>
option was contingent upon the market price of the Common Stock equaling at
least $9.50 per share within a three-day period immediately preceding the date
of exercise. On July 31, 1996, the Board of Directors amended the plan
entitling the exercise of these options for 130,000 shares of Common Stock at
any time prior to the expiration of the option period. In October, 1996
36,000 of these shares were exercised. At September 30, 1997 options to
purchase 94,000 shares of Common Stock were outstanding under this agreement.
In 1990, the Company provided for the award of options to purchase up to
200,000 shares of the Company's common stock to key Company employees. The
options generally expire in eight years from date of grant and become
exercisable evenly over a four-year period. At September 30, 1997, 108,279
options are outstanding under the 1990 plan, 97,779 of which are exercisable.
The Company has various stock option plans established in 1994 and 1997 under
which it may grant to employees responsible for the growth and financial
success of the Company options to purchase shares of Common Stock. These
options generally expire ten years from the date of grant and become
exercisable based on continued employment in one-third increments as follows:
(i) on the first anniversary of the grant date (ii) on the date when the
average sale price of the Company's common stock is at least $7.50 per share
and (iii) on the date when the Company and its subsidiaries, on a consolidated
basis, achieve a positive cash flow for a six-month period, as determined by
the Company's independent auditors.
In 1997, the exercise price for The Female Health Company employee stock
options granted under the 1997 Plan and the 1994 Stock Option Plan (the "1994
Plan") were amended to $2.00 per share (the last sale price of the Company's
common stock as of April 22, 1997).
Under the 1994 plan, the Company provided for the award of options to purchase
up to 449,000 shares of the Company's common stock. At September 30, 1997,
433,867 options were granted and are outstanding under the 1994 plan, 143,734
of which were exercisable.
Under the 1997 plan, the Company provided for the award of options to purchase
up to 600,000 shares of the Company's common stock. At September 30, 1997,
444,600 options were granted and are outstanding under the 1997 Plan, none of
which were exercisable.
Directors who are employees of the Company do not receive compensation for
serving in such capacity. Directors who are not employees of the Company each
receive $1,000 for attendance at each Board meeting or a meeting of a
committee of which he or she is a member. In addition, during 1996 the
Company established a stock option plan for outside directors (the "Outside
Director Plan"). The Outside Director Plan provides each director who is not
an employee of the Company receives a grant of options to purchase 30,000
shares, 150,000 total shares, of the Company's common stock at an exercise
price equal to the last sale price on the date of grant. The options
generally expire ten years after the grant date and 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. In 1997,
options to purchase 60,000 shares of common stock at $2.00 per share were
granted and the exercise price on 60,000 options granted in 1996 was lowered
to $2.00. At September 30, 1997, 120,000 options were outstanding under the
Outside Director Plan, of which 60,000 were exercisable. <PAGE>
During 1995, Phoenix Health Care of Illinois, Inc. ("Phoenix"), a related
party was awarded options to purchase 90,000 shares of Common Stock at $6.00
per share. The options vest in accordance with the same vesting criteria as
the 1990 and 1994 stock option plan above. During 1997, the exercise price
was amended to $2.00 per share (the last sale price of the Company's common
stock as of April 22, 1997). No compensation expense was recognized. At
September 30, 1997, 30,000 shares were exercisable.
During 1996, the Compensation Committee of the Board granted special stock
options to outside legal counsel to purchase 30,000 shares and an officer of
the Company to purchase 120,000 shares at an exercise price of $3.875. The
Company recognized a charge to income of $91,000 in connection with the
issuance of options to a nonemployee under FAS 123. During 1997, the Company
amended the exercise price on the 30,000 options to outside legal counsel to
$2.00 per share resulting in additional expense of $10,500. The options vest
in accordance with the same vesting criteria under the 1994 Plan as described
above. At September 30, 1997, 150,000 options were outstanding, 50,000 of
which were exercisable.
Summarized information regarding all of the Company's stock options is as
follows:
Weighted-
Average
Number Exercise
of Shares Price
--------- --------
Outstanding at September 30, 1995 837,638 6.04
Granted 350,900 4.17
Exercised (13,350) 3.51
Expired or canceled (160,384) 4.75
---------
Outstanding at September 30, 1996 1,014,804 4.89
Granted 504,600 2.00
Exercised (39,833) 4.49
Expired or canceled (18,825) 6.53
---------
Outstanding at September 30, 1997 1,460,746
--------- 2.92
Exercisable at September 30, 1997 495,513 $4.30
September 30
1997 1996
------- -------
Exercisable shares 495,513 396,904
Available for future grants 200,533 92,100
Stock options have been granted to employees at, or in excess of, fair market
value at the date of grant. Accordingly, in accordance with APB 25 and
related interpretations, no compensation cost has been recognized related to
such stock option grants.
Had compensation cost for the Company's stock option plans been determined
based on the fair value at the grant dates for all awards during Fiscal 1996<PAGE>
and 1997 consistent with the method set forth under FASB Statement No. 123,
"Accounting for Stock-Based Compensation" ("FAS 123") the Company's net loss
and loss per share would have been increased to the pro forma amounts
indicated below:
Year ending September 30
Earnings Earnings
1997 per share 1996 per share
- --------------------------------------------
Net loss attributable to
common stockholders $(5,624,114) (.67) $(8,660,303) (1.31)
Compensation expense related
to stock options granted (688,975) (.08) $(566,487) (.09)
------------ ------- --------- ---------
$(6,313,089) (.75) $(9,226,790) (1.40)
============ ======= ============ =========
As the provisions of FAS 123 have been applied only to options granted since
September 30, 1995, the resulting pro forma compensation cost is not
representative of that to be incurred in future years, when the pro forma cost
would be fully reflected.
The fair value of options was estimated at the date of grant using the
Black-Scholes option pricing model assuming expected volatility of 69.1% and
74.1%, risk-free interest rates of 5.86% and 5.51% for 1997 and 1996,
respectively, and expected lives of one to three years and 0.0% dividend yield
in both periods. The weighted average fair value of options granted or
options with reduced exercise price was $.84 and $1.57 for the years ended
September 30, 1997 and 1996, respectively.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. Because the Company's employee stock options have
characteristics different from those of traded options, and because changes in
the input assumptions can materially affect the fair value estimate, the model
may not provide a reliable single measure of the fair value of its employee
stock options.
Stock Bonus Plan
During 1997, the Company adopted the 1997 Stock Bonus Plan ("1997 Bonus Plan")
to provide stock bonuses in lieu of cash bonuses to key employees who are
responsible for the Company's future growth and financial success. The 1997
Bonus Plan provides for the award of up to 200,000 shares which are
nontransferable and subject to a risk of forfeiture for one year subsequent to
grant date. At September 30, 1997, 10,000 shares of restricted stock had been
issued to one employee under the 1997 Bonus Plan.
Common Stock Purchase Warrants
During 1996, the Company entered into a consulting agreement (the "Consulting
Agreement") with a third party to provide investor relations services. In
connection with the Consulting Agreement, the Company granted the consultant
common stock purchase warrants to purchase 150,000 shares of the Company's
common stock. In 1997, the Company amended the consulting agreement, reducing
the exercise price to $2.00 per share. The Company recognized compensation of<PAGE>
$89,500 and $78,500 in 1997 and 1996, respectively, under FAS 123 in
connection with the exercisable shares. At September 30, 1997, 50,000 warrants
were exercisable.
No warrants were exercised during 1997. At September 30, 1997, the following
warrants were outstanding:
Number
Outstanding
-----------
Warrant in connection with the consulting
agreement 150,000
Warrant to the lender and the guarantor
in connection with a $1,000,000 note 20,000
Warrant to the lender and the guarantor
in connection with a $1,000,000 note 220,000
Warrants issued in connection with
Convertible Debentures 40,201
---------
Warrants outstanding as of September 30, 1996 430,201
Issued during 1997 in connection with:
Note payable (Note 4) 200,000
Convertible Debentures (See Note 4) 67,333
Convertible Preferred Stock (See Note 8) 52,000
--------
Outstanding at September 30, 1997 749,534
At September 30, 1997, the Company had reserved a total of 2,610,813 shares of
its common stock for the exercise of options and warrants outstanding. This
amount includes shares reserved to satisfy obligations due if the Company
defaults on the payment of interest or principal on an $1 million note due
March 25, 1998.
Issuance of Stock
During 1997, the Company issued 124,564 shares of common stock with a market
value of approximately $330,000. The stock was issued to various consultants
for providing investor relation services. Consulting expense of $206,617 and
$127,188 was recognized during the years ended September 30, 1997 and 1996,
respectively.
In 1996, the Company sold in a public offering 700,000 shares of common stock.
The proceeds were used to repay a (Pounds) 312,000 promissory note and make a
partial prepayment on another promissory note and to fund the Company's
operating and working capital requirements. Net proceeds to the Company from
the offering, after deduction of associated expenses were $2.8 million. In
addition, 27,000 shares of common stock were issued to the placement agent in
November, 1996 for accrued offering expenses.
Note 8. Preferred Stock
In 1997, FHC raised approximately $1.6 million proceeds, net of issuance costs
of $96,252, in a private placement of 680,000 shares of 8% cumulative
convertible preferred stock. In addition, 52,000 common stock purchase
warrants were issued to the placement agents. Each share of preferred stock
is convertible into one share of the Company's common stock on or after August
1, 1998. Annual preferred stock dividends will be paid if and as declared by
the Company's Board of Directors. No dividends or other distributions will be<PAGE>
payable on the Company's common stock unless dividends are paid in full on the
preferred stock. The preferred stock may be redeemed at the option of FHC, in
whole or in part, on or after August 1, 2000, subject to certain conditions,
at $2.50 per share plus accrued and unpaid dividends. In the event of a
liquidation or dissolution of the Company, the preferred stock would have
priority over the Company's common stock.
Note 9. Acquisition and Disposition
In 1996, the Company sold WPC Holdings, Inc. ("Holdings"), which owned all of
the assets and liabilities of the Company other than those related primarily
to the Female Condom, and purchased Chartex Resources Limited ("Chartex"), the
owner of certain worldwide rights to, and sole manufacturer of, the Female
Condom.
In 1996, the Company completed the sale of the net assets of Holdings for
total consideration of $8.75 million, valued for accounting purposes at $8.285
million. Total consideration included a $1 million note receivable with
interest at 8 percent, principal due in four equal annual installments
beginning January 1999. This note receivable was discounted using an
effective rate of interest of 15 percent and, as a result, was valued at
inception at $785,000. The carrying value of the note was reduced to $750,000
at September 30, 1997 in expectation of early repayment of the note for an
amount less than face value.
During the period beginning with the Company's Board of Directors approval of
the plan to sell Holdings until the sale was completed, Holdings was accounted
for as a discontinued operation. Results of Holdings for the period October
1, 1995 through January 29, 1996 were as follows:
Net revenues $3,258,346
Gross profit 1,524,302
Operating expenses 1,623,100
---------
Operating income (loss) (98,798)
Nonoperating expense (130,201)
---------
Income (loss) from operations (228,999)
Gain on sale of discontinued operations 224,538
---------
Income (loss) from discontinued operations $ (4,461)
=========
Interest expense included in discontinued operations totaled $81,731 for the
year ended September 30, 1996. The purchaser of Holdings has assumed
responsibility for all of Holdings obligations. However, the Company remains
contingently liable for certain obligations incurred prior to the sale of
Holdings (See Note 12 - Contingent Liabilities).
In, 1996, the Company completed its purchase of all of the issued and
outstanding share capital of Chartex Resources Limited the parent company and
sole owner of stock in Chartex International, PLC (collectively referred to as
"Chartex"). Chartex is based in London, England and owns certain worldwide
intellectual property and proprietary manufacturing technology for the female
condom.<PAGE>
The acquisition of Chartex was accounted for as a purchase. The purchase price
of $5.2 million was less than the fair value of net assets purchased by $7.5
million. The excess of the fair value of the net assets acquired over the
purchase price was allocated to reduce long-term assets on a pro rata basis in
order to arrive at the purchase accounting values for the assets and
liabilities acquired.
The results of Chartex are combined with the Company after the February 1,
1996 acquisition date. The following unaudited summary, prepared on a pro
forma basis, combines the operating results of the Company and Chartex as if
the acquisition of Chartex had occurred on October 1, 1995:
(millions, except per share data)
Net revenues $2.1
Net loss (9.3)
Net loss per share ($1.41)
The above amounts reflect adjustments for amortization of intangibles and
depreciation based upon purchase accounting values, imputed interest on
borrowed funds, and elimination of intercompany transactions. The pro forma
information is not necessarily indicative of the results that would have
occurred had the purchase been made at the beginning of the period or of the
future results of the combined operations.
Note 10. Employee Retirement Plan
Effective October 1, 1997, the Company adopted a Simple Individual Retirement
Account (IRA) plan for its employees. Employees are eligible to participate
in the plan if their compensation reaches certain minimum levels and are
allowed to contribute up to a maximum of $6,000 annual compensation to the
plan. The Company has elected to match 100% of employee contributions to the
plan up to a maximum of 1% of employee compensation for the year.
Note 11. Industry Segments And Financial Information About Foreign and
Domestic Operations
The Company currently operates primarily in one industry segment which
includes the development, manufacture and marketing of consumer health care
products.
Since the Company's 1996 acquisition of Chartex, the Company has operated in
foreign and domestic regions. Information about the Company's operations in
different geographic areas (determined by the location of the operating unit)
is as follows.
September 30
(Amounts in thousands) 1997 1996
------- -------
Net revenues:
United States $2,050 $1,514
International 866 550
Operating profit (loss):
United States (3,120) (6,071)
International (2,118) (1,865)<PAGE>
Identifiable assets:
United States 3,349 4,946
International 4,990 6,320
On occasion, the Company's U.S. unit sells product directly to customers
located outside the U.S. Were such transaction reported by geographic
destination of the sale rather than the geographic location of the unit, U.S.
revenues would be decreased and International revenues increased by $293,000
in 1997.
Note 12. Contingent Liabilities
Prior to the sale of Holdings, the Company entered into an employment
agreement with Mr. Wundrock and an agreement for the lease of the Holdings'
facilities. Each of these agreements was assigned to Holdings and assumed by
the buyer of Holdings. However, because the third party creditor did not
release the Company from any future liability under these employment and lease
agreements at the time of their assignment, the Company remains contingently
liable if Holdings defaults in making any payments under the agreements. At
September 30, 1997, the total future payments for these contingent liabilities
was $3.1 million for the lease of Holdings' facilities and $.6 million for the
employment agreement.
The testing, manufacturing and marketing of consumer products by the Company
entail an inherent risk that product liability claims will be asserted against
the Company. The Company maintains product liability insurance coverage for
claims arising from the use of its products. The coverage amount is currently
$5,000,000 for FHC's consumer health care product.
The Year 2000 compliance issue exists because many computer systems and
applications currently use two-digit fields to designate a year. As the
century date change occurs, date-sensitive systems may either fail or not
operate properly unless the underlying programs are modified or replaced. The
Company is assessing the extent of programming changes required to address
this issue. Although final cost estimates have not been determined, it is not
expected that these expenses will have a material impact on the Company's
financial condition, liquidity, or results of operations.
Note 13. Related Party Transactions
For 1997, the Company paid the rent for office space leased by Phoenix but
used by two officers of the Company. No agreement currently exists between
the Company and Phoenix regarding the lease, however, it is the Company's
intention to continue paying the rent in order to provide office space for its
employees.
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.
<PAGE>
Note 14. Current Accounting Pronouncements
Earnings Per Share
Statement of Financial Accounting Standards No. 128, "Earnings per Share,"
which supersedes APB Opinion No 15, was issued in February 1997 by the
Financial Accounting Standards Board. The Statement changes the computation
and presentation of earnings per share by all entities that have common stock
or potential common stock, such as options, warrants and convertible
securities, outstanding that trade in a public market. Those entities that
have only common stock outstanding are required to present basic earnings
per-share amounts. All other entities are required to present basic and
diluted per-share amounts. Diluted per share amounts assume the conversion,
exercise or issuance of all potential common stock instruments unless the
effect is to reduce a loss or increase the income per common share from
continuing operations. All entities required to present per-share amounts
must initially apply Statement No. 128 for annual and interim periods ending
after December 15, 1997. Earlier application is not permitted.
The Company has numerous issues of potential common stock outstanding,
including options to employees and stock purchase warrants that become
exercisable if certain conditions are met and preferred stock that is
convertible to common stock. Each of these potential common stock instruments
must be separately evaluated to determined whether they are dilutive, and
various adjustments to income and share amounts are computed. Due to the
complexities involved, management has not completed its assessment of the
effects that the application of Statement No. 128 will have on the per-share
information presented in the accompanying financial statements.
Capital Structure
Statement of Financial Accounting Standard No. 129, "Disclosure of Information
about Capital Structure," was issued in February 1997 by the Financial
Accounting Standards Board. The Statement requires an entity to explain the
pertinent rights and privileges of the various securities outstanding. The
standard is effective for financial statement periods ending after December
15, 1997. The Company does not believe the adoption of the Standard will have
a material impact on the consolidated financial statements.
Comprehensive Income
The Financial Accounting Standards Board has issued Statement No. 130,
"Reporting Comprehensive Income," that the Company will be required to adopt
for its year ended September 30, 1998, and disclose in its interim financial
statements beginning with the period ending December 31, 1997. This
pronouncement is not expected to have a significant impact on the Company's
financial statements. The Statement establishes standards for the reporting
and presentation of comprehensive income and its components. The statement
requires that items recognized as components of comprehensive income be
reported in a financial statement. The statement also requires that a company
classify items of other comprehensive income by their nature in a financial
statement, and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. For the years ended September
30, 1997 and 1996, the Company's components of comprehensive income (loss)
consisted of its reported net (loss) and foreign currency translation
adjustments.
Segments of an Enterprise<PAGE>
Statement of Financial Accounting Standard No. 131, "Disclosures about
Segments of an Enterprise and Related Information," was issued in July 1997 by
the Financial Accounting Standards Board. The Statement requires the
Corporation to disclose the factors used to identify reportable segments
including the basis of organization, differences in products and services,
geographic areas, and regulatory environments. The Statement additionally
requires financial results to be reported in the financial statements for each
reportable segment. The Statement is effective for financial statement
periods beginning after December 15, 1997. The Company does not believe the
adoption of the statement will have a material impact on the consolidated
financial statements.
Note 15. Continuing Operations
The Company's consolidated financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the settlement
of liabilities and commitments in the normal course of business. The Company
incurred a loss of $5.6 million for the year ended September 30, 1997, and as
of September 30, 1997, had an accumulated deficit of $36.2 million. At
September 30, 1997, the Company had working capital of $1.3 million and
stockholders' equity of $3.6 million. The Company expects to incur
substantial expenditures in an effort to increase consumer awareness and
acceptance of the Female Condom. As a result, operations in the near future
are expected to continue to use working capital. Management recognizes that
the Company's continued operations depend on its ability to raise additional
capital through a combination of equity or debt financing, strategic alliances
and increased sales volumes.
At various points during the developmental stage of the product, the Company
was able to secure resources, in large part through the sale of equity and
debt securities, to satisfy its funding requirements. As a result, the
Company was able to obtain FDA approval, worldwide rights, manufacturing
facilities and equipment and to commercially launch the Female Condom.
Management believes that recent developments, including the Company's
agreement with the UNAIDS, a joint United Nations program on HIV/AIDS, provide
an indication of the Company's early success in broadening awareness and
distribution of the Female Condom and may benefit efforts to raise additional
capital and to secure additional agreement to promote and distribute the
Female Condom throughout other parts of the world.
Management has held preliminary discussions with potential investors and
financial institutions regarding the Company's capital requirements. These
parties have expressed interest in providing financing under certain
circumstances that may satisfy the Company's currently anticipated
requirements. Specifically, the Company entered into an agreement with Vector
Securities International, Inc. (Vector), an investment banking company
specializing in providing advice to pharmaceutical medical devices and managed
care companies. Pursuant to this agreement, for a one-year period, Vector
will act as the Company's exclusive financial advisor for the purpose of
identifying and evaluating opportunities available to the Company for
increasing shareholder value. These opportunities may include selling all or
a portion of the business, assets or stock of the Company or entering into one
or more distribution arrangements relating to the Company's product. However,
no specific opportunity has yet been identified and there can be no assurance
that any such opportunities will be available to the Company or, if so
available, that the Company will ultimately elect to consummate any such
transaction. Further, there can be no assurance, assuming the Company<PAGE>
successfully raises additional funds or enters into business agreements with
third parties, that the Company will achieve profitability or positive cash
flow. If the Company is unable to obtain adequate financing, management will
be required to sharply curtail the Company's efforts to promote the Female
Condom and to curtail certain other of its operations or, ultimately, cease
operations.<PAGE>
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not Applicable.<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of The Exchange Act.
Certain information in response to this item is incorporated herein by
reference to "Election of Directors" in the Company's Proxy Statement for its
1998 Annual Meeting of Shareholders (the "Proxy Statement"), which will be
filed with the Securities and Exchange Commission within 120 days after the
end of the Company's fiscal year ended September 30, 1997, and to "Executive
Officers of the Registrant" in Part I hereof.
Item 10. Executive Compensation
Information in response to this item is incorporated herein by reference to
"Executive Compensation" in the Proxy Statement.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information in response to this item is incorporated herein by reference to
"Principal Security Holders and Security Holdings of Management" in the Proxy
Statement.
Item 12. Certain Relationships and Related Transactions
Information in response to this item is incorporated herein by reference to
"Certain Transactions" in the Proxy Statement.<PAGE>
Item 13. Exhibits, List and Reports On Form 8-K.
A. Documents Filed as a Part of This Report:
1. Financial Statements.
The following consolidated financial statements of the Company are included in
Item 8 hereof:
Consolidated Balance Sheet - September 30, 1997
Consolidated Statements of Operations --Years ended September 30, 1997 and
1996
Consolidated Statements of Stockholders' Equity --Years ended September 30,
1997 and 1996
Consolidated Statements of Cash Flows -- Years ended September 30, 1997 and
1996
Notes to Consolidated Financial Statements
2. Financial Statement Schedules.
None.<PAGE>
3. Exhibits Filed:
Number Description
3.1 Amended and Restated Articles of Incorporation. (1)
3.2 Amended and Restated By-Laws of the Company. (2)
4.1 Amended and Restated Articles of Incorporation same as Exhibit 3.1 (1)
4.2 Articles II, VII, and XI of the Amended and restated By-Laws of the
Company. (included in Exhibit 3.2)
10.1 Employment Agreement between John Wundrock and the Company dated
October 1, 1989. (1)
10.2 Wisconsin Pharmacal Company, Inc. (k/n/a The Female Health Company)
1990 Stock Option Plan. (3)
10.3 Commercial Building Lease dated May 1, 1992 covering the Jackson,
Wisconsin office and manufacturing facility. (4)
10.4 Reality Female Condom Clinical Trial Data Agreement between the
Company and Family Health International dated September 24, 1992. (5)
10.5 Trademark License Agreement for Reality Trademark. (6)
10.6 Office space lease between the Company and John Hancock Mutual Life
Insurance Company dated June 1, 1994. (7)
10.7 Employment Agreement dated September 10, 1994 between the Company and
Dr. Mary Ann Leeper. (8)
10.8 1994 Stock Option Plan. (9)
10.9 Investor relations and development services Consulting Agreement
between the Company and CCRI Corporation dated March 13, 1995. (10)
10.10 Consultant Warrant Agreement dated March 13, 1995 between the Company
and CCRI Corporation, as amended on April 22, 1996. (11)
10.11 Offshore Securities Subscription Agreement for the sale of 370,000
shares of Company Common stock dated February 7, 1995. (10)
10.12 Offshore Securities Subscription Agreement for the sale of 100,000
shares of Company Common stock dated February 7, 1995. (10)
10.13 Offshore Securities Subscription Agreement for the sale of 500,000
shares of Company Common stock dated February 7, 1995. (10)
10.14 Settlement Agreement and Mutual Release of All Claims between WPC
Holdings, Inc., Reflect, Inc. and the Company dated June 15, 1995.
(11)
10.15 Stock Purchase Agreement by and between WPC Acquisition Corporation
and the Company dated June 20, 1995. (12)
10.16 Agreement relating to the acquisition of the entire issued share
capital of Chartex Resources Limited and exhibits thereto. (13)
10.17 Company Promissory Note payable to Stephen M. Dearholt for $1 million
dated March 25, 1996 and related Note Purchase and Warrant Agreement,
Warrants and Stock Issuance Agreement. (12)
10.18 Outside Director Stock Option Plan (11)
10.19 Exclusive Distribution Agreement between Chartex International Plc and
Taiho Pharmaceutical Co., Ltd. dated October 18, 1994. (14)
10.20 Supply Agreement between Chartex International Plc and Deerfield
Urethane, Inc. dated August 17, 1994. (14)
10.21 Employment Letter dated February 28, 1990 from Chartex Resource Ltd.
to Michael Pope, and Board amendments thereto. (14)
10.22 Grant Letter dated March 7, 1996 from the Government office for London
of the Secretary of State of Trade and Industry regarding economic
development grant to the Company. (14)
10.23 Letter Amendment to Asset Sale Agreement dated April 29, 1996 between
the Company and Dowty Seals Limited and Chartex International Plc.
(14) <PAGE>
10.24 Form of Offshore Securities Subscription Agreement entered into
between the Company and certain foreign investors on September 12,
1996. (15)
10.25 Form of 8% Convertible Debenture Due August 31, 1999 issued by the
Company to certain foreign investors on September 12, 1996. (15)
10.26 Form of Warrant issued by the Company to certain foreign investors as
of September 12, 1996. (15)
21.0 Subsidiaries of Registrant
27.0 Financial Data Schedule
(1) Incorporated herein by reference to the Company's Registration
Statement on Form S-18, Registration No. 33-35096, as filed with the
Securities and Exchange Commission on May 25, 1990.
(2) Incorporated herein by reference to the Company's 1995 Form 10-KSB.
(3) Incorporated herein by reference to the Company's December 31, 1990
Form 10-Q.
(4) Incorporated herein by reference to the Company's June 30, 1992 Form
10-Q.
(5) Incorporated herein by reference to Pre-Effective Amendment No. 1 to
the Company's Registration Statement on Form S-1, Registration No.
33-51586, as filed with the Securities and Exchange Commission on
September 28, 1992.
(6) Incorporated herein by reference to the Company's 1992 Form 10-KSB.
(7) Incorporated herein by reference to the Company's June 30, 1994 Form
10-Q.
(8) Incorporated herein by reference to the Company's Registration
Statement on Form S-2, Registration No. 33-84524, as filed with the
Securities and Exchange Commission on September 28, 1994.
(9) Incorporated herein by reference to the Company's 1994 Form 10-KSB.
(10) Incorporated herein by reference to the Company's March 31, 1995 Form
10-Q.
(11) Incorporated herein by reference to the Company's Form S-1
Registration Statement filed with the Securities and Exchange
Commission on April 23, 1996.
(12) Incorporated herein by reference to the Company's June 30, 1995 Form
10-Q.
(13) Incorporated herein by reference to the Company's Current Report on
Form 8-K dated November 20, 1995.
(14) Incorporated herein by reference to Pre-Effective Amendment No. 1 to
the Company's Form S-1 Registration Statement filed with the
Securities and Exchange Commission on June 5, 1996.
(15) Incorporated herein by reference to the Company's 1996 Form 10-K.
B. Reports on Form 8-K:
The Company has not filed any reports on Form 8-K during the last quarter of
the period covered by this report.<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
THE FEMALE HEALTH COMPANY
BY: /s/O.B. Parrish
O. B. Parrish, Chairman,
Chief Executive Officer and Acting
Chief Financial and Accounting Officer
Date: December 29, 1997<PAGE>
In accordance with the Exchange Act, this Report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
date indicated.
Signature Title Date
/s/O.B. Parrish Chairman of the Board December 29, 1997
- ----------------------- Chief Executive Officer,
O.B. Parrish Acting Chief Financial and
Accounting Officer,
and Director
/s/Mary Ann Leeper President, Chief Operating December 29, 1997
- ------------------------- Officer and Director
Mary Ann Leeper, Ph.D.
/s/William R. Gargiulo Secretary, Vice-President December 29, 1997
- ------------------------- International and Director
William R. Gargiulo, Jr.<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- -----------------------------------------------------------------------------
21.0 Subsidiaries of Registrant
27.0 Financial Data Schedule<PAGE>
Exhibit 21.0
SUBSIDIARIES
The Female Health Company - UK
The Female Health Company - UK, plc<PAGE>
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